The Great Age of Decoupling


On April 23rd, the Pew Research Center released its analysis of recent US Census Bureau data. It supported with data, what the rhetoric was already suggesting.  During the first two years of the “US economic recovery”, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.  This is in the context of overall wealth increasing.   

This should come as no surprise to anyone who has been following the trends.  In that great documentary on the financial crisis called “The Flaw”, the point was made that the last time income inequality was this high was in the run up to the Great Depression.  Aside from the overall level of income inequality is the fact that the trend shows that the gap has been widening for a while.  Recent Gini coefficients that measure inequality demonstrate that it has been rising in the US and here in the UK. USA Tax Singapore
        
This whole phenomenon becomes stark when you look at youth unemployment numbers.  This week’s Economist does a good job of highlighting the issue. But it’s not just a problem in the US or here in Europe but in Africa,Latin America and parts of Asia as well. For many, this is the first generation in a while that believes that it will be worse off than their parents.  No longer is a degree a guarantor of a job and the concept of underemployment is becoming a part of the reality of so many. American Tax Singapore

So we have a decoupling or a disconnect between production and wealth creation on one hand, and employment on the other.  Another manifestation of this disconnect is what some commentators have called - the productivity puzzle.  Unlike other recessions where we saw productivity gains, we have actually been seeing productivity declining in the UK, Germany and Italy.  The UK productivity puzzle is complicated by increasing employment numbers (particularly in the private sector) amidst falling productivity.  The US stands out as it showing the characteristic productivity gains post 2008. The US productivity puzzle is complicated by falling private sector employment amidst rising productivity.

For me it is clear that our Western economies are in the midst of a major paradigm shift.  What is driving this great decoupling of production from employment?  It is more than just the impact of inflation,tax policy or international trade.  To me a key driver that must be incorporated into any explanation is the extent to which technological change is driving this decoupling.

I found this December 11th 2012 article in the NYT that speaks to this very point.  The authors note that as digital devices like computers and robots get more capable thanks to Moore’s Law (the proposition that the number of transistors on a semiconductor can be inexpensively doubled about every two years), they can do more of the work that people used to do.

This substitution of technology for labor happens first with more routine tasks, which is a big part of the reason why less-educated workers have seen their wages fall the most as we moved deeper into the computer age. 

The authors go on to say that the Great Decoupling will only accelerate, for two reasons.  Firstly,computers will keep getting cheaper over time.  Digital labor will become cheaper than human labor not only in the United States and other rich countries, but also in places like China and India.  Off-shoring is only a way station on the road to automation.  Secondly, technologies are going to continue to become more powerful, and to acquire more advanced skills and abilities.  They can already drive cars, understand and produce natural human speech, write clean prose, and beat the best chess players.

So we live in the age of the great decoupling.  The decoupling of productivity from employment.  The decoupling of wealth from work.  The key to it all is technology.  Technology is racing ahead and leaving more and more people behind. In my everyday life I look at the impact tax preparation software is having on the tax preparation industry. I look at the impact file sharing technology is having on the music industry.  I look at the impact that the internet is having on the travel industry. As symbolized in so many movies, the race against the machines is already here.  Those that learn to race with the machines are winning.  Those that try to race against the machines are being left behind.

I end with a quote from venture capitalist Marc Andreessen, who says: “The spread of computers and the Internet will put jobs in two categories: People who tell computers what to do, and people who are told by computers what to do.” Only one of these two job categories will be well paid.

Read more on DerrenJoseph.blogspot.com 

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