Friday, January 23, 2015

Whither the Welfare State?

Here, George Will provides an accurate and succinct description of the growth of the welfare state in America over the past three or four decades.  As usual, Mr. Will gets it right and offers entirely thoughtful comments.

Unless I misread his intent, Mr. Will is less than happy about the growth of transfer payments now received evermore broadly by Americans who would not be considered "needy."  Although I rarely find myself at odds with the ideas of George Will, I will offer a different perspective for explaining continuing growth in the welfare state in America and in other developed countries of the world.

The American economy continues to grow at a modest pace (about 2% per year over the long haul), which is far more impressive than pundits seem to think.  Our GDP weighs in at about $17 trillion per year, which is really a huge economy.  China is second at about $9 trillion per year.  Japan is third these days at about $5 trillion per year.

Even a small rate of growth for something as large as the American economy generates impressive gains in income per household.  Two percent of $17 trillion is about $340 billion.  If that $340 billion were divided equally among the approximately 118 million households in America, just 2% growth in GDP per year would bring an additional $2,800 per year to each household.  Or, examined on a 10-year period (which government types are fond of doing), a $31,500 increase in household income over the 10-year period, accounting for compound growth.

Of course, annual gains in GDP are not earned equally across all 118 million American households.  The widening gap between annual income of the top quartile and the bottom quartile of households in America is frequently the topic for hand wringing by those who call themselves progressives.

Mr. Will writes in his essay,
"America’s national character will have to be changed if progressives are going to implement their agenda. So, changing social norms is the progressive agenda."  
He is correct, of course.  But I propose that we all might as well get used to a sea change in America's national character and its social norms.  Let me explain.

In a word, "technology."  The widening income gap between the top and bottom of the statistical income distribution in the United States (and in other developed countries) is pretty much a direct result of advances in technology, in my judgment.

People who own income streams generated by creating technological advances (e.g., Bill Gates), or by owning income streams generated by astute use of technology (e.g., many IT employees across the nation), enjoy high and rising income.  People who own only their labor, made evermore obsolete by advancing technology, suffer from low and falling income.  Hence, the expanding income gap between those who benefit from advancing technology and those who don't.

Tyler Cowan has written a book Average is Over: Powering America Beyond the Age of the Great Stagnation   that explores many implications of the truth that advancing technology is making common labor obsolete for production of goods and services in our economy.  But people who own nothing other than common labor services must somehow keep body and soul together.

The answer is not "work harder," as any number of pundits on the right are wont to expound.  Nor is the answer "get more education," as any number of politicians and academicians have advised.  The simple truth is that an ever-rising number of people are not now capable of and will not become capable of inventing advanced technology, or becoming astute users of advanced technology.

Advancing technology makes it ever more possible to produce greater quantities and better qualities of goods and services with less human labor.  In the United States, our creation and use of advancing technology has already enabled us to transfer about 14% of annual GDP from people who earn it to people who did not earn it each year.  Although many lament such expansive transfer payments, the amazing thing is that it is possible to make such transfers while the standard of living for the payers of those transfers continues to rise!

Think for a minute of all the people who have jobs that literally could be done without.  I can easily think of tens of people I know whose job falls into that category.  Even what I do, which is teach economics and finance to college students, is quick on its way to falling into that category!  Yes, even college teachers will be replaced in the fullness of time with advanced technology.

On the one hand, advancing technology that permits a rising standard of living for everyone on the planet is a good thing.  On the other hand, most of us will not be inventors of that technology, nor will we be astute users of it, which means that most of us will have declining work-based claims on goods and services as technology continues to advance.  Yet, we will still want to eat, be clothed, be sheltered, and enjoy life.

Yes indeed, America's national character and social norms will definitely have to change.  They have been changing for decades, and they will continue to change.  The challenge we and other developed countries around the globe face is how to live in a world of abundance --- a world in which advancing technology makes it possible for an ever-growing percentage of GDP to be transferred from those whose current job generated it to those who either have no job or who have a job that is unnecessary for generating goods and services.

In my own insignificant corner of the world, I continue to add value by what I do because I have been an early adopter of computer technology throughout my teaching career.  I became certified in online teaching, for example.  I am a fairly astute user of technology.  But, still, I am not safe.  I can foresee the day when what I do will be unnecessary, due to a combination of clever computing and clever computer programming.  Call it a fairly meager advance toward artificial intelligence, which I think is not far off.

In a world of abundance --- a world in which scarcity of resources has been greatly attenuated --- we face a disconnect between work, income, and wealth.  I grew up in an era when hard work and education led to higher income.  I grew up in an era when social norms required attention to being a productive member of society.  I grew up in an era when national character and social norms dictated that those who would not work hard and obtain an education should not earn much income.

But what is one to do when what one can do has little productive value?  Which of you reading this essay is capable of inventing advanced technology?  Which of you is capable of even using advanced technology astutely?  And what of technology that is literally just around the corner that we cannot yet even imagine.  If you doubt that advancing technology is likely to be the rule, all you need to do is think about the technological advances that have occurred in just the most recent 50 years. David Hume was right in noting that the future is under no obligation to repeat the past.  Still, I think the future of advancing technology will be very much like its recent past.

Technology is advancing at an advancing rate.  It's not even linear; it's exponential.  Advancing technology is not a bad thing; it is a good thing.  But we humans will have to figure out a way for the fruits of advancing technology to benefit all of humanity, not just the inventors and the astute users.

I will close this essay with an analogy, one that some readers may find offensive, although no offense is intended.  My dogs have limited intellectual capacity,  even though they appear to have unlimited willingness to please.  No amount of hard work or eduction will enable my dogs to learn algebra.  If the material well-being of my dogs somehow depended on their learning algebra, they would be toast.

I submit that George Will and any number of others who lament rising transfer payments in America and around the world may as well get used to a continuing rise.  How else will the masses keep body and soul together?  How else will most of us enjoy the rising abundance of real goods and services available to humanity?

I confess that I have no good answers to the questions I just posed.  But I think they are questions we must grapple with out in the open, because I absolutely believe that technology will continue to mitigate the ravages of scarce resources.  I invite economists around the world to quit talking about scarcity and get on to the challenging business of creating economic theories that embrace abundance and the problems of income distribution in the face of rising abundance --- abundance that is the result of a very small number of persons, compared to the population of earth.

I am a confirmed classical liberal, as readers of EconoBlast have surely noticed. I believe fervently in individual liberty.  My recently published book, Morality and Capitalism, is a testament to that fact. When I note that transfer payments in the United States will be an ever-rising proportion of GDP, it is not because I favor the progressive policies of the current federal administration.  I have not lost my way, but the path is getting harder to see.