The Software Society

How digital technology is changing our culture and economy

Economic trends validate concerns in The Software Society

It’s not pleasant to deliver or receive bad news. But recent trends validate the concern in The Software Society that the core problem with our economy is not being addressed. Instead, it is being “papered over” by printing money, an unsustainable solution. Echoing a concern expressed in the book, a panel of federal regulators warned last week that a sudden rise in interest rates could have a destabilizing effect on financial markets. A bridge made of paper will fail with the first rain.

While the unemployment rate has recently declined slightly to 7.6%, the number is misleading. It only counts those that are seeking jobs, and ignores those who have given up looking, taken a part-time job, or taken a position with a salary that doesn’t fully reflect their qualifications. The number of people getting disability payments is at a record high; they don’t show up in unemployment statistics. February’s median annual household income was 5.6% lower than it was in June 2009, when the recovery technically began. People making less spend less.

The details of unemployment are similarly unsettling. According to The Economist, almost 290 million youth worldwide are neither working nor studying – almost a quarter of the planet’s youth and nearly equal to the US population.

The Commerce Department reported Friday that Gross Domestic Product in the first quarter grew at a 2.5% annual rate, after growing only 0.4% in the fourth quarter. Economists had expected a 3.0% growth pace based on seasonal factors, according to the Reuters news service.

A recent Time Magazine cover story pointed out that manufacturing is returning to the US, but not creating many jobs, as new factories are highly automated. And the manufacturing jobs being created, Time noted, usually require higher educational levels than previous manufacturing jobs.

The Software Society argued that the core problem is that companies are doing their best to avoid hiring employees as the economy recovers. Or worst, laying off employees to improve profitability; IBM reported it would spend about $1 billion in the second quarter on layoffs, to cite one case.

If I were running a company, I would feel it was necessary to use automation and minimize the number of employees to compete with rivals doing the same. The problem is that this apparently rational microeconomic policy is disastrous in its macroeconomic impact. The result is fewer people able to afford to buy products or services in the economy, reducing the revenue of most companies. Declining sales then result in more layoffs or more investment in automating away the need for jobs. As the economist John Maynard Keynes argued after the great depression, sometimes the only way to break a downward economic spiral is by government action.

That action must encourage creating jobs. I’m not suggesting that one ignore the benefits of improvements in productivity, but that those productivity improvements be through creating better jobs, jobs where technology makes a worker more productive and potentially better paid.

How do we encourage companies to emphasize creating jobs? My suggestion in The Software Society is an “automation tax.” I can’t repeat the details and justification here, but an automation tax is a corporate tax that is higher for companies that use fewer employees to create a dollar of revenue and, in one form, reduces taxes for companies with more employees used to create a dollar of revenue. The automation tax makes the choice between hiring people and computers more balanced. Today’s employment laws and taxes, e.g., payroll taxes, discourage hiring.

Another aspect of the automation tax is that it asks companies that are more profitable due to higher automation or outsourcing to pay their fair share in supporting our national social safety net. Rather than debating which individuals we ask to pay higher taxes, lets ask our healthier companies to pay more of their profits rather than simply piling up cash. Those companies can reduce the tax impact by hiring more employees or reversing outsourcing, creating more jobs in the US as an alternative to paying more taxes. Or they can simply reduce their cash hoard by paying taxes.

How can we make an automation tax happen? Politicians will not embrace such a revolutionary change in tax policy without significant pressure. I hope that this pressure doesn’t come in the form of a double-dip recession or worse.

Politicians do react to pressure from the constituents that elect them to office. If enough people send letters to their representatives encouraging them to look at the economy honestly, perhaps the subject will at least rise to the level of public debate.

One thought on “Economic trends validate concerns in The Software Society

  • Bill Meisel says:

    The May 13 issue of the Wall Street Journal had an article, “Economic Road Clearing, but the Going is Slow.” While the title sounds somewhat optimistic, much of the hard data is discouraging. The article noted:
    • The US still employs more than 2.5 million fewer people than when the recession began. At the current rate of job creation, the article quotes the Brooking Institution as estimating it will take nine more years to return to the prerecession level of employment when one adjusts for population growth.
    • The drop in unemployment rate is misleading. The article notes that “millions of unemployed Americans have given up looking for jobs,” and “many will likely never work again.” Youth unemployment stands at 16.1% even though 1.5 million have dropped out of the labor force.

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