The Software Society

How digital technology is changing our culture and economy

The Productivity Paradox: Efficiency without Jobs?

The Federal Reserve governors are apparently cautiously optimistic about the economy, but a CNN poll published shortly after Christmas found that 70% of Americans think the economy is in bad shape. The public—the troops on the front line—may be more insightful than the experts in this case.

A core problem is largely being ignored—a “productivity paradox.” If a company can produce a product or service at less cost, that company has improved its productivity and potentially its profits. But, when a company improves productivity by reducing the number of employees, jobs disappear. For most of modern history, new categories of quality jobs appeared quickly enough to replace the jobs lost. Today, productivity improvements driven by accelerating technology development are destroying jobs faster than good jobs are being created. This leads to an economic problem rather than the boost that productivity has historically given the economy.

According to the Organization for Economic Co-operation and Development (OECD), the portion of national income that goes to labor versus “capital” is dropping. Labor’s share of income dropped to 62% in the 2000s, down from over 66% in the early 1990s, and is showing a continued downward trend. (This number hovered near 70% in the US for so many decades that some economics textbooks characterized it as a fundamental constant in the economy.) The Census Bureau reported that median household income, adjusted for inflation, was $51,017 in 2012, down about 9% from a peak of $56,080 in 1999 and about the same as it was in the late 1980s, suggesting the jobs that are being created are at lower salaries. We have a jobs problem that is not simply cyclical, but created by technology automating away jobs faster than the workforce can adapt to any new economic opportunities it creates.

With a shortage of jobs and a drop in median income, demand and consumption must eventually drop, particularly when the optimism created by recovering home prices and the 2013 stock market rise abates. Eventually company revenues will drop as consumers reduce buying. When revenues at companies decline, companies will be motivated to increase automation and drop even more employees to maintain profits. Ultimately, a drop in overall consumption because of consumers having less to spend must depress the economy. The productivity paradox results from microeconomic actions that make sense for individual companies not leading to macroeconomic equilibrium, but to a destructive feedback process, a downward spiral. Every company wants the other guy to create jobs for its customers.

Greater corporate profits are a short-term symptom of the improvement in productivity. Profits of companies in the S&P 500 have nearly doubled since the bottom of the recession in June 2009. But such profit gains are sustainable in the long term only with increases in the buying power of consumers.

By reducing costs, productivity improvements can lower the price of products and services. This feature accounts in part for current low inflation rates, despite the Fed pouring money into the economy. This is generally a good thing. But, in another aspect of the productivity paradox, it can lead to deflation when demand is low, and, as Japan learned, deflation is a burden on the economy. With the current Fed reduction in bond buying, deflation, powered in part by increased productivity, is a real threat. Another downward spiral.

The most direct way to address the productivity paradox is to tax the corporate profits it creates and invest those taxes to create jobs and improve demand. New tax revenues could be channeled into support for R&D, education, and infrastructure improvements that are proven ways to improve the economy, as well as supporting social security and other social safety nets that provide disposable income.

A corporate “automation tax” is one option that will slow the loss of jobs as well as generating tax revenue that could be channeled into job creation, a suggestion explored in detail in my recent book, The Software Society. An automation tax would increase taxes for those companies that have high levels of automation, perhaps as measured by revenues per employee. One might think of the automation tax as a “payroll tax” on computers, reducing the advantage of “hiring” computers rather than humans.

The obvious problem with a solution that requires new taxes is political. Not only would many powerful companies fight the idea, more taxes are simply anathema to many politicians and voters. The idea may only become feasible as the economic recovery remains stubbornly slow or worse, and companies realize that they can’t prosper without customers. This recession may have been started by the mortgage debacle, but it won’t end simply because we’ve eliminated some of those abuses. A full recovery requires recognizing and dealing with the productivity paradox.

William Meisel, Ph.D.

Author, The Software Society: Cultural and Economic Impact (2013)

Executive Director, Applied Voice Input Output Society

President, TMA Associates

 About the author:

William Meisel, president, TMA Associates and Editor, Speech Strategy News, is also Executive Director of the non-profit Applied Voice Input Output Society (AVIOS) and author of the 2013 book The Software Society and the related blog (www.thesoftwaresociety.com). He began his career as a professor of Electrical Engineering and Computer Science at USC. Meisel wrote an early technical book on computer pattern recognition. He founded and ran a speech recognition company for ten years. Meisel organizes the program for the Mobile Voice Conference (www.mobilevoiceconference.com). He has a B.S. in Engineering from Caltech and a Ph.D. in Electrical Engineering from USC.

The Software Society: Cultural and Economic Impact is available from Amazon and other sources.

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