Has the Internet Really Been a “Colossal Economic Disappointment”?


shutterstock_59508448That’s the strong claim made by venture capitalist and former Intel executive Bill Davidow for Harvard Business Review“For all its economic virtues, the Internet has been long on job displacement and short on job creation. As a result, it is playing a central role in wage stagnation and the decline of the middle class.”

I took issue with Davidow in a recent piece for The Week. It’s just too much. While there is little doubt that automation has driven job polarization — bad for clerical workers and those doing repetitive factory work — one also has to acknowledge that the US economy is creating gobs of jobs right now. And there is some reason to believe wages will soon be on the upswing. Also, Davidow doesn’t offer evidence that the Internet or robots or other smart machines are behind the sharp drop in labor force participation or the employment rate vs. demographics and the aftermath of the Great Depression. Oh, and what about the nearly million app developer jobs created by the Internet? What’s more, economist David Autor argues that the “the deceleration of the U.S. labor market after 2000, and further after 2007, is more closely associated with … the bursting of the dot-com bubble, followed by the collapse of the housing market and the ensuing financial crisis … and the sharp rise of import penetration from China following its accession to the World Trade Organization in 2001.”

Along the same lines, here is Ferdinando Giugliano in the FT on some new research:

In a paper entitled “The Labour Market Consequences of Electricity Adoption”, presented this week at the Royal Economics Society meeting in Manchester, Miguel Barroso Morin, an academic at Cambridge University, takes a look at what happened in the 1930s, when a sharp fall in the cost of electricity led to its widespread adoption across US industry. … But Morin takes a close look at the cement industry during the Great Depression and, unfortunately, finds little reason to support this more optimistic theory. Cheaper electricity did not lead to any significant increase in output, while causing a 21 per cent decrease in employment. And while labour productivity jumped by 36 per cent, the share of income going to workers fell by 11 per cent. …

In a separate paper (“Robots at Work”), Georg Graetz from Uppsala University and Guy Michaels from the London School of Economics analyse the economic effects of the introduction of robots in 17 developed countries between 1993 and 2007. Their analysis mainly looks at manufacturing, though they also consider agriculture and utilities. … The good news from the study is that, on average, the increased use of robots contributed about 0.37 percentage points to yearly economic growth, which accounts for roughly a tenth of the total. It also explains around a sixth of labor productivity growth. The authors claim that this is roughly comparable to the effects that the railroads had in the 19th century.

Furthermore, unlike Morin, Graetz and Michaels find that technological development did not lead to a reduction in overall employment and, in fact, boosted wages. However, the two researchers paint a very different picture across different type of workers: their research finds robots had a detrimental effect on low- and middle-skilled workers, who saw both their employment levels and their wages fall. These effects were absent in the case of high-skilled workers.

All that said, Davidow’s policy suggestions are pretty good:

To start with those policies must be implemented with the Internet’s efficiency in mind. Raising the minimum wage, for instance, plays straight into the hands of the Internet efficiency engine. Raising the minimum wage will just drive employers to use machines to replace people. An earned income tax credit is a better approach. Low paid workers get the benefit of transfer payments and employers who will not pay hirer wages will feel less pressure to automate.

Investing in infrastructure is an excellent way to create jobs but such infrastructure should be compatible with an increasingly virtual world. Yes we should fix the roads but as more and more people work from home, as more and more of what we purchase gets delivered to our doorstep, as more and more of us go out to the movies in our living rooms, and as highway congestion grows, the chances are that more and more of us will use our cars less. … For a millennial, the infrastructure of the future will be higher bandwidth interconnections and public transportation that will take the place of his car.

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  1. Misthiocracy Member

    It’s amazing how much the role of demographics is downplayed in these analyses.

    Current US Population Pyramid

    There are two population bulges.

    The first is with people nearing retirement age, but still hanging on to those top-paying management positions for dear life so they aren’t available to those working their way up (and maybe not even giving them up after they hit 65, if they can help it).

    The second is the huge number of 20-somethings just entering the job market now.

    Those two factors pretty much guarantee depressed wages.

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  2. PHCheese Inactive

    I am always impressed with the power of the Internet. I have been trying to find a squeak in my truck for several weeks. Today it dawned on me to look on the net for similar problems on other trucks.Sure enough problem found, problem fixed.

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  3. ParisParamus Member

    This is slightly off topic, but when seeking to understand the causes of the labor market contraction, has anyone compared the degree of contraction (if any) across American states? For example, has the labor force, as a % of the population decreased as much in Texas as in New York; dynamic state v semi-comatose state?

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  4. Rodin Member

    In what universe, was a global technology expected to goose jobs and wages in the USA? Silicon Valley has had a job and wage bonanza as the source of much of this technology. But globalization requires that regions specialize to take advantage of a global marketplace. Those that successfully specialize get the benefit from globalization, those that do not have to compete with those specialized regions on a less efficient basis. Protectionism is like a dike against rising seas. If you need to access the seas your dike will likely not be high enough; if the dike is an impermeable enclosure you must be self-sufficient in both in your desires and your needs.

    The internet facilitates or retards local economic policies, it is not a substitute for rules and regulations implementing free market or redistributionist schemes.

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  5. Ricochet Moderator

    I don’t think a profit motive drove Al Gore to invent the internet.

    I don’t know the best way to measure the economics of information or the impact of information costs on all else but it seems that access to information of all kinds is vastly cheaper.

    I am so old that I used to have to use a library.  I had the habit of using a pencil to write down new words, new metaphorical or historical references and anything else I needed to look up in whatever I was reading at the time.  When I finished the book or article, I would start the process of looking up all those things. That was my real education. The curriculum was just a set of prompts to start the real learning.

    Now I read almost entirely on devices (internet, kindle) which allow me to instantly search anything and I do so, almost compulsively.  My kids and grandkids have had this power their whole lives but almost no curiosity or sense of achievement in gaining info.  It is as if there is no need to know or learn anything because if you really need it, it’s already online. Just Google it. Like the talking rings used by the Eloi.

    It has not happened yet but all professions based on expert knowledge will need to change and will steadily be devalued.  There will still be special needs for surgeons (until robots get better) and barristers (can AI bullsh*t yet?) but internists and solicitors will be displaced by Ai renditions  of WebMD and LegalZoom.  Nobody needs to know that stuff.  It will be online if you need it.

    I think the Right needs to have a medium-term game plan to preserve freedom when the issue will increasingly be about machines owned by a relatively few individuals providing surplus value that needs to be distributed to a population that is largely unemployed and economically superfluous.

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  6. Ricochet Member

    “Plumbing, children!” I said, to mine. “And carpentry, and nursing…you can’t outsource unclogging your toilet, changing Depends or building a new deck…”

    robots, though??? Oh dear.

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  7. user_989419 Inactive

    The answer, obviously, is to destroy the internet.  Perhaps via some kind of federal cash-for-routers program.

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  8. Annefy Member

    I don’t doubt the Internet has been a disappointment in some arenas. But how to measure the improvement in quality of life? Like OB, I am dazzled daily by the obscure questions I have that someone on the Internet has taken the time to answer.

    And I’m wondering how many people there are like me. I don’t count on anyone’s employment #s, but I do okay working for people who need help with websites, databases and the like. None of them need anyone full time, but there are a lot of people who need someone like me 10 hours or so a month.

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  9. Sisyphus Member

    Creative destruction is always a job killer. Not all that long ago in historical terms 95% of us worked in agriculture. All of those jobs thoughtlessly, horribly destroyed by John Deere and his ilk may never be seen again. Brick and mortar has suffered, certainly, but Amazon offers far more variety than any brick and mortar smaller than the Pentagon could approach.

    The business model for newspapers is completely dissolved. The coupons no longer cover the cost of the bird cage liner, and the days news is now the hours news and rolled into millions of RSS readers and podcast players for the consumer’s flexibility. Historically pulp-based media have not wised up and offered affordable digital-only subscriptions for people that no longer want stacks of paper entering the house to be managed and ultimately disposed of.

    What was a 3 magazine household in 1970, today is drawing on hundreds if not thousands of providers from an international market for a fraction of the cost.

    Meanwhile, petite fiefdoms from easy government collection of taxes from brick and mortar to the USPS control of periodical content by the extension of cheap postage classes requiring content review by government bureaucrats.

    Maybe the US economy’s failure to perform is a little more obvious, though? Confiscatory corporate taxes? Runaway government spending? A pervasive pay-to-play mentality in Washington that Bill Clinton did not invent but certainly flogged for all it was worth without the slightest blush, and that Obama, that scion of the Chicago Way, has made the religion of the political class. (Their real legacy.)

    Small business, so difficult to rein in on that whole pay-to-play thing owing to the very flexibility and innovation that drives a healthy economy, has been suppressed by tight money and a Regime hostile to small business that is not captive to the SBA pay-to-play “mentoring” culture.

    But, if I must blame the Internet, I will be comforted by the fact that that is on some level implicitly blaming the AlGore that so speciously claims credit for it.

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  10. Seawriter Contributor

    Well . . .

    My freelance writing career was fueled by the Internet.  It allowed me to get writing assignments and to research what I was writing about.  I would say 75% of everyone I have sold to have either been through contacts made via the Internet or products only sent through the Internet.

    It has also given me a chance to reach markets I otherwise would not have reached. For a few years I was writing a model-making column for an English-language magazine in Hong Kong. (That’s right folks.  China outsourced work to America! And got it.)

    Finally, my freelance writing career allowed me to transition from being a space navigation software engineer to a technical writer in the energy industry when the Space Shuttle program ended. There was a surplus of space navigation software engineers and a demand for high end technical writers. While I had some relevant documents from my old job (software users guides and APIs, mostly) the body of published work in the general marketplace provided credibility as to my ability to write.

    As a result of the Internet, I have experienced job mobility, and wage increases. I am middle class. If not for the Internet I would be another unemployed rocket scientist. (There are a lot around right now.)


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  11. user_989419 Inactive

    One if the biggest benefits of the internet was the destruction of corporate call centers.  Remember the old days?  If you had a problem with a product, such as a printer or a thermostat, you had to call Hewlett Packard or Honeywell’s 800 number.  You could only call during business hours.  You had to wait, on hold, until someone answered.  You had to explain your question to them.  Now, you go to their web sites, at 2 in the morning if you want, and you pull up a pdf of the product manual.

    I know what you’re thinking — if I do have to talk to a human being, now I have to talk to someone in India.  I’m not sure we blame that one on the internet or not.  But I can’t imagine going back to the days where we have to find out everything through the phone line — what are the color options of a 2015 Ford Musting?  During what hours is Walmart open on Tuesday?  Where is the local Chinese restaurant?  Who are the candidates running for dog catcher in the upcoming election?  How do I troubleshoot my HP-1100 printer?

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