The misperception derives from the fact that this recovery is different from anything that has happened in the past, and the traditional measures of economic well-being are no longer very helpful. To see the bigger picture we have to back up and consider some very basic facts. As Milton Friedman eloquently pointed out more than 50 years ago, the measure of any economy is how well the consumer does. If the consumer thrives, we're all richer than we were before. And contrary, if the consumer suffers, we're poorer.
The economy is not about workers or employment. Adding workers and paying them more raises the cost to consumers and lowers our standard of living. Consumers are best served when workers work efficiently for market rates. Nor is the economy about capital. Prices are cheapest when interest rates are zero and capital is freely abundant. Ideally, profit margins go to zero.
Marxists certainly don't understand this. They think the economy exists to benefit workers--the goal is to raise wages, featherbed work sites, and constrain efficiency. While this might make small groups of workers better off, it hurts everybody else. Because--and this is the point they miss--everybody is just another name for the consumer. All people, from the richest capitalist to the lowliest bum, is a consumer, and will be better off if prices are low.
So how's the consumer doing these days? I'm typing this on my new computer, which I purchased for $249. By a good margin it's the best computer I've ever owned. It weighs 2.4 pounds, has a six hour battery life, comes with wireless and Bluetooth, along with a built-in, hi-res color monitor. The first computer I purchased (back in 1987 or so) was an IBM-XT, and if memory serves it cost about $2,000, which adjusted for inflation comes out to $4,000 today. It weighed about 50 lbs, including the monitor, wasn't connected to anything (it'd never heard of the Internet), and didn't even have a battery. Unless you consider fluorescent green to be a color, it didn't have a color monitor.
So this consumer is doing fine. But--answer the naysayers--that's only true for the IT industry. Once you get away from computers and software, prices have not fallen that much. And worse, wages have been static since the 1970s. They say I've cherry picked the example to make my case. And a few years ago they'd have been right, but not anymore. For just as it took a generation before electricity actually changed the economy, and just as the automobile (mass produced already in the 1920s) didn't beget the interstates until the 1950s, so also computers have spent a generation as a separate phenomenon, having rather little influence on the larger economy.
But that's changing fast. We see it already in the law business. The legal workforce is being drastically reduced as more and more services are automated and computerized. Wages for new lawyers are falling fast, assuming they can find a job at all. Applications to law schools are declining, and inevitably some of them will close. This is good news--not for lawyers, and certainly not for those who bet wrong and just graduated from law school--but for consumers. Less money is spent on legal services than before, and our standard of living is commensurately higher.
Education, especially higher education, is being automated, and as a result prices are beginning to fall dramatically. Georgia Tech now offers an on-line, masters degree in computer science for under $7,000. Soon enough, most lecture classes will be delivered on-line, significantly improving the quality of the student's experience. Grading homework sets in college science classes is already completely automated. The result is the ranks of college professors will decline substantially, and the job they do will be very different from what they do today. Students (i.e., consumers) will get a better education at greatly reduced prices. The same trends are happening in K-12 education as well.
The driverless car is on the cusp of mass adoption. The primary hurdles are legal, not technical, but they are already legal in three states (Nevada, California, and Florida). Initially they will probably aid the handicapped--blind people will be more mobile with a car that drives itself. But soon enough it goes mainstream--taxicabs won't need drivers, and the cost of a cab ride will decline by 50% or more. Indeed, in the future riding cabs may be cheaper and more convenient than owning your own car. Trucks will also go driverless--the cost of moving freight will shrink accordingly. Millions of cab drivers and truck drivers will be unemployed, along with traffic cops and parking enforcers. But the consumer (again--everybody) gets better service at cheaper prices.
There are many more examples: manufacturing, retail, medicine--all of these and more will be automated and their work forces laid off. It's terrible for workers, and long term not all that good for capital, either. But it's fantastic for the consumer, and that's the bottom line.
So today I got a new computer at a fraction of its historical price, and tomorrow the whole vast array of consumer goods will be similarly cheaper. My children and grandchildren will have a much higher standard of living than I have today. As I say, we're in the early stages of the greatest economic boom ever.
So what's with the pundits and the statistics? Why can't they see the obvious changes described above? The problem is they're looking at the wrong thing. For there are two ways to raise our standard of living, i.e., make consumers richer. One is you can employ them as workers, pay them higher wages, and watch their standard of living go up. This is the pattern that prevailed in the 1950s and 1960s, and it's the pattern that the pundits expect to repeat today.
But there's another way consumers can get rich. Instead of giving them more money, let's instead just lower prices. Today my computer cost $249. Ten years from now I'll be buying better computers at the Dollar Store for $4.99. A college education for my grandchildren might cost
The historic measures of economic health are GDP growth and total employment. Neither of these have recovered as much as hoped, from which pundits infer that the economy is still struggling. But they're looking at the wrong data, and drawing the wrong conclusions.
The Fed has been printing money at a rate of over $1 trillion annually. Many folks, especially over at Zerohedge, warn that inflation--maybe even hyperinflation--is just around the corner, or has even started now. But they're wrong. If anything, the Fed is just barely keeping the deflationary wolf from the door. Because of automation, the marginal cost of production has gotten so low that prices have nowhere to go but down--despite the Fed's heroic efforts to the contrary.
Non-physical services are heading toward free. Wikipedia and Google Search are free. Education--the repackaging of public-domain information--will trend toward free. Medical care--another information-intensive business--will see prices drop toward zero. With 3D printing even traditional metal-banging industries will be able to cut costs dramatically. Look for much cheaper and better cars and airplanes in the near future.
So real prices are going down, and absent the Fed's mega-printing, nominal prices would be going down as well. GDP is a measure of all product purchased by consumers--but consumers are paying less. Therefore, GDP has to go down, and would do so dramatically except for the Fed's levitation. But this is not bad news--it just means we're getting richer faster than the economy can keep up.
Likewise, productivity is measured as output per hour worked. Historically, the initial benefits of increased productivity have accrued to capital--hence the value to the capitalist of what The Militant calls "speed-up." But no more. Today the benefits go straight to the consumer. Amazon is an excellent example--not only is it a big, automated company, it is also a zero-profit company. They are betting the store on future profitability, and in the meantime passing all the advantages of automation on to the consumer. If the value of output declines (because of lower prices), and the number of worker hours also declines (because of automation), then productivity will stagnate. Observers conflate that with recession, which it isn't.
There are some things that are unlikely to get cheaper. Food and lodging are two. Absent another great, green revolution that dramatically increases world agricultural productivity, food will continue to be expensive. Likewise, land and housing are fixed commodities for which prices cannot go down by much. Fuel will also cost approximately the same per btu, but new technology will greatly reduce the btu's needed, so the overall fuel expense will decline.
But this has a perverse effect on statistics. One common measure of well-being is the fraction of income spent on food. In a rich country (the USA) it is a low 6%. In poor Kenya people spend an average of 45% of their income on food. This is taken as proof that the US is richer than Kenya, which it is. But since food, housing and (to a lesser extent) fuel cannot decline in price as fast as everything else, then in the new normal we will spend a larger fraction of our incomes on food than before. You can already hear the wailing and gnashing of teeth--oh see how poverty is increasing, they will claim. But it's not true. Food costs relatively more not because we're getting poorer, but because everything else is getting cheaper.
Still, the naysayers will claim, you've got millions of unemployed people--all those drivers, teachers, doctors, lawyers. And in the short and medium term that's true. The typical college graduate is now ill-prepared for the marketplace. But long run, if you give consumers extra money--either by paying them more or lowering prices--they'll figure out a way to spend it. People are like that. And since gizmos will be cheap or even free, the money will get spent on personal services, i.e., things that only people can do.
People will do much less mechanical and mental work than they do today. Computers and machines can do that better and cheaper. Instead people will do emotional work--work that makes you (the consumer) feel better, flatters your ego, inspires you, makes you happy. The smiling waitress, the solicitous bellboy, the charming prostitute, the marvelous writer, the amazing juggler, the awesome musician, the skillful masseuse, the personal trainer, the charismatic teacher, the wise pastor--these are the jobs of the future.
Dog-walking and waitressing are not high-paying jobs--not the sort of work your newly minted Princeton graduate aspires to. Though we can count on smart, creative people to find ways to add value to emotional work jobs. Still, the naysayers will moan about how many people are "falling out of the middle class." The economy "can't create enough quality jobs for new graduates." Well, horsefeathers, I say. Just suck it up and enjoy the wealth.
On a typical day twenty years from now, waitress Jane buys a new computer for under $5, visits a (virtual) neurologist for $15, pays her son's monthly tuition bill for $19, and picks up a bag of groceries for $55, along with an additional $2 for the cab fare. Can she live on a minimum wage job? Hell yes!
So we'll be working harder in less fulfilling jobs at (slightly) lower pay. Yes, there will be some geeks and skilled laborers and even a few professors who beat the odds, but the majority of labor will be the emotional sort. We won't be happy as workers, though we'll get much more enjoyment as consumers. Prices will go down faster than wages, and quality will improve. Perhaps we won't enjoy as much as we should, but we will gradually, slowly, relentlessly, irreversibly be getting richer and richer and richer.
Laissez les bon temps roulez!