Saturday, April 26, 2014

Resurrecting the UAW

On January 29th radio host and economist Jack Rasmus interviewed the retired UAW activist Gregg Shotwell for the program Alternative Visions. The podcast is here. (I listened to it last night. I do not have a transcript, so any quotes below are recited from memory.) The topic concerns the state of the modern union movement, specifically the UAW, and its future prospects. I found it while searching for Mr. Shotwell's views on the UAW's Chattanooga defeat--this interview happened before that vote, but I think one can infer his opinion.

Neither of these gentlemen are stupid. I thoroughly enjoyed the podcast and learned much. But their Progressive (actually, Marxist) world view renders them blind to unassailable facts. It always astonishes me how ideological commitment can lead people so obviously astray. I'm certain I behave similarly in other contexts--it's human nature--but on this I can undoubtedly see more clearly than they can.

Mr. Rasmus introduces the topic by asking how unions have failed over the past three decades. And fail they have. As recently as 2002 the UAW had just under 640,000 members. By 2012 that had fallen to a bit over 380,000. Both of those are a steep decline from the 1.5 million members in the 1970s. The defeat in Chattanooga probably signals the end of the UAW as a significant player in American economic or political life.

So what have the unions done wrong?

The problem, according to Mr. Shotwell, is that unions have lost sight of their core mission to defend the interests of the workingman. Wages, working conditions, and benefits are what it is all about. The union should not be involved in plant management or profitability. In Mr. Shotwell's view the relationship between union and management is irreducibly adversarial and zero-sum. It's class conflict all the way down.

Unless unions can earn substantial benefits for their members, argues Mr. Shotwell, then unions serve no purpose. Concession contracts--which aim to increase the competitiveness of the company--are counterproductive. Likewise neutrality agreements (where the company agrees not to oppose the union) must come with some quid pro quo attached, which will ultimately screw the workingman. That, in his view, is what was happening in Chattanooga.

I think Mr. Shotwell's assessment is not far off. The UAW's decline is certainly partly because they can no longer win any benefits for their membership. The union earns $683 annually from each member--that's more than $50/month. For somebody earning $15/hour that's a significant sum, and it is not clear they're getting any value from it.

I believe the economic space for the union has disappeared--the union can no longer provide enough benefits to the workers to justify its cost. But Mr. Shotwell blames this entirely on the cupidity of the union leadership. The UAW boss, Bob King, is the son of a human resources manager at GM. In Mr. Shotwell's opinion this taints his entire attitude. He is more interested in managing the company than in protecting the workingman. Hence the concession contracts and the back-room deals with management.

So Mr. Shotwell would have a lot more credibility with me if the only bad guy were Mr. King. But he attributes vile motives to the entire union leadership, at whatever level. They've all been bought off or have lost touch with their constituents. Indeed, he is down on anybody who even competes for leadership positions. While he expresses sympathy for people in reform caucuses (those who try to replace the current, concessionary leaders with more militant sorts), he thinks they're ultimately doomed to fail. The new leaders will ultimately be bought off or rendered powerless. Mr. Shotwell provides examples.

To me this sounds like a conspiracy theory. That there are one or two bad apples is believable, but that people who have devoted their entire lives to unionism and its cause have all been bought off wholesale--this is incredible. Whatever the flaws of Bob King, or Andy Stern, or Richard Trumka, I have a hard time believing that they're principally interested in selling out their members. No way.

Instead, people who ascend to leadership positions are forced to confront reality. Facts are very stubborn things, unless all you want to do is kibbutz from the sidelines--which, despite his passion, is all that Mr. Shotwell does. A union leader realizes that there is not some bottomless pit of money that's just there for the taking. Management really is operating on very tight margins. Profit--condemned by Mr. Shotwell--is indeed an essential part of doing business, as the plant and equipment required to build cars costs money. Were that not true, then each individual autoworker could build and sell cars in his garage without any investment.

Instead, Mr. Shotwell urges unionists to take matters into their own hands. They shouldn't trust or even wait for the leadership. Rather, if the boss causes problems, they should organize right there on the shop floor to fight back. He calls it the "inside strike," and the tactic involves work-to-rule, work slow-downs, or even short sit-down strikes. Hit-em where it hurts, counsels Mr. Shotwell. Once you threaten profits then the boss will pay attention.

Yeah, right. Inside strikes will undoubtedly get attention, and if repeated probably result in closing the plant. There's a reason why that strategy hasn't caught on among workers.

There are two words that never cross Mr. Shotwell's lips: consumer and automation. Ultimately, cars are produced for consumers. Workers will get paid only if their product is both cheaper and better than the competition's. Mr. Shotwell is wrong about who most benefits from speed-up and strenuous working conditions: it's not primarily the bosses. It is, instead, the customer.

And if the customer benefits, then indirectly so do the shareholders and the employees. The workers keep their jobs, and the shareholders make a profit. It is precisely not a zero-sum game. The class-struggle description is not accurate. The UAW leadership understands this--the long term future of the workers depends on the viability of the company. Worrying about corporate profits is exactly what a union needs to do.

Automation is the principle reason why the UAW membership has been shrinking. Cars are assembled with far fewer people today than before. Indeed, the proletarian worker is increasingly an endangered species, displaced by the robot. Instead of relatively unskilled laborer, technical people are required--folks with computer skills. The world that Mr. Shotwell describes is fading away.

What bothers me most about both Misters Shotwell and Rasmus is their opposition to free trade. Mr. Shotwell still opposes NAFTA, despite the fact that it has substantially improved Americans' standard of living. Few people other than died-in-the-wool unionists are against it these days. Even Adam Smith understood that free trade made people richer--the bigger the market, the greater the degree of specialization, and the richer the society. By ignoring the consumer, our friends completely miss this phenomenon.

I admire and respect Mr. Shotwell. Much of what he says rings true. But he does not understand basic economics.

Further Reading:

Friday, April 25, 2014

More on Piketty

Back in January I posted about Thomas Piketty's new book Capitalism in the 21st Century here. I confessed to not having read the book, understandable since it hadn't appeared in English yet. But I still haven't read it, and now I don't plan on doing so. I have read many reviews, most of which have been negative. As an amateur economist I can read whatever I want to read, and I don't feel like reading Piketty's book.

Much of today's post is based on Kevin Hassett's very nice talk and accompanying slides, here.

My previous description of Piketty's work seems to be reasonably accurate, if simple-minded. Let me just briefly summarize. Piketty defines two quantities. r is the rate of return on capital, roughly equivalent to the interest rate or to the inverse of the price-earnings ratio. g is the global economic growth rate, usually expressed as a percentage of GDP. Piketty's claim is that if r is bigger than g (r > g), then an ever larger percentage of global income will accrue to capital. Contrary, if r < g, then the income will instead accrue disproportionately to labor.

Piketty, who has done an extensive study of historical economic data since the French revolution (for which he is universally credited), contends that r < g for much of the 20th Century, up until 1970 or so. Accordingly, this was the heyday of labor, with the rise of unions, the growth of the middle class, and indeed, the increase of all the good things we associate with capitalism. But in the 19th Century, and then again since 1970, r > g, which favors capital. As capital is mostly owned by rich people, the rich get richer and the poor get (relatively) poorer, leading to wider inequality. That, indeed, is what we have seen in selected wealthy countries.

Piketty goes on to claim that r will be greater than g for the indefinite future, and hence the outlook for capitalism is bleak.

The reviews I have read criticize this in three ways. First, they doubt that r will always be greater than g. If global growth declines (which seems likely), then the return on capital must per force decline with it, at least in the longer term. And even in the shorter term r can't remain high. As capital accumulates, then more capital is chasing ever fewer opportunities, leading to declining returns, i.e., smaller r. Indeed, we find evidence for this trend in current data--low interest rates and the record cash hordes accumulated by corporations indicate that there is a glut of capital. Unlike Piketty's claim that r is generally around 5%, today it's closer to 1%.

Apparently there is a loophole in this logic that Mr. Piketty could squeeze through. r can remain permanently greater than g if the elasticity of capital substitution is larger than one. Now I'm not professional enough to really tell you what that means, but roughly it says if capital can completely replace a worker, then capital will grow at the expense of wages. For example, a hamburger-flipping robot might completely replace a hamburger-flipping person. The elasticity of substitution is very high, though perhaps not greater than one. While the flipping person is redundant, the hamburger-flipping-robot-repairman is still on call. So even in this case the elasticity is likely less than one.

Mr. Hassett reports that 40% of capital is invested in buildings and real estate. This investment replaces no labor at all--the elasticity is zero. (We think Mr. Hassett is joking when he argues that buildings replace people holding umbrellas.) He suggests that the economy-wide elasticity is on the order of 0.4 or 0.5--far less than what Piketty's theory requires.

Then Piketty is dinged on factual grounds. While his study of inequality seems beyond reproach, he may not be looking at it the right way in doing comparisons. Within the US, for example, it is certainly true that income has gone disproportionately to the rich since 1970. We say that the Gini coefficient (a measure of inequality) has increased. But two other ways of looking at it give you a different result. First, mostly because of the dramatic rise in living standards in China, the global Gini coefficient has decreased, i.e., there has been a global trend toward greater equality. This contradicts Mr. Piketty's thesis.

Second, the appropriate measure of poverty is not necessarily gross income, but rather gross consumption. The poor are only poorer if they can't buy what they used to buy. But the Gini coefficient for consumption has remained remarkably constant in the US since 1970. Mr. Hassett explains that, though the rich received large investment returns, government transfer funds have increased in tandem. Measured by consumption, the poor are not poorer.

Finally, Mr. Piketty completely ignores human capital, i.e., any investment in education and skills. Many, such as the economist Gary Becker, believe that the majority of capital is, in fact, the human sort. Mr. Piketty apparently ignores it because it can't be bought or sold like a factory. You can't sell your education. Capital is only invested in stuff you can sell.

The counter argument is that lots of things are illiquid, and yet they're regarded as capital. In the 1990s the post office invested heavily in mail sorting machines, expecting a continued increase in first class mail. That, of course, didn't happen, and presumably those machines lost most of their value. Why should they be counted as capital, but education not? The only reason, so it seems to me, is to avoid a measurement problem, for no doubt the value of human capital is much harder to quantify. But it's still capital.

If you account for human capital, then a good deal of money accounted as wages is instead a return on capital. In that case a much larger fraction of the population will benefit from capital substitution--the phrase don't work harder, but work smarter will hold in spades. Piketty apparently admits as much, suggesting that about 50% of the population will benefit from the trend toward capital.

I find these counter arguments compelling. That, of course, is no reason not to read Mr. Piketty's book. But I find I'm just no longer interested.

Note: Blogging has been very light recently. Partly I am busy with my day job--it's nearing the end of the semester. And then I'm working on my new Jobs book. You can read a draft excerpt here.

Further Reading:

Wednesday, April 9, 2014

Book Review: Lord Of The World

Apparently the Pope has read and frequently refers to Robert Hughes Benson's novel Lord Of The World. Or so says George Weigel in two articles about President Obama's visit to the Vatican, here and here. Mr. Weigel claims (perhaps facetiously) that it is not great literature. I am no judge of literature--I only know if I enjoy reading the book. I did enjoy reading this one.

The book, written in 1907, is a novel about the distant future a century hence, i.e., about 2007. On one level it can be read as science fiction--a prediction about what the modern world will be like. Father Benson (for he was a priest) was not especially interested in technology and that certainly is not his focus. Still, it figures into the plot.

A primary mode of transport is the volor, which modern readers will recognize as an airplane. A volor ascended to 500 feet and could occasionally top 150 miles per hour. Inside, however, they were outfitted like railway carriages, with compartments and a dining car, staffed by a conductor and piloted by a "steersman." They were unheated--passengers packed coats and blankets for the relatively arduous journey over the Alps. There are no automobiles, computers or telephones, though radio telegraphs exist at the margin. It's the world of Sherlock Holmes with airplanes.

Fr. Benson anticipates George Orwell's 1984. His world is divided among three empires: Asia (everything east of the Urals), Europe (west of the Urals, and including Africa), and the Americas. The threat is war between Asia and Europe, which if it happened would be unimaginably destructive. Both sides possess the new "Benninschein explosives," which "...if tales were true, entire towns could be destroyed with a single shell." War had not happened in Europe in living memory, and needs to be avoided at all costs.

Salvation comes in the form of the Antichrist (Mr. Weigel's term, not used in the novel), who by dint of charisma and intelligence unites Europe and Asia under his presidency. This is met with near universal acclaim, and even Catholics acknowledge that the new leader had accomplished good things. Like Hitler, he made the trains run on time.

The struggle is between the supernatural and the natural, humanist world. In the latter humanity is raised to divine status. Religious holidays are replaced by four secular ones: Maternity, Life, Sustenance, and Paternity. The fearless leader has the status of a Nietzschean hero, and is worshiped accordingly.

In opposition is the small remnant of the Catholic Church, the last group of rebellious Christians who have managed to resist both material temptation and violent persecution. Protestant denominations have long since yielded. Catholics believe in the supernatural, and that God will intervene in history and redeem his people. The value of that faith is the matter of this novel.

I don't know about the supernatural, but I agree with Fr. Benson, George Weigel, and (apparently) the Pope that humanism makes for a very poor religion. Where it has been tried--from the French Revolution to Stalin to Hitler to Kim Jong-un--it has failed miserably. For humanism denies the one great empirical fact underlying all religion: all normal people perceive themselves as sinners, unworthy of the moral demands placed upon them. The boundary between Good and Evil runs through the middle of every human heart.

Who knows why people feel that way. I'm sure evolutionary psychologists will have something to say about it. But apart from psychopaths and small children it appears to be a human universal. Humans are simply not divine. Humanism as a religion elides or denies this great fact, and assumes that people can raise themselves up by their own bootstraps to escape from sin. They can't. It simply is not part of our nature.

So religions are both more demanding and more tolerant. Religions believe God's law is absolute, and violation is a sin. At the same time they understand that no real person can obey God's law, and that's where forgiveness comes in. In the religious world view, you can be a sinner and still be a child of God. Sometimes the "sinners," (e.g., gays) find religious forgiveness (e.g., Phil Robertson) to be intolerably arrogant and patronizing. But all religions have as a goal to separate the sin from the sinner--to condemn the sin while forgiving the sinner.

Humanism can't do that. Humanism aspires to create a socialist Man, or a master Race, or (in the case of Fr. Benson's book) a humane Society. Sin must be ruthlessly punished and the sinners killed. Stalin murdered Kulaks and counter-revolutionaries. Hitler murdered Jews and Gypsies. Kim Jong-un murders just about anybody. At least at the beginning all of this murder is for a worthy cause: to expunge sin from the world. But sin is unexpungeable, and soon enough murder just becomes murder, no matter what the intention was.

Humanism is incapable of tolerance.

So I don't know precisely what sin is. In particular, I'm less convinced than Phil Robertson that homosexuality is a sin. It's more likely to be a handicap, if not just an alternative lifestyle. I don't know if using contraception is a sin, though it does seem to me to be horribly counterproductive. Why would you want to purposely impair your own fertility? People who use contraception will not determine the future. Abortion is undoubtedly a sin, but it still has to be legal, as are many other sins.

But this much is certain: no truly religious person will advocate the murder of any of those sinners, if sinners they be. Humanists can make no such distinction--why even today some environmentalists are advocating criminal charges against those who disagree with them on global warming.

So I enjoyed Fr. Benson's book. It's a rousing good tale. I skimmed through some of the longer religious passages about the adoration of the Sacred Host, etc. I understand Catholic thought better than I did before, but I am no closer to believing in the supernatural. I admire and envy their faith, but unfortunately I can't really share it. But of this I am convinced--the Catholic Church represents on balance a positive good in the world. I wish Godspeed and all the best to Pope Francis and his army of believers.

Further Reading:

Saturday, April 5, 2014

Your Future Job: Building A Career In The New Normal

A friend of mine and I are collaborating on a new book entitled Your Future Job: Building A Career In The New Normal. It's intended for college freshmen and their parents, though we hope it will help any intelligent young person. Maybe it's a bit too heavy on the economics for that audience, but we hope not.

We expect it to be around 100 pages long, and hope to have it completed by the end of Summer.

Here is a draft excerpt from Chapter 3 entitled What's New About Normal?

Of course computers can’t do things the same way that humans can. For example, it is now possible for a computer to drive a truck across the country without human assistance (as long as it stays on or near the Interstate; automated trucks can’t quite navigate city traffic yet). Humans do that because they have good vision--we can read signs that say “Kalamazoo--Next Right.” Computers can’t do that--computer vision is still very primitive compared to what humans can see. And for the longest time people thought that computers could never drive trucks.

But two things changed. First came GPS. That means the computer knows exactly where it is. And second came comprehensively detailed maps, such as supplied by Google. That means the computer knows what exit to take without having to read any signs. Indeed, every bend in the road is carefully mapped. The computer can navigate without seeing anything.

The truck-driving computer only needs to see the lane markers, and it needs to slow down or stop if something in front of it does the same. And here the automated truck has an advantage. It can use cameras on all sides of the truck--there are no blind spots. Further, it can use Lidar technology to determine how fast the car in front is moving--this is already in widespread use in the form of adaptive cruise control. The computer never falls asleep, is always fully attentive, and measures reaction time in milliseconds. It can drive 24 hours per day. The result is that automated trucks are safer, cheaper and faster than the human-driven sort.

It is only a matter of time before automated trucks dominate the nation’s highways. The consumer surplus will be huge--costs for things like fresh produce from California will decline dramatically. But millions of jobs will be lost. Over-the-road truck drivers will go the way of Pony Express riders.

And not just truck drivers. Computers, which are primitive today compared to what they’ll be ten or twenty years from now, will displace millions of workers in lots of professions. Brynjolfsson and McAfee cite the following table as a guide:

Table 1: Automation by job type

Already automated
Not easily automated
Being automated now
Not easily automated

Manual routine jobs include a factory assembly-line worker. These jobs are already mostly gone, and the few that remain are disappearing. Similar jobs in fast-food places--flipping burgers--are also on the verge of automation. All of that can be done by machine.

Cognitive routine jobs are being automated right now. Dan’s father was a travel agent--a job that mostly doesn’t exist anymore. Accountants are increasingly displaced by software, such as Turbotax. Routine legal work is being automated--we’ll have more to say about that in a minute. Indeed, there is a long list of jobs that are in whole or in part on their way out: secretary, receptionist, purchasing agent, retail clerk, telemarketer, etc. Whole swaths of the pink collar and white collar workforce are on the bubble. Tom Joad knows exactly how they feel.

The non-routine manual jobs are a different story. Because computers continue to have relatively poor eyesight and hearing, and also are not particularly good at walking around, there are many things they can’t do. (Though there is much progress--see here and here.) Home health care aide jobs look to be pretty safe. Even if a computer had good vision, they still couldn't easily talk to patients.

Then there are the non-routine cognitive jobs, a category that traditionally includes professor and doctor. Tyler Cowen refers to them as jobs for the “cognitive elite,” by which he means people who can work with computers rather than against them. Certainly these are the jobs that many readers of this book aspire to. Table 1 suggests that these jobs will not be automated.

We don’t entirely agree with that conclusion, and that’s why we've put that table entry in italics. The category is more complicated than the simple description non-routine cognitive implies.

So before we tackle that last box in Table 1, let’s think about what computers will and will not be able to do. Inevitably, this implies peering into the future. We are very much aware of the fact that ten years ago people thought that computers could never drive a car. But in some ways that’s true--computers are nowhere near being able to drive a car the way people do. They simply can’t see well enough.

And here’s our prediction: computers will never possess vision, hearing, feel, smell, or taste that in any way rivals that of a human--at least not in your lifetime.

Take vision for example. Human color perception depends as much on psychology as on physics. Human vision does not just depend on the eye, but also on hormones. It’s a horrendously complicated process that evolved over a billion years (or, if you prefer, was created by God). A computer’s digital simulation of human vision will never duplicate the incredibly messy analog reality. Computers are valuable tools that can substantially augment human vision, but they are not even close to replacing us.

We’ll change our mind when a robot can play major league baseball, or compete in a PGA golf tournament.

Computers can flip burgers, but they will never be able to taste food and judge whether or not customers will enjoy it. The skilled chef will always have a job. A computer can diagnose cancer, but only a skilled human being can gather the necessary data from a patient, either by observation or conversation. A lot of specialist physicians will be unemployed while the primary care doctor is still working.

Computers can replace the cashier and ring up purchases, but they will never rival the good salesman. If you already know what kind of car you want, you can order it online. But if you’re not sure, then the personable car salesman is going to play an important part in your decision. Likewise with the real estate agent, or even those travel agents that still exist.

In the last few years a new word has entered the language: big data. This refers to the analysis of a large amount of data, from which conclusions can be drawn. The Jeopardy-playing computer, Watson, and millions and millions of trivia data stored in its memory, along with an algorithm to retrieve them on command. Its command of big data allowed it to beat a human Jeopardy player. Computers just memorize all the answers. That’s the way they drive a truck--they don’t need to see the road because they’ve memorized it. Computers have a better memory than you do.

Computers can also do math better than you can. Math really means any kind of logical manipulation--not just with numbers. They can manipulate words just as easily, and they can do it very quickly. While chess-playing computers have memorized all possible moves for the first 15 or 20 moves into the game, after that they use logic to calculate further moves. As computers get bigger they’ll simply memorize whole games and dispense with the math. Then it will be impossible to take them by surprise.

Here’s where the “cognitive elite” are going to run into trouble. Any job that requires a large amount of memorization will be computerized. As mentioned, that includes many doctors. They spend years in medical school memorizing diseases, symptoms and treatments. This is not time well-spent. Computers will take over that part of the physician’s job. Similarly, professors pride themselves as fonts of knowledge. Sorry Prof, but the Internet knows more than you do.

So here is what it means for you:

  • Your future career depends on skills much more than knowledge. Computers know things, but they can’t do things.
  • The more specialized you are, the more your job is at risk for automation. The general practitioner will be employed long after the oncology specialist is laid off.
  • Jobs that employ the five senses in a sophisticated way are more secure than those that don’t. The chef and the artist have secure jobs. The laboratory technician maybe not so much.
  • People skills are really important.

Further Reading: