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Inequality May Lead to Rage Against the Machines

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
March 9, 2012
Financial Times

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Citigroup just hired a brilliant consultant called Watson to build out its digital banking. This very same Watson also advises healthcare companies such as WellPoint and, in his time off, took the top prize last year on Jeopardy!, the television quiz show. According to his friends, Watson has other corporate gigs that he is coy about, and will soon earn more than $1bn annually. His astronomical income puts him in the top 1 per cent of the top 1 per cent of all American workers. Or rather, it would if he were human. He is a machine.

It is worth contemplating the rise of this IBM supercomputer amid a fraught election season. Out on the campaign trail, Republicans promise to bring jobs back by reining in the government and bashing China. Barack Obama counters with a mirror-image populism, blaming the super-rich for the troubles of ordinary workers. Watson stands as a reminder that something more profound is happening. We are in the midst of a technological upheaval; and financial rewards are flowing to the elites who create and control the new machines. Almost everybody else is threatened – including sophisticated bank executives at Citi and WellPoint's healthcare analysts.

Watson is the standard bearer of a formidable army. Thanks to the relentless arithmetic of Moore's law, the latest Intel chip contains 2.6bn transistors, a million times more than the path-breaking Intel 4004 of four decades ago. The cost of computer storage has fallen about 90 per cent in just six years, according to Martin Barnes of BCA Research; today's transistors are so tiny that you can fit 3,000 of them into the width of a human hair. As a result, companies can store and analyse information on every aspect of the world around them. The era of Big Data is at hand.

The machines that mine these data are upending businesses of every stripe. Renaissance Technologies, the Long Island firm that runs what is probably the best-performing hedge fund of the past two decades, is led by two scientists from IBM's artificial-intelligence lab. Human judgment is making way for machine-driven analysis in the executive offices of sports teams. Tomorrow's medicine is, at least in part, a large programming challenge.

Small wonder, then, that inequality is rising. Innovators and programmers are earning more than ever, as are the entertainers and intellectual superstars who leverage the new technologies to create global brands. High-touch, high-skill professions that cannot be automated (think fancy divorce lawyers) are doing nicely, thank you. But for large swaths of the workforce, the outlook feels bleak.

It is a quirk of US politics that neither Democrats nor Republicans indulge in rage against the machine. Foreign competitors, Wall Street fat cats and big government are the preferred scapegoats, never mind that technology plays a larger role in stoking worker insecurities. But even though Campaign 2012 is ignoring the most crucial change in the economy, it is still important to be clear on what it means.

Do Watson and his ilk portend higher unemployment? In the long run, clearly not. There is no finite set of tasks in an economy, so the fact that intelligent machines perform vastly more functions will not prevent able-bodied workers from landing jobs. But in the short- and even medium-run, displaced workers may have trouble finding new employment, with consequences for social policy that are seldom recognised. To rescue overstretched pension systems, for example, western societies are raising the retirement age. But, as Harvard's Lawrence Summers argues, the timing is unfortunate. Postponing retirement may compound the frictional unemployment that technology threatens.

Even if displaced workers do find jobs, will these jobs be dignified? A society divided between master-programmers and servants may not appeal to the servants, who will be the majority. But neo-Marxist visions of burger flippers on the barricades seem a touch too paranoid. In the 19th century, the shift from farm to factory was decried as dehumanising. But the supposedly alienated proletariat soon morphed into proud welders and machinists and today it is the decline of factories that is perceived as a problem. The lesson is that attitudes adjust and job status is elastic. There may be real unhappiness during the adjustment phase, but eventually the nannies of yesterday will be the respected childcare professionals of tomorrow. Cooks will turn into executive chefs.

And so, in the last analysis, Watson's most enduring impact will be to accentuate the trade-off between equity and growth. Technology and globalisation magnify differences in productivity among workers; if pay tracks performance so as to optimise incentives, rising inequality is the certain result. How far we want to tame that trend should be a central question in the politics of the coming decade. But politicians of both parties are weirdly silent.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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