Sunday, April 22, 2012

One thing you should never predict is the future

The following piece is my first post at New Economic Centre a blog friend:

Sala-i-Martin a Columbia University professor wrote not long ago that if you want to know how the economy is going to perform in the next years you should not ask an economist but a fortune-teller.

The truth is that usually economists are mistaken for fortune-tellers. Economists’ main duty should not be long-term forecasts but to analyse policies effectiveness. Like weathermen, some economists do short-term forecasts, but those are basically based on the ‘what goes ahead must be similar to what’s left behind’ principle. That is, they use statistical models that predict the future based on the past. That is like driving a car looking at the rear-view mirror. In short, economists are ignorant of future events as anyone.

Yet there are exceptions to any rule. In particular, I found two exceptions worth mentioning. One is 1996 Paul Krugman masterly article in the New York Times and the other is Alan Blinder 2005 academic paper. Both forecasted the same future events, but to do so they didn’t use a crystal ball but basic economic principles. Here I just want to focus on their prediction about the end of higher-education. This prediction, they suggest, is going to happen as a result of two economic events or factors.

First event is about the information age and its importance. Krugman disagreed with all those prophets that argued information to be a key sector: “In general, when the economy becomes extremely good at doing something, that activity becomes less, rather than more, important. […] When something becomes abundant, it also becomes cheap. A world awash in information is one in which information has very little market value.” Today’s world is supremely efficient at growing food; that is why it has hardly any farmers. The future world, and to some extent the present one, is supremely efficient at processing routine information; that is why traditional white-collar workers are going to virtually disappear. Many of the jobs that once required a college degree or postgraduate degree will be eliminated. College provides knowledge and information to its students but as it’s been said information is going to lose its value, computers which are proficient analysing and processing information will replace white-collar professionals.

The second event is about the possibility that human analysts play a –small- part in the information sector. If such future happens, white-collar workers of Europe or America won’t have an opportunity either. In this future, information will be transmitted easily to poor countries and analyzed there for a fraction of the cost in Boston or London. This is what has been called, downsizing and outsourcing. Downsizing and Outsourcing are already affecting for the first time the college, white-collar graduates and will affect them even more in the future. Alan Blinder give us a clue why this is happening “…because technology is constantly improving, and because transportation seems to grow easier and cheaper over time, the boundary between what is tradable and what is not tradable is constantly shifting-- Over time, more and more items will become tradable. Many services are now tradable and many more will surely become so”.

Consequently, wages trends are clear, educated jobs will diminish. In relative terms, personal, face-to face jobs, (that is, jobs that cannot be delivered electronically) will see an increase of their wages. Face-to-face jobs like paranursing, waiters, firemen, policemen, carpentry, household maintenance and so on, “[will] pay nearly as much as if not more than a job that requires a master's degree, and pay more than one requiring a Ph.D.”

This should be rather obvious already; Steve Jobs and Bill Gates were college dropouts, Krugman argued. He finished saying that white-collar, college-educated workers will be fired in large numbers, even while skilled machinists and other blue-collar workers will be in demand. This will signal that the days of ever-rising wage premiums for people with higher education are over. Without investment returns for students, higher-education will lose their clients and without clients universities will disappear or in the best-case scenario become what they were back in the 19th century, a club for the children of the rich, a social institution “to refine their social graces and befriend others of their class.”

So, in conclusion “education, full stop, cannot be the answer anymore.” Blinder says. Don’t get too scared, Dr. Blinder also offers a solution “Want to get ahead today? Forget what your parents told you. Instead, do something foreigners can’t do cheaper. Something computers can’t do faster.” For example, playing live a piece of beautiful music can not be done faster or abroad.


Aaron Andersen said...

As somebody who works as an analyst, in a large performing arts institution, a symphony orchestra in fact, I agree that what our musicians do will certainly be harder to replace than what I do in the future.

But those face-to-face live interactions are already prohibitively expensive in the arts, if the artists are being compensated. If the artists aren't being paid, which is fairly common, the product is more affordable, but quality is often highly variable. So, most people consume cheaper alternatives to live music (and live performances of all types) in mass quantities, even when inferior. If I listen to a symphony at home or watch a movie at home, it's not necessarily because I want or need to be at home--it's because the live version costs too much to consume. As a result, organizations like mine tend to raise an increasing share of revenue in the form of contributions from a decreasing pool of wealthy contributors.

If this is the also direction that labor costs will go for waiters and paranurses and cleaning staff, then enjoying the productive results of their labor is going to become increasingly cost-prohibitive as well, quelling demand for those services. If carpenters salaries increase a lot, then we're going to see even more manufactured homes, as traditionally built home prices will exceed the budget of an increasingly large share of the population. We've already seen this with furniture.

Further, there are a lot of information workers currently paying for all of these services. If we see information worker salaries continuously decline, it will cut demand for those direct services, as well.

If all of this results in a general decline in demand, then local tax collectors will struggle to even pay for the police and fire fighters.

In sum, I don't see that my daughter's best career path is to become a musician, nor a carpenter, nor a waiter. It's looking rather bleak, to be honest.

TS said...

Well, one thing I think this shows is that everyone can't help but predict the future.

This is because all of us have certain expenses but uncertain future income. As Keynes pointed out in the General Theory, we will always tend to extrapolate the current economic situation into the future, however far out is necessary to make a decision.

The problem, of course, is that some people can't stop, and start applying this methodology willy-nilly to whatever trend catches their fancy. In many cases, you can be right for the wrong reasons predicting a cyclical economy, but all of us living on the moon or driving around in hovercrafts still escapes us.

In this case, the trend of foreigners making stuff cheaper has been around for about fifty years, and yet we're all not playing in symphonies. There's actually quite a few people in the U.S. still making cars, something that was supposed to end two or three decades ago when the Japanese were taking over the world.

And while the most valuable company in the world, while it does have most of its I-products made overseas, still finds the capacity to employ tens of thousands in the U.S. in relatively high paying jobs.

While the downcycle was indeed horrible, and the policy response worse, the economy managed to recover somewhat despite this, and almost certainly will continue for the near future. Projecting any kind of upward or downward spiral on an inherently cyclical economy is only going to leave one wrong and frustrated.

Unknown said...

The future is a bounded space and only exists as a vision to fill that projected outcome space with weighted risk-adjusted temporal expectations. An economist can extrapolate lineal trends from any set of data points but at no point or plane do these linear projections have a need to intersect on what amounts to no vision. Trends with no time zone capture quotient.

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