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Don’t fear robots taking your job – worry about them cutting your wages

Don’t fear robots taking your job – worry about them cutting your wages

Robots and artificial intelligence (AI) seem to be in the news all the time, and breakthroughs are announced regularly.

Last year, it was an AI programme which beat the world champion at Go, a game immensely more complex than chess. Now, in the austere American journal the Proceedings of the National Academy of Sciences, comes news of a big step forward in the task of getting AI programmes to think like humans.

Once we have learned to ride a bike or swim, we can remember how to do it, even after a lapse of many years. In the meantime, we will have learned many other skills as well.

This is straightforward for humans. But it has proved to be extremely difficult for AI. When an algorithm such as a neural network learns a new task, the challenge is to prevent it from “forgetting” how it solved previous ones, how to stop its knowledge from being overridden. A big team from Google’s Deep Mind and Imperial College London claims to have solved the problem.

Scientific progress such as this is uplifting and inspiring to read about. Yet there always seems to be a downside. On almost the same day as the Deep Mind paper was publicised, the latest in a series of gloomy reports about the impact of robots and AI in general on jobs was released by PwC.

“Up to around” 30 per cent of existing UK jobs are susceptible to automation by the early 2030s, intones the firm’s blog on the report. Many others have come up with similar sorts of numbers.

For economists, the question of the impact of AI on the labour market is not so much about the eventual impact on jobs. It is about the level of real wages at which jobs will continue to exist.

We have seen massive technological progress for over 200 years. Huge numbers of jobs have been destroyed, but many others have been created. Professor Len Shackleton of Buckingham University points out that, in the census of 1841, domestic servants made up one quarter of all jobs. Lots more were in what he calls the “horse economy”, for railways had scarcely begun. Almost all of these disappeared long ago. Now, we have behavioural pet therapists instead.

Bob Rowthorn at Cambridge and Stephen DeCanio at the University of California have both separately extended the standard model of economic growth to include a robot (AI) sector. DeCanio’s summary is almost a popular caricature of economists: “an increase in robotic labour can have either a positive or a negative effect on wages”. But both of these highly technical papers are serious attempts to grapple with trying to understand the circumstances in which AI will either raise or depress real wages. The answer is not obvious.

Apart from a brief surge of interest in the 1990s, the mainstream model of economic growth has not really been worked on since its inception in the 1950s. But it offers a powerful framework for understanding the impact of AI. Economists should start to focus on it again.

As published in City AM Wednesday 29th March 2017

Image: TOSY Ping Pong Playing Robot by Humanrobo is licensed under CC by 2.0
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Claims that a low tax, low regulation UK would be a disaster are rubbish

Claims that a low tax, low regulation UK would be a disaster are rubbish

Dame Minouche Shafik, Deputy Governor of the Bank of England, is leaving to become Director of the London School of Economics.  Last weekend, she gave her final interview wearing her Bank hat.

Shafik issued what was described in the media as a “thinly veiled warning” to the Chancellor, Phillip Hammond.  She stated that it was an “illusion” to believe that transforming the UK into a low tax, low regulation economy would give it a competitive advantage.  Indeed, Shafik went further and offered the opinion that such polices risked “hugely disastrous consequences for the economy”.

We have heard such prognostications before. In the run up to Brexit, the Treasury claimed that unemployment would rise by 500,000 by the end of 2016 in the event of a leave vote.  It actually fell.  The Bank signalled a similar opinion, that Brexit would be bad.  Doom and gloom was prophesised by the OECD and the IMF.

These institutions seem permeated by what we might call “Davos liberalism”, the sorts of opinions which would be congenial to George Clooney.  Of course clever, well meaning people can design policies and regulations which will benefit ordinary people, who after all cannot be expected to understand these things and might hold incorrect views!

Shafik claimed that the UK economy has lost 16 per cent of GDP relative to trend because of the financial crisis. Looser regulation would run the risk of an even bigger loss in future.  But the French economy is much more highly regulated than that of the UK.  It has lost at least 20 per cent of GDP relative to trend, some £80 billion more than the UK.  And France has at least 1 million more people who are unemployed.

Shortly after the Shafik statement, the government announced a major review of how the UK can become the world leader in artificial intelligence (AI) and robotics.  We can take with a pinch of salt the unnervingly precise estimate that £654 billion can be added to the British economy by 2035 if the growth potential of AI is achieved.  But we are clearly already a world leader in this area and, equally clearly, if we succeed in capitalising on this, GDP will be boosted by a very big number.

An essential ingredient for success is to attract the innovative thinkers who will push out the frontiers of the science, and the entrepreneurs who will help turn the ideas into practical tools.  It is of course possible that a system of high personal and corporate tax rates could succeed in attracting such people.  But it seems plausible that low tax rates are more likely to do the trick.

The high taxes imposed by President Hollande in France illustrate the point.  Young French people have flocked to the UK.  London is now the sixth largest French city in the world in terms of the population of native French speakers.

Our borders need to remain open to highly skilled individuals.  But we need policies which continue to attract them rather than drive them away.

Image: French President François Hollande by Foreign And Commonwealth Office is licensed under CC by 2.0
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The people of Burnley and Bradford have a point about the impact of immigration

The people of Burnley and Bradford have a point about the impact of immigration

The scenes as the migrant camp was cleared in Calais once again provoked bitter divisions in British society. Metropolitan luvvies and liberals tweeted their virtue and called for no restrictions on immigration. In more traditional areas, there is active resentment at the possibility of even further inflows of foreigners.

When New Labour decided in the early 2000s to allow large-scale immigration from new EU member states, we were seriously invited to believe that an influx of immigrants on a scale unprecedented in our history would only have positive economic effects and would boost economic growth.

Economics certainly suggests that an increase in labour supply can increase growth in output. But in the so-called neoclassical growth theory of economics, even in the post-endogenous variety made notorious by Ed Balls in his previous incarnation, by far the most important source of sustained growth is innovation.

A truly modern economy does not rely on more and more capital and labour being fuelled into the machinery of production. That was the old Soviet model.

A modern economy relies instead on innovation. So there are at best limited benefits from importing more and more labour. True, immigrants can bring new skills, found innovative new businesses and, as they tend to be younger, they can slow down the ageing of society. But they, too, get older eventually, so this is not a long-term solution.

The anxieties about immigration are not couched in the arcane language of economic theory. But a fuller appreciation of the theory does enable us to understand why people worry so much. Underlying the theory are the assumptions that supply and demand balance in labour markets, and that the prices of the various kinds of labour – in other words, wages – are set at appropriate levels.

A recent paper in the Journal of Economic Perspectives by Christian Dustmann and Uta Schönberg of University College London shows that large-scale migration in fact creates serious imbalances and mismatches in labour markets.

They provide extensive evidence of what economists call “downgrading”. “Downgrading” occurs when the position of immigrants in the labour market is systematically lower than the position of natives with similar education and experience levels. The authors calculate that, in Germany, recent immigrants have wages which are on average 17.9 per cent below those received by natives with similar age and skill profiles. In the US, the figure is 15.5 per cent and in the UK 12.9 per cent.

Dustmann and Schönberg illustrate the disruption which mass migration can cause even more starkly. They calculate that while 69.7 per cent of immigrants in their samples can be classed as high skilled in terms of their education, only 24.6 per cent are in high skilled jobs. In their dry terminology, this means that “immigrant arrivals to the United Kingdom were a supply shock in the market for low-skilled workers”.

Mass migration has not simply meant more people competing for jobs. It has meant that people with higher skill levels are competing for your job. In other words, the people of Burnley and Bradford have been right all along, and the metropolitan liberal elite completely wrong.

 

As published in CITY AM on Tuesday 1st November

Image: Calais Jungle by malachybrowne is licensed under CC by 2.0

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Corbyn is completely out of touch with the real debate about UK austerity

Corbyn is completely out of touch with the real debate about UK austerity

Following the Brexit vote, normal service seems to have resumed. A key question in economic policy since the General Election of 2010 has moved centre stage once again: should the government abandon austerity?

At one level, the question has an easy answer. Interest rates are now so low that the UK government can borrow for 30 years at a rate of not much more than 1 per cent, so some relaxation in terms of infrastructure spending does seem sensible. It is essential that the projects are not motivated by purely short-term political expediency, but in principle they are a good idea.

For Jeremy Corbyn, the answer is even easier. He would carry out no less than £500bn of extra public spending. How would this be paid for? Even easier, just grow the economy, stupid! Extra taxes generated by economic growth will fund whatever we like.

This is not a spoof, it is what Corbyn and his shadow chancellor John McDonnell actually believe. Taxes are currently about 40 per cent of the economy, so to pay for £500bn of extra spending, the economy needs to grow by something like £1.25 trillion. Its total size at the moment is just under £2 trillion. This stupendous growth will take place like something out of Harry Potter, once Jeremy waves his wand.

The real task of political economy facing the chancellor is a much more difficult one. At one level, there is no need to relax the policy of austerity and the simple reason is that the UK is at full employment. The unemployment rate from April to June, the latest data available, was just 4.9 per cent. This is well below the average of 7.3 per cent during the period since the major oil price shock in 1973. Record numbers of people are in work, no less than 31.75m of them, up by 600,000 on the same period a year ago. The labour market is essentially in equilibrium, and almost anyone who wants a job can get one.

But a key reason for full employment is that labour has priced itself back into work. Following the recession in 2008, earnings after allowing for inflation fell every single year until 2014. Only last year was this trend halted and a modest increase registered. Workers have become cheaper to employ.

The downside is that many people in work have experienced falling living standards. If real earnings rose by 5 to 10 per cent to make up the lost ground, on the one hand there would be less incentive for an individual employer to hire someone. But on the other hand, the “price” of labour is the wage, and higher wages mean more money to spend, and higher demand for goods and services. So more workers would be needed by firms to satisfy this demand.

In principle, full employment can exist with higher earnings. The risk, however, is that we become trapped in a relatively low wage full employment situation.

If the government were to relax austerity to do something about this, it would be a very difficult balancing act to pull off. But the political rewards could be huge.

As published in City AM on Wednesday 31st August 2016

Image: Anti Austerity March London by bjpcorp licensed under CC BY 2.0

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Why austerity must be the order of the day for May’s chancellor

Why austerity must be the order of the day for May’s chancellor

On the face of it, the Brexiteers have a bit of explaining to do.

A week before the vote, Boris Johnson dismissed fears about the value of sterling, and accused the governor of the Bank of England of “talking the economy down”.

Yet the economy does seem to have stalled, property funds have had to suspend redemptions, and the pound has collapsed. So what is to be done? The chancellor – whoever Theresa May chooses for the job – faces something of a challenge to kick-start the economy and restore confidence. Fortunately, economic history provides some very clear guidelines.

In 1949, the post-war Labour government devalued the pound by 30 per cent, from a rate of $4.03 to $2.80. The latter rate held until 1967, when the Labour government of Harold Wilson reduced it further to $2.40, a fall of 14 per cent.

By the time of Margaret Thatcher’s first government, the world had moved away from fixed exchange rates to a floating system. Against the dollar, sterling fell by 13 per cent in 1981 compared to the previous year, and by further 14 per cent in 1982.

In each case, the devaluation was followed by periods of strong economic growth. In the five years after the devaluation of the late 1940s, GDP grew by an average of 3.7 per cent a year. Following the Wilson devaluation, the five year average was 3.6 per cent, and the corresponding figure in the 1980s was 3.9 per cent.

These compare to the average over the post-war period of just 2.5 per cent. Obviously, a fall in the value of the pound makes our exports more competitive and enables British goods and services to compete more effectively against imports in our domestic markets. But there was an additional factor which was necessary to take advantage of the devaluations.

In both the late 1940s and mid to late 1960s, the economy was at full employment. There was a bit more slack in the early 1980s, but this was almost entirely in the old industrial areas. In the current situation, we are effectively at full employment. The unemployment rate is only 5 per cent, and a record 74.2 per cent of the working age population are in work. Space had to be created to enable net exports to expand.

In each of the three historical episodes, the then chancellors did so by tightening the fiscal stance. In other words, by implementing austerity.

Under the left-wing government of the 1940s, the policy was dramatic. A budget deficit of over 6 per cent of GDP (over £100bn at today’s prices) was transformed to surpluses of 4.6 per cent in 1949 and 3.4 per cent in 1950. Roy Jenkins changed the 1967 deficit of 3.9 per cent of GDP to a surplus of 1.8 per cent in 1969. And Geoffrey Howe provoked the notorious letter signed by 364 economists by cutting public spending in the early 1980s. In each case, devaluation combined with drastic fiscal tightening worked wonders.

The lesson is clear.

As published in City AM on Wednesday 13th May

Image: Numbers and Finance by reynermedia licensed under CC by 2.0

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The poor state of macro justifies scepticism with Brexit disaster forecasts

The poor state of macro justifies scepticism with Brexit disaster forecasts

David Cameron has tried to frame the Brexit debate into one based on economics.  Standing with him is the overwhelming consensus of economists themselves, from academics to the International Monetary Fund (IMF).  Their pronouncements are not having that much impact on the electorate if the polls are to be believed.

There is justification for this public scepticism. The arguments relate to what might happen to the economy at the aggregate, or macro level.  How much will GDP rise or fall, how many jobs will be lost or created, what will happen to trade, to inflation?

At the individual level, or micro level as economists call it, a great deal of progress has been made in the past twenty years or so. But at the overall, macro level, mainstream economics has if anything gone backwards. Concepts such as rational behaviour and equilibrium have been incorporated into the thinking of macro economists, at the very time that their micro colleagues are challenging them.

Olivier Blanchard, until recently chief economist at the International Monetary Fund, has real form on the perils of believing orthodox macro economics. In August 2008, for example, just three weeks before Lehman Brothers collapsed and the worst recession since the 1930s burst on the world, he published a paper claiming that the state of macroeconomics was “good”.

The relationship between inflation and unemployment is a central building block of macroeconomics.  Economists even have a special phrase for it, the so-called ‘Phillips curve’, named after the LSE based academic who discovered it in the 1950s. The curve in theory says: the lower is unemployment, the higher is inflation.  This is the subject of Blanchard’s latest offering in the American Economic Review.

The Phillips curve is not just of academic interest. The Monetary Policy Committee, for example, has an inflation target, and unless they know what the curve looks like, they are not going to be able to do a very good job.

Blanchard sets out a formidable looking mathematical model. He then employs statistical techniques in conjunction with the theory, in the same way that, for example, the UK Treasury published one with their estimates of the trade costs of Brexit, and claims that “the US Phillips curve is alive and well”.

Up to a point, Lord Copper. For one of Blanchard’s conclusions is that “The standard error of the residual in the relation is large, especially in comparison to the low level of inflation”. Translated into English, this simply means that his model does a poor job at explaining what has been going on. This is hardly surprising.  The unemployment rate peaked in the US at just under 10 per cent in 2010. Since then it has halved to stand at 5.0 per cent.  But inflation is slightly lower, at 1.2 per cent compared to the 1.6 per cent average in 2010.  The story is just the same in the UK and Germany. Since the crisis, unemployment has fallen sharply, and inflation has edged down. Macro models are by far the weakest part of economics.

Paul Ormerod

As published in CITY AM on Wednesday 8th June

Image: Exit by Shannon Clark is licensed under CC BY 2.0

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