How to save US workers from the robots: A Q&A with entrepreneur Ashwin Parameswaran

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An important question and a vexing one: Why is the US recovery still so weak? Five years after the official end of the Great Recession, growth remains maddeningly subpar. Folks on the right like to talk about “uncertainty” stemming from President Obama’s economic policies, from Obamacare to environmental regulation to Dodd Frank. Folks on the left have latched onto a theory called “secular stagnation,” cooked up by former Obama White House economist Larry Summers, which see chronic inadequate demand  – partially driven by income inequality — as the big problem.

Blogger, ex-banker, and current entrepreneur Ashwin Parameswaran has an intriguing thesis of his own — much of it concerning automation –outlined in his marvelous essay “Technological Unemployment Amidst Stagnation.” This alternate explanation also attempts to explain why “the “benefits of the current economic recovery have flown disproportionately towards corporate profits with wages and employment lagging far behind.” In this episode of the Ricochet Money and Politics Podcast, I chat with Parameswaran about his ideas. Here are some edited highlights from our chat:


Let’s start by laying out your theory. and then I’m going to try to push back a bit on it.

There are more than two ways of looking at what’s wrong with the economy right now, and there are a lot of contradictory positions. One of the contradictions that a lot of people don’t seem to focus on is the fact that we seem to be worried about technological unemployment and that robots are going to make human beings obsolete. And at the same time, we seem to have this idea that we are in the midst of this great stagnation [as seen in] Tyler Cowen’s great book on this topic.

This essay in particular and a lot of my other work is trying to argue that these two are not opposing phenomena. They both can happen at the same time. The primary argument is really that we are getting a lot of process innovation which means that we are making things that we consume today in a more efficient and cheaper manner which means less manpower. That leads to a lot of technological unemployment. But we are not getting enough product innovation. We are not getting enough disruptive innovation, which means we are not making new products that people consume.

The combination of these two things means that we can have long-run stagnation, but at the same time we get technological unemployment. It’s easy to argue why we have process innovation and technological unemployment because of it. But the larger question is why we don’t have enough disruptive innovation.

So you’re saying that there’s a weird phenomenon in that we are very worried that people are losing their jobs because there’s so much automation. Yet at the same time people are also worried that there’s not enough innovation in the economy. But what you’re saying is that there is more than one kind of innovation. There’s the kind that replaces human workers with machines which is what we are all kind of worried about. But there’s this other kind of innovation which creates new businesses, new products, new services, and hopefully good jobs?

Absolutely. Let’s put it this way: If we had no consumer goods during the twentieth century and if all we did was make food in an increasingly efficient manner, then sooner or later there’s only so much food that you and I are going to eat. Just making our existing basket of consumer goods in a cheaper and more efficient manner does not lead to long-run increases in aggregate demand.

You need to create new products that replace the old products in the consumer basket. Today, most of us consume a basket of goods that is very, very different from what a person would have consumed 100 years ago.

OK, it’s not like there is good innovation and bad innovation. Both have their role. But how do we know that is happening, that we are getting more of this one kind of innovation and not enough of the other? 

The evidence on this is not very easy to get. But at least in the United States, there’s a lot of incredibly good data on the rate at which new firms are being created, the amount of employment being created by new firms, the sort of flux in the churn of the corporate sphere or what some would call “business dynamics.”

Some of the other stuff is pretty circumstantial, I agree with you that it’s hard to get good evidence on exactly how this is happening. One of the arguments you can see in the sluggish pace of the new entry of firms. One of the most established results in management theory—Clayton Christensen is someone who says pretty similar things, though it really predates him (I think the first management theorist who came up with this distinction was James Utterback in the 1970s)—essentially concluded that process innovation comes largely from incumbent firms who were already established in the market.

Product innovation or disruptive innovation tends to come almost completely from new entrants. One of the problems we have in the American economy and in the British economy to a large extent as well is that we don’t have enough new entry. We don’t make it easy enough for new entrants to get in there. A lot of what people call the neoliberal revolution in the last 30 years has really just been a transfer of government power to large incumbent corporations.

Let’s assume that you are right that we are getting a lot of the kind of innovation that replaces man with machine and makes things more efficient and makes existing products better. And we’re not getting enough of the new, cutting-edge, disruptive new firm kind of innovation. If this is indeed happening, why is it happening?

We have too many regulatory barriers to new firms starting up. It’s too expensive for new firms starting up in many parts of the economy. To give you two very obvious examples: finance and healthcare, where the notion of a start-up is an oxymoron. In most parts of these sectors, you’d have to spend a few million dollars on lawyers and dealing with regulators before you could start a new business up. That’s a huge barrier to entry.

It’s true in a lot of other places. I think in some instances, it’s much worse in the United States than it is in places like the United Kingdom. A great example would be occupational licensing and the sort of regulations you have on food, which are probably a little bit more lax in the United Kingdom. One of the criticisms I get a lot from people is that people assume that I am talking about Silicon Valley entrepreneurs.

Well that’s what people are thinking as you’re talking. They say: “What do you mean? We’ve got Google, Facebook, Twitter, Apple!” I mean we seem to be in a golden age of innovation.

Right, but I’m talking about much more mundane and widespread innovation: the small entrepreneurs, the people who start up food carts on the street or the people who want to run small farms doing something interesting. These are not businesses that are going to be the next Google. I’m talking about businesses that the middle class can use to get away from having to work as employees. It’s not that there’s anything wrong with working as an employee—and I guess this is another point that is a big part of my thesis—but if you give people the option to be capitalist, then that increases their bargaining power.

That’s a much more robust way of helping the masses than trying to protect them from the power of the large corporations by increasing trade union power.

You’re painting a description of the economy with not enough creative destruction and churn and dynamism. How can that be, in both the British economy and the American economy, when we’ve had this 30-year pro-market shift in public policy, which is supposed to create a more market, free-flowing economy. I thought that’s what we’ve been doing for the past 30 years which a lot of folks on the left say that we have to stop doing. Has that not worked?

I don’t see the last 30 years as a shift towards really small enterprise or freer enterprise. It’s really a shift from state-dominated economies to large private-sector entity-dominated economies. A great example of this shift is actually in mainland Europe. If you look at what’s happened in countries like France or Italy over the last 30 or 40 years, it’s really that they simply privatized a lot of industries and replaced what was a state monopoly with a private sector monopoly.

That obviously works well to some extent because the private sector player is incredibly motivated to squeeze out process inefficiencies. The private sector player is much more motivated to keep costs down. On the other hand, sooner or later, when you have only two or three players, they are simply never motivated to in some sense disrupt their own business. In fact, this is pretty much Clayton Christensen’s primary thesis that the incumbent is not motivated to kill his own business.

So unless forced by a new competitor to try to be more innovative and ‘innovate or die,’ they are going to go for innovations that just allow them to do what they have been doing, but just in a more profitable way. That’s the flip side. So you want the new companies to bring out new products, but you also want new companies to put pressure on incumbents then, right?

Absolutely. The empirical evidence is that even when new companies do put a lot of pressure on incumbents, incumbents still don’t react often. At the very least, you need that pressure, otherwise nothing will happen.

The other part of my thesis which very, very few people agree with me on is my criticism of the role of the Greenspan-Bernanke Fed in all of this. Over the past thirty years, the Greenspan doctrine of monetary policy essentially can be boiled down to one thing: protect asset prices. He realized that if you protect financial asset prices, whenever they begin to fall then the real economy takes care of itself. The effect of protecting asset prices feeds through the real economy and economic growth recovers.

My argument is that this sort of wholesale protection of broad based asset prices distorts the economy in some pretty dangerous ways. If you’re a smart private sector player, you realize that this exists and you align your portfolio and your business strategies to take advantage of this protection. So, you’ll take on a lot of very broad-based macro-economic risk. You’ll level it up. But you will not take idiosyncratic risk: business specific risk that is not subject to this protection. Innovation is fundamentally about taking idiosyncratic risk.

So you have banks getting involved with exotic mortgage products and mortgage-backed securities and derivatives. So you have them doing that and not loaning to entrepreneurs?

If you look at what the Fed was set up to do—now the Fed, or the ECB, or any of the central banks—the loans that they do lend against to their repo window are primarily mortgages, pooled asset-backed securities: there are no small business loans in these pools; it’s a very recent phenomenon that the European Central Bank actually has included these loans. But, for most of the last 30 years, they have not.

So what do you incentivize the banks to do? You incentivize the banks to take what they would think of as the most broad-based macroeconomic risk possible. The most obvious to that risk is housing because it’s so connected to the business cycle. One economist said that housing is the business cycle in the United States and always has been. So, that’s one part of it.

My favorite example again here is that to me the original sin of the Greenspan Fed was the [Long-Term Capital Management hedge fun] crisis. In 1998, the economy is doing brilliantly. Everything was going well. The markets then fell a little bit and LTCM was obviously in trouble. The Fed cut rates pretty significantly in two months. That’s a great example of where no other macroeconomic indicator would have justified those rate cuts. It was purely determined to save the financial system.

If a couple of the investment banks that did go down in 2008 and 2009 failed in 1998 that would’ve been a great lesson. I always give the analogy of forest fires. You would’ve had a much smaller forest fire in 1998 than in 2008. The smaller forest fire would have cleaned the undergrowth and protected us against the catastrophic meltdown that we saw in 2008.

What would you have done in 2008 as these banks were collapsing? Would you have just let them collapse and let the chips fall where they may?

I think in 2008, it was probably too late. The regime had gone on so long that the market and the financial system was incredibly fragile. If you had just let it all fall, that would have led to an absolutely catastrophic recession. So you probably needed more creative solutions then.

My preferred solution to most of this, which again is incredibly controversial and is one where I get more support from left-wing people, is that I would’ve let the banks fail. To combat deflation, I would’ve simply printed money and sent it to every person in the country. The Fed would simply send a check to every household in the country. It would be as much of a check as needed to prevent a deflationary collapse.

So a massive monetary stimulus but different than what we see with QE, which is there to prop up asset prices? This is more of a distributed, democratic (small-d version) of stimulus in which it would have not just helped people who have huge portfolios and then their stocks will go up, and then they’ll spend more money and then that’ll be good for the economy. This is a more populist version of that?

It is by definition. This is one of my principles. Risk of failure is incredibly important to the capitalist system, it keeps capitalist players honest. To the extent that you try macroeconomic stabilization, you want to stabilize the economy in a manner where you still preserve the threat of failure and simply mitigate the consequences of this failure upon the masses.

The way I’ve sort of described it is that we want a safety net for individuals, but we don’t want a safety net for companies. We want massive churn and Darwinism in action, the survival of the fittest, and then try to shield individuals from the negative fallout of that churn which is unemployment primarily. We want to try to give them the safety net but yet allow companies to battle it out in the marketplace without government preventing those competitors from existing or providing a backstop for failed companies which is what we kind of saw during the financial crisis.

To get back to your “capitalism for the masses” thesis: If we’re looking at the economy and we should want to generate a lot more of this product innovation, we are going to get this economy where robots (and I use that word broadly so it can also mean algorithms) can do a lot more than what they have in the past. To quote you briefly:             

The routine jobs that provided avenues of mass employment in the twentieth century are increasingly a thing of the past. It is very easy to envisage a future where a vast majority of the work and large, established parts of the economy is almost fully automated with human beings simply performing the role of monitoring and managing the system during extraordinary circumstances.

If that is the economy of the future and we also think it’s important for people to do stuff and not just get a check, then what do you do?

Well, this is harder. This is really a thesis that says that a lot of the jobs of the twentieth century were jobs that were pretty mundane. But they existed because of our inability to automate a lot of fundamental human skills. Most of these skills are what are called sensory and motor skills. So the fact that we still don’t have robots that can pick up things as well as we can pick up things with our hands.

Part of the problem here is increasingly these advantages are vanishing. When they vanish, there are going to be no more mundane jobs out there that human beings will be better at than robots. Now if that’s the case, then every human being who can be employed needs to be doing something that a robot cannot do for the foreseeable future. These are jobs that involve creativity that inevitable involve much higher skill levels. This is a pretty dramatic u-turn because a lot of research is being done that when we moved from the era of craftsmanship of the nineteenth century to the era of assembly-line manufacturing, workers probably got deskilled.

They required less skill at the height of capitalism than they did before it. Now we are suddenly saying, wait a minute, you need to become much, much more skilled than you were. That requires a change in our educational system, for one. It’s a much higher burden for people to jump over. But one of the skills in this which is underrated is simple entrepreneurial skills. In capitalism, it’s still abundant today. If you are an entrepreneur with a reasonable idea or something that people are willing to buy, then I think that there’s more than enough funding available there.

This is not just for Silicon Valley ideas. I’ve seen people who make burgers on the street get funded on Kickstarter. That’s the sort of entrepreneurship that I’m talking about. But, absolutely, it requires more risk-taking ability. It requires a certain level of skill that I think is not being given to people at least today in the educational system. That’s a hard problem, there’s no doubt about that.

It is a very hard problem. We need to re-skill our workforce, which as you said is very difficult, and one of those skills might be trying to show people how to be entrepreneurs. But we also want a system that makes it as easy as possible or at least doesn’t prevent or create barriers to people becoming entrepreneurs whether it’s in a very mundane way or it’s on a very high level way. What would be the policies to encourage widespread entrepreneurship and start-ups that are proactive and policies to prevent incumbents from getting an unfair advantage?

One of the fundamental things which we need to do is that we need a better financial system. We need a financial system that is much less suspicious of small entrepreneurs raising funding, whether it is debt funding or equity funding from the masses. In another essay I wrote, I said that there’s more than enough money out there from people who want to fund other people doing businesses. This is what Kickstarter or the phenomena such as crowd-funding, peer-to-peer lending in the United Kingdom have shown this. Our conventional wisdom says that if you want businesses that are funded for the long-term then you need banking to intermediate between savers and investors.

But that is not the case anymore. There’s more than enough money available which individuals want to invest for extremely long-term businesses. In the United Kingdom right now, you could borrow a five-year loan at an interest rate that is probably pretty similar to what a bank would lend you at from another person and it’s perfectly legal. That kind of contradicts the conventional wisdom on banking. I think we need to make this a lot easier. We still haven’t gotten all the way there in the sense that we allow people to donate money on Kickstarter, but we don’t allow people to buy a stake in that business. That is insane.

They get some other privilege. I know when people donated on Kickstarter for films then they get a sneak preview or something, but they don’t actually get a stake in the business.

That’s because that’s not legal in a simple enough manner. There are so many hoops to jump through, but it is happening. I think the SEC is on it and it’s increasingly becoming the case. We need to ensure that it is as easy to do as possible. The other thing to do would be simply that you need to make the playing field even. If a small player needs to get regulatory approvals, the government can make it easier. They can make it free. They can provide assistance to ensure that small players can get easy approvals.

It seems to me that right now at least in the United States that we are not doing that. I think of a company like Uber where you have government at the behest of incumbent players like taxicab companies trying to quash Uber. Or you have Tesla which is creating a new automobile and is a threat to established incumbent players, but there’s a lot of regulations regarding how they can sell their car and having to do it through dealerships to make it harder for that new company to start up and make a profit. It seems to me that right now, we have policy makers at the behest of business who aren’t really thinking about creating an economy of “maximum competitive intensity,” which is what we need to get more of that other kind of innovation.

This is the very definition of a crony capitalist economy. A lot of my thinking comes from the fact that I was born in the quintessential crony capitalist economy which was India before it got liberalized in the 1990s. This is how these economies work. A lot of things that I had seen happening in India seem to me to be happening in a different form in the Western economies.

To what extent do you see these problems, the lack of “competitive intensity,” the lack of churn, the lack of dynamism, also in continental Europe?

Probably the worst example in Europe, which is probably even worse than the United States and the United Kingdom, is France. The Scandinavian economies are surprisingly good at it. They are seen as incredibly socialist, left-wing states, but Denmark, for example, is the only country which allowed any bank to fail during the crisis. They are a lot better at ensuring that the large, incumbent players are not protected.

The importance of failure in an economy is what a lot of your work is about. Since you’re advising us from overseas, any other advice you would give policymakers to either create a more dynamic private sector or to create a more effective safety net for workers?

No, that’s pretty much it to be honest. For me, you provide a safety net only for people. You need to dismantle entry barriers for most sectors and I think the rest will take care of itself.

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