The Future of the U.S. Economy: Apple, Exxon, and Robots

Karl Smith - Assistant Professor of Public Economics at UNC-CH and Blogger at Modeled Behavior

Tyler Cowen has a nice essay up at The American Interest on an Export-Oriented America. He offers us three reasons to be optimistic about the US export future: artificial intelligence, shale oil and gas, and a rising Asian Middle Class.

I think he more or less nails the last two, what I refer as the Exxon and Apple economies, respectively.

In a somewhat provocatively note in an post on climate change, fossil fuel extraction and processing is likely to be a god-send for the American working class. It may seem strange at first, but part of what makes the outlook so bright for workers is that the shale oil in particular is difficult to extract and the wells burnout in some areas in less than 60 days. This requires an intense process of re-drilling and re-fracturing.

This process means smaller windfall profits for the owners of the land and more work for oil extractors. Traditionally in economics we consider this a loss, as labor employed by the oil extractors cannot be employed elsewhere. Yet, this is increasingly becoming something of a gain, as the social problem of finding constructive and dignified work for low-educated men becomes more severe.

As economists we are trained to say that we work to live, we do not live to work. Yet, as we watch the corrosive effects of long-term unemployment on our social fabric build we may have to revisit that viewpoint. If we are not quite ready to cheer make work jobs, we might nonetheless be thankful for an opportunity like the new fossil fuel economy.

The creative class in America will likewise be buoyed by a world in which creativity is in ever greater demand. The source of America's well-spring of creativity and dominance in music, movies, television, social media has been long discussed and never fully understood. Yet, unless something dramatic changes, we should expect those trends to continue.

In a world with ever more middle class consumers is a world in which the returns to innovation accelerate, the killer electronic devices of the 2020s will have a potential market measured in the billions when they launch.

These two trends are clear. What's less clear is how soon intelligence will fundamentally change the manufacturing landscape. Cowen writes:

It's not just that Silicon Valley and the Pentagon and our universities give the United States a big edge with smart machines. The subtler point is this: The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States.

A point which Tyler Cowen and I have never fulled hashed out is the extent to which productivity gains are endogenous.  It's true enough that we can create machines that will run virtually the entire manufacturing process for us. That's not the issue. The issue is whether it's cost effective to do so. When labor is cheap, investing in the latest machines doesn't pay.

What Tyler has to be arguing is that the machines will get so cheap that fully automated production will be even cheaper than subsistence wages, for there are many areas where subsistence wages are still paid. I don't think we are about to hit that point any time soon.

Nonetheless, given the factors currently building the United States as an export powerhouse is no longer wishful thinking. It is my baseline scenario.