American Horror Story: Productivity's Impact on Income, Lifestyle Creep & a Culture of Credit
Unit 1: AI ; Topic 3: Economic Impacts of Tech Innovations in America
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Whether you are an AI-optimist or a ferocious Luddite who shuns all forms of social media, the future is here, babes. The advent of ChatGPT and the impacts of AI have charted from theoretical to tangible. We’ve already touched on the breakneck adoption rates in our last article, and now we’re unpacking the changes that have occurred at hyper-speed & placing them in the larger employment landscape.
The company behind ChatGPT, OpenAI, has been true to its namesake. Their public API is already spawning a new era of SaaS technologies that run on top of its core functionality. Tech royalty is shouting that the age of AI is underway. This technology already has, and will continue, to rewrite the way we relate to work.
Basic economic theory tells us that tech + human capital + physical capital = productivity. With the human and physical capital sources being relatively finite, exponential movement in productivity numbers stems from the application of new technologies. At some point, productivity may even cannibalize the need for human capital.
The steam engine, the microchip, and the Internet have revolutionized the ways in which shareholders are able to expand profit margins to a degree that would make Henry Ford’s eyes roll back in his head.
Without venturing into the speculative, let’s try to establish some context around the current state of affairs. History rhymes, not repeats, so the adage goes. We will strive to keep one foot grounded in the present while looking back at what has happened in the wake of previous technology advancements.
Struggling to Keep Up: Wage Deflation, Income-Secured Debts, & the Productivity Treadmill
Despite our mounting increase in productivity, dollar for dollar we are only making peanuts more. This is a well-documented phenomenon called Engel’s Pause. This is a term popularized by Robert C. Allen to explain the period from 1790 to 1840, in which British worked-class wages plateaued despite per-capita gross domestic product increasing exponentially during a technological upheaval.
While some economists question the impact and existence of Engel’s Pause, many others draw parallels between this period and that of the twenty-first-century technological boom we have seen. In any case, it is a helpful framework for the potential disparity that an AI-explosion could cause between wages and productivity.
Let’s take a step back. Engel’s Pause is a roughly 50-year period in which wages linger and then subsequently match the productivity rate. If we look at the last potentially Engel’s Pause-inducing event, we can turn towards the Internet Bubble, which has a happy birthday of January 1983. In the 35 years following (1983-2018), productivity skyrocketed to over 94%, while median wage increase hovered at about 26.9%.
But inflation! So true, we must account for that. Between 1950 and 2018, the productivity index increased 299%. Over that same period, the median household income increased only 152%. When you factor in the 942% increase in inflation over the same period, the results for American incomes read grim.
While we can follow the trajectory of wage and productivity index growth, it only serves us to a point as Engel’s Pause has been running full steam ahead. Innovations crash into innovations as lingering effects of previous technologies stagnate in the cultural consciousness. The Age of AI may be here, but we still have some loose ends to tie up with the Information Age, cough, cough…social media.
Social commerce is projected to grow at a CAGR of 30.7% over the period of 2022-2030, which it’s official advent marked in 1997, and popularization really taking off in 2004. All the while we’re collectively still coping with the societal vestiges of past booms and a backlog of compensation to productivity increases.
To cut to the chase: unlike the past applications of Engel’s Pause, in which technology was developing at a more glacial pace and with fewer life-altering applications, we are witnessing the rate of innovation today compounding away from our grasp. There is no time for “pause”.
It can be helpful to think of this as a technological seismograph of sorts. Prior to the Industrial Revolution and leading into the early 1900s, society was producing 2.0-4.5 trembles, ranging from barely felt to lightly impacted.
Since the production of the microprocessor in the 1950s, we have been witnessing a high number of 6.0-8.0 quakes, shocking society’s system and causing new infrastructure to support the innovations. If we look at AI, we can consider it a 9.0 or above….” extensive damage over broad areas.”
Engel’s Pauses are effectively cannibalizing one another…by the time we began to better match wages to the productivity output of the Internet, we then built an entire social commerce ecosystem with a whole new set of economic gains produced through hyper-connectivity.
In the midst of this lag, it only makes sense that the economic gap between classes has increased - of the 350 largest companies in US, the CEO-to-worker compensation ratio is just shy of 400x as of 2021. And with the advent of AI, the disparity is only at greater risk of growing if left untethered. ~Officially deep dives off the edge of Engel’s Pause~
Lifestyle Creep to Keep You Up at Night
Despite these earth-shaking innovations and the gaping craters they produce, the reverberations of this disparity are not as keenly felt by the middle class.
This can be credited to a culture of financing. From AMEX to Klarna, leveraged debt has bolstered the effects of income loss for working Americans.
Lifestyle creep has gradually accustomed consumers to a certain standard of living, one that would quickly unravel if future incomes, on which consumers depend to secure credit, were to falter.
Lifestyle creep leaves working Americans in a precarious position, vulnerable to wage losses, and reliant on future income.
The threat of job displacement is nothing novel, previous technology eras have restructured the workforce and off-shored previously domestic jobs, but it is particularly salient today with the widespread financial vulnerability that has become our normal.
Maintaining American standards of living relies on the promise of future remuneration, which assures creditors we will have money at some point.
While we cognitively grasp the concept of cash flow problems, it takes on sharper, more tangible meaning when checks are being awaited to pay down bills. Americans are hooked on cheap debt that hinges on their next payday.
If theoretically, the gap between compensation and productivity output continues to grow, there will also be a rising gap between the ability to finance certain lifestyles.
The growth of the technology sector (if you recall the tech + human capital + physical capital = productivity equation) infringes on the need for human capital or physical capital.
Standing in the fear of our own obsolescence, let’s not adhere to the choir of normalists who preach an organic course as a convenient antidote to our unease.
In our next topic, we will begin to explore how technology adaptation by global leaders can determine our fates. Subscribe to continue reading!
Discussion Questions:
Would you rather…be able to work remote or have a 401K?
Think back on your life 5 years ago. How have your spending habits changed? What categories have the biggest difference?
When did you get your first credit card? What is your relationship like with credit cards?
Glossary:
Engel’s Pause: Engel’s Pause is a term first used by historian Robert C. Allen to describe the period between 1790 and 1840 during which British working-lass wages stagnated while per-capita gross domestic product increased quickly during technological revolution.
Lifestyle Creep: Lifestyle creep is a term used to describe a phenomenon where individuals gradually increase their spending as their income rises. It refers to the tendency of people to upgrade their lifestyles, increase their expenses, and adopt more luxurious habits as they earn more money.
Sources:
How U.S. Labor Productivity Has Changed Since 1950 by Joni Sweet