Help, I've Been Mugged by a Geek

The protests in Hong Kong this week and Israel in 2011 have a lot to do with a technology revolution that is leaving most of us worse off economically.

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Demonstrators wave lights from their mobile devices during an ongoing protest outside central government offices in Hong Kong, China, October 4, 2014.
Demonstrators wave lights from their mobile devices during an ongoing protest outside central government offices in Hong Kong, China, October 4, 2014.Credit: Bloomberg
David Rosenberg
David Rosenberg

Does this sound familiar? A tiny political entity of seven or million people, it has made the most of globalization and is outwardly prosperous. But scratch off the facade of glitter and you find that ordinary people have seen their wages grow a mere 3% in the last decade.

Income inequality is high and economic growth has done little or nothing to reverse the trend. Housing prices have skyrocketed, putting the cost of owning a home beyond reach for many. There is a shortage of land to begin with, but the fact that land is controlled by a monopoly makes it worse.

Their eyes fixed on top-line numbers like the increase in gross domestic product, politicians seem incognizant of, or indifferent to, the struggles of ordinary people. Finally, those anxieties of the great middle class reach a breaking point and they pour out into the streets in protest.

That, of course, describes Israel in 2011. But it also describes with uncanny similarity Hong Kong, a place way off on the other side of Asia that has seemingly little in common with us. Except that the mass demonstrations in Hong Kong have been framed by their leaders and by the media as a call for more democracy and freedom, and no doubt they are.

But the protests have an important sub-text. As The New York Times, The Washington Post and other media outlets reported this week, wages in Hong Kong have edged up just 3% in the past decade after discounting for inflation, and the Gini coefficient for the area – a measure of inequality – is among the highest in developed world. Meanwhile, home prices have doubled since 2006. Land is scarce and is controlled by a small cohort of billionaires.

You could easily dismiss the similarities between Hong Kong and us as coincidence, but they aren't. Both are manifestations of what The Economist magazine this week called "The great third wave" - a third industrial revolution created by the huge advances information and communication technology of the last decades.

It's not just the Internet, which has had a profound effect on ordinary people in their day-to-day lives, but machine intelligence and robotics whose impact is only just beginning to be felt and properly understood.

A thrilling revolution

People like Bill Gates or Mark Zuckerberg – and not only them – have cast the technology revolution in wholly positive terms. It is bringing the bounties of a better life to ordinary people, empowering them by giving them access to information and the ability to communicate as never before and by relieving them of the more mundane tasks for working and living.

Indeed it's hard to argue with benefits bestowed on us by iPad, smartphones and countless other technologies. More than just a way to stay in touch with friends, technology is giving ordinary people market power -- to compare prices and shop anywhere they choose, opt for a ride-share instead a taxi or work from home, to name a few.

And that's just the power of the Internet. By some reckonings, we're on the cusp of a giant leap in computer intelligence that will bless us with driverless cars, robots that can perform increasingly complex tasks once reserved for humans and computers that can really understand human language.

Or unknown, dangerous territory?

But, as The Economist writes, technology is also leading us into unknown and dangerous territory.

Technology is opening a gaping divide not between the wealthiest and the poorest as we conventionally understand it but between the skilled and wealthy few and the rest of society, including the great middle class that has served as the bedrock of modern democracy. The digital economy provides outsized rewards great talent and vision (think Mark Zuckerberg and his net worth of $33 billion and thousands of Facebook employees with stock options and generous salaries).

But the digital economy also takes away (think the 2,000 manufacturing jobs at Eastman Kodak lost to digital photography).

So, Kodak was the victim of – to use a popular term among tech pundits – industry disruption? Google, Apple and Facebook are employing people to design, make and market the new technology. Meanwhile, people are photographing and sharing pictures more than ever because they no longer have to deal with film and processing. Cameras are cheap and ubiquitous, just one small example of the blessing of the goddess technology.

But appearances are deceiving. For reasons economists are not entirely clear about, technology hasn't increased overall labor productivity in the Western world. Without gains in productivity – in other words the ability of each worker to produce more goods and services – wages can't grow over the long run.

Wouldn't bother to automate the burger flipper

And that is exactly was has happened over the last two decades. The only growth in income has occurred at the very top, where skilled people, from pop stars to serial entrepreneurs to Nobel Prize winners, are taking a bigger piece of the pie.

The boilerplate answer to this problem has been to ensure more people get an advanced education. But even that economic driver is reaching its limit. In the United States, the share of the population with a university degree has barely budged since the 1990s and in other developed economies it's showing no sign of exceeding the benchmark set by America. In Israel, it is falling.

In all events, a university degree is yielding increasingly diminishing returns as more people get one and technology takes away the kind of jobs in law, accounting and other professions traditionally filled by many graduates. Ironically it's at the bottom of labor market – the world's burger flippers – where there's been real employment growth because pay is too low to make it worthwhile for business to invest in the technology to make such jobs obsolete.

The skill-set elite

These gaps have an impact beyond the job market. The skill-set elite likes to live in certain cities , the obvious ones being New York, San Francisco, London for instance, driving up prices to the point that even solid middle class wage earners can't afford to live there. That is what has happened in Hong Kong, as mainland Chinese snatch up luxury flats, and that is what has happened to large degree in Tel Aviv, too.

In Israel, our preoccupation with the gap between the wealthiest and the poorest blinds us to an even more worrying phenomenon, namely shrinkage of the middle class, which it seems has been wrought in large part by the impact of technology. The Bank of Israel found that 25.4% of all households were in the lower class in 1997 as measured by income; by 2011 the figure had grown to 30.2%.

Meanwhile, the middle-middle class shrunk to 24.7% from 28.8% of all households. The upper-middle class shrank from 26.9% to 25.7%.

All of this should cast the problems Israel – and Hong Kong – face in a different light. The problems of stagnant wages, income inequality, the high cost of living and the overweening power of the business elite aren't exclusively local problems demanding the traditional solutions being trotted out. Indeed, the fact that Israel is Startup Nation, with its plethora of tiny companies enriching a few entrepreneurs, senior employees and investors, only makes the problem worse.

Yes, the tax burden has to be reformed to make it more progressive. Yes, the power of tycoons, labor unions and monopolies must be undercut. And, yes, we have to invest more in education. But we should be careful about setting our expectations about our ability to treat the socio-economic ailments too high.  

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