Why the Middle Class Risks Consuming Itself

The bulk of the economy in more affluent countries is now based on services. And that constitutes much of what consumers consume.

But behavioral economics suggests that these purchase decisions and the consequences of the choices they impose may mean that the middle class could put their own financial future at risk by encouraging greater automation. JL

Noah Smith reports in Bloomberg:

Most of what Americans are paying for is the salaries of the people who work in service industries. Health care, tuition and child care represent a large amount of what people consume during their lifetimes. Of the 20 fastest-growing occupations in the U.S., the bulk are in care-related jobs. As workers have shifted into services, inequality has gone up and the fiscal system has become more redistributive. If middle-class Americans spend most of their time taking care of and teaching each other (and building each other’s houses and roads), all their other needs will be met by robots.

Americans are increasingly anxious about the costs of services such as health care and education. But these are the very same industries that increasingly sustain the middle class. Resolving this paradox is the key to creating the economy of the future.

It's not much of a surprise to note that prices for most physical goods have dropped, but the cost of big-ticket services have become much higher:

As health care absorbs an ever-larger share of national income, many want the government to take over. Soaring tuition has spurred calls for free public college. Child care seems to have similar issues. These services represent a large amount of what people consume during their lifetimes.

Some might suspect that these high costs are filling the coffers of the country’s wealthiest individuals. But a quick perusal of the Forbes 400 list reveals that most of the super-rich made their fortunes in either technology or finance. The top health-care billionaire is Thomas Frist Jr., No. 41 on the list, who co-founded the for-profit hospital company HCA Healthcare. But he’s the exception; a handful of others made their money in medical devices, medical equipment or pharmaceuticals. Even fewer people make vast fortunes selling education.

This suggests relatively little of the soaring costs Americans pay for health care, education and child care is being sucked up by profits. Only 20% of hospitals are for-profit, and less than 10% of college students attend for-profit universities.

Instead, most of what Americans are paying for is the salaries of the people who work in services industries. And the number of those employees is growing; less than 5% of the workforce was in health care and education in the 1950s compared to more than 16% today:

Of the 20 fastest-growing occupations in the U.S. in 2018, the bulk are in care-related jobs such as home-health aides, occupational-therapy assistants and so on. Most of the rest were high-end software, math and statistics jobs of the type that will probably never be options for the bulk of middle-class Americans.

The rise of care jobs may be one reason why predictions of mass unemployment due to automation haven’t come to pass. As agriculture and manufacturing have become more productive with fewer workers, Americans shifted into service work:

Now, many technologists are predicting that the rise of artificial intelligence will automate a bunch of service jobs as well in food service, retail and elsewhere.

Health care and education -- things humans only feel comfortable having other humans do -- could become the last refuge for middle-class workers for whom top-end jobs in software or data science are out of reach. This will be especially true if regulations prevent health and education from being automated, for example by specifying the ratio of workers to children in child-care centers. Another refuge occupation might be construction, where productivity growth has been notoriously low.

If middle-class Americans spend most of their time taking care of and teaching each other (and building each other’s houses and roads), all their other needs -- food, transport, physical goods -- will be met by robots. Those robots will be built and managed by a small number of very high-skilled workers, and owned by an even smaller number of entrepreneurs and financiers. That sounds like a recipe for vast inequality.

That’s where taxes come in. Those who decry health and education costs the loudest often clamor for higher taxes to pay for these big-ticket items. In real terms, this means forcing the entrepreneurs, financiers and highly-paid engineers to hand over some of the vast material bounty created by their robots to a middle-class populace increasingly engaged in care-related work.

It’s possible that such a system might work. Arguably, the U.S. economy has already moved in this direction over the years, as workers have shifted into services, inequality has gone up and the fiscal system has become more redistributive.

But there may be limits to this process. If the wealthy eventually find a way to evade the burden of higher taxes, the system may be unsustainable. And if care jobs and construction are subject to more automation in the future, the long-feared technology-driven unemployment wave might materialize at last. So to hedge against such a collapse, the government should do two things. First, it should look for ways to make the middle class more productive; even if everyone can’t be a programmer or data scientist, programs such as Germany’s apprenticeship system and vocational education may be able to find many workers productive jobs outside care-based industries. And experimenting with welfare programs such as universal basic income, funded by social wealth funds, might prepare the country for the possibility that work itself could one day become obsolete.