2014 February 02 Sunday
What A Relief: Upper Classes Big On Personal Spending

When I describe a future where capitalists move their robots offshore to small countries where most goods get produced some people raise the objection that if wealth gets too concentrated at the top demand for consumer goods will collapse. Hey, an article from the Gray Lady has great news: Companies are scrambling to satisfy the demands of the top 20%.

In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models.

Get this: the top 20% account for 61% of personal consumption expenditures already. The top 5% are responsible for more than half of that. So we are well along in the transition to a society where most people either do not work or do not make much money. Yet the economy has not collapsed. This means the decline of the middle class and the expansion of lower class are in the cards. The heavily robotic global economy is probably going to be successful at least for the owners of robots and natural resources.

A much bigger threat to the economy than rising inequality: declining Energy Return On Energy Invested (EROEI). The growth in oil exploration and extraction spending is slowing. Charles Hall thinks we are in danger from the decline in EROEI. This isn't just a problem for those of us who still have jobs. You welfare recipients and retirees need us to keep working and for the economy to keep humming or you are going to find yourselves in a world of hurt.

Share |      By Randall Parker at 2014 February 02 09:14 PM 


Comments
James Bowery said at February 3, 2014 1:53 PM:

I foresaw this in 1992 and proposed a solution:

The government should tax net assets, in excess of levels typically protected under personal bankruptcy, at a rate equal to the rate of interest on the national debt, thereby eliminating other forms of taxation. Creator-owned intellectual property should be exempt.
...
Under the NAT, government functions and regulation can be cut back as capitalism becomes more functional. This does not mean, however, that government expenditures will necessarily decline.
...
With the exception of basic functions of government and the pay down of debt, the government budget should be dispersed to citizens as cash, rather than being spent in government programs or even limited in the form of vouchers. This is "market democracy" in which the citizens and their markets, rather than central planning and politics, influence the selection of goods and services to be capitalized and provided.
...
The "middle class" it is currently in vogue to worry about are those people, primarily people born in the 1950's (middle to late baby boomers), whose family stability and household net worth suffered greatly as a result of these housing shortages combined with lowering real incomes.
...
Throughout the 1970's and 1980's these 50's babies were locked out of homes in perpetual courtship behavior. The relative unaffordability of housing delayed the onset of nesting far longer than those born before 1950. Courtship behavior is notoriously consumptive and exhausting. Nesting behavior is investive and constructive. Thus 60 million Americans born in the 1950's are now suffering from low equity for their ages, and little hope for the future.
...
In reality, it is too late to do anything for the members of this group since most of its females are now leaving their childbearing years -- some desperately risking late pregnancies. Most families have already been irreversibly damaged, assuming they were formed at all. The best we can do now is attempt to rebuild the middle class for future generations and try to allow those we have decimated to build some equity for retirement with their productive years.

At the time this was well received by at least one economist at Brookings, but, of course, as we now see with race replacement in on full throttle, the demographic and economic disaster has hit exactly as I predicted it might.

Observing this disaster unfold like a slow motion propane tanker train wreck over the course of decades, has been instructive.

What I've observed is the influx of group-selectionist cultures occupying the economic rent niches that might have gone into a citizen's dividend -- while they keep the indigenous north and west European elites in an opiated dream-like condition while their less fortunate coethnics are literally drowned in the effluent of their affluence. These elites will, of course, eventually be replaced -- their grandchildren if not their children turned into the moral equivalent of sex slaves as the group-selectionist cultures demonstrate their "superiority" as civilized peoples. Each of these grandchildren of guys like Bill Gates and Mark Zuckerberg will find their fortunes evaporate and their lot in life their own personal crisis -- a result of their "silver spoon in the mouth" decadence, which will be a logical extension of the opiated haze now experienced by Bill Gates and Mark Zuckerberg.

Here's my main problem with all this:

As E. O. Wilson points out in excruciating detail in "The Social Conquest of Earth", the evolution of eusociality in humans has reached a fever pitch wherein the conquest of Earth's entire biosphere is all but assured. The people being wiped out by this group-selectionist competition could design hives with very small ecological footprints that would also provide a more extreme form of addiction to the eusocial condition than cosmopolitan centers have to populations throughout the millenia. This might buy enough time for a breakout into space where energy and materials are even more available.

After getting privatization of space started with PL101-611 so that the long-term process could begin for space settlement, my focus went to the near-term with algae as a way of radically reducing the ecological footprint of this eusocial conquest by group selectionist cultures. I have the solution in hand now, but the group selectionist cultures have now so totally dominated the minds of the people who might invest, that it appears entirely plausible that they will prevent its deployment. Its as though the people with capital have been turned into drooling idiots by their immersion in a cesspool of sycophants that are, themselves, incapable of placing a value on anything other than group conquest in the zero if not negative-sum terms of rent-seeking.

AB said at February 3, 2014 2:06 PM:

High-end consumption is ultimately bad for innovation. This is because high-end consumption is about positional consumption. High-end, positional consumption primarily supports marketing, branding, exclusivity and zero-sum status competition games rather than genuine innovation.

commentfield said at February 3, 2014 2:28 PM:

So it's get rich or die trying? Because the alternative of living just as well on less money does not appear to be an option.

AB said at February 3, 2014 3:59 PM:

Rising inequality has nothing to do with increasing returns to capital, including returns to "human capital" as Randall Parker likes to argue, and everything to do with increasing returns to land. It's just that this has been obscured because land hasn't been distinguished by economists from capital for the past century. The classical economists distinguished between land and capital, but with the rise of neo-classical economics a century ago, land has been ignored and treated simply as "capital". See the following:

http://ftalphaville.ft.com/2014/02/03/1759582/piketty-and-the-case-for-land-capital

"Piketty uses the term capital to refer both to capital as classical economists understand it, and land. Now, neoclassical equations of the type Piketty employs rarely give reference to land, focusing solely on capital and labor. The great economist Bob Solow, who helped popularize that approach, once quipped that if God had intended there to be three factors of production he would have made it easier to draw three-dimensional graphs. Land was rapidly declining in relevance and Solow invoked Occam’s Razor to lop it off altogether.

The thing is, land is back. Piketty’s charts illustrate this as well as anything I have seen.

http://ftalphaville.ft.com/files/2014/02/Piketty-France1.gif

What we see here is the value of French “capital” as a percentage of French National Income over the last 300 years. The total value makes a familiar U-shape with its nadir in the early-to-mid 20th centuries. We’ve become accustomed to inequality graphs of this sort, demonstrating a golden age of low inequality in the mid 20th century, followed by a return to Edwardian levels by the 21st. What should stand out, however, is that the decline was driven almost entirely by a decline in the value of agricultural land. This was the growing irrelevance of land that led neoclassical economists to exclude it from their equations.

Importantly, however, the resurgence in capital is driven almost exclusively by a rise in housing values, and those values stem almost entirely from what classical economists would have termed land. Nominally, the value of real estate in general is divided into the value of land and the value of the structures that sit on the land. Yet, for housing in the modern world there is a third source of value, the option value induced by zoning and land use restrictions. Paris is the perfect example of the powerful effects of such land use restrictions.

The demand for housing in Paris is extremely high in part because Paris is the legislative, financial and commercial capital of France. If you wish to be doing business at a certain level in France then you must live in or around Paris. Yet, there is also another important source of demand from those who wish to experience the legendary culture and beauty of the city and to live in proximity with others who value it. Paris maintains the latter demand in large part by severe restrictions on the height and architecture of buildings within the city. Those restrictions preserve the history of Paris, but also make it impossible for it to house all of the millions who would come today to live and work in the legislative, financial and commercial capital of France. The result is that only those willing and able to pay the highest rents or mortgages can live in Paris and the rest are pushed to the suburbs.

This increase in rents and housing prices is the option value of Paris’s land use restrictions. It is also properly accounted for as a land value, not a capital value. The value does not stem from the creation of new structures, plant or equipment, but by the preservation of an irreproducible bounty handed down to us from previous generations. Irreproducibility and inheritance are the essential features of land in classical economics. Thus, the story here isn’t so much about capital, but about land in the 21st century.

Why does this matter?

It matters because few of the policies that economists recommend apply equally to capital. The optimal tax rate on capital is the source of great debate and a non-trivial number of economists place it at or around zero. The optimum tax rate on land is the subject of virtually no debate among economists, and the consensus places it at 100 per cent or just shy for administrative reasons."

AB said at February 3, 2014 4:04 PM:

See also:

"The Return of Land Prices"

www.slate.com/blogs/moneybox/2014/02/03/piketty_and_land_ricardo_s_return.html

"Classical economics had three factors of production—labor, capital, and land. Contemporary economists normally treat land as simply a form of capital. This is mostly the pattern Thomas Piketty follows in his important new book Capital in the 21st Century. But as Karl Smith writes, many of Piketty's findings about "capital" seem like they may mostly be findings about land.

...

The ratio of capital to income used to be very high, then you had the midcentury compression, and now you have a return of capital. In the second chart, you see that "other capital" has actually been fairly constant throughout this period. The compression is a collapse in the value of agricultural land. The return of capital is a massive increase in the value of residential housing."

aSPIRANT said at February 3, 2014 4:22 PM:

A Farewell to Alms proposed that the reason England became the main driver of the industrial revolution was indirectly because of its stratified society where most of the poor could barely afford to feed themselves, let alone reproduce.

Poorer families died out, never had children, while upper-class families had too many. Population dynamics forced people to move to a lower social station than their parents. This gave them a workforce of people smart enough to run machines, but poor enough to be willing to do the repetitive and grueling labor they required.

While I do see us returning to that kind of extremely stratified society, I don't think it will have the same distant future benefits, at least as long as welfare is considered a pass to have babies.

If you're young, get used to scraping by. As I see it, the chances of being able to move up in the world are slim.

The future doesn't look good for me. Though I'm getting a normal education, I can't see how it's going to help me 20 years from now if things continue how they are. There's a very good chance not even software developers are going to be able to find work. Once everyone moves all their business stuff to two or three cloud providers, and once all the content on the internet is consolidated to about five websites (thanks FCC!), how many software people will we really need?

People in my position are especially fucked, even moreso than during the great depression. In the 1930's we were a much more homogenous society. You could feel safe walking at night, or camping out somewhere. People would let you into their homes, because there existed some smidgen of social trust. I don't expect modern ghettos to show any mercy to a down-on-their-luck engineer. Any middle class person nowadays who lets strangers into their home is going to get murdered in their sleep.

I'm keeping up on low-level computer architecture, crypto, and current hacking techniques. If things get bad, some of us may have to steal for our supper.

aSPIRANT said at February 3, 2014 4:22 PM:

A Farewell to Alms proposed that the reason England became the main driver of the industrial revolution was indirectly because of its stratified society where most of the poor could barely afford to feed themselves, let alone reproduce.

Poorer families died out, never had children, while upper-class families had too many. Population dynamics forced people to move to a lower social station than their parents. This gave them a workforce of people smart enough to run machines, but poor enough to be willing to do the repetitive and grueling labor they required.

While I do see us returning to that kind of extremely stratified society, I don't think it will have the same distant future benefits, at least as long as welfare is considered a pass to have babies.

If you're young, get used to scraping by. As I see it, the chances of being able to move up in the world are slim.

The future doesn't look good for me. Though I'm getting a normal education, I can't see how it's going to help me 20 years from now if things continue how they are. There's a very good chance not even software developers are going to be able to find work. Once everyone moves all their business stuff to two or three cloud providers, and once all the content on the internet is consolidated to about five websites (thanks FCC!), how many software people will we really need?

People in my position are especially fucked, even moreso than during the great depression. In the 1930's we were a much more homogenous society. You could feel safe walking at night, or camping out somewhere. People would let you into their homes, because there existed some smidgen of social trust. I don't expect modern ghettos to show any mercy to a down-on-their-luck engineer. Any middle class person nowadays who lets strangers into their home is going to get murdered in their sleep.

I'm keeping up on low-level computer architecture, crypto, and current hacking techniques. If things get bad, some of us may have to steal for our supper.

James Bowery said at February 3, 2014 5:12 PM:

The rising cost of labor drove the industrial revolution. Labor cost rose because people were moving to free land in the new world where they could capture the economic rent for their own fertility and make use of that fertility in further supply of labor for more land use.

Eric Blair said at February 3, 2014 5:41 PM:

Aspirant obviously hasn't been working very long, not to mention misreading English history in a way that is just plain wrong. I've been finding COBOL coding jobs, and they like me, because I speak English and can actually express a thought in English, instead of the usual dumb looks and mumbled incoherencies from all the Patels and Durgas that Zuckerberg and the like want import for their indentured labor.

But really, no middle class retailers in Manhattan? Are there really any middle class people in Manhattan anymore? I got relatives in Queens. The last place they'd shop is Manhattan. More likely just order what they want off the internet. I won't debate the figures being cited, but I'd like to ask the question of *what* exactly is being bought? So the Rich are buying their fur sinks and gasoline powered turtle neck sweaters for what ever high price they're paying.

Meanwhile, everybody else is paying not a lot for lots of cheap Asian consumer goods.

Don't yak "income inequality" at me when the Census bureau is reporting that "poor" people in the USA have cars, phones, refrigerators, air conditioners, washing machines, computers, cell phones, DVD players and so on.

AB said at February 3, 2014 5:55 PM:

"The rising cost of labor drove the industrial revolution. Labor cost rose because people were moving to free land in the new world where they could capture the economic rent for their own fertility and make use of that fertility in further supply of labor for more land use."

Yes, if you notice in the links I posted, there are graphs showing the % of national income obtained by agricultural land, housing, and capital in France. Starting in 1815 when France's industrialization began until 1950, the % of nat'l income obtained by agri-land plummeted while the %'s obtained by housing and capital stayed constant. The % of nat'l income that agri-land used to capture was being captured by labor during that period of industrialization in France.

Since 1950 however, the % of nat'l income obtained by capital and agri-land have stayed constant, while the % captured by housing has increased dramatically.

aSPIRANT said at February 3, 2014 10:28 PM:
Aspirant obviously hasn't been working very long, not to mention misreading English history in a way that is just plain wrong. I've been finding COBOL coding jobs, and they like me, because I speak English and can actually express a thought in English, instead of the usual dumb looks and mumbled incoherencies from all the Patels and Durgas that Zuckerberg and the like want import for their indentured labor.
It's interesting you chose as your counter-example a niche that only stands to shrink in the coming years, and which your generation likely won't vacate until it's painfully obsolete.

New businesses are ordering ready-made solutions, cloud stuff, SaaS. My nephew goes to a private school that just laid off most of their IT staff in exchange for cloud-based solutions. Text books, assignments, email, documents, all on the cloud. One IT staff and a server farm aims to do the work of 100 school departments. Payroll used to be a big deal too. Managing changes, keeping up with regulations etc took a lot of man hours. Now you just call up ADP and they handle it all for you.

COBOL will probably be around only as long as members of the COBOL generation are around. As soon as they're all retired, people are going to have to find something new. Will they come to me to write a scalable custom solution? Or will they just pick something off-the-shelf for a fraction of the cost?

This isn't to say I think I'm going to have trouble finding a job, just that my employment will be spotty, project-based. I'm going to need to be extremely flexible, I may be running my own business one year and working for people off-and-on the next. I'll probably never be able to get a job and keep it for twenty years. I'll be extremely lucky to work one place for five.

I really should have gone into engineering.

Don't yak "income inequality" at me when the Census bureau is reporting that "poor" people in the USA have cars, phones, refrigerators, air conditioners, washing machines, computers, cell phones, DVD players and so on.
Disregarding the fact that things like medical and education are still very much pay-to-play, I don't really care if it's fair at all. All I want is stability.

Stuff like education, living arrangements, even being able to hang out in places where you can make career contacts are going to keep getting more expensive. Money really is power, and for lack of it most of us stand to lose a huge measure of control over our lives.

Bob said at February 3, 2014 10:37 PM:

"I really should have gone into engineering."

What kind of engineering? Isn't engineering under the same pressures as programming?

Randall Parker said at February 4, 2014 8:14 PM:

James Bowery,

James Watt made the industrial revolution possible. The rising wages of workers was one of the consequences.

aSPIRANT said at February 4, 2014 8:30 PM:

Bob:
It seems like engineers are more indispensable. I know a couple of chemical engineers, and their work is very specific to the company, they often know trade-secrets they don't want wandering off to a competitor. They themselves invented a couple of those trade-secrets. They're often doing original research, running real life experiments. I can't begin to tell you how jealous I am of what they're doing.

With computers, all you're really doing anymore is implementing something from a library. There are specific best-practices you are expected to adhere to with the intention of making yourself replaceable. You're working with something someone else built, you're assembling legos.

I suppose I could try to do something very unique, make myself indispensable. One of my IT friends tried that, put together an (ill advised IMO) presentation to make the company see how they could save money doing things differently. All he did was irritate his bosses. He was laid off less than a month later. He probably way overestimated the rapport he had with them. He was always complaining about how stupid they all were there.

AB said at February 4, 2014 8:42 PM:

Randall,

James Bowery is right. Rising wages don't automatically occur as a result of an invention since economic rent goes up with invention and economic growth as well. Workers may become more productive as a result of a new invention, but they may have to pay more to their landlords, for example, in which case the economic rent accrues to the landlords, not the workers themselves and there is no consequent rise in wages.

It's only when labor has access to land in which it can capture rent for itself that workers' wages rise as factory owners have to pay high enough wages to entice labor away from land.

AB said at February 4, 2014 8:50 PM:

Randall, see here:

http://www.wealthandwant.com/themes/Law_of_Wages.html

Picture an unpopulated island where we're going to produce one good, corn, and there are eleven grades of land. On the best land, we can grow ten bushels of corn per week; the second land grows nine bushels, and so on to the worst land that grows zero bushels. We'll ignore capital goods at first. The first settlers go the best land. While there is free ten-bushel land, rent is zero, so wages are 10. When the 10-bushel land is all settled, immigrants go to the 9-bushel land.

Wages in the 9-bushel land equal 9 while free land is available. What then are wages in the 10-bushel land? They must also be 9, since labor is mobile. If you offer less, nobody will come, and if you offer a bit more than 9, everybody in the 9-bushel land will want to work for you. Competition among workers makes wages the same all over (we assume all workers are alike). So that extra bushel in the 10-bushel land, after paying 9 for labor, is rent.

That border line where the best free land is being settled is called the "margin of production." When the margin moves to the 8-bushel land, wages drop to 8. Rent is now 1 on the 9-bushel land and 2 on the 10-bushel land. Do you see what the trend is? As the margin moves to less productive lands, wages are going down and rent is going up. We can also now see that wages are determined at the margin of production. That is the "law of wages." The wage at the margin sets the wage for all lands. The production in the better lands left after paying wages goes to rent. That is the "law of rent." If you understand the law of wages and the law of rent, you see the cat! To complete our cat story, suppose folks can get land to rent and sell for higher prices later rather than using it now. This land speculation will hog up lands and make the margin move further out than without speculation, lowering wages and raising rent even more.

Now we have good news and bad news. The good news is that when we put in the capital goods we first left out from the example above, the tools and technology increase the productivity of all the lands. If production doubles, rent doubles, and wages go up. Wages won't double, because workers have to pay for the tools, but even if wages go up 50 percent, that's good news, and why industrialized economies have a high standard of living. Also, high skills enable educated workers to have a wage premium above the basic wage level. The bad news is that the technology enables us to extend the margin to less productive land, which lowers wages again. So there is this constant race between technology raising wages and lower margins reducing wages.

AB said at February 4, 2014 10:33 PM:

More on the land vs. capital issue:

http://ftalphaville.ft.com/2014/02/04/1761692/not-all-forms-of-wealth-are-equally-pernicious/

This threshold extends from a fundamental property of free-market capitalist economies. When the value of capital rises above its replacement rate folks start to produce more of it. Remember that in the classical formation, capital is distinguished as being reproducible. You can make more it.

As the quantity of capital increases, the return to capital is driven down. Eventually, the return to capital falls below the growth rate of the economy, and the value of the capital stock starts to shrink. This shrinking arises from the same dynamics that Piketty evokes to explain the growth in capital values over time. It is all about the return on capital vs. the growth rate of the economy.

Now, in real life the process is a bit more violent than elegant formulations suggests. The dot-com boom is instructive. The value of IT stocks started to rise rapidly in the late 90s. And, low and behold, the market responded by massively increasing the number of dot-com start-ups. High valuations for dot-com stocks plus a flood of new dot-coms caused the total valuation of the US capital in general and the NASDAQ in particular to soar.

However, it soon became clear that the expansion plans of our plenteous dot-coms were mutually exclusive. Earnings and revenue growth began to disappoint. There was not room enough in the future for every startup’s dreams. Valuations came crashing down and trillions of dollars in wealth vanished over a matter of months.

This automatic correction mechanism is not an anomaly but a fundamental feature of capital. Because capital is reproducible, high valuations invite competitors. Competitors soak up the oxygen and drive the valuations back down. Land does not have this correction mechanism and, as Piketty shows, land in the Ancien Regime of France was twice as valuable — relative to the economy — as capital ever has been.

...

It is one that led me to conjecture, and still suspect, that landlords are the once and future global plutocracy. And this happens precisely because all wealth is not created equal and some forms are more persistent and pernicious than others.

In the wake of the subprime crisis, I understand the temptation to rally against big banks and global finance. However, Lehman Brothers is dead. Sam Zell, founder and CEO of Equity Residential, is still alive. This is not an accident. The future does not belong to high flying titans. It belongs to dogged men and women who squirrel away rent checks when times are good, and buy your home when times are tight. This is the tyranny of land. Ignore it at your peril.

James Bowery said at February 5, 2014 11:22 AM:

A little elaboration is due this quote to make it more relevant:

So there is this constant race between technology raising wages and lower margins reducing wages.

The Iron Law of Wages has classically stated that, in the limit, wages reduce to subsistence. Historically "subsistence" did not include inhibition of reproduction by the conscientious. That's one reason for the demographic collapse of the Nation of Settlers in the US, as birth control has collided with the Iron Law of Wages and its definition of "subsistence". Quoth:

"The limitations of the average wages of labor to the necessaries of life requisite among a people, according to custom, for the prolongation of the existence of the individual and for the perpetuation of the species—this is the iron and cruel law which controls the wages of labor under the relations of today." (Quoted in Lujo Brentano, Porter Sherman, The Relation of Labor to the Law of Today--1891)

Hence we get race replacement of the Nation of Settlers by less conscientious races immigrating to the West under the protection of the global plutocracy for whom Randall continually admonishes us to "work harder":

landlords are the once and future global plutocracy. And this happens precisely because all wealth is not created equal and some forms are more persistent and pernicious than others.

However these global plutocrats are, themselves, undergoing race replacement because some races are more adapted to zero-sum economic competition (rent seeking) than others. Shortly after I warned (see my prior comment about the grandchildren of guys like Bill Gates becoming quasi sex-slaves of south Asians if not Africans) about this race replacement, this story broke: "Satya Nadella named Microsoft CEO as Bill Gates steps down as chairman".

Microsoft is the exemplar of modern economic rent seeking due to the network effect aka network externality aka natural monopoly that was created for MS-DOS the moment IBM shipped it with its 4.77MHz 8088 PC. It is precisely to these niches of economic rent collection that people from zero-sum cultures immigrate. Others are license-protected professions and public sector rent-seeking via transfer programs.

AB said at February 5, 2014 7:13 PM:

"Shortly after I warned (see my prior comment about the grandchildren of guys like Bill Gates becoming quasi sex-slaves of south Asians if not Africans) about this race replacement, this story broke: "Satya Nadella named Microsoft CEO as Bill Gates steps down as chairman"."

Apparently Nadella is known at Microsoft as "the guy who cuts middle management": http://www.businessinsider.com/satya-nadella-cuts-drama-management-2014-2

Also apparently 34% of the employees at Microsoft are Indian: http://articles.timesofindia.indiatimes.com/2008-03-11/india/27751871_1_collaborative-research-indians-basic-sciences


Randall Parker said at February 5, 2014 9:43 PM:

AB,

Cutting out middle management is happening in most companies. Computers are replacing middle managers as the tools that aggregate information and monitor progress. The ratios of employees to managers have been rising. Even the state of Oregon is requiring a higher ratio of workers to managers.

aSPIRANT,

Lots of (very well paid) software developers work on much harder classes of problems. People who aren't working on harder problems either should switch jobs (moving if necessary) or upgrade skills and then switch jobs.

James Bowery,

It is possible to work harder in ways that will get you more money if you find the right employer. I've worked too much for the wrong employers where that was not the case. But some pay very well for excellent work.

Part of my "work harder" though is about taking on more responsibility and to expand one's skill set. Lots of people do not try to do this. The cost of failing to do this is high and rising. The middle is shrinking. I keep saying this because it is true. But it isn't just the bottom that is growing. Some people can move up. Anyone with the brains and motivation should try to do so.

AB said at February 5, 2014 10:04 PM:

I know that cutting middle management is happening in most companies. I brought up Nadella's prominent role in cutting middle management at Microsoft in light of James Bowery's point regarding ethnic competition at Microsoft et al.

James Bowery said at February 6, 2014 10:43 AM:

A little anecdote about the "cuts" that happened in Silicon Valley starting in the spring of 2000 when the dotcon bubble burst:

The flood of H-1bs that had been let into Silicon Valley prior to the bubble burst did _not_ go home but most of the guys I know who were working in Silicon Valley for their entire careers were sent packing -- many losing their life savings over the next several years. The way this happened was stark ethnic nepotism that took the form of much lower rates of pay for the H-1bs so they could meet basic living expenses, doubling or tripling up on living accommodations. The rest of us couldn't make rent and had to "go back where you came from" which, for many, meant the midwest which had been denuded of its original computer industry -- indeed, its originating computer industry.

I was offered jobs in Silicon Valley subsequent to this but I looked at the amount of money it cost to 1) detect I was not of the right ethnicity during a downturn and 2) stop the hemorrhage of assets and "go back where you came from", and then calculated the mean time between failure of the job market, yielding an amount of money I'd have to make in order to compensate for the risk. Needless to say, they weren't offering that much money.

If anyone said "go back where you came from" to the H-1bs, their careers would be destroyed.

williamwilliam said at February 7, 2014 10:25 AM:

"Upper Class" and "Middle Class" are becoming a "stage" of life many Americans just pass through. You can shrink or grow the numbers in either group, but that just masks the overall trend that too many Americans assume that they will always be in there current class, then spend accordingly. As someone mentioned earlier, massive lay-offs moves many into lower class. Economists know three things most likely send Americans into lower class: long-term unemployment, sickness, and divorce. These three things are harder to recover from the older you are. Hence my first sentence on "upper class" and "middle class" are just a "Stage in life for many Americans.

Randall Parker said at February 7, 2014 6:58 PM:

James,

When the bubble burst many foreigners were taking their cars that they were making payments on, driving them to SFO, abandoning them in the parking lot, and flying off to India or wherever else they came from. So some people got jobs going around collecting license plate numbers at SFO parking lots to find these cars so they could be repossessed.

Lower rates of pay for the H-1bs wasn't ethnic nepotism. It was supply and demand.

Midwest originating computer industry: Shockley started in Silicon Valley. Upstate NY, Boston area, and other computer hubs have all fallen to Silicon Valley. There's a trend toward heavier concentrations of talent with each industry clustered in fewer locations. In those locations each industry pays much more. Lots of software devs making way north of $100k in Silicon Valley.

Risk of getting laid off and having to move again: How much is the move cost? $10k? $20k? I used to know military contractors who moved every 2-3 years to the next project working at hourly rates.

James Bowery said at February 7, 2014 10:54 PM:

Once again statistics are important. My perception is that the low pay jobs were not available to guys like myself who had been in the computer industry for 25-30 years. We just had to go and, if possible, get jobs at convenience stores or start repairing computers in some hamlet. The fact that some of the folks had to fly off to India merely begs the question: How many of the subsistence -- stop the hemorrhaging -- jobs in Silicon Valley went to people who had been there before the dotcon flood vs those who had come in during the dotcon flood?

Also, its not just the risk of getting laid off. Its the time it takes to figure out you're f****d before you stop the hemorrhaging. Moreover, Silicon Valley's primary draw, as you almost said yourself, was the ability to change jobs without the financial hit of selling a house, moving and buying a house. Not all of us owned houses, of course -- but those who got to Silicon Valley during the late 70s and early 80s did and many lost them.

Randall Parker said at February 8, 2014 10:25 AM:

williamwilliam,

Certainly divorce knocks a lot of people down a peg. But the bigger problem is a game of musical chairs for middle class jobs. The high long-term unemployment is due to that game of musical chairs. Why? Many kinds of middle class jobs are getting automated. Take management. The fan-out from managers to underlings is getting higher. Each manager has more reports. Why? The manager has fewer other things to do and faster ways to communicate with and monitor reports. A lot of the info from the top that used to get passed down thru middke managers now goes out via email from a VP to everybody.

I agree that people are spending at their income level on the mistaken belief that they can continue at that income level. I keep telling people they need to stop assuming they can maintain their current standard of living. But how many of the people who read my words who are heading for a fall are willing to believe me? Precious few I fear. Of those who are willing to believe even fewer are willing to act on that knowledge by spending less and choosing what to spend on with an eye toward a future step downward.

Randall Parker said at February 9, 2014 3:03 PM:

James,

Employers show a strong bias toward hiring young software developers. You didn't just learn this 10 years ago, did you?

To stay employed later in your career you've got to develop a specialty that few can do or develop other skills that set you apart. It is something I worry about a great deal and it makes me extremely driven. I keep trying to rack up visible wins. Very few devs try to do what I do. I'm extremely uncomplacent and expect at any time that the party will end. When I try to tell my friends my age and older that they need to do more to set themselves apart they can't be bothered.

Part of your problem was that you were hit by the rare popping of a really big bubble. I know lots of devs who were hit hard by it. Some eventually recovered to quite high salaries. Others became admins or marketers.

I know what salaries are like in Silicon Valley now and they are quite high compared to the rest of the country. Devs can make $100k, $150k, $200k and even much more.

One problem I see: It is very hard to evaluate people in a job interview. It helps to have individual accomplishments you can point to that are totally of your own doing. I think the ideal thing would be a site driven by a machine learning model of your own devising that does something that is very interesting. The ML roles would open up.

James Bowery said at February 11, 2014 10:28 AM:

Randall,

Of course I've been aware of the preference for hiring younger programmers since at least the early 80s when I read Gerard O'Neill explicitly state that preference in his futurist book "2081" and became only more aware of it as I was seated on SAIC's corporate software process board, myself responsible for hiring.

Where you and I part company is in our perspectives on the genocide of the Nation of Settlers.

I was, quite obviously, aware of this genocide as early as 1992 as evidenced by my prior comment in this post:

http://www.parapundit.com/archives/009383.html#reply20140203135328

The chief benefit of being the target of genocide is that you, if you are a survivor, might enjoy a bit more demand for your labor. Since the mechanism of this particular genocide was to prevent the birth of children, the demographic hole did, indeed, create additional demand for older programmers. The H-1b program supposedly put in place temporary foreign workers and then only for jobs that could not be filled by survivors. Naturally, this resulted in a preference for younger foreign workers when there were positions and even though it did, contrary to law, lower wages for survivors it at least didn't deprive them of their "three hots and a cot" in Silicon Valley.

We can ignore the fact that age discrimination is against the law since everyone else obviously does and has for decades in programming. What we cannot reasonably ignore is the massive violation of the H-1b statute that was, in 2000, a new phenomenon, and critical in preventing a return of Silicon Valley to the conditions in which the survivors of the genocide against the Nation of Settlers could expect some protection from systemic age discrimination by virtue of demographic necessity.

Yes, of course, now that I see this reality, I am better calibrated and less likely to overstay my welcome in a high-cost of living area during a downturn and hence less likely to see my assets frittered away on foolish belief in the rule of law. So, yes, the hit I take in the next downturn will not be as bad and so, yes, I don't need to demand astronomical income during the time I might be in demand in one of these high-rent job centers. The rational considerations still mitigate against a return to those centers for all of the reasons you, yourself, have stated.

What you are recommending is, essentially, reducing to practice a patentable invention in machine learning and presenting a demonstration of that invention during the equivalent of a "job interview" as a substitute for my CV. So after I give my invention away -- not having the resources to patent it myself (I've been down that road and it was part of what wiped me out; see my first comment about inventor owned patents) how many months before I've got to come up with another one?

Sam said at February 11, 2014 5:08 PM:

There's also the class action lawsuit going on right now against Silicon Valley firms like Apple, Google, Intel, Adobe etc for colluding to keep software engineer salaries low:

http://www.reuters.com/article/2014/01/15/siliconvalley-collusion-lawsuit-idUSL2N0KP02P20140115

This is in addition to these firms promoting H1B.

Randall Parker said at February 16, 2014 7:28 PM:

James,

You say:

The rational considerations still mitigate against a return to those centers for all of the reasons you, yourself, have stated.

Rational consideration? If you can get a high paying job in a high cost area by all means go. In spite of high cost for an apartment you can still save a lot of money.

You are misconstruing what I'm saying when you say this:

What you are recommending is, essentially, reducing to practice a patentable invention in machine learning and presenting a demonstration of that invention during the equivalent of a "job interview" as a substitute for my CV.

First of all, you do not have to explain enough to the interveiwers for them to know how you did it. Or you can build something that is just amusing and of little value but which demonstrates your capabilities. Then you can explain it without giving away anything of value.

In ML the challenge is mainly in identifying and preparing signals. The hiring company usually has a problem domain they want to solve with ML that will be unrelated to whatever you did to prove your chops. Lots of ML people get jobs for problems unrelated to whatever they get hired for.

Glengarry said at February 24, 2014 11:52 AM:

As our Lion of the Blogosphere has noted previously, it seems fairly clear that a regular career in computer programming sucks compared to other choices: you accumulate little human capital due to the rapid churn of technologies, and you will have little career longevity as a developer anyway. There are better jobs to shoot for. Readers about to start college, take note since you will furthermore have to pay back that loan.

I wonder what the situation will be for Indian developers in 10 years or so? Shall we guess costs have risen and revenue declined, and Tata and the rest are opening development centers in other parts of the world.

Mac said at February 27, 2014 2:40 PM:

"Shortly after I warned (see my prior comment about the grandchildren of guys like Bill Gates becoming quasi sex-slaves of south Asians if not Africans) about this race replacement, this story broke: "Satya Nadella named Microsoft CEO as Bill Gates steps down as chairman"."

The new chairman of the board of Microsoft is black: http://www.businessinsider.com/new-chairman-microsoft-needs-to-change-2014-2


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