I've been musing on this for some time, and Krugman spurred me to type. Today he launched a Luddite lament, which just happens to contain the core of Apple's problem.
In 1786, the cloth workers of Leeds, a wool-industry center in northern England, issued a protest against the growing use of "scribbling" machines, which were taking over a task formerly performed by skilled labor. "How are those men, thus thrown out of employ to provide for their families?" asked the petitioners. "And what are they to put their children apprentice to?"
As Krugman goes on to point out, between financialization of Western economies (by shipping actual widget making elsewhere) and highly concentrated capitalization of new industry (save, financial services, itself), all labor has taken it on the chin, starting with the PATCO workers. Reagan/Thatcher made it fashionable to blame all economic ills on greedy wage earners. The result has been massive redistribution of income and wealth to the 1% and .1%. So, why is this Apple's problem? Shouldn't Apple be happy that the 1% get richer, and the poor have kids?
Today, however, a much darker picture of the effects of technology on labor is emerging. In this picture, highly educated workers are as likely as less educated workers to find themselves displaced and devalued, and pushing for more education may create as many problems as it solves.
All those Indians and Bulgarians and Chinese are willing, in no small part due to (nearly) free education, to do what has historically been high wage American brain work for the price of low wage farm work. In such countries, the choice is rather stark: earn $1/day; your choice, in the steaming hot fields, or an air conditioned office. Not too hard to see where the choice goes.
Wage arbitrage has been going on in the USofA for centuries. Manufacturing left New England in the mid-19th century for "business friendly" Southern states. When Mexico and the Caribbean acquired adequate power and water supplies and automation reduced the need for any skilled labor, off the businesses went there. And so, on to China and Vietnam (those commie bastards!) and such. It's always amusing to see Toyota pickups with those American flags, and "Proud Member of XYZ Union" bumper stickers.
So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: "Who will maintain our families, whilst we undertake the arduous task" of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?
And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we're told we need, only to learn that the economy no longer wants those skills?
Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).
Therein lies the problem. Unrest in the Arab world, and Southern Europe, has been sparked by educated youth with no prospect of using that education appropriately. There's that old saw about philosophy Ph.D.'s driving cabs. What happens when it's math and engineering kids who face that prospect because IBM can find Indian equivalents for a fraction of the price? Even if education were free, worldwide, what would happen? Think of it this way: Intel has a few hundred, perhaps a few thousand, engineers designing a given chip. And a few more running the manufacturing. What's the marginal value of yet another engineer? Do we really need more folks like the London Whale? Is such the best use of talent? And those Texas ads touting all those jobs? Mostly low wage, no benefits, customer facing shift work; "want fries with that?".
What have been the growth occupations? Medical and financial services. The latter cratered the economy, and the former will bankrupt us. If you abide with certain political philosophy. What, exactly, should displaced workers learn to do? Is there sufficient work in this newly capital controlled economy for any high skill, high wage employment? Was the middle heavy income distribution of the past due to education, or mores? The answer is the latter. And that will always be the latter. Education, intelligence, and income are all relative; none is absolute. Is there any benefit to Apple if growth in employment is only in hamburger flipping? Does Apple really want, or need, the Gekkos to prevail? Or, is it already too late? The bed made, and must be slept in?
As returns to capital increase, the value of labor, educated or not, decreases. With declining wages, folks can't afford widgets. This is a particular problem for capital. As I've confirmed recently, computer tech finds itself in a bind. Payback periods are increasing (since the cost of new physical capital increases), yet product cycles are, at best, static; at worst,shortening. The result is a diminished return on investment, even without distributional effects. One attempt to combat the arithmetic is merger and competition elimination. Good luck with that. In simple terms: capital is well on its way toward destroying its customers.
In the short, and may be medium, term capital wins the battle. But doing so loses the war for all. Without enough folks in the 1%, the likes of Apple and Rolex collapse. When that happens, capital no longer has much value; the value of capital is in production, not hoarding, unless it's the Dark Ages and you're a thane with a castle. The Bernanke Bucks (and Greenspan Greenbacks earlier) are being hoarded by capital. Bush/Obama have engaged in supply side, trickle down, voodoo economics (to conjure that other Bush). It can't work. Some of the quants are figuring out that the QE money has only caused an asset bubble, both by corporations indulging in buybacks and coupon clippers seeking 10% return. The net effect is to boost demand for equities, thus trading interest return into capital gain. The problem with capital gain is that it's a one time deal. The only way one can continue to get 10%, say, is to churn ahead of the lemmings. The only way that the real economy (as opposed to the financial sector) can support X% return on capital is if that capital is more productive by something more than X%. What we're finding out is that the days of decades of return on investment (a steel mill, for example) are long gone.
Without continuing, long term gains in productivity, there can be no long term return on capital. The arithmetic doesn't work. The capitalist can only afford to pay 10% if his fiduciary capital has been turned into physical capital, which in its turn is somewhat more productive than 10%. Financial, i.e. time preference, can "demand" 10%, but if the real world use of capital can't sustain 10%, it won't get paid. If, through market or political power, financial gets more than the real world increment, the same seeds of destruction (collapse of consumer demand, for lack of moolah) are sown.
But, the whole artifice is held up by end user consumption, i.e. the Middle Class. Apple, and its adherents, crow about having the biggest margins, and all that profit. But without a growing (in terms of count) demographic, Apple (and Rolex) is limited in how large it can grow.
Think of it through a small thought experiment.
Time0 we have the 1% with 10% of GDP, so for a nation of 1,000, that's 10. And, say, that works out to $1,000/annum of income. This is enough to afford an Apple Widget; less than $900 prices you out of Apple. Let's say the total population at $900 and above is 20.
Time1 we have 1% with 20% of GDP, so for the nation of 1,000, that's still 10. These 10 now have $2,000/annum of income (or thereabouts, with the historic US data stream, the 1% have gotten nearly all of the GDP growth since 1980). Clearly, those 10 can still afford Apple. But what about those on the margin? Those from $900 to $999? Are there more now, or fewer? The answer is fewer. The top 10 have increased their share of the pie (which doesn't grow by 100%, the increase realized by the 1% in this experiment) out of proportion to their population. In this scenario, not only have the 1% kept all the productivity gains, but now have more of total GDP. The only place the additional moolah can come from is the remaining 900, whose incomes must fall. Depending on how right skew the full distribution was at Time0, the decrease in addressable market for Apple at Time1 could be even worse. Those having the $900 is fewer than before; perhaps 8. Apple can't sell more widgets in this scenario, at the same price, margin, and profit.
If, on the other hand, the 1% moves to 5% of GDP, the count of those having at least $900 goes up; by how much depends on the specifics of the distribution, perhaps 17. It is, in any case, a larger number than at Time0, or the alternative Time1.
Krugman closes with,
I can already hear conservatives shouting about the evils of "redistribution." But what, exactly, would they propose instead?
Well, they just want the rich to get richer and the poor have kids, since macro growth is of no concern to them and so have nothing to propose, beyond "we like it this way". Apple, on the other hand, has to be concerned.
That's Apple's problem, at its core. While Apple makes its appeal to the Gekkos, Apple's concerns diverge from that of the Gekkos. The Gekkos don't want macro growth, only Gekko growth. Apple can't survive the Gekkos. Apple needs more, not fewer, $900 households. Unlike exotic cars, there's not much demand for multiple Apple widgets. Yeah, having both an Aston Martin and a Ferrari is neat. Having two iPhones? Not so much. Apple has been able to capture most, if not all, of the high end market (population) during the Bush years. But, if the trend of concentration, both of current income and income growth, continues their market (population) must shrink. The arithmetic makes it so. The only question is how fast and how bad is the collapse?
Those happy with the trend will reply: "Apple just needs to sell to the high end incomes in other countries". OK, but how do those incomes get generated? In particular, how does Apple ensure that it gets the US dollar equivalent for its widgets sold ex-US? All of those Foxconn drones won't be buying iPhones. Ah, matey, thar's the rub. For Apple to profit (to the same degree) from ex-US sales, exchange rates have to remain in the US's favor. That was the regime while Bretton-Woods prevailed, but currency wars have been the norm since the 1973 OPEC embargo. Out went the dollar's favored status. Sort of. A recent post implies that chaos could ensue if Abe's gambit fails in some spectacular way, since Japan (and every other country, for that matter) holds US dollars as reserve currency. Now, whether the global/macro effect would be materially different if Japan loosed equivalent specie is debatable. I don't see any material difference; all specie would fall in value if trading supply spiked. In any case, Apple's problem with ex-US sales is that most of those countries, save Europe's, have even more skewed distributions. Not so many potential customers as national population numbers might imply.
So, in the end, Apple needs the 1% (or whatever the quantile is that they covet; it's likely more like 10%) to grow in count. Concentration doesn't help Apple's future, at all. The Gekko types aren't smart enough to see beyond the ends of their noses, so they can't figure this out. Not even Jonah with Excel. It's not coincidental that the growth in the US up to 1973 was driven by an income distribution which was heavy in the middle. And it's not coincidental that it all began to unravel after 1973, and gained momentum with Reagan in 1980/1 with the head swelling up like a melon.
Apple's problem is that it painted itself into a corner. And they don't seem to know it, yet.