Hot! Will technology provide the path to prosperity?

TheGlobeandMail.com – news/national/Our Time to Lead
Nov. 22 2013.   Konrad Yakabuski

This story is part of The Globe and Mail’s Wealth Paradox series, a two-week examination into how the income divide is shaping Canada.

Twenty-five years ago, a new word captured the middle-class angst of an era. That word – “McJobs” – was inspired by the employment offered at a certain fast-food behemoth and evoked a future in which low-paying service jobs dominated a rusted-out North America.

Back-to-back recessions and surging competition from an Asian juggernaut (back then it was Japan) had devastated manufacturing across this continent. In 1987, a bombshell U.S. study found that almost 60 per cent of American jobs created earlier that decade were low-wage positions in the service sector.

Talk of wage polarization, precarious employment and middle-class decline was rampant. Could an economy led by the service sector, rather than manufacturing, sustain middle-class lifestyles? Ottawa commissioned studies on the topic, but their hopeful conclusions did little to stop the foreboding.

Meanwhile, as North American factories closed, the continent’s stock markets boomed. Wall Street went on a tear, sparking an eponymous Hollywood blockbuster whose “greed is good” ethos epitomized the attitude of a new class of mega-millionaires who earned, rather than inherited, their fortunes.

The best of times for the 1 per cent seemed like the worst of times for the other 99.

“In a sharp reversal of the equalizing trend that had been under way since shortly after World War II, the extremes of wealth have grown further apart and the middle has lost ground,” Barbara Ehrenreich wrote in a 1986 New York Times Magazine article titled Is the Middle Class Doomed? “Some economists have even predicted that the middle class … will disappear altogether.”

One influential economist told Ms. Ehrenreich: “It’s incontestable that as a service economy we won’t be able sustain the level of growth required to maintain our standard of living.”

That assertion seemed as overwrought then as it does now. Though we were already deep into the information age – I bought my first personal computer in 1987, a Tandy 1000 with 256 kilobytes of memory – the cognoscenti still did not believe the service sector could ever create good jobs on a massive scale. Yet, in less than a decade, the Internet was doing just that.

Entire new job categories sprung up, post-manufacturing service jobs more akin to the work of lawyers or journalists than those manning fast-food cash registers. These allowed twentysomethings to become coders and webmasters, and out-earn their middle-class parents. In the decade before the 2008 financial crash, almost 20 per cent of Canadian manufacturing jobs disappeared, yet the median after-tax income of Canadian families increased in real terms by 18 per cent. Resources played a part in that. But the service sector was the main driver.

Since the recession, however, eighties-style hand-wringing is back in fashion. A global rise in income disparity, twinned with fears that robots are poised to replace millions of mid-level workers, has spawned gloomy predictions about what’s in store for the middle class. Experience should have taught us to guard against making such sweeping prognostications. While some innovations might destroy jobs, other as-yet-unknown technologies are just as likely to create even better ones. It has happened before – repeatedly.

To be sure, economic transitions are never entirely fair or painless. Globalization has deprived governments, businesses and workers of the near absolute control they once exerted over domestic economies. It has also enabled a lucky few to earn eye-popping (if not unseemly) incomes with the emergence of a global market for top talent. Combined with currently slow-growing salaries for the rest, the distribution of income has become more unequal in most developed countries. Restoring balance won’t be easy, as an aging population depresses consumption and economic growth, while emerging economies seek to move up the food chain by eating our lunch. But before we try to roll back the clock, as so many seem eager to do, we need to understand why we face these challenges in the first place, and why rising to them will make us all better off.

The middle-class myth

Fifty years ago, Canada’s self-image as a middle-class nation was more illusion than reality. In 1961, fewer than 15 per cent of Canadian households owned an automatic washer and only 6 per cent had two cars. InThe Vertical Mosaic, his groundbreaking 1965 study of class divisions in this country, sociologist John Porter wrote that “Canada is still a long way from the generalized middle-classness of the popular image.” Indeed, the Canada of the early 1960s was a highly stratified society with limited social mobility; a place where “the top 1 per cent of income recipients received 40 per cent of all income from dividends.”

With the growth of government and manufacturing, however, the ranks of the Canadian middle class expanded rapidly thereafter. A tariff wall shielded Canadian factories from foreign competition, enabling companies to pay workers ever higher wages and benefits, the cost of which were passed on to a captive market of consumers. “Branch-plant economy” was not a pejorative term then but, rather, a development model that seemed to work for the masses and elites alike.

It came at a price, however. Canadians forked out a much larger proportion of their incomes for basic goods. The rates charged by banks, airlines, railways and utilities were largely set by regulators. So was the pace of innovation. It wasn’t a very customer-friendly economy. Long-distance phone calls were a luxury, and air travel the preserve of the rich and business elite.

In the United States, this “blue social model” (a term coined by American intellectual Walter Russell Mead) began to unravel in the 1970s. Not even a towering tariff wall could prevent cheap Japanese cars from eating into the market shares of the Big Three auto makers. Consumer advocates on the left railed against “monopoly pricing” in telecommunications, transportation and financial services, forcing politicians to open those sectors to more competition.

The deregulation south of the border soon spread to Canada. Combined with a simultaneous global move toward freer trade, it produced a windfall for consumers. The price of durable goods (such as washers and televisions) and services (such as plane tickets) plummeted in real terms. In 1984, just before Ottawa deregulated air fares, a return ticket between Toronto and Vancouver cost about $1,800 in current dollars. (Today, a non-stop flight can be had on Expedia for about $700, and that’s when there is no seat sale on.)

Globalization and deregulation, however, forced rude awakenings on previously shielded businesses and their workers. Electrohome, a preferred Canadian electronics brand for the postwar generation, stopped making televisions in Kitchener, Ont., in 1984. Paying hefty wages and pensions to semi-skilled employees was an easier proposition when the cost could be passed on to consumers. But as Air Canada and General Motors discovered, open competition changed all that. Both companies went through bankruptcy proceedings, forcing major concession on their workers. In this open economy, worker compensation had to be tied more closely to productivity, or companies simply went out of business.

The result is that the economic model that created the Canadian middle class, and sustained it for decades, is history. That’s not all bad. The old economy was sluggish and bred mediocrity. Incomes may have been more evenly distributed, but was life really better for average Canadians?

The information age has created opportunities for self-fulfillment that our parents and grandparents could not have dreamed of. More educated than ever, young Canadians have a greater chance of leading lucrative and challenging careers, using more of their brainpower, than ever before. In 2012, the starting salary for a Canadian mobile app developer – a job category that didn’t even exist until 2007 – was between $79,000 and $112,000, according to IT recruiting firm Robert Half Technology.

Since the 2008 recession, employment growth in the professional, scientific and technical services category has outpaced all other sectors except health care and construction, according to the Conference Board of Canada. While many young Canadians have seen their careers get off to a slow start since the recession, demand for their digital skills promises to reverse that trend before long.

The blue social model enabled Canada to build a robust system of public education, health care and pensions – all critical factors in fostering equality of opportunity and offsetting the less desirable consequences of free markets. But to protect those institutions and ensure they work for future generations, Canada must become more of a leader in innovation than a follower.

This will require accelerating our embrace of the very “disruptive technologies” that the doomsayers claim are killing middle-class jobs. History proves that technology usually creates far more jobs, and far better ones, than it destroys. Our schools, businesses and governments must be early adopters rather than latecomers to the technology table.

The country we should most seek to emulate in this is the United States. That may seem counterintuitive, given our southern neighbour’s current status as the poster country for inequality. But the main factors driving income disparities there – a disproportionately big financial services sector with insane salaries, a less redistributive tax system and the enduring racial and class divisions that have suppressed the educational attainment of minorities – should not blind us to the fact that the United States remains the world’s most innovative economy.

How to jump-start innovation

Over the years, countless government task forces have unanimously bemoaned Canada’s lagging innovation performance, and each has provided a grocery list of recommendations aimed at fixing the problem. But the broad-brush approach has yielded mostly shrugged shoulders from policy makers and business leaders alike. With so much to do, where do you start?

How about focusing first on closing the Canada-U.S. gap in investment in information and computer technologies? In 2011, per-worker business investment in ICT in Canada was only 57.8 per cent of the U.S. level, according to a report this year by the Ottawa-based Centre for the Study of Living Standards (CLSC). The Conference Board of Canada gives this country a “D” in ICT investment, noting that the Canada-U.S gap has not only persisted, but also widened in the past decade. The cumulative impact has been damaging, sapping overall Canadian productivity.

It’s not hard to see why. In a modern economy, investments in computers, software and other ICT applications not only incorporate the innovations of others – they are also the primary drivers of innovation in the firms that adopt them. Most research conducted today is done at a desk on a computer, not in a science lab. Companies and institutions that continually invest in the latest technology enter a virtuous circle of continuous improvement in innovation and productivity.

That’s not to say such investments aren’t usually disruptive. And that likely explains why risk-averse Canadian businesses, particularly small– and medium-sized ones, are such late adopters of new technology. Andrew Sharpe and Vikram Rai of the CSLC suggest part of the solution lies in better-educated bosses. “The education of managers favours greater ICT investment per worker in the United States,” they note. “Managers have lower educational attainment overall in Canada, which means managers in charge of investment decisions are less likely to understand how ICT assets can improve the productivity of their firm’s production process.”

Former BlackBerry co-CEO Jim Balsillie believes Canada also needs to seriously sharpen its teeth to compete in the shark tank of global intellectual property rights. Patent wars – such as the one being currently waged between Apple and Samsung – can lay waste to promising tech startups without the legal or financial wherewithal to defend the rights to their innovations.

“You might ask why the wonderful small companies we have in Canada can’t get big, become another Google, [BlackBerry predecessor] RIM, Apple, Amazon or Samsung,” Mr. Balsillie says. “[The reason is] they get blocked by intellectual property rights. They lack a capacity to anticipate and deal with them effectively … Predators lurk until a startup gets traction. Trolls and big-company IPR spinoffs also await, severely hampering their competitive viability.”

The federal government could play a stronger role in defending Canadian innovators by in aggressively pursuing foreign firms (via international trade actions) that encroach on Canadian patents and ensuring that critical intellectual property remains in Canadian hands. The possible sale of struggling BlackBerry – with its hoard of patents valued at as much as $5-billion – is a gut check for Ottawa. It’s not so much a question of economic nationalism as economic realism. Does anyone believe the U.S. would hesitate to block the sale of key Apple patents to a foreign competitor? Governments in France and South Korea have moved to create public-private funds that invest in patents to ensure domestic firms get first dibs on using them.

Finally, Canada needs to leverage its advantage in public education – we consistently score well on international rankings of student performance – to channel more students toward technology-oriented careers. Our education system has been particularly good at compensating for the socioeconomic disadvantages of some students, because schools are primarily funded at the provincial, not local level. But we can do more. Instead of the best teachers teaching at the best schools, they should be encouraged – financially, if need be – to move to the worst ones.

And while equalizing opportunity should remain a primary mission of public education, Canada needs to do more to foster excellence. We need to produce more top students – tomorrow’s entrepreneurs, innovators and leaders. They will make or break our economic future. As much as redistributive social policy, they will close the income gap and save the middle class from the McJobs dystopia to which fatalists would condemn it.

Reporting contributed by Barrie McKenna.

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