Are we replacing robots with Chinese people?

OK, REALLY, dissertation committee, this is my last blog post for a while. PROMISE.

But this Tyler Cowen article was too good to pass up. I just had to blog it. The article is about new data that show that productivity growth has stagnated since 2009. There's lots of good stuff in the article, but I want to focus on one part that really caught my eye:

One problem may be offshoring by American companies, as stressed in a study by Michael Mandel, chief economic strategist of the Progressive Policy Institute, and Susan Houseman, senior economist with the W. E. Upjohn Institute for Employment Research. Some productivity gains from the manufacturing of the iPad are captured by workers in China, who make important parts of the device, rather than by American workers. American companies often save on costs by finding lower wages abroad, not by enhancing the abilities of American workers. That would help explain why measured productivity has often been high over the last decade while despite year-to-year variation domestic wages and job creation have been flat.

I've been critical in the past of Mike Mandel's thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT...productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer - and I feel like this is what Cowen and Mandel may have been getting at - is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics undergrad like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a "public good"), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big difference. If we're not channeling enough of our economic output into the production of new technology, we'll all be poorer down the line.

And here's the interesting part. Romer's first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don't bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

This is just an assumption, of course. Even if the model works well, the assumption may be wrong. But it's an interesting idea, isn't it? What's even more interesting is that this exact same idea is one of the leading explanations for the "Great Divergence" between Europe and China that began around the 1600s. The idea is that European countries, flush with capital but short of labor, invented modern industrial technologies to compensate for their labor scarcity, while China, with a huge labor surplus, felt no need to invest in fancy machines. For more technical formulations of this notion, see Basu & Weil (1998), and this recent survey by Allen. But the basic idea is pretty clear: cheap humans crowd out robots.

So here's the question: what if our slow rate of innovation is due not to an inexplicable slowdown in the arrival of new ideas, but from the fact that China has made the discovery of those ideas less urgent? If that were true (and I'm only raising the possibility), what would be our best response? Would shutting ourselves off from cheap Chinese labor force us to become like 1600s Netherlands and invent a bunch of cool robots? Or would it just cause companies to pack up and leave the U.S. entirely, rendering us a protectionist backwater? If there is a "negative labor spillover" going on, is our only choice simply to wait until it runs out? And is it already running out?

I can't claim to have the answers. But I feel like Mike Mandel and Tyler Cowen (and Paul Romer and Basu & Weil) are on to something here.