The Third Industrial Revolution

Why yesterday's plan for the economy won't work for tomorrow.

In the late 19th century, roughly half of Americans worked in agriculture. By 2000, that fraction had fallen to under 2 percent. During the last century alone, we have seen those involved in the production of goods (from mining to manufacturing to construction) fall from about a third of the population to just under one in five. Over the same period, the proportion of Americans involved in services more than doubled, from 31 percent in 1900 to almost 80 percent by the turn of the last century. Since 1900, the number of farms in the United States has fallen 63 percent, and the average farm size has grown by two-thirds.

The U.S. economy has, in the past 150 years, seen stunning changes. It has gone from agrarian to industrialized, from primarily rural to primarily urban and suburban -- from one in which primarily men worked to one in which by 2010 more than half of professional workers were women, from one in which most people did not complete high school to one in which 40 percent of 18- to 24-year-olds are enrolled in college, from one in which most American companies made their money in the United States to one in which about half the sales of S&P 500 companies come from other countries.

We should be comforted by this story of adaptation. The result has been unprecedented benefits across society, from GDP growth to rising standards of living. This has been not one industrial revolution but a whole series of upheavals culminating in the massive shift in recent decades from manufacturing to services, powered by globalization and new technologies.

Naturally, the folks in charge had to adjust. Protectionism that may have worked in the 19th century proved a calamity by the early 20th. Gold-based currencies were ultimately replaced by fiat alternatives. New data were needed to judge economic health. New regulations were needed to protect society and individual citizens. Indeed, national economic institutions like the Federal Reserve and the Securities and Exchange Commission have had to be augmented by coordination with similar groups in other countries to ensure market stability, liquidity, and crisis response.

Now, however, signs suggest that another enormous change is afoot -- only this time, the folks in charge are not adjusting.

Once upon a time, the U.S. economy grew in tandem with the productivity of American workers, leading to the creation of jobs and wealth across society. During this century's first decade, however, this relationship no longer applied. GDP grew and productivity climbed, while job creation slowed to a crawl, median incomes fell -- and the rich got richer.

This is not just a problem for the United States. Emerging economies -- even China -- are facing a similar phenomenon. Erik Brynjolfsson and Andrew McAfee, digital-business specialists at MIT, describe the disconnect in grim detail in Race Against the Machine, their book about what might be called a third Industrial Revolution. They explain that massive increases in productivity due to the happy marriage of information technology and advanced manufacturing techniques are having a chilling, unprecedented effect on job creation.

The potential consequences as fewer jobs are created for the middle classes, while wealthy investors rack up the profits, are great and unsettling. Brynjolfsson and McAfee argue that what's happening will have the same devastating effect on white-collar jobs that recent technological advances have had on traditional middle-class jobs -- in other words, lawyers and accountants may well start feeling the same pain that assembly-line workers have been experiencing for decades.

Profound as the impact of such changes may be, they are not the only global market shifts that will demand new thinking from policymakers. For one thing, the dependable engines of economic growth -- developed countries -- have stalled. Second, the new engines of growth -- the big emerging economies -- have also hit idle speed. One top IMF official recently predicted to me that Europe will be in recession for the next five years and that growth in the BRICS might well fall to 60 or 70 percent of current levels for the same period.

Four years after Lehman Brothers imploded, we're still unsure what risks are being built into the global economy thanks to the ongoing proliferation of complex, opaque financial instruments like derivatives, which now carry more value than all the printed money on Earth many times over. It gets worse: With increased computing power, markets are growing vastly more volatile, and the advent of trading based on previously unmanageable data sets is only going to accelerate this trend and give special advantages to those able to gather and process massive amounts of information rapidly.

So the economy of tomorrow is unlikely to look much like that of yesterday. But did you even once hear anyone discuss this paradigm shift during the U.S. presidential election season or over the course of the never-ending debates about the European debt crisis? As argued in books like Race Against the Machine and confirmed daily in the headlines, the new global economy will force us to rethink our most fundamental assumptions, whether it's how many hours we should work each week or an education system that stops once people enter the workforce -- to say nothing of government's role in redistributing wealth from the few who harness the technologies to the rest who will be dislocated by the changes.

Perhaps with election seasons and leadership changes behind us, world leaders will be able to begin discussing what the transition to this new economy will entail. But we already know what won't work: trying to use the same old dog-eared playbook to address an entirely new set of challenges. A good place to start would be setting aside our hopes of simply going back to where we once were, creating manufacturing jobs we'll never see again, ones that haven't been outsourced to another country but to the past. Another is to recognize that the keys to growth will be the new infrastructure and education demanded by a rapidly reconstituted labor force.

But that means embracing the future, not running away from it. You can't run an entire economy on nostalgia. That's why it's so frustrating to be stuck with leaders whose main idea for a better tomorrow is to go back to the ways of yesterday; listen to them talk, and you'll have a hard time deciding whether their approach is that of an ostrich burying its head in the sand -- or a deer frozen in the headlights.

Alfred T. Palmer/Farm Security Administration Via Library of Congress

David Rothkopf

The Election Is Over

It's time to start worrying about 2013, because the Obama team clearly isn't.

It's the first of October, and here's your October surprise: October is already over. So is the first week of November. The campaign is over. The voters have decided. The only remaining step is watching as the clock strikes midnight after Election Day is done and Mitt Romney disappears from the American political scene like Cinderella's coach.

Poof. What was that fellow's name again?

This is a surprise because the United States remains a deeply divided country politically. Opposition to the president remains strong, and his record remains spotty at best. It is a surprise because the past few weeks have seen bad news on the economic front and the unraveling of the story that Barack Obama is a foreign-policy master.

The race should be closer. By some reasoning, Romney should even be ahead. Heck, if Romney had gone on vacation to Lake Winnipesaukee for the past three weeks, he might be. But every time events have turned against the president -- from weak job numbers to bad manufacturing results, from the debacle in Libya to the rapid deterioration in Iraq, Afghanistan, Syria, and U.S.-Israel relations -- Romney has come to Obama's rescue with a boneheaded statement or some distracting gaffe of his own.

So now the swing-state polls suggest it is highly unlikely that the Republican candidate can orchestrate a victory. Behind by 9 percentage points in the latest Columbus Dispatch poll in the state he must win, Ohio, and trailing in eight of the nine Florida polls tracked by RealClearPolitics, Mitt has no clear path to 270 electoral votes. The media will spin this election up and down between now and Nov. 6 to try to create the illusion of drama, but stick a fork in it: The Romney goose is cooked.

Although this might be a letdown for political junkies, it is a relief for normal people who can tune out the incessant, mind-numbing, serially prevaricating television spots for the candidates and get on with their lives. Better to look ahead instead and start doing the planning for 2013 that the Obama White House, senior-level sources tell me, is not really doing right now. They're caught up in the election, and as a result they are letting a lot of big issues slide.

The result is that next year could be momentous on many fronts and even destabilizing on some. Let's give ourselves a head start and begin to consider just five of the most important challenges with international implications that Obama will face in the wake of his reelection victory:

Rebuilding his team: Out the door go Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, and, if Defense Secretary Leon Panetta can push aside those trying to get him to stay on a little while into the new term, he will join them. So too will leave many other less visible members of an Obama team who are burned out, ready to make money, and/or disaffected. One senior official told me, "If Obama had his way, he'd probably do without having a cabinet altogether." He was referring to this White House's renowned neglect of its team, its tendency to micromanage or simply shut down initiatives from its cabinet departments, and the fact that a handful of people around the president think they can do it all themselves. (While everyone was stewing over why U.N. Ambassador Susan Rice offered an assessment of the Libya situation that was inconsistent with readily apparent reality, isn't it more offensive that this past weekend the White House thought it appropriate to have one of its political operatives, David Plouffe, serving as its spokesperson on sensitive foreign-policy issues … again?) Getting new talent in will be almost as tough as getting folks confirmed by a still deeply fractured Senate. Yet, much of Obama's legacy will depend on whether he finally becomes the leader of a strong Team of Rivals or whether he will opt for a Team of Staffers -- bland, back-bench choices who won't make waves and will require the president to do all the heavy lifting.

The fiscal cliff and beyond: The coming combination of required tax hikes and budget cuts will likely give the world a scare come year's end, but the president and Congress will probably paper together a deal that effectively does what they have done best for the past few years: Push off hard decisions into the future. If the markets tolerate this behavior, shame on them. But, because they like a good time as much as anyone (more, actually, because good times allow them to line their pockets now as insurance against the day when the fiscal chickens come home to roost), they probably will. And then the president and the Republicans will face the great litmus test of their collective legacies: Will they use the time they have bought themselves to fix problems, or will they continue to blame each other and leave it to their successors to clean up their mess?

The Middle East's worst year ever: It is hard to remember a time when the Middle East has not been fraught with tension. But it is impossible to remember a moment more dangerous than the one that looms ahead next year. Not only will the decision of whether to hit Iran before the country achieves nuclear weapons capability probably come due, but it will do so in the midst of a region caught up in an increasingly tense proxy war between, on one side, Iran and its Syrian and Hezbollah allies (and Russian enablers) and, on the other side, the Arab states that would seek to bring down Assad and contain Iran. Egypt and Libya are home to fragile reform efforts, and countries like Jordan, Bahrain, and Yemen are nervously studying their examples. The failure of the Palestinian leadership to lead and the failure of Israeli Prime Minister Benjamin Netanyahu's administration to be of any help exacerbate these problems. So too does the alarmingly rapid devolution of Iraq and the signs that the situation in Afghanistan is only going to get worse. Any one of these could trigger a regionwide conflict bigger and with greater global consequences than previous Middle Eastern crises -- and that's saying a lot, especially given that right now the United States has no strategy to deal with the situation and no inclination to get more deeply involved.

Europe will continue to struggle: As Obama seeks to harness modest U.S. growth and real comparative advantages such as cheap energy, good universities, strong intellectual property and legal regimes, deep wells of capital, and stability that other big economies could only dream of, the worst thing that could happen would be another big economic shock. Every time European leaders "solve" their problems, they forget to tell the people in the street who have to live with the austerity. That means political backlash is always a threat to Europe's recovery and therefore to America's fragile climb back.

China's new leadership will not have it easy: The incoming leaders of the world's most populous country are facing a soft-ish economy, confrontations with their neighbors in the South China Sea, incomplete political and economic reforms at home that have caused real tensions, scandal, and political infighting, and an America increasingly serious about getting tougher on trade and containing a rising China.

And there are other areas where potential problems could flare up. It was not much noticed, for example, that during his September trip to Asia, Defense Secretary Panetta made pointed references to the cyberthreat from China. But within the Obama administration, Panetta's decision to raise the profile of this growing problem was seen as significant -- "the tip of the iceberg," as one official put it to me. Given the possibility for constant, low-grade, nearly invisible, hard-to-trace, and hard-to-retaliate conflict between cyber-rivals, that could greatly make this tough relationship more difficult.

The rest of the world could pose its own problems. Increasingly, for example, Russia is behaving as an adversary, if not quite America's No. 1 geopolitical foe. Africa is going to be a growing source of concern due to extremist violence and greater U.S. economic interest in the region. The international financial system is not being appropriately overseen or regulated, and there are a number of vulnerable big financial institutions that will remain a cause for concern for years to come.

The stakes are enormous. They will affect Obama's legacy -- but more importantly, they could shape our lives for better or worse for decades to come. So better we should shift our attention from the screaming headlines about the non-stories of this pre-election month and raise our gaze over the horizon to the issues that really matter.