Wednesday, March 11, 2015

Mainstream Economics and Post-Scarcity: Larry Summers on the Automation of Labor

See the full article here on Larry Summers' personal website

     The idea that labor automation technology will be an increasingly disruptive economic force in the 21st century has become the subject of serious economic debate in the last few years. Case in point--comments recently made by Larry Summers, a prominent Harvard economist, former Secretary of the Treasury and former Director of the National Economic Council. Summers is one of the most respected economists within the discipline, and certainly one of the most influential, evidenced by the fact that his advice played a large role in the Obama administration's response to the Great Recession.

     Appeals to authority aside, that technological displacement is now the subject of hot debate among economists who actually give advice to policy makers is obviously itself a critical step in the creation of an efficacious response to this displacement.

     In this interview, Summers lays out his view of several key themes in the debate: effects on inequality, the limitations of increased education, and how the nation should help workers who are displaced by automation. Here's the full question and response on that last point--
How should the country help workers displaced by technology?
More progressive taxation means they will have to pay a smaller share of tax burdens. And in the case of poorer workers, more support for their work through the earned income tax credit may be possible. Reduced economic rents mean lower prices, which mean higher real wages, and a larger share of a firm’s revenues going to compensation.
Part of reducing rents is adequately empowering workers, whether it is through increases in the minimum wage, through giving collective bargaining a serious chance, or whether it is through promoting arrangements that give workers a share in profits.
    A brief explanation for non-economists of several terms and their relevance--
    Progressive taxation is a taxation system wherein higher income individuals pay a larger share of their income than lower income individuals. The degree to which a taxation system is progressive is the magnitude of that relative gap in taxation, so for instance a system where top 20th percentile earners pay 50% of their income in taxes compared to 10% for the bottom 20th percentile is more progressive than a system wherein top earners only pay 40% and bottom earners 20%.

    The increase of income inequality over the last few decades is an inarguable economic fact, so what's left up for debate is what role technological change has played in that development. Like Summers, I'm convinced by arguments that technological progress has played a large role in inequality growth and will play in even larger one in the years to come, such as put forward by Erik Brynjolfsson of MIT, but Summers is also correct to point out that there is some fuzz here in the data. The logic makes sense--automation replaces some jobs, some technologies make skilled workers disproportionately more productive than unskilled workers, and especially now, technology means that a few people can become extremely successful (I'm looking at you, Instagram).

    The idea then is that taking forward the assumption that technological progress today is biased towards creating concentrated wealth, then increasing the progressiveness of our taxation will make the benefits of technological progress more directly and evenly distributed throughout society.

    An earned income tax credit, or EITC, would be the output of that increased tax revenue raised through increased rates on top earners. An EITC is a taxation system typically meant for low to medium earners that is supposed to both increase their standard of living while not distorting their incentives away from work. Basically, for every dollar an individual earns, the government will match with some amount, and the individual should always have something to gain from working more.

    Compared with basic income, an EITC is almost certainly the better option in the short term, if for no other reason than it has been tested and found effective on a large scale (Meyer and Rosenbaum, 2009) and thus economists and policy makers have a good understanding of how it actually works, with little guesswork or chance of catastrophe. Ultimately it may be a poorer solution as automation becomes ubiquitous enough to make even a little bit of labor from some people unnecessary, as EITC helps the working poor but not the absolutely unemployable and poor.  In the meantime, there's little danger in expanding EITC, other than it potentially becoming a problematic hurdle to adopting basic income in the further future.

    Economic rent is a more academic term. I'll quote the first sentence from Wikipedia

"In economicseconomic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production"
   That's a technical definition, and can be fairly confusing, so here are the examples of economic rents Summers gives in the same piece
" values protected by exclusionary zoning, franchises contributing to the politically fortunate, overly generous protections of intellectual property, or implicit subsidies to the financial system..."
   The crux of the idea of an economic rent is that some revenue is essentially unearned, and should be treated differently from economic profit--it is undesirable. Summers believes, and he is surely firmly supported by most economists on this point, "Reduced economic rents mean lower prices, which mean higher real wages, and a larger share of a firm’s revenues going to compensation."

    Summers is far from the first or last economist to take on the topic of technology and labor, but it's certainly heartening to see the issue come into the prominence that it deserves. Automation will be a process, and it's likely that the best policies for transitioning society through this technological revolution will change depending on just how far labor substitution has progressed.