PROBABLE SCENE OF LABOUR MARKET DUE TO TECHNOLOGY
THE FEAR
The increasing sophistication of robots and the progress of artificial intelligence has generated considerable anxiety
1. about what would happen to our societies if only a few people had interesting jobs and everyone else had either no work or had a horrible job,
2. and inequality ballooned as a result.
Especially if this happened because of forces largely out of their control. This has already happened—in the United States since 1980.
IMPACT OF NEW TECHNOLOGY-AI AND AUTOMATION ON LABOUR MARKET
In their book The Second Machine Age, our MIT colleagues Erik Brynjolfsson and Andrew McAfee offer a bleak view of the impact of digitization on the future of employment in the United States.
1. Digitization, they suspect, will make workers with “ordinary” skills increasingly redundant. As tasks from car painting to spreadsheet manipulation are done by computers or robots, highly educated workers who are adaptable and can program and install the robots will become more and more valuable, but other workers who can be replaced will find themselves without jobs unlessthey accept extremely low salaries.
2. In the first IT revolution, as David Autor has shown, jobs involving routine repetitive tasks were the ones that went. Jobs that required quickjudgment and initiative stayed put. The number of typists and assembly-lineworkers diminished, but executive assistants and burger flippers kept their jobs.
3. Artificial intelligence will be the final nail in the coffin of these ordinary workers.This time, many say, it is different. Artificial intelligence means machines can learn as they go and are therefore able to carry out increasingly nonroutine tasks, such as playing Go or folding laundry. InJune 2018, a restaurant offering robot-made burgers opened in San Francisco. Humans are still taking the orders and cooking the sauces, but the robots cook the gourmet burgers, such as the Tumami Burger (“Smoked oyster aioli, shiitake mushroom sauce, black pepper and salt, pickles, onion, butter lettuce—Designed by Chef Tu, Top Chef Season 15”5), in five minutes and for $6. Esther’s sister Annie Duflo, the CEO of a large NGO, does not have a human assistant; she relies exclusively on an AI-powered assistant named Fin. Fin books her hotels and her plane tickets, manages her calendar, and takes care of her travel reimbursements. Annie is, sadly, much happier with Fin than she was with her human assistants. She pays him (her? it?) much less and gets much more reliable service. To be sure, there are some humans behind Fin, but fewer and fewer, and the business model is clearly to move away from them.
4. The AI revolution is thus poised to hit people across a wide spectrum of jobs. Accountants, mortgage originators, management consultants, financial planners, paralegals, and sports journalists are already competing with some form of artificial intelligence or, if not, will soon. Cynics might say it is precisely because these more high-end jobs are on the line that we are finally talking about this, and they may be right. But AI will also hurt shelf stackers, office cleaners, restaurant workers, and taxi drivers. Based on the tasks they perform, a McKinsey report6 concludes that 45 percent of US jobs are at risk of being automated, and the OECD estimates that 46 percent of the workers in OECD countries are in occupations at high risk of being either replaced or fundamentally transformed.
5. Of course, what this calculation misses is that as some tasks get automatized, and the need for humans gets relieved, people can be put to work elsewhere. For the time being, humans have not been made redundant. Unemployment in the United States, as we write this book in the first quarter of 2019, is at a historical low and falling.
6. With more and more women joining the labor force, the share of the population in the labor force rose substantially until about 2000 (when it started to plateau or reverse). Jobs were found for all those who wanted to work, despite rapid laborsaving technological progress.
7. Of course, it is true we are probably just at the very beginning of the process of AI-fueled automation. The sense that artificial intelligence is a new class of technology makes it hard to predict what it might do.. Like AI today, the spinningjenny, the steam engine, electricity, computer chips, and computer-assistedlearning machinery all automatized and relieved the need for humans in the past.
8. What happened then is very much what one might have expected: by replacing workers with machines on some tasks, automation has a powerful displacement effect. It makes the workers redundant. This is what happened to the skilled artisans spinning and weaving at the dawn of the industrial revolution. They were replaced by machines. We are told that in the long run everything wasfine, but the long run was very long indeed. Real blue-collar wages in Britain were almost halved between 1755 and 1802. Although 1802 was a particularly low year, they were on a declining trend between 1755 and the turn of the century, and it is only at the turn of the century that they started increasing again. They would recover their 1755 level only in 1820, sixtyfive years later.
9. This period of intense technological progress in the United Kingdom was also an era of intense deprivation and very difficult living conditions. The economic historian Robert Fogel showed that boys in England during this period were significantly undernourished compared even to slaves in the US South. The literature of the time, from Frances Trollope to Charles Dickens, describes what was happening to the economy and society with acertain amount of unmitigated horror. Those were Hard Times indeed.
10. We know that eventually there was a turnaround in the UK. Even as some workers lost their jobs, the labor-saving innovations raised profitability of other inputs, and hence the demand for workers producing them. Improvements in weaving technology, like John Kay’s flying shuttle, for example, increased demand for yarn, creating jobs for people to produce yarn. And the burgeoning wealth of those profiting from these innovations increased demand for new products and services in a range of sectors (more solicitors, accountants, engineers, bespoke tailors, gardeners, etc.), which created more jobs.
11. However, nothing tells us the rebound is guaranteed to happen. There may well be no rebound from the fall in demand for labor resulting from this wave of automation and AI. Sectors that become more profitable may invest in new labor-saving technologies instead of hiring more workers. The new wealth may be used to purchase goods made in another country. We don’t know what will happen this time around, since we haven’t seen the very long run yet, but the impact of the current wave of automation (which started in 1990, giving us a perspective of more than twenty-five years) appears so far to be negative.
12. In a study on the impact of automatization, researchers computed, for each region, a measure of exposure to industrial robots, capturing the spread of robots in the industries in that region. They then compared the evolution of employment and wages in the most affected areas to that in the least affected areas. The study found, to the surprise of the authors, who had written a previous paper emphasizing the forces that should lead to a rebound, large negative impacts. One more robot in a commuting zone reduces employment by workers and also depresses wages. The employment effects are most pronounced in manufacturing and they are particularly strong for workers with lower than a college education, especially those who do routine manual tasks. However, there are no offsetting gains in employment or wages for any other occupation or educational group. These local impacts of robots on employment and wages are reminiscent of the impacts of greater exposure to international trade. They are surprising for the same reasons. As many tasks in a particular industry get automatized, we might have expected displaced workers to find employment in new businesses that would have come to the region to take advantage of the freed-up labor, or to move elsewhere. It is also worrying that the automation of simple tasks did not lead to the hiring of more engineers to supervise the robots. The explanation is probably similar to why competition with China hurt low skilled workers; in the sticky economy, seamless reallocation is anything but guaranteed.
13. For some of these reasons, we suspect the current drive toward replacing human actions with robots cannot be prevented from taking a serious toll on the already dwindling stock of desirable jobs for low-skilled workers, first in the rich countries but very soon everywhere. This will add, to a greater or lesser extent, to what the China shock and the other changes described in previous chapters have done to the working class in much of the developed world. It could lead to a rise in unemployment or a multiplication of poorly paid, unstable jobs.
14. Now it is true that even if a business adopts a highly productive new technology that displaces labor, the increase in productivity also creates new resources that could be deployed to find new uses for the freed labor. The technologies most dangerous for the workers are what some researchers have described as “so-so” automation technologies; they are just productive enough to be adopted given the distortions in the tax code, and displace workers, but not productive enough to raise overall productivity.19 Unfortunately, notwithstanding the grandiose talk about singularities, the bulk of R&D resources these days is directed toward machine learning and other big data methods designed to automate existing tasks, rather than the invention of new products that would create new roles for workers, and hence new jobs. This may make economic sense for the companies, given the financial gains in replacing workers with robots. But it distracts researchers and engineers from working on the truly pathbreaking innovations. For example, inventing new software or hardware health workers could use to assist patients in doing their rehabilitation therapy at home after a surgery rather than in a hospital could potentially save insurance companies lot of money, improve well-being, and create new jobs. But the bulk of the automation effort today in insurance firms goes toward searching for algorithms that automate the approval of insurance claims. This saves money but destroys jobs.
15. This emphasis on the automation of existing jobs increases the potential for the current wave of innovation to be very damaging for workers. This specific force of automation is exacerbating what is always a concern. When a worker is fired, the firm is done with him, but society inherits the liability of his continued well-being. Society does not want him to starve or his family to be homeless; it wants him to find another job he likes. We fear his anger, especially if it leads to a vote for the many lurking extremists in today’s world, whereas the firm does not have to pay for the retraining, the welfare payments, or the social costs of the anger. This kind of argument has traditionally been used to justify making it difficult to fire workers. Some labor laws, like India’s, make it virtually impossible to fire anyone in larger firms. Others, like the French laws, make it difficult and uncertain. The worker can appeal and possibly be reinstated with back pay. The problem with such firing costs is that they can make life very difficult for a manager faced with a nonperforming worker or an urgent need to downsize in order to survive. As a result, firing costs may discourage hiring in the first place, which would exacerbate unemployment.22
16. Even if the total number of jobs does not fall, the current wave of automation tends to displace jobs that require some skills (bookkeepers and and accountants) and increase the demand, either for very skilled workers (software programmers for the machines) or for totally unskilled workers (dog walkers, for example), which are both much more difficult to replace with a machine. As software engineers become richer, they have more money to hire dog walkers, who have become relatively cheaper over time, since there is little alternative employment for those with no college education. Even if people remain employed, this leads to an increase in inequality, with higher wages at the top and everyone else pushed to jobs requiring no specific skills; jobs where wages and working conditions can be really bad. This accentuates a trend that has taken place since the 1980s. Workers without a college education have increasingly been pushed out of mid-skill jobs, such as clerical and administrative roles, into low-skill tasks, such as cleaning and security.
WHY AUTOMATION?
So should we try to stop the push toward automation? There are in fact good reasons to suspect that some of the recent automation is excessive; corporations seem to decide to automate even when robots are less productive than people. Excessive automation reduces GDP instead of contributing to it.
1. TAX REBATE
One reason is the bias in the US tax code, which taxes labor at a higher rate than capital. Employers have to pay payroll taxes (used to finance social security and Medicare) on labor, but not on robots. They get an immediate tax rebate when they invest in the robot, since they can often claim “accelerated depreciation” for a capital expenditure, and if they finance it with a loan they also get to deduct the interest from their earnings. This tax advantage gives employers an incentive to automate, even if it would otherwise cost less to keep the workers.
2. FREEDOM FROM LABOUR RELATED ISSUES
Moreover, even without subsidies from the tax code, the many frictions in the labor market may make managers dream of factories without workers. Robots won’t demand maternity leave or protest a wage cut in a recession. It is probably not an accident that automation in the retail sector (such as automatic checkout lines) started first in Europe, where the labor unions are stronger.
3. MONOPOLISTIC BUSINESS AND INDUSTRY
The increase in industry concentration and monopolies could also reinforce this tendency. A monopolist does not fear competition. It has no reason to constantly reinvent what it is offering its consumers. Therefore, the monopolist will tend to focus more on cost-cutting innovations, which will increase its profit margins. In contrast, a competitive firm might go for a moonshot to try to take over the market.
HOW CAN EFFECTS OF AUTOMATION BE MITIGATED
1. ROBOT TAX
The alternative to restricting firing or banning the use of robots in some sectors is a tax on robots, large enough to prevent them from being deployed unless the productivity gains are sufficiently high. This is now the subject of a serious discussion. Bill Gates has recommended it. In 2017 the European Parliament considered, but ultimately voted down, a proposed “robot tax,” citing concern over stifling innovation. Around the same time, however, South Korea announced the world’s first robot tax. The Korean plan reduces tax subsidies for businesses investing in automation and combines it with a tax on outsourcing, so that the tax on robots does not lead to outsourcing.
PROBLEMS IN CONTROLLING THE IMPACTS OF AUOMATION
1. The problem is that while it is easy to ban self-driving cars (whether or not it’s a good idea), most robots do not look like R2-D2 in Star Wars. They are typically embedded inside machines that will still have human operators, just fewer of them; how does the regulator decide where the machine stops and the robot begins? A robot tax would likely lead companies to find new ways around it, further distorting the economy.
For some of these reasons, we suspect the current drive toward replacing human actions with robots cannot be prevented from taking a serious toll on the already dwindling stock of desirable jobs for low-skilled workers, first in the rich countries but very soon everywhere. This will add, to a greater or lesser extent, to what the China shock and the other changes described in previous chapters have done to the working class in much of the developed world. It could lead to a rise in unemployment or a multiplication of poorly paid, unstable jobs.
2. This perspective deeply worries the elites who feel responsible for, and also threatened by, this state of affairs. This is why the idea of a universal basic income has become so popular in Silicon Valley. Most tend to think, however, that robot-induced despair will become a problem in the future, after technologies have improved even further. But the problem of high and rising inequality has already been staring us in the face in many countries, nowhere more so than in the United States. The last thirty years of US history should convince us that the evolution of inequality is not the by productof technological changes we do not control: it is the result of policy decisions.
In the 1980s, while growth remained sluggish, inequality exploded. Thanks
to the outstanding and painstaking work of Thomas Piketty and Emmanuel
Saez, the world now knows what happened:
CONCENTRATION OF INCOME AND WEALTH AND INEQUALITY
1. FROM 1928 TO 1979 CONCENTRATION OF WEALTH AND INCOME DECLINED
USA
In 1928, at the end of the Roaring Twenties, the richest 1 percent captured 24 percent of the income. In 1979, that number was about a third as big.
UK
The story for the UK is very similar. Before. 1979, the top income share falls steadily from 1920.
CONTINENTAL EUROPE
In continental Europe the pattern is strikingly different. Before 1920, the top income share in France or Germany, Switzerland or Sweden, the Netherlands or Denmark was not too different from that in the US or UK. But sometime after 1920, inequality crashed in all of these countries, like in the United States, and stayed down, unlike in the United States.
2. FROM 1980 CONCENTRATION OF INCOME AND WEALTHA INCREASED
US
1980 is the year Reagan was elected. It is also almost exactly the year the share of national income that goes to the richest 1 percent reverses fifty years of decline and starts a relentless climb in the United States.
In 2017, the last year to be included at the time of writing, that ratio was almost back where it was in 1929. The increase in income inequality was accompanied by a rise in wealth inequality (income is what people earn every year; wealth is their accumulated fortune), although wealth inequality has not yet reached its early 1920s level. The top 1 percent wealth share in the United States rose from 22 percent in 1980 to 39 percent in 2014.
UK
The turning point, like in the US, is somewhere very close to 1979, the year Mrs. Thatcher took over. After 1979, there is a similar rise, interrupted briefly by the global financial crisis of 2009. Unlike in the United States, inequality has not yet reached the 1920s levels, but it does not have that far to go.
CONTINENTAL EUROPE
There are small ups and downs, and Sweden actually has a significant upswing starting somewhere in the 1980s, but the levels remain very low by US standards.
INCREASE IN WAGES STOPPED FROM 1980
At the same time, around 1980, wages stopped increasing, at least for the least educated. The average hourly wage adjusted for inflation for US workers who were not managers rose through the 1960s and 1970s, reached its peak in the mid- to late-1970s and then drifted down through the Reagan-Bush years, before slowly turning around. As a result, the average real wage in 2014 was no higher than in 1979. Over the same period (from 1979 to today), the real wages of the least educated workers actually fell. Among high school dropouts, high school graduates, and those with some college, real weekly earnings among full-time male workers in 2018 were 10 to 20 percent below their real levels in 1980.33 If there had been any trickle-down effect of lower taxes, as its advocates claimed, one would expect wage growth to have accelerated in the Reagan-Bush years. But the opposite happened. The labor share (the share of revenues used to pay wages) has continuously declined since the 1980s. In manufacturing, almost 50 percent of sales were used to pay workers in 1982; it had fallen to about 10 percent in 2012.
CAUSES OF GROWTH OF INEQUALITY
The fact that this great reversal takes place during the Reagan and Thatcher years is probably not coincidental, but there is no reason to assume Reagan and Thatcher were the reason it happened. Their election was also a symptom of the politics of the time, dominated by anxiety about the end of growth. It is not impossible that if they had lost, whoever won would have gone some distance along the same path.
Thomas Piketty, squarely blaming changes in policies, while most economists emphasize that the structural transformation of the economy, and particular changes in technologies, also had a lot to do with it.
1. NEW PLAYERS
The reason why this is not an easy question is that this was also a period of momentous changes in the world economy. Starting in 1979, China launched market reforms. In 1984, India started taking baby steps toward liberalization. These countries would eventually become two of the largest markets in the world. Partly as a result, world trade expanded relative to world GDP by about 50 percent over this period, with the consequences we discussed in chapter 3.
2. ADVENT OF NEW TECH OF COMPUTERS
The advent of computing was the other characteristic feature of the era.
(A)Microsoft was founded in 1975;
(B) in 1976, the Apple I was released, by the much more widely sold Apple II in 1977;
(C) IBM released its first personal computer in 1981.
(D) Also, in 1979, NTT launched the first widely distributed handheld cell phone system in Japan. Mostly on the strength of selling cell phones, Apple became the first trillion-dollar company in August 2018.
To what extent do technological change and globalization explain the pattern of increase in inequality in the US and the UK? To what extent did policy, tax policy in particular, play a role?
(a) With computerization came other technological change. This may not have been a revolution in the sense that the steam engine brought in a revolution, as Robert Gordon argued, but like the steam engine and its love child, the internal combustion engine, it killed a lot of jobs. No one probably makes a living by being a typist now.
(b) And this technological progress was to a large extent skewed against the less qualified. This skill-biased technological change clearly explains the increase in the return to college education.
(c) MORE INCREASE IN WAGES AT TOP THAN AT MIDDLE
But it cannot explain what happened at the very top of the income distribution, unless we think skills were suddenly transmogrified just for the very richest. We usually think of skills increasing relatively continuously with education and wage levels. So, if the explosion of top income inequality was just due to technological progress, the widening of the distribution of wages should have been not just for the ultra-rich but also for the merely rich. But, in fact, those making, say, between $100,000 and $200,000 a year have seen their pay increase only slightly more rapidly than the average, while those who are making more than $500,000 have seen their incomes explode. This suggests that plausible changes in technology are unlikely to explain the stratospheric increase in incomes at the very top. Nor, for that matter, can they explain the difference between United States and continental Europe; technological change has been similar in all rich countries.
WINNER TAKE ALL?
HIGHER INCREASE IN WAGES AT THE HIGHEST LEVEL : RISE OF SUPER BIG ULTRA TECH COMPANIES
## However, technology has also changed the organization of the economy. A lot of the most successful inventions that came out of the high-tech revolution were “winner take all” products;
## there was no point in being on Myspace when the whole world was on Facebook, and Twitter is meaningless unless someone is retweeting your tweets. Technological innovations have also transformed existing industries, and created large benefits from being connected to industries where they used to be largely absent, like hospitality or transportation. For example, if drivers know that all passengers use a particular ride-sharing platform, they will choose to stay on that one. Conversely, if passengers know that all drivers use a particular platform, that is where they will go. These network effects explain in part the dominance of giant tech companies like Google, Facebook, Apple, Amazon, Uber, and Airbnb, but also of “old economy” behemoths, such as Walmart and Federal Express. In addition, the globalization of demand has increased the value of brands, as rich Chinese and Indian customers can now aspire to the same goods. And the ability to browse, compare, and boast on Facebook has made consumers more aware of differences in prices and quality, but also more sensitive to fads. The result is a winner-take-all (or if not all, most) economy, in which a few firms capture a large part of the market. As we saw in the chapter on growth, in many sectors sales have become more concentrated, and we see the increasing dominance of “superstar firms.” And in sectors that have become more concentrated, the share of revenues going to pay wages has gone down more. This is because those firms, which are monopolies or near monopolies, make more profits, and those tend to be distributed to shareholders. The increase in concentration thus helps explain a part of why wages are not keeping pace with GDP.
## The rise of the superstar firms also offers an explanation for why overall wage inequality has been rising: some firms are now much more profitable than others and they pay higher wages. It is also true that profitability is more variable than it used to be, with more clear winners and clear losers, even outside the set of superstars. In fact, in the United States, the increase in inequality between the average salaries at different companies can explain two-thirds of the overall rise in inequality (increase in inequality between workers within the same company explains the rest). A lot of this increase in inequality between firms seems due to changes in who works where; the highest-paid workers in low-paying firms are moving to those that pay more. If one assumes that higher earnings reflect higher productivity (which is probably true on average), then the more productive workers are increasingly working with other high-productivity workers.41 This is consistent with a theory in which superstar firms attract both capital and good workers.42 If more productive people benefit more from being paired with other productive people, then the market should drive such people to come together to form high-productivity firms that would, as a result, have higher wages and salaries than other firms. Moreover, once a firm has invested in a galaxy of talents, the CEO of such a firm is in a position to make a big difference; if he pushes them down the wrong path, he would waste a whole lot of productive capacity. Therefore, such firms should strive to get the best CEO possible even if that requires paying him or her what some may feel is an obscene salary.43 The rise in top incomes, in this view, is just the flip side of the rise of superstar firms that value getting the best top management and are willing to pay a lot for them.
## That the economy is sticky also contributes to the rise in inequality between firms. As production in some sectors gets concentrated in superstar firms, other firms in those sectors all over the country are shutting down (think the local department store versus Amazon), in addition to those that shut down because of the effect of new technology or trade. Since workers do not move out, wage growth in the affected area flattens or gets reversed, and rents do the same. This is good news for the surviving firms in those pockets, especially if their clients are elsewhere. The resulting windfall in profits may lead to greater investment in these companies, but probably not enough to halt the overall decline of the area. In other words, part of the distinction between good firms and bad firms may be purely happenstance. If you are a firm in a failing local economy lucky enough to be able to continue to sell to the national or world economy, you can do very well, at least for a while, until the overall drain in talent from these places, as the young and the ambitious move out, starts to hurt.
In other words, globalization and the rise of the infotech industry, combined with the sticky economy, and no doubt with other important but perhaps more local changes, created a world of good and bad firms, which in turn contributed to an increase in inequality. In this view, what happened may have been unfortunate, but it probably could not have been stopped.
TAXATION AND INEQUALITY
The other way the rich will surely try to react to a tax rise, however, is by finding ways to not pay taxes.
EXAMPLES
1. One thing the absence of caps in European soccer and the resulting astronomical salaries does is encourage players to evade taxes. In 2016, Lionel Messi (who made more than €100 million in 2017) was found guilty on three counts of defrauding tax authorities of €4.1 million and given a suspended jail sentence. In July 2018, the Spanish government and Cristiano Ronaldo signed a deal in which he agreed to pay a fine of €19 million and receive a suspended prison sentence. He was accused of four counts of tax fraud worth €14.7 million, resulting from the use of shell companies outside Spain to hide income made from image rights from 2011 to 2014. Moreover, many of those who do not actually cheat shop around for lower taxes.
2. Comparing countries in Europe that raised or lowered taxes at different points in time, a study found that when the tax rate in a country increases by 10 percent, the number of foreign players goes down by 10 percent. In 2018, Ronaldo left Spain for Italy to lower his tax bill.
3. The exposé of the so-called Panama papers, which revealed the efforts of Panamanian law firm Mossack Fonseca on behalf of the global plutocracy in setting up hundreds of thousands of shell companies for them to evade taxes, showed just how pervasive tax evasion had become. The list of names included former prime ministers of Iceland, Pakistan, and the UK. Even in famously honest Scandinavia, only 3 percent of personal taxes are evaded on average, but the very rich are much more serious offenders. A study estimated that those in the top 0.01 percent in the wealth distribution of Norway, Sweden, and Denmark evade 25–30 percent of personal taxes they owe.
TAX INEAFFECTS QUALITY
If taxes go up a lot, so will tax evasion. The question is, by how much? In the short run, the response will surely be substantial. We already mentioned this in the context of the Reagan tax cuts. When taxes go up, we expect to see the reverse: a sharp drop in taxable income as those who can hide their incomes do so right away, but a smaller effect afterward.
In part for this reason, a small number of politicians in the United States and some economists are pushing for a progressive wealth tax applicable on worldwide wealth (in 2019, Elizabeth Warren proposed a 2 percent wealth tax on Americans with assets above $50 million, and a 3 percent wealth tax on those who have more than $1 billion). The idea is not new. After all, most Americans who own a home already pay a tax on the value of their home: the real estate tax they pay to their municipal government. But this tax is regressive. Suppose you own a house worth $300,000 and pay 1 percent property tax ($3,000). Then you will effectively pay 10 percent of your net wealth if you have a mortgage of $270,000 (since your net wealth is then $30,000) but 0.1 percent of your net wealth if you have financial assets of $2.7 million and no mortgage (since your net wealth is then $3 million).
The wealth tax would be progressive and apply to all forms of wealth, not just real estate. The advantage of a tax applied on very high wealth, from the point of view of fighting inequality, is that very wealthy people do not consume the vast majority of the income they derive from their wealth. Instead, they take a small fraction of the wealth income in the form of a dividend, and they plow the rest back into their family trust or whatever structure has allowed their wealth to accumulate. In the current tax codes in
most countries, they do not pay any taxes on the amount that goes back into the trust. This is part of the reason why Warren Buffet, as he likes to remind us, pays very little in income taxes. It is difficult to have a redistributive income tax if most of the top incomes are effectively (and legally) shielded from taxation in this way. Moreover the tax advantage gets compounded. The new wealth generates new investment income, most of which is again untaxed for the same reasons, making the rich even richer.
A wealth tax on very high fortunes solves this problem. The best way to think about it is not, as the economic press and the politicians try to explain it, as a way for the wealthy to make a special effort to “give back” (though if that makes them feel better maybe it’s okay). Instead, it is simply a convenient and administratively (relatively) simple way to ensure they pay a tax on all
their income, regardless of what they chose to do with it: someone whose $50 million in wealth makes at least $2.5 million in investment income in the average year. A 2 percent tax on wealth ($1 million) amounts to a 40 percent tax on this income, which is not outrageous. Unlike estate tax, which got a bad rap after being called the “death tax,” the idea of wealth tax is very popular. In 2018, percent of respondents to a poll conducted by the New York Times were in favor, including 50 percent of Republicans.
So it even may be politically feasible. Yet in recent decades many countries got rid of their wealth tax if they had one, and few countries have put one in place (Colombia is an exception). In France, getting rid of the wealth tax was one of the first actions of the centrist Macron government after his election in 2017. As we saw, this was a very dangerous political move; the abolition of the wealth tax and the attempt to put in place a surcharge on fuel was the original motivation for the Yellow Vest protest movement. In an attempt to quell it, Macron promised a number of giveaways, but did not reinstate the wealth tax.
There are two reasons why wealth taxes are so politically difficult.
First, because of effective lobbying. High-net-worth individuals finance the
campaigns of politicians on the left and on the right, and few are in favor of
wealth taxation, even when they are otherwise quite liberal.
Second, it is easy to avoid the taxes, legally or not, particularly in small European
countries where people can move or park their wealth abroad.
This gives rise to a race to the bottom on tax rates.
SOLUTIONS TO TAX EVASION AND AVOIDANCE
1. We should not lose sight of the fact, however, that all of this happens in part because the world tolerates tax evasion: most tax codes have loopholes galore and the penalties for parking money abroad are ineffective. As we saw, countries with a simple tax code with few loopholes lose less from evasion when taxes go up than the United States.
2. Identifying a set of steps is of course not sufficient. There needs to be the political will to implement them.
TAX COMPETITION
Preferential tax schemes for high-skilled foreign workers have been introduced in Belgium, Denmark, Finland, the Netherlands, Portugal, Spain, Sweden, and Switzerland. In Denmark, for example, high-earning foreigners pay only a 30 percent flat tax for three years (against a top rate of 62 percent for the Danish). This was very effective in attracting high-income foreigners to Denmark, which may be good for Denmark, but bad for other countries. Now they have the choice between taxing their top earners less or pushing them to leave. This tension between country welfare and global welfare in the design ofindividual income tax policy has loomed large in the debate about tax competition.
But the point is that these are political problems, not economics
impossibilities.
there are no iron laws of economics keeping us from building a more humane world, but there are many people whose blind faith, self-interest, or simple lack of understanding of economics makes them claim this is the case.
WORLDWIDW REND OF LESS TAX ON THE SUPER RICH AND POPULIST UPRISINGS
CITIZENS UNITED?
From the strict point of view of economic efficiency, therefore, the evidence suggests that nothing stops a government from having a very progressive tax schedule with extremely high top marginal rates.
The difficulty of raising top tax rates is a political one. Indeed, we seem to be in the midst of a vicious cycle of concentration of political and economic power. As the rich become richer, they have more interest and more resources to organize society to stay that way, including financing the campaigns of legislators willing to lower taxes at the top.
The “Citizens United” decision of the US Supreme Court, which ruled as unconstitutional legislative limits on corporations’ ability to fund electoral campaigns, has formally legitimized the unlimited power of money in influencing elections.
But it seems unlikely that this state of affairs can continue unfettered without generating a massive backlash. High tax rates on the top earners are already quite popular.
To some extent, the recent populist uprising in the United States is the beginning of this backlash. Behind it is a profound sense of disempowerment, a feeling, right or wrong, that the elites always decide, and in any case what they decide makes no difference for the average Joe or Jean. In the United States, Trump, for all his wealth and elite connections, was elected on his promise to undermine business as usual, but the Republicans lined up behind him because they were confident he was as pro-rich as any of them. Indeed he did deliver the tax cut.
But it is not clear how long this game of bait and switch can continue without it all exploding. The rich may eventually see that it is in their self-interest to argue for a radical shift toward real sharing of prosperity, or it may end up being imposed on them in even less favorable ways. The reason is that the increase in inequality has been at the root of a deep increase in social anxiety and unhappiness.
INEQUALITY-TAXATION -HAPPINESS
KEEPING UP WITH THE JONESES
Social scientists have long suspected that people’s sense of self-worth is related to their position in the groups they see themselves as part of—their neighborhoods, their peers, their country. If this were true, inequality would of course directly affect well-being.
Given how plausible this seems to us, it has been surprisingly difficult to prove beyond doubt. For example, evidence suggests that, at any given income level, people tend to be less happy when the average income in their locality is higher than their own. But it could be because they live in an expensive neighborhood where everything, from housing to cups of coffee, costs more. In other words, the facts can be explained without reference to inequality per se.
STUDY
A recent study from Norway shows that increased awareness about one’s place in the distribution of income increases the extent to which a person’s happiness depends on their income. In Norway, tax data has been publicly available many years, but the records were kept as hard copies and were therefore hard to access. This changed in 2001, when they were put online, and it became possible to snoop on your neighbors or your friends with just a few clicks of your mouse. This was very popular, to the point it was dubbed “tax porn,” and everyone seemed to know exactly where they stood. What we saw right after the data went online was that
the poor were sadder and the rich happier. The awareness of one’s place on the totem pole does seem to affect well-being.
CONSEQUENCES
THE AMERICAN NIGHTMARE - ISSUE OF MOBILITY
DECLING MOBILTY IN TH USA
Americans have another peculiar problem of their own. Fed a steady diet of the “American dream” along with their breakfast cereals, Americans tend to believe, in spite of everything, that although their society is unequal, it rewards industry and effort. In a recent study, researchers asked people in the United States and in several European countries their views of social mobility. When asked, “Out of 500 families divided in 5 groups of 100, how many of the children born of parents in the poorest group will stay in the poorest group, move one group up, two groups up, or make it to the richest group?” Americans are more optimistic than Europeans. They believe, for example, that out of one hundred poor children, twelve will make it to the richest quintile and only thirty-two will be stuck in poverty. In contrast, the French believe that out of one hundred, nine poor children will make it to the top, and thirty-five will be stuck in poverty. The rosy American view does not reflect reality today in the United States. Along with the general stagnation at the bottom, intergenerational mobility has declined sharply in the US. Mobility is now substantially lower in the United States than it is in Europe. Within the OECD, the child from the bottom quintile most likely to remain stuck in the bottom quintile is from the US (33.1 percent), while the least likely is from Sweden (26.7 percent). The average for continental Europe is below 30 percent. The probability of moving to the top quintile is 7.8 percent in the US, but close to 11 percent on average in Europe. The places within the United States most likely to cling to the outdated notion of American social mobility, a.k.a. the dream, are actually those least likely to experience it. Americans also generally believe effort is rewarded (with the corollary that the poor must be in part responsible for their own plight), and probably for this reason, those who believe mobility is high also tend to be suspicious of any government effort to address the problems faced by the poor.
RISE IN ANGER AND DESPAIR
When overoptimistic perceptions of mobility clash with reality, there is a strong urge to avoid the awkward truth. The majority of Americans whose wages and income have stagnated, and who confront an ever-widening gap between the wealth they see around them and the financial woes they are experiencing, face a choice between blaming themselves for not benefitting from the opportunities they believe their society offers and finding someone to blame for stealing their jobs. That way lies despair and anger. By all measures, despair is on the rise in today’s America, and it has become deadly.
CONSEQUENCES --LESS EDUCATED HEIGHER MOBILITY There has been an unprecedented increase in mortality among less-educated whites in middle age and a decrease in life expectancy. Life expectancy declined in 2015, 2016, and 2017 for all Americans. This grim trend is specific to US whites, and in particular to US whites without college degrees: in all racial groups in the US except the whites, mortality is falling. Other English-speaking countries that have pursued a broadly similar social model to the US, namely the UK, Australia, Ireland, and Canada, are also going through a similar change, albeit in slow motion.
Anne Case and Angus Deaton have shown that the increase in mortality is due to a steady rise of “deaths of despair” (such as deaths from alcohol and drug poisoning, suicide, alcoholic liver disease, and cirrhosis) among white middle-aged men and women in America, combined with a slowdown in the progress against other causes of mortality (including heart disease). Self-reported health and mental health follow a similar pattern. Since the 1990s, middle-aged whites with low education are increasingly likely to report themselves in poor health, and they are more likely to complain of various pains and aches. They are also more likely to report symptoms of depression.
This is probably not so much a result of low (or unequal) incomes perse. After all, blacks did not fare any better economically over the period, and they are not affected by this trend.
LESS EDUCATED LESS MOBILITY In all the other wealthy countries, on the other hand, mortality is going down, and going down faster for the uneducated (who had higher mortality to start with) than for the educated.
In other words, when the rest of the world saw convergence between mortality levels of the college educated and the rest,
the United States went the other way And there was no uptick of mortality in Western Europe, even after incomes stagnated during the Great Recession. On the other hand, Russia’s mortality exploded after the breakup of the Soviet Union in 1991, and like in the United States, most of the increase was due to changes in mortality from vascular disease and violent deaths (mainly suicides, homicides, unintentional poisoning, and traffic incidents) among young and middle-aged adults.83 Case and Deaton also point out that although the increase in mortality in the United States started in the 1990s, it capped a trend that had begun long before that. After the cohort that entered the labor market in the late 1970s, each subsequent cohort fared worse than the preceding one in many different ways.84 At every age, among less-educated white Americans, each subsequent cohort was more likely to have difficulty socializing, to be overweight, to experience mental distress and symptoms of depression, and to have chronic pain. They were also more likely to kill themselves or die of a drug overdose. It is the accumulated weight of these deprivations that eventually led to the increase in mortality. Any number of slow-moving factors could have caused this erosion of the well-being of less-educated Americans. Every single one of these cohorts was also less likely than the preceding one to be in the labor force. For those who worked, their real wages were no higher than those of previous cohorts, and sometimes lower, and they were less likely to have a strong attachment to a particular job or company. They were less likely to be married or in stable relationships. All in all, the white non-college educated working class collapsed after the 1970s, and this was probably a product of the specific kind of unequal economic growth the country experienced.
DIFFRENT TYPES OF REACTION TO INEQUALITY
RAGING AGAINST THE WORLD
The alternative to despair is anger. Becoming aware of the lack of social mobility does not necessarily make people more willing to support redistribution. In the study we discussed above, after eliciting the views of Americans, the researchers presented some of them with an infographic suggesting mobility was much lower than they thought (and the others with another infographic showing the same data, but with a rosier angle). For respondents who originally identified with the Republican Party, this made them even less likely to agree that the government could be part of the solution.
An alternative is to rebel against the system, potentially at great personal cost. In an experiment in Odisha, India, when employees in a firm felt the pay varied arbitrarily, they rebelled by working less hard, and being absent more often, than in comparable firms where the wage was kept constant, and since they were paid a fixed salary for every day they came to work, they hurt themselves by doing so. Workers in firms with unequal pay were also less likely to cooperate to achieve a collective goal tied to a reward. Workers were willing to tolerate pay inequality, but only when it was clearly tied to performance.
In the United States, there is another possible reaction. Because many believe the American market system is fundamentally fair, they must then find something else to blame. If they don’t get that job, it must be because the elites have somehow conspired to give it to an African American, a Hispanic, or at one remove, to a Chinese worker. Why would I trust the government of those elites to redistribute to me? More money for the government is more money for “those other guys.” Therefore, when growth either fails or fails to benefit the average guy, a scapegoat is needed. This is particularly true in the United States, but is happening in Europe as well. The natural foils are immigrants and trade. Behind the anti-immigrant views, as we argued in chapter 2, are two misconceptions: an exaggeration of how many migrants are coming in, or about to come in, and a belief in the nonfact that low-skilled immigrants depress wages.
More international trade, as we saw in chapter 3, hurts the poor in rich countries. This has provoked a backlash not only against trade, but also against the existing “system” and the elites. Autor, Dorn, and Hanson found that in US electoral districts more affected by the China shock, moderate politicians were replaced by more extreme ones. In counties originally leaning Democratic, centrist Democrats were replaced by more liberal ones. In counties originally leaning Republican, moderate Republicans were replaced by conservative Republicans. Counties highly affected by trade tended to be in traditionally Republican states, and therefore the overall effect of this was to push many districts toward more conservative candidates. This trend started well before the 2016 elections.87 The problem of course is that since conservative candidates tend to be against any form of government intervention (and redistribution in particular), they then exacerbated the problem that little was done to compensate those hurt by trade. For example, many trade-affected states governed by conservative Republicans refused federal funds to expand Medicare expansion. And this in turn fueled the resentment against trade. A similar negative cycle may emerge as people gradually understand that they live in a society that has much more inequality and much fewer opportunities than they previous believed. As in the study mentioned above, they may become even more upset with the government and even less likely to believe it can do something to help them. This has two implications. First, the obsession with growth at the root ofthe Reagan-Thatcher revolution, and that no subsequent president has taken issue with, has caused lasting damage. When the benefits of economic growth are largely captured by a small elite, growth can be a recipe for a social disaster (like the one we are currently experiencing). We argued before that we should be wary of any policy sold in the name of growth because it is likely to be bogus. Perhaps we should be even more scared if we think that such a policy might work, because growth will benefit onlythe happy few.
The second implication is that if collectively we as a society do not manage to act now to design policies that will help people survive and hold on to their dignity in this world of high inequality, citizens’ confidence in society’s ability to deal with this issue might be permanently undermined.This underscores the urgency of designing, and adequately funding, an effective social policy.
No comments:
Post a Comment