As technology progresses and disrupts more jobs, more workers will be employable only at lower wages

Gareth MorganEconomics, Tax and WelfareLeave a Comment

The latest edition of “The Economist” (October 4) is another commentary on the consequences of the Information and Communication Technology (ICT) revolution, how it has been the driver of this boost in incomes and rise in overall productivity of several economies.

What the various industrial revolutions have in common is that they disrupt life and its norms. Certainly the ICT one is doing that – the incomes of those who have the skills to augment the inventions in ICT have soared, while those of folk in traditional roles have stagnated. Some have even seen their jobs disappear – branch offices of the insurance industry in NZ being just another victim last week. And now as the robotics phase of ICT really starts to kick in, it is impossible to predict how many more jobs could soon be at risk.

As “The Economist” points out, the developing economies stand to be every bit as disrupted by the technological tsunami as does the developed world. No longer are the forces of globalisation such a major windfall for them. The factories that not so long ago were being built all down the Chinese eastern seaboard to house workers from the fields, manufacturing the hardware of the ICT revolution – ipods, smartphones, tablets – as well as for that country’s burgeoning vehicle manufacturing, are all moving to robotics in order to maintain competitiveness. As a result of this, high tech manufacturing the US is now experiencing “onshoring” – a reversal of the offshoring trend where companies left to use cheap Chinese labour.

Since time began economists have always had confidence that these waves of technological progress, although they cause great upheaval, do boost overall income and as that is dispersed across society, everybody benefits. There is no reason not to believe that will occur this time around. Although how long that might take, and whether anything like full paid employment ensues, nobody can foresee.

The challenge for governments is to see their societies navigate through this wave of disruption without unbearable social fallout along the way. Report after report over recent years has pointed out the rising income inequality that has emerged since the egalitarian policies that flourished after World War 2 were wound back. Progressive income tax and a burgeoning welfare state were the tools governments used to spread the spoils of national income in those years. With the birth of Thatcherism, Reaganism and our own variant Rogernomics from the early 1980’s, that process was capped.

To redeploy the same tools of progressive income tax and burgeoning welfarism this time around would be fatal. With a much more globalised market – thanks in part to the ICT revolution – the international mobility of high earning industries is without precedent. The risk of a return to post World War 2 policies is that the best talent and companies could simply shift. Countries trying that approach could find themselves very quickly sliding down a low wage, low employment path to even greater dismay.

Nevertheless the forces of disruption are real and they are here and will require a response. As the article in “The Economist” puts it;

“As technology progresses and disrupts more jobs, more workers will be employable only at lower wages. The modest earnings of the generation that technology leaves behind will need to be topped up with tax credits or wage subsidies. That need not mean imposing higher tax rates on the affluent, but it does mean closing the loopholes and cutting the giveaways from which they benefit.”

In other words, forget raising wages by decree, forget raising tax rates but accept that we do need more transfers to low income households via tax. So far in New Zealand this has been primarily via Working for Families (WFF) – an approach I criticised yesterday as being totally unsuitable for the scale of the problem that is emerging. Rather, the way to address the issue “The Economist” identifies, is as we described in our 2012 book, “The Big Kahuna” – a UBI (unconditional basic income) funded by closing the loopholes around tax, viz; a comprehensive capital tax (CCT). A full CCT – not just a half-hearted land tax, and a single, flat income tax rate would see the loophole properly closed but the incentive to earn more fully protected. And the efficiency of capital would be greatly improved as investment decisions once more became determined solely by rate of economic return, not by tax advantages.

The challenge we face from the ICT revolution is without precedent, there have been familiar technologically-driven upheavals but the conditions (like globalisation) weren’t the same. Some of those frightened of formulating policy appropriate to this unique challenge are trying to rehash old approaches (like the Left’s penchant for raising wages and income tax rates, while keeping the tax loopholes; or the Right who think a few more handouts via WFF will keep ‘em quiet). Others are waiting for someone else to make the first move, believing if there’s no political precedent it can’t be right. Imagine if Roosevelt, Savage, Thatcher, Reagan and Co had waited for precedents! As “The Economist” argues, all of the timid are missing the point. Only by closing loopholes will a government address the issue fairly, and it’s the widespread mood of unfairness that will disrupt societies the most.

Through all this we must not forget that the news is good – the ICT revolution is a blast. If we subscribe to the utopian view that most of the economists, philosophers of the Age of Enlightened maintained (even up to the time of Keynes), then we will get to the point that the machine does all the work while we will have all the material wealth we want – it’s fantastic. The only fault with that view – as Keynes pointed out – that the demand for material wealth by humans is insatiable, unbridled leisure doesn’t cut it.

The issue we face is how to navigate the journey so all in society are a step closer at least to that nirvana. Doing nothing is not an option.

As technology progresses and disrupts more jobs, more workers will be employable only at lower wages was last modified: December 15th, 2015 by Gareth Morgan
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Gareth Morgan