Wednesday, 2 January 2013

Smart machines and long-term misery


That’s the title of the latest paper by Jeffrey Sachs and Laurence Kotlikoff. You know the theme, but some interesting points being raised all the same.
Some extracts:
But what if the Luddites are now getting it right ‐‐ not for labor as a whole, but
for unskilled labor whose wages are no longer keeping up with the average? Indeed, what if machines are getting so smart, thanks to their microprocessor brains, that they no longer need unskilled labor to operate?
Evidence of this is everywhere. Smart machines now collect our highway tolls,
check us out at stores, take our blood pressure, massage our backs, give us directions, answer our phones, print our documents, transmit our messages, rock our babies, read our books, turn on our lights, shine our shoes, guard our homes, fly our planes, write our wills, teach our children, kill our enemies, and the list goes on.
Yes, technology has always been changing. But today’s change is substituting for, not complementing unskilled labor. Yesterday’s horse‐drawn coaches were replaced by motorized taxis. But both required a human being with relatively little human‐capital investment – a cabbie ‐‐ to drive them. Tomorrow’s cars will drive themselves, picking us up, dropping us off, and returning home all based on a few keystrokes. This will make cabbies yet another profession of the past.
And expanding on Krugman’s new favourite stat, the declining share of labour:
This decline in labor’s overall share may also reflect accelerating growth in machine brainpower. Machines, after all, are a form of capital, and the higher income they earn based on better machine brains may show up as a return to capital, not labor income.

Brainier machines pose not just an economic threat to the welfare of today’s
unskilled workers. They also pose a threat to tomorrow’s workers, whether skilled or unskilled. Obtaining skills takes time studying in school and learning on the job. Thus skilled workers are disproportionately older workers. Hence, when machines get smarter, older workers get richer. And since older workers as well as retirees disproportionately own the machines as well as the inventions that enhance the machines, machine‐biased productivity improvements effects a redistribution from younger, relatively unskilled workers to older relatively skilled workers as well as retirees.
That disproportionate benefit to older workers and longer-term owners of capital is what I was also getting at in previous posts, except that I was coming at it from the point of view that the capital asset becomes disproportionately valuable.
And here they come to the need to democratise the capital rents emanating from the creation and ownership of such technologies, echoing my point about us heading towards either a Star Wars dystopia or Star Trek post-capital utopia:
In short, better machines can spell universal and permanent misery for our progeny unless the government uses generational policy to transform win‐lose into win‐win.
There is something paradoxical about a pure rise in productivity that leaves all generations but one worse off. After all, machines can now do more on behalf of humanity than they could before the rise in u. It should be possible, in principle, to make all generations better off as a result of the pure increase in machine productivity.
Indeed it is. The key is to tap some of the windfall of the older generation in period 3, and share it with the young generation and with succeeding generations. Intergenerational fiscal policy can do the trick.
In other words, the “debasement” of older capital assets is increasingly necessary to spread the wealth, and stop the benefits of technology flowing disproportionately to a new tech rentier class.
Though, as I’ve also been arguing, it’s also necessary to stop tech owners and corporates from creating artificial scarcities just to preserve their capital advantage at the cost of overall wealth.
Anyway, here’s their conclusion — it neatly sums everything up:
Suppose that an innovation in machine technology (e.g. improved software) raises machine productivity in a manner that indeed reduces the marginal productivity of low‐skilled workers while raising the marginal productivity of high‐skilled workers. This not only increases the income gap between skilled and unskilled workers, but also has a generational effect, raising the incomes of the older generation while lowering the income of the young. This effect occurs because the old have accumulated physical and human capital, while the young are endowed with unskilled labor. The generational redistribution has a knock‐on effect on national saving. Income shifts from young savers to older dis‐savers, thereby depressing the national saving rate and the future stock of capital.
The effect can be strong enough, if the parameter values are within a certain range, to reduce the incomes not only of today’s young workers but also of future generations. The fall in today’s saving rate means that the next generation will have even lower wages than today. The economy will reach a new equilibrium in which the technological advance has raised the wellbeing of today’s older generation while lowering the wellbeing of today’s young generation and of all future generations!
The Luddites may, therefore, have had a point after all. Advances in machine productivity can indeed immiserize today’s young and future generations. But does this mean that we should smash the machines? Here we can benefit from a bit more insight. Instead of smashing the machines (or more prosaically, preventing their deployment), we can instead use inter‐generational tax‐and‐transfer policy. When the older generation enjoys a windfall from the advance of technology, the government can tax some of that windfall, and then use the proceeds to improve the wellbeing of today’s youth and of future generations. With the right choice of tax‐and‐transfer policies, all generations can benefit from the advance in technology, while under laissez faire, only today’s older generation benefits, and at the expense of all other generations.

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