With technology generating products at unbeatably low costs, and the gains accruing to very few, oddly voters are attracted political slogans suspicious of regulation. The status quo is getting dangerous

With technology generating products at unbeatably low costs, and the gains accruing to very few, oddly voters are attracted political slogans suspicious of regulation. The status quo is getting dangerous

By Kaushik Basu*

Austria’s close-call presidential election on December 4, which almost brought a far-right nationalist to power, was a telling coda to a sad year. The uncertainty and fear that many people feel today is reminiscent of W.H. Auden’s poem “September 1, 1939”: “As the clever hopes expire/Of a low dishonest decade.”

This was a year when many countries lurched rightward, toward leaders and political parties that serve partisan interests and narrow identities. This trend is no fleeting aberration: the turn to vicious politics is partly rooted in ongoing economic changes that have now reached an inflection point.

The poor and the middle class have seen their jobs disappear and their incomes erode, and they are now flailing against the status quo, desperately ignoring the fact that they are choosing leaders who will only make matters worse.

The root cause of the problem is not immigration or trade, as the populists argue, but rather the steady march of technology. As jobs are replaced by machines or off-shored to emerging economies, global GDP is expanding, but the gains are not being distributed evenly, and some groups that are losing out altogether. Many countries are experiencing higher inequality amid negative GDP growth – now at -3.3% in Brazil, for example, -10% in Venezuela, -1.8% in Argentina, and -0.8% in Russia. Others, like Japan and Italy, are growing, but just barely.

China and India, for their part, are growing reasonably well. But India just threw a wrench into its economic engine by announcing a bafflingly inept demonetisation policy; and China is maintaining growth by allowing corporate debt to pile up unsustainably, which poses major risks that are being partly hidden, but also accentuated, by new high-yield financial products. More important, manufacturing employment is deteriorating, notwithstanding Chinese officials’ claims that new graduates are simply taking a break before launching their careers. In 1995, wages as a share of GDP in China were 53%; that ratio is now 47%.

In the US, the nominal unemployment rate has fallen, but this belies a more jarring trend. Official data show that the median household is worse off now than in 1999, even though overall per capita GDP has grown substantially. This implies that all of the gains have gone to the top earners.

There are two primary forces behind these trends: technological innovation, which is both inevitable and desirable; and the appropriation of incomes from workers by those who own the new labor-displacing machines, which is neither inevitable nor desirable. The problem is often characterized as one of labor versus labor: workers in advanced economies are competing with those in developing ones. In truth, it is a problem of labor versus capital. After all, it is the number of manufacturing jobs, not the manufacturing sector itself, that is shrinking.

Consider the example of Eastman Machine, in Buffalo, New York – a city where manufacturing is making a comeback, but in a different form than in past decades. Eastman Machine makes machines and tools for the textile sector, and it exports half of its output, often to developing countries such as Bangladesh and Vietnam. The key to its success is that it relies on virtually no human labor; it employs 122 people, who account for a mere 3% of its total production costs.

There is another, related problem. With new technologies creating vast economies of scale, firms like Eastman Machine – after incurring substantial start-up costs – can manufacture their products at a negligible marginal cost. This has made certain markets more oligopolistic, and even monopolistic in some cases. This trend will continue.

In addition, because companies are increasingly armed with extensive customer and user information, they can price discriminate, extracting all surplus out of consumers, more easily than ever. These changes have created new challenges for regulators.

John Maynard Keynes, prophetic as he was about so many features of economic life, made one big mistake. In his 1930 essay “Economic Possibilities for our Grandchildren,” he predicted that all major economic problems would be “solved” within a hundred years, and we would only have to figure out how to pass the time. But he failed to anticipate that economic problems would continuously evolve. For example, business strategies are constantly changing, because every time governments introduce regulations to serve consumers’ interests, producers find new ways to serve their own.

We need new, innovative regulations to reverse the trends of widening inequality and market monopolisation. Such measures should embody ideas that once seemed radical, such as corporate profit sharing for workers, and new consumer protections to prevent price discrimination.

To be sure, any new regulatory regime must take care not to eliminate entrepreneurs’ incentive to produce, innovate, and expand their businesses. But safeguarding the profit motive should not be an alibi for market fundamentalism. If we have learned anything in 2016, it is that leaving everything to the market can lead to social and political turmoil.

Of course, nowadays, to advocate innovative forms of state intervention to fight inequality is to risk being redbaited. Once, in Kolkata, after telling my mother about an upcoming international conference on welfare, which would be attended by the world’s leading economists, I heard her brag to her cousin that I was meeting with other “communists” to discuss how to make the world a better place. At 90, she had begun to confuse similar-sounding words. Today’s trolls have no such excuse – only a morbid fascination with an increasingly dangerous status quo.


Kaushik Basu, formerly Chief Economist at the World Bank and Chief Economic Adviser to the government of India, is Professor of Economics at Cornell University. Copyright: Project Syndicate, 2016, published here with permission.

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the poor and middle class have seen their jobs disappear in new zealand but i dont think it is down to technological advances but for two reasons.one the government doesnt care.two: cheaper production costs overseas..before we exposed our housing to international investors there was always the chance of growing your own fruit and veges and firewood to help to survive the coming recessions.

So why the concern about Japan, the master machine makers?

One piece of technology that has had a significant impact is air travel. The long haul twin-engined jet continues to make air travel cheaper and cheaper. Migrants are practically just a short trip from their homelands which they can return to yearly. This must make migration even more desirable.

..they are now flailing against the status quo, desperately ignoring the fact that they are choosing leaders who will only make matters worse.

Is there any evidence for this statement? The evidence from history would suggest otherwise -China, Singapore, Taiwan, South Korea, pre war Japan and Germany? The writer is pushing an agenda that suits him.

In truth, it is a problem of labor versus capital. After all, it is the number of manufacturing jobs, not the manufacturing sector itself, that is shrinking.

Hmmm.... In which jurisdiction and whose debt financing?

At the peak in 2000, calendar year factory orders were $4.16 trillion. Three years into supposed recovery, factory orders in 2004 were still less than $4 trillion. It wasn’t until the sharp rise in 2005 that the factory sector finally appeared to put what was really a mild recession behind. But manufacturing in the US wasn’t ever the same.

While the US economy was ostensibly in recovery 2002, 2003 and 2004, it was mostly if not all from the “demand” side of the equation. It was during those years where the largest exodus of manufacturing jobs in history was witnessed. Whether or not you believe Ross Perot was correct in his “giant sucking sound” prophecy, there is no doubt that there was some good correlation between the loss of those jobs during those years and what to many was not a recovery; and even in economics, there was a great deal of agreement that economic function during that time was highly unusual.

That is what led policymakers toward embracing the lunacy of the housing bubble in its final stage. In one sense the one led to the other, or at least allowed it to happen. By that I mean the huge buildup in debt was that “demand” side that essentially paid, at the margins, for those goods to be produced overseas. It was the substitution of finance for income; mortgage and consumer debt for the labor lost in manufacturing jobs and production. Read more

Exactly. The US went from having a current account surplus to a deficit, ie to living off borrowings;
https://i1.wp.com/bawerk.net/wordpress/wp-content/uploads/2016/11/US-Deb...
http://bawerk.net/2016/11/10/toward-a-new-world-order/

Nothing can be done until the taxation system is overhauled. I believe that income tax is a relic of the past and with its myriad of deductions and exceptions has created a monster unproductive industry designed to exploit those deductions and exceptions. If we look at the premise that everybody should contribute to the running of their country then it is failing dramatically. The extreme is the large international companies exploiting those loopholes but it happens at every level of society. Unfortunately the tax burden falls mainly on the wage and salary earners. With fewer and fewer people being wage and salary earners with many being required to be independent contractors, a new system of tax collection must be looked at. In a world where we are now told that cash is to be replaced with electronic transactions then the system I would like to see, based on Prof Tobin's FTT of 1% of the 1970s, would be a gradual replacement of the existing income tax based system in its entirety with an FTT one. It would attach to all Bank electronic amd cash deposits, with the word ‘Bank’ being widely defined. It would be collected by the Banks and paid directly to Government. So, imagine, each time you paid someone then that amount would recorded in their bank statement as such and then the statement would show an amount of tax deducted and paid to Government. Now look at that from the very real picture of your and every persons grocery shopping at say Pak & Save. The amount collected by P & S each and every day is huge and would attract, even at a tax rate of 1%, a large revenue for Government. Then look at that nationwide. Businesses would not be affected because remember they are now not paying any income tax and even if they tried to recover that revenue and increased prices it would be futile and not matter anyway because people would have more money in their pockets and any increase in prices would attract more tax revenue. An FTT is not difficult and is a simple and elegant system of taxation. The aim is to clean up the existing structure. There would be no income tax, no deductions and no GST, (which hurts the lower income people).The politics of how to spend the money comes later. We have to clean up the system first so that everybody contributes to the running of the country. My politics then come into play because I believe that we could then consider the actual percentage rate for the FTT in order to seriously consider a UBI which would not only help our grandchildren but everybody who is being affected by the technological changes that are being foisted on us. I believe it should be on the same lines of the existing super payments. We could also have a world class hospital system, a world class education system etcetera. I would also impose a progressive tax on all income over $100,000.00 and reintroduce the inheritance tax but that would be for the purpose of reducing inequality not revenue. This country could, to paraphrase America, be great again!

Wouldn't that simply incentivise people to engage in non monetary swaps and/or have running accounts between a group of businesses such that at the end of the period only the difference is transferred?
For example Company A sells ($100 of goods) to Company B who sells ($100 of goods) to Company C who provides a service (worth $90) to Company A. At the end of the period only 1 transaction of $10 is done (c to a).

So companies would instead of paying staff and attracting tax simply have a debit facility for their staff with a cap based on that staff's wage? Staff could then use the debit facillity to make purchases?

I suppose there could be rorts but not to the extent there are now. And apart from that, what I have heard is that wages and salaries have to be paid to a person's bank account although I am not 100% sure of that. As there are now, there would have to be inspectors to check on such rorts. But as always it is the number of inspectors that you have to investigate that shows up the malpractice. Think of Pike River. That is a very good example. Also look at the penalties that attach as to whether a government is serious about reducing bad practice. I have always thought that the owners/Directors of businesses that pay below the minimum wage should be imprisoned not just allowed to go bankrupt or hide behind the corporate veil so that they can just start up again.

didnt they try that in USA,even have a song about it."you load 16 tons and what do you get,another day older and deeper in debt,st peter dont you call me cos I cant go,I owe my soul to the company store."

Yes.
Long advocated a desperate need for change, I believed at the time Cullen should have used the coming surpluses to do it, so with more surpluses in the line....... I don't know wether a Tobin or land or whatever tax is best but change is a must.

I don't regard a land tax as solving the problem because really it is an envy/punishment tax. It would create resentment and anyway it would not bring in enough revenue to replace the existing system.
Everybody/company should contribute to the running of the country they live/operate in and in my view the only way that can happen is by abolishing the existing tax structure in its entirety and replacing it with an FTT system

Philosophically... Private property rights are a Govt. granted licence.. ( In the same way that ownership and use of the radiowave spectrum and fisheries are...etc...etc )
ie. any natural resourse that is "godgiven"..so to speak.

The dichotomy of "god given" resources, is too what extent they belong to the "people" and to what extent they belong to individual owners....
eg. Indigenous people have a different relationship to the" land" than you and I do...etc.

In that context ... a land tax IS NOT an envy/punishment tax.

I personally believe a land tax might be a good thing.... though I have not put alot of thought into it.
( I think Henry George had some good views on this )

I'm a bit distrustful of the argument, but the argument for a land tax is something as follows, it appears harmless enough, but doubtless it is open to expoitation by special interests who know how:
Part of the increase in value of a piece of land is due to the efforts of the society around it, not to the work of the land owner. So, a town grows bigger and richer and so a well situated plot becomes more valuable as a result. This increase in value was created by society and so should accrue to society, whereas without a land tax it accrues to the (astute, forsightful) owner. So a land tax should take only the increased revenue that was due to society's efforts.

Presumably society should refund the loss of value when the town declines, but I have never heard that bit mentioned. It also means the town's income disappears if land values stop going up. The idea is that it encourages good behaviour on the part of the city as they get more revenue if the town prospers, and ensures that land is put to its best use, as the tax is levied on the capital value of the land, not land plus buildings. I suspect that's all just an excuse for self righteous people who know best to push taxes onto those more thrifty or more fortunate than themselves.

Good points Roger. Taxation should not be based on envy or even seem to be so. I do believe the FTT is the only answer.

the tax burden does fall on wage and salary earners but only up to a level,if you are on a salary of say 600,000 dollars then you could be only paying tax on 70,000 dollars of that if you are investing in the only game in town,namely renting houses to those on lower incomes.the inheritance tax used to work but there are more ways to hide assets now and get money into other jurisdictions.australia used to have a transaction tax before they introduced GST and it used to annoy the hell out of me.i think a better idea would be to get the IRD,WINZand immigration staff out of the office and do a few raids on the blatant benefit fraudsters and tax avoiders.

With a UBI there would be no beneficiaries. And to say that beneficiaries are the problem does not face up to the problem of technologies taking away jobs.

No but some people fell so much better for it and it completely diverts/subverts the whole argument, very effective political ploy. UBI is sounding more plausible all the time. Seems there is so much that could be changed too improve the systems as opposed to the steady as she goes current mobs.

Hmmmmm...

In testimony to Congress, Dr. Jared Bernstein was asked by Rep. Mick Mulvaney (R-SC) whether he was generally disposed to favor the statement, "from each according to his abilities, to each according to his needs." Dr. Bernstein answered, apparently in earnest, that he viewed the statement "generally favorably."

The last vestiges of the Soviet Union were swept away more than two decades ago, but they are being reconstituted slowly in various capacities. While Vladmir Putin seeks to recreate, allegedly, the physical structure and stature of the "evil empire", its core philosophy is catching more and more as economic malaise grinds the current system asunder.

Where Martin Wolf recently and openly extolled the heavy redistributionist idea of a guaranteed minimum income (from the state, not the government), essentially appealing to the nineteenth century race-neutral version of slavery, we also have a prominent "economist" making significant noise with his "new" contention that Karl Marx, "wasn't wrong, just early." Thomas Piketty's new book, Capital in the Twenty-First Century is another flavor of exposition about just such redistribution. Read more

If machines are taking away work then the only rational response is to reduce the working week. We also probably need to do something like income taxing the robots.
So why do we need to raise the retirement age and flood the country with immigrants- seems to be a disconnect here.
This whole area needs some careful thinking about what we are doing and how we are going to handle it in future because the situation is only going to intensify.

A side note. This article has a global perspective and perhaps we should look at the NZ situation from this view point. Contrary to many of the industrially advanced countries NZ does not seem to be doing very well at increasing our productivity through investment in automation. Our current government is leading us in exactly the opposite direction by relying on increasing immigration which lowers wage pressure and the motivation to raise productivity. Recall John Key's comments a few weekends before Christmas, where on Sunday he said that continued high immigration was vital for the economy and on Monday said the productivity was not important. These policies are totally at odds with what advanced economies are doing and will not serve us for the future. Labour's policy to reduce immigration to 45,000 per year is not much better than National in this respect. (and we haven't even mentioned housing pressures)

The headline is a bit contradictory isn't it?
"unbeatably low costs"
"gains accruing to very few"
Surely if prices are unbeatably low then we are all better off (at least consumers of these particular goods and services). There are more ways than higher pay (which I assume the "gains accruing to very few" refers to) to share the benefits of technology with the masses, lower prices across the board being one of them.

No, we are not all better off. The social and environmental costs are outsourced to the tax payer. And so we all lose.
Except for those who don't pay tax, or severely minimise their tax obligation.

I have a personal view on why people who have a job are increasingly struggling.
The concept of "having a job for life" is relatively new, it became widespread with the industrial revolution, so it's less than 200 years old. Before, people had to do whatever it took to feed themselves, get a shelter etc. Having a job teaches people to exchange their time for a wage (I work X hours and I get $...). This results in not really looking after oneself because the wages will always come in. It may well be that technology is currently dramatically changing the game and that "having a job" is becoming less and less important (read efficient, useful, productive)
We live in a very fast changing world, so fast, that what holds us back is the slow pace at which our mentalities adapt, especially if we have our mind set to believe that we have a right to a job that will provide us with a good life standard for the rest of our life, it may just no longer be the case.
Maybe it is time to regain control of our own life instead of expecting someone else to provide for us ?

On reflection, is this article just another earnest rehash of old ideas that are not very relevant? He mentions jobs and production but ignores the main mechanism of wealth transfer, namely the financial system. Has he been under a rock the last few years, endlessly rehashing the failed ideas of his youth?

Roger I think you're missing the point. This article creates an important discussion. You ask about wealth transfer and point to the financial system. What about ordinary people? Where would they get any wealth they have from? It is jobs at the core of the issue. Unless some form of utopia is created where every one gets a UBI, a job is required to create wealth just to live. These ideas are totally relevant. Over the last year various articles identify the impacts that include Brexit and Trump, that for the masses jobs that provide a livable wage are an increasingly significant issue for developed (and undeveloped) countries. It is OK for the top 1 or 2% but the majority of averagely educated and talented people are heavily reliant on Governments to provide some level of protection of their jobs. The problem is and is alluded to here, is that globalisation, and vested interests have corrupted Governments to legislate in favour of money, not the people. And now the people are beginning to push back.

On present trends at some time there must be a significant mismatch between supply and demand - if the middle and lower income classes have no disposable income they will be unable to buy the production no matter how cheap it is.
Equals recession/depression and political turmoil

mass production only works when you have mass consumption.

Individuals need to start making a choice on how they spend their money, supporting directly local producers and craftspeople will create jobs locally.

buying less items with higher quality or intrinsic value for more money (same total amount of money) will benefit the consumer, they will have better quality products that last longer and benefit the local community (society) by creating local activity.

Maybe a bad example, but it is a real one.
In the 90's we had a small watch factory in Hong Kong together with a local Chinese partner, we made small volume runs (100 per model per time), selling in NZ, Australia, while our partner exported to other markets. After the hand over of HK to China, many small manufacturers moved their factories to China. Due to the scale of the factories in China production runs needed to be increased to 1000 per model which was not suitable for us Markets, we had a choice we could increase the business significantly with most business outside of our existing markets, we could close down and buy from a mass producer, or we could move the factory to NZ and continue to support of existing markets (which is what we choose to do). Surprising the labour cost difference between HK and NZ was small (50 cents a unit) and even comparing with China the labour cost difference was only $2.50 or 10% of the total manufactured cost. the flexibility of local manufacture out weight the small cost difference.
The story ended badly unfortunately as we had not taking into consideration the perception of NZ made back then, sad to say NZ made was seen as lower quality or hobby craft back then. I am sure we have grown up since then...

So the choice is ours

I also think it would be helpful if we began to understand that when we buy something, that any pollution that was caused in the making of it, is our responsibility as the end user.