The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (30 page)

In cases like these, most economists advocate taxing the pollution. Such taxes are called “Pigovian” after Arthur Pigou, a British economist of the early twentieth century who was one of their early champions. The taxes have two important benefits. First, they reduce the amount of undesirable activity; if a utility gets taxed based on the amount of sulfur dioxide it releases into the atmosphere, it has strong incentives to invest in scrubber technology that leaves the air cleaner. Second, Pigovian taxes raise revenue for the government, which could be used to compensate those harmed by the pollution (or for any other purpose). They’re a win-win. Taxes of this type are popular across the political spectrum and among people in many fields; members of the “Pigou Club,” a group of advocates identified by economist Gregory Mankiw, include both Alan Greenspan and Ralph Nader.
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By improving measurement and metering, the technologies of the second machine age make Pigovian taxes more feasible. Consider traffic congestion. Each of us imposes a cost on all other drivers when we join an already overcrowded highway and further slow traffic. At peak hours, traffic on Interstate 405 in Los Angeles crawls at fourteen miles per hour, more than quadrupling what should be an eight-minute drive. Congestion pricing, aided by electronic passes or digital cameras, can dynamically adjust the cost of the roadway so that drivers would only choose to drive when the total cost created, including the additional congestion, was less than the value of their trip.

Congestion-reducing activities like carpooling, off-peak commuting, bicycling, telecommuting, and mass transit would all increase with congestion pricing in effect. Already Pigovian principles have been applied to revenue-generating segments of infrastructure like toll roads and London’s congestion zone, which reduces traffic and takes in money by charging motorists to drive into the city center during peak times. Meanwhile, Singapore has implemented an Electronic Road Pricing System that has virtually eliminated congestion.

Americans collectively spend over one hundred billion hours stuck in traffic jams, a testament to the fact that road pricing is not yet widely adopted. By some estimates, the revenues from optimal congestion pricing would be enough to eliminate all state taxes in California. In the past, it was impossible to meter road usage in a cost-effective way, so we settled for leaving it unpriced and putting up with what resulted: the kinds of long lines and waiting we rarely saw outside the former Soviet Union for other goods and services. Digital road pricing systems could help us recapture that lost time while replacing revenues from other sources.

TAXES ON ECONOMIC RENTS

The supply of some goods, like land, is completely inelastic—there’s the same amount of land, no matter how heavily it’s taxed. That means that a tax on the revenues from that good (in other words the ‘economic rents’ from it) will not reduce its supply. As a result, such taxes are relatively efficient—they don’t distort incentives or activities. The nineteenth-century economist Henry George took this insight and argued that we should have just a single tax, a land tax. While an enticing idea, the reality is that revenues from land rents aren’t high enough to pay for all government services. Still, they could pay for more than they currently do, and there are other rents in the economy, including those from natural resources like government-owned oil and gas leases, that could be significantly increased.

There’s also an argument that a big part of the very high earnings of many ‘superstars’ are also rents. These questions turn on whether most professional athletes, CEOs, media personalities, or rock stars are genuinely motivated by the absolute level of their compensation versus the relative compensation, their fame, or their intrinsic love of their work. In all likelihood, we could raise more revenue by increasing marginal tax rates on the highest income earners, for instance by introducing new tax brackets at the one-million- and ten-million-dollar levels of annual income. We do not find much evidence supporting the counter-argument that higher taxes on this population will harm economic growth by eroding high earners’ initiative. In fact, research by our MIT colleague and Nobel Prize–winning economist Peter Diamond, in partnership with Clark Medal winner Emmanuel Saez, suggests that optimal tax rates at the very top of the income distribution might be as high as 76 percent.
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While we don’t see the need for that level of taxation, we do take comfort from the fact that the last time income taxes were substantially raised under Bill Clinton, the economy grew rapidly in the years that followed. Indeed, as noted by economist Menzie Chinn, there is no visible relationship between top tax rates and overall economic growth, at least in the ranges the U.S. experienced.
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We don’t pretend that the policies we advocate here will be easy to adopt in the current political climate, or that if they somehow were all adopted they would immediately bring back full employment and rising average wages. We know that these are challenging times; many people have seen their fortunes suffer during the Great Recession and subsequent slow recovery and are being left behind by the twin forces of technology and globalization. Inequality and other forms of spread are increasing, and everyone is not sharing in all the types of bounty the economy is generating.

The policy recommendations we outline above share one simple and modest goal: bringing about higher rates of overall economic growth. If this happens, the prospects of workers and job seekers alike will improve.

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The same is true for textbooks by Krugman and Wells, Cowen and Tabarrok, Nordhaus, and on and on.

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This was from a posting he put on his Facebook wall—sometimes the medium is part of the message.

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Prizes have a long history going back to the Longitude Prize offered by act of the British Parliament in 1714. While latitude was relatively easy to calculate, longitude was a bigger problem, especially during long ocean voyages. A series of prizes totaling over one hundred thousand British pounds motivated major advances throughout the 1700s in the measurement of longitude. In 1919, the twenty-five-thousand-dollar Orteig Prize for a nonstop transatlantic flight motivated a series of aviation innovations, culminating in Charles Lindbergh’s successful flight in 1927.

“Work saves a man from three great evils: boredom, vice, and need.”

—Voltaire

T
HE
RECOMMENDATIONS
WE
MADE
in the previous chapter will help boost the bounty and reduce or reverse the spread. But as we move deeper into the second machine age and the second half of the chessboard, will the Econ 101 playbook be enough to maintain healthy wage and job prospects?

As we look further ahead—into the 2020s and beyond—we see androids. They don’t look like the machines in the
Matrix
or
Terminator
movies—some don’t even have physical bodies; they’re not going to declare war on us, and they’re not going to replace all human workers, or even most of them, in the next few years. But as we’ve seen in earlier chapters, technology is steadily encroaching on humans’ skills and abilities. So what should we do about the fact that the androids are coming? What are the right policies and interventions going forward?

Please, No Politburos

Let’s start by being humble. History is littered with unintended and sometimes tragic side effects of well-intentioned social and economic policies. It’s difficult to know in advance exactly which changes will be most disruptive, which will be implemented with unexpected ease, and how people will react in an environment that has never before been observed.

Caveats aside, we do have some ideas about how to proceed, and how not to. We do not think the right policy would be to try to halt the march of technology, or to somehow disable the mix of exponential, digital, combinatorial innovation taking place at present. Doing so would be about as bad an idea as locking all the schools and burning all the scientific journals. At best, such moves would ensure the status quo at the expense of betterment or progress. As the technologist Tim O’Reilly puts it, they’d be efforts to protect the past against the future.
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So would attempts to protect today’s jobs by short-circuiting tomorrow’s technologies. We need to let the technologies of the second machine age do their work and find ways to deal with the challenges they will bring with them.

We are also skeptical of efforts to come up with fundamental alternatives to capitalism. By ‘capitalism’ here, we mean a decentralized economic system of production and exchange in which most of the means of production are in private hands (as opposed to belonging to the government), where most exchange is voluntary (no one can force you to sign a contract against your will), and where most goods have prices that vary based on relative supply and demand instead of being fixed by a central authority. All of these features exist in most economies around the world today. Many are even in place in today’s China, which is still officially communist.

These features are so widespread because they work so well. Capitalism allocates resources, generates innovation, rewards effort, and builds affluence with high efficiency, and these are extraordinarily important things to do well in a society. As a system capitalism is not perfect, but it’s far better than the alternatives. Winston Churchill said that, “Democracy is the worst form of government except for all those others that have been tried.”
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We believe the same about capitalism.

The element that’s most likely to change, and to present challenges, is one that we have not mentioned yet: in today’s capitalist economies, most people acquire money to buy things by offering their labor to the economy. Most of us are laborers, not owners of capital. If our android thought experiment is correct, though, this long-standing exchange will become less feasible over time. As digital labor becomes more pervasive, capable, and powerful, companies will be increasingly unwilling to pay people wages that they’ll accept and that will allow them to maintain the standard of living to which they’ve been accustomed. When this happens, they remain unemployed. This is bad news for the economy, since unemployed people don’t create much demand for goods and overall growth slows down. Weak demand can lead to further deterioration in wages and unemployment as well as less investment in human capital and in equipment, and a vicious cycle can take hold.

Revisiting the Basic Income

A number of economists have been concerned about this possible failure mode of capitalism. Many of them have proposed the same simple solution: give people money. The easiest way to do this would have the government distribute an equal amount of money to everyone in the country each year, without doing any means of testing or other evaluation of who needs the money or who should get more or less. This ‘basic income’ scheme, its proponents argue, is comparatively straightforward to administer, and it preserves the elements of capitalism that work well while addressing the problem that some people can’t make a living by offering their labor. The basic income assures that everyone has a minimum standard of living. If people want to improve on it by working, investing, starting a company, or doing any of the other activities of the capitalist engine they certainly can, but even if they don’t they will still be able to act as consumers, since they will still receive money.

Basic income is not part of mainstream policy discussions today, but it has a surprisingly long history and came remarkably close to reality in twentieth-century America. One of its early proponents was the English-American political activist Thomas Paine, who advocated in his 1797 pamphlet
Agrarian Justice
that everyone should be given a lump sum of money upon reaching adulthood to compensate for the unjust fact that some people were born into landowning families while others were not. Later advocates included philosopher Bertrand Russell and civil rights leader Martin Luther King, Jr., who wrote in 1967, “I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.”
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Many economists on both the left and the right have agreed with King. Liberals including James Tobin, Paul Samuelson, and John Kenneth Galbraith and conservatives like Milton Friedman and Friedrich Hayek have all advocated income guarantees in one form or another, and in 1968 more than 1,200 economists signed a letter in support of the concept addressed to the U.S. Congress.
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The president elected that year, Republican Richard Nixon, tried throughout his first term in office to enact it into law. In a 1969 speech he proposed a Family Assistance Plan that had many features of a basic income program. The plan had support across the ideological spectrum, but it also faced a large and diverse group of opponents.
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Caseworkers and other administrators of existing welfare programs feared that their jobs would be eliminated under the new regime; some labor leaders thought that it would erode support for minimum wage legislation; and many working Americans didn’t like the idea of their tax dollars going to people who could work, but chose not to. By the time of his 1972 reelection campaign, Nixon had abandoned the Family Assistance Plan, and universal income guarantee programs have not been seriously discussed by federal elected officials and policymakers since then.
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