17 Oct 2014

The middle class is dead, long live the middle class

Many people blame crooked politics for the growing (and ridiculous) income and wealth gaps between the 1% and 99%. I totally agree that corrupt politicians are a big part of the problem, but exogenous pressures from globalization and technological change are also transferring power and money from labor to capital in ways that nobody can stop (except by ending trade and innovation). Those exogenous pressures are affecting people, worldwide, so they will disrupt life in well-managed countries at the same time as they push dysfunctional countries even further towards class warfare (economic chaos and social disruption).*

I'm not going to dispute the claim that technology is cannibalizing "middle class" jobs (law, accounting, engineering, teaching, etc.), as the patterns are already clear. Instead, I am going to offer some ways to offset the inevitable, negative impacts.

Technology is going to result in even stronger gains in income to the creative and capital classes who design the widgets we buy or collect a few pennies from billions of fans. Coming from the opposite direction, we're going to see more people chasing fewer jobs, as technology automates more tasks. Computers are now faster than us at many things (most teens can barely add or subtract these days), but new software is going to make computers smarter than us at many things (doctors are already losing credibility to expert systems). It's not clear that people will enjoy a middle class lifestyle on lower class wages.

There are three possible policy responses to these forces: denial, opposition and coping.

I'm pretty sure that US politicians will go with denial, as their pro-rich policies serve them well [pdf]. Most Americans still believe in "the American dream," even as they commute further for a lower standard of living and smaller chance of their children rising above their socio-economic status. The same goes for politicians in other corrupt, plutocratic countries (Russia and China spring to mind), since they don't really care about average citizens.

Politicians in other countries will go for opposition, in a foolhardy attempt to either soak the rich or block technological change. I'm pretty sure this is the case in Italy, Spain and Greece, where politicians are busy "defending" wages and punishing businesses. Those actions will merely push more activity into the black market and offshore.

Politicians will try to cope with these imbalances in countries where exogenous forces are understood and balanced though social welfare programs. It seems that the Netherlands and Scandinavian countries fall into this category. Coping will mean extending existing programs for job training, unemployment insurance and social housing, but these will need to be augmented.**

Perhaps the best idea is to implement a "basic income" support for all citizens that will (1) help them pay for necessities and (2) work fulfilling jobs that pay less due to automation, offshore competition, etc. Such a program would support work in human services (health, learning, psychology), the arts and other areas that are considered hobbies today. I cannot put enough emphasis on benefits of this program, in terms of human security, fulfillment and cooperation.

I think that a basic income program should be funded with property taxes. Higher taxes on income are unlikely to work, as the rich and corporate can evade/avoid them in numerous ways.*** Higher taxes on consumption would merely push transactions underground. Taxes on property are easy to collect, regardless of ownership or use, since property cannot be hidden and property values are fairly easy to estimate when there's a property market.

Bottom Line: The gains from globalization and technological evolution are going to a smaller group of people. Politicians should allow this process to continue for its economic benefits, but they should tax capital (land) to provide financial support to the masses who must (and should) find their own, not-so-profitable ways of living with dignity in a harmonious society.

* The Economist recently wrote on this topic: Introduction, rewards to capital, losses to labor, the end of development-through-industrialization and potential solutions

** Econtalk has many episodes on labor. This recent one discussed how "technology is a complement for the high skilled but a substitute for the low skilled." They also glossed over a troubling problem, i.e., the last technological wave did not cause huge social problems because people displaced by agricultural innovations could move into industrial and service jobs, but where will those people go when technology destroys those jobs?

*** I reckon that half the corporate fraud and lobbying would disappear if corporations were not taxed. The economic theory supporting such taxes only makes sense in the context of income taxes (i.e., shifting income back and forth between real and corporate "persons").