Order Before Peace
Kissinger’s Middle East Diplomacy and Its Lessons for Today
Six months ago, Microsoft’s Bill Gates proposed a robot tax, on the grounds that if workers pay taxes, so too should the machines that take their jobs. Such a policy would, in Gates’s words, “slow down the speed” of automation, thereby allowing societies to “manage [the] displacement” of workers. The idea speaks to a widespread sense that the labor market isn’t working like it used to.
But since Gates made his statement, it has become clear that taxing technology entails a comically large number of problems. One is that robots can both reduce and increase the demand for human labor. Search algorithms reduced the need for travel agents, but Uber increased demand for drivers. It is impossible to determine ex ante which robots to tax.
Others have noted that a robot tax would be impossible to structure and police. If a robot is, as the dictionary puts it, something that “is capable of carrying out a complex series of actions automatically,” then what is a dishwasher? Taxing some machines and not others would be a regulatory muddle.
Finally, whereas Gates saw a robot tax as a way of addressing the negative side-effects of rapid technological change, it is also a tax on capital investment—investment that every country is trying to encourage. No wonder that, when asked if he would support a robot tax, the European official in charge of digital affairs said, “No way, no way.”
Proposals like the robot tax are appealing because countries across the Atlantic are facing wage stagnation and rapid technological change, producing populist backlash. And it seems like robots are at least partially to blame. At Davos earlier this year, a parade of Silicon Valley chiefs drew the connection between the impact of artificial intelligence and populist movements. Microsoft’s Satya Nadella said his “biggest lesson of last year” was to ensure that “the surplus [from] breakthroughs in artificial intelligence” were not concentrated among the few. Salesforce’s Marc Benioff warned of the possibility of “digital refugees” as a result of advances in automation. At his farewell address, U.S. President Barack Obama told an audience, “The next wave of economic dislocations won’t come from overseas. It will come from the relentless pace of automation that makes a lot of good, middle-class jobs obsolete.”
Current wage stagnation has less to do with robots and more to do with real estate and market power.
Yet recent academic work in macroeconomics suggests that current wage stagnation has less to do with robots and more to do with real estate and market power.
Real wage growth is a function of two things: changes in productivity and changes in the share of national output attributed to labor. If the share of GDP going to workers doesn’t change, then real wages simply track productivity.
Over the past four decades, wage growth in the United States has diverged from productivity because of a decline in the labor share of output. In 1975, labor received 65 percent of all income in the United States. Today, that figure is below 60 percent. If the share had remained the same, American workers would be receiving an extra $1 trillion per year. Instead, that money accrues to capital holders.
Some observers attribute labor’s declining share to diminishing worker bargaining power, outsourcing, or declining union membership. U.S. President Donald Trump, for example, has blamed slow wage growth on “bad” trade deals that empower China and other low-cost producers. But the decline in labor share of income is a global phenomenon, visible not only across the North Atlantic but also in China and Japan. And the labor share has fallen in both tradeable and non-tradeable sectors. Offshoring, then, cannot be the primary cause. And empirical studies have found limited correlation between declining union membership and shifts in the labor share.
It is also difficult to blame robots. As Northwestern economist Matt Rognlie has pointed out, robots and automation—broadly defined—are a tiny part of U.S. capital stock by value, worth at most 15 percent of U.S. GDP, a fraction that has been roughly stable over the last several decades. By contrast, the value of structures—houses, apartments, offices—is equivalent to 175 percent of GDP. Labor and capital shares are flow figures, whereas these are stock figures, but the serious difference in scale between automation-related capital and housing-related capital should caution against seeing robots as the primary cause of recent wage weakness. While technology and automation have clearly played an important role in recent economic growth, the capital stock figures suggest they cannot explain the recent declines in labor share.
A better explanation for the decline in labor share of GDP is diminished competition and a rise in real estate prices. Most people understand how a decline in corporate competition, especially given the rise of tech giants such as Amazon and Google, could increase corporate pricing power and reduce returns to labor. But few people think their own houses have anything to do with stagnant wages.
Much of the increase in the capital share of income has gone to real estate—as hard-pressed renters or homebuyers in London or New York can attest. By one account, the share of housing in total output is three times higher today than in the 1950s. A key driver of higher house prices in cities such as New York and San Francisco is regulations that prevent the housing supply from increasing. Higher housing prices reduce real wage growth because workers must spend part of any pay increase on rent or mortgage payments that are higher than they would otherwise be. By contrast, artificial constraints on housing supply push up real estate prices, benefitting a specific class of capital holders—owners of pricey property.
By one account, the share of housing in total output is three times higher today than in the 1950s.
Regulations that limit housing supply underpin high house prices and ensure that existing homeowners, who are often already wealthy, remain so. These policies have also reshaped labor migration patterns. New research by economists Peter Ganong and Daniel Shoag shows that janitors earn seven percent less in New York than in the Deep South after adjusting for housing costs. Yet in 1960, janitors in New York made 70 percent more than janitors in the Deep South, again after adjusting for housing costs. High housing costs are locking low-skilled workers out of high-income areas, reducing labor mobility.
Because low-skilled workers are congregating in low-productivity regions, the surplus of low-wage labor in those areas further suppresses income growth. In other words, zoning laws in New York and San Francisco not only drive low-wage workers out of the cities, but they also drive down wages elsewhere in the country. Wages in lower-income and higher-income areas in the United States stopped converging around 1980. And that, in turn, is part of the reason labor share of GDP has fallen.
Governments know how to tackle reduced corporate competition. The EU’s antitrust authorities have fined Google billions of dollars over antitrust violations. In the United States, Democrats such as Senator Chuck Schumer (N.Y.) are also turning to anti-monopoly policy to boost real wages.
But politicians have been less inclined to do anything about real estate. Slashing regulation to build more housing is politically challenging because it cuts against political orthodoxies. The left doesn’t like deregulation, whereas the right fears hitting homeowners, who form their core voter base. But many countries, particularly the United States and the United Kingdom, face a new political “trilemma,” in which only two of the following three things are possible: income growth, low taxes, or expensive houses. If governments choose to tolerate ever-higher house prices, the only way to get greater wage growth is via more redistribution. A tech leader looking to inject fresh ideas into politics should drop the robot tax and build cheap apartments across Silicon Valley’s most expensive suburbs.