CAMBRIDGE – Around the world this May Day, policy proposals that would have appeared radical just a few years ago are now on the agenda. In the United States, for example, high marginal tax rates, wealth taxes, and single-payer health care have become mainstream ideas. Yet unless policymakers get their priorities right, the opportunity for meaningful reform could be squandered, leading to even deeper social and political divisions.
In fact, while the reforms that are needed are radical and sweeping, they are not the ones currently in vogue. The top priority should be creating high-wage jobs, and this goal should guide policymakers’ approach to everything from technology, regulation, and taxes to education and social programs. Historically, no known human society has created shared prosperity purely through redistribution. Prosperity comes from creating jobs that pay decent wages. And it is good jobs, not redistribution, that provide people with purpose and meaning in life.
Creating such jobs requires that technological innovation be directed toward boosting demand for workers. Good jobs do not emerge naturally from free markets. Rather, they require labor-market institutions that protect and empower workers, generously funded education systems, and effective social safety nets. This is the institutional architecture that furnished the US and other advanced economies with four decades of strong, inclusive growth after World War II.
The massive growth in labor demand during that era rested on three pillars. First, businesses deployed technology in ways that increased labor productivity, thus fueling wage growth and demand for workers. At the same time, governments provided crucial support, by funding education and research, and (in some cases) becoming major purchasers of high-tech equipment. Most of today’s defining technologies owe something to government-funded innovation from this period.
Second, governments during the postwar era shaped the business environment with minimum wages, workplace-safety regulations, and other labor- and product-market regulations. Such measures are often blamed for choking off employment. But they can actually create a virtuous cycle of growth, because the cost floor for labor creates an incentive for firms to rationalise and upgrade their production processes, thereby increasing productivity and thus demand. Similarly, by ensuring that product markets remain competitive, governments can prevent firms from charging monopoly prices and reaping higher profits without having to hire more workers.
Third, governments in the post-war era expanded access to education, which meant that more workers had the skills that were in demand. In the US, for example, the federal government made higher education and vocational training available to millions of citizens with the G.I. Bill, Pell Grants, support for research, and other measures. Yes, all of this investment in innovation and education required higher tax revenues. But moderately higher tax rates and economic growth itself were sufficient to make up the difference.
A similar institutional architecture took hold across much of the industrialized world during the postwar era. For example, in Scandinavia, shared prosperity was achieved not through redistribution, as is commonly assumed, but as a result of government policies and collective bargaining, which created an environment conducive to the creation of high-wage jobs.
This is not to suggest that the 1950s and 1960s were perfect. In the US, discrimination against African-Americans and women remained deeply ingrained, and educational opportunities were not equally distributed. Still, in many other ways, economic conditions then were better than they are now, particularly when it comes to the availability of high-wage jobs.
Having averaged about 2.5 per cent per year between 1947 and 1987, private-sector wage growth in the US decelerated sharply after 1987, and ceased altogether after 2000 – a full seven years before the Great Recession. This stall has coincided with a period of weak productivity growth and a reorientation of investment toward automation, and away from the creation of new, higher-productivity tasks for humans. As a result, high-wage jobs have dried up, wages have stopped growing, and a larger share of prime-age adults have dropped out of the labor force.
More broadly, the institutional architecture that once underpinned job creation crumbled during this period. Protections for workers were steadily weakened, market concentration in many sectors increased, and the government abandoned its previous support for innovation. By 2015, federally funded research and development had fallen to 0.7 per cent of GDP, down from 1.9 per cent in the 1960s.
Many regard the falloff in the creation of high-wage jobs as the inevitable result of advances in artificial intelligence and robotics. It isn’t. Technology can be used either to displace labor or to enhance worker productivity. The choice is ours. But to ensure that such decisions benefit workers, governments need to coax the private sector away from its singular focus on automation.
In the US, this might start with fixing tax policy, which is far too favorable toward capital income. Because firms can reduce their tax burden by deploying machines, they often have an incentive to pursue automation, even in cases where hired workers would actually be more productive. Government also needs to get back into the business of supporting technological innovation, in order to provide a counterweight to the big tech firms, whose business models are overwhelmingly geared toward automation at the expense of job creation. And, of course, expanding educational opportunities across the board is essential.
As in the postwar era, this institutional architecture will require higher tax revenues, especially in the US, where annual tax revenue relative to GDP is around 27 per cent, well below the OECD average (34 per cent). In raising that figure, the point should not be to punish the rich, but to remove distortions such as the favorable treatment of capital. That means broadening the tax base and increasing tax rates modestly (to avoid discouraging investment and innovation).
A society powered by shared prosperity is not out of reach. But getting there will require urgent action to align technology with workers’ needs, prevent monopolisation, and fix the tax code so that we can fund the investments we need. Restoring the post-war institutional architecture will be a job for humans only.
The writer is professor of Economics at MIT and co-author of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty (forthcoming from Penguin Press in September 2019).
Copyright: Project Syndicate.