What to Do in the Face of Mass Technological Unemployment

The risk of job loss is the principal risk faced by the subject of a liberal market democracy. In the era of ‘social democracy’ 1946-1979, countercyclical fiscal policy was combined with unemployment insurance to counter the risk; in the ‘neoliberal era’, that is to say since Volcker’s appointment, the Fed has taken the lead in macroeconomic stabilization. Both of these solutions were hit upon to deal with cyclical threats; the first to deal with high unemployment; and the second high inflation. Neither is a solution to a secular rise in the unemployment rate. While more generous unemployment insurance and better macroeconomic stabilization may help in a modest uptick in unemployment due to labor saving innovations, they would be insufficient to the task were mass technological unemployment to arrive in force. By mass technological unemployment we mean the Luddite nightmare—a real shortage of work for a painfully substantial portion of the populace due to labor saving innovations.

Say’s Law is usually deployed to point out the so-called Luddite fallacy. But Say’s Law only holds only if one assumes that the real wage will never fall below the subsistence level; thus allowing the labor market to clear without unleashing mass starvation. Even with a completely flexible price mechanism, there is no logical reason why the market clearing wage rate could not fall below the subsistence level. Hence there is no logical reason why the Luddite nightmare cannot obtain.

Yes, historically that did not happen. Work did not disappear as a result of labor saving innovations, including the introduction of radically new machines and techniques. It may be that some yet-to-be-discovered deep law of economics forbids it. But it could also be that the rapidity of technological change has nonlinear effects. And that the revolutions associated with steam, telegraphs, railways, internal combustion engines, telephones, computers, and the Internet, were just not revolutionary enough. That a major technological revolution—such as a rapid near-total automation of all existing work—may yet give life to the Luddite nightmare.

In what follows we will assume that it has arrived. The question is: What should we then do about it? This is posed in the technocratic spirit of Bernanke (2004)’s proposals on what to do were the economy to hit the zero lower-bound for a prolonged period. His proposals became the basis of the highly successful policy innovations introduced by him; later sustained under Yellen; and copied by all hard currency central banks.

Unfortunately, Bernanke’s technocratic solutions which rely on elevating the wealth of investors in search of ‘wealth effects’, are unlikely to work in the event of the Luddite nightmare. The monetary authority may find itself fighting deflation and high unemployment at the zero lower-bound; pushing on a string for years on end. A major technological revolution could make monetary management of the economy completely unviable, thus ending the primacy of the Fed. Governments would quickly find themselves too indebted to keep fighting unemployment rates still hovering above 30 percent. Markets would lash out and punish sovereigns, now paying no more attention to the impotent central bankers. People would not accept being abandoned to market discipline. The whiplash of the world economy is likely to generate significant political instability both in the center and on the periphery.

The good news is that crises can be useful for pushing through game-changing policy innovations. My wager is that with a combination of legal, institutional and policy changes it is possible to shield the populace from the whiplash of the global market without dismantling the open economy and the liberal order.

My proposal has five components. All five are important and they will work best in tandem with each other.

First, the legal and effective workweek will be reduced from five eight-hour-days to four; with mandatory 30min lunch breaks and employers required to pay overtime for any and all work done over 30 hours in any given week. The impact of this measure would directly redistribute work from those who have to those who don’t by a simple intervention with minimal distortions. Apart from generating a substantial near-term reduction in the unemployment rate, the utility gain in leisure time for the entire population would be substantial. It might reduce labor productivity by letting second-benchers do as much work as the first-benchers, but that should be the least our worries with labor productivity so high as to precipitate mass technological unemployment.

Second, and to compensate for the first, the minimum wage rate will be raised to be consistent with generating enough money to provide a decent standard of living for a family of four with two working adults now working only 30 hours a week. If you think $15 is fair for the US at the present time, then under my proposal, the minimum would have to be $20 an hour. (This can be implemented fairly easily through market mechanisms if my next proposal is adopted.)

Third, the unemployment dole will be abolished tout court and so will unemployment itself. A National Labor Service (NLS) will be formed. It will pay the minimum wage in exchange for work to every legal resident who so desires. Each person who signs up will list their skills and provide their resumes—and they will be given priority for jobs that match their skillset. Labor allocation will be tasked to an independent agency within the NLS called the Planning Board. It will coordinate the allocation on ‘the supply side’ with the Works Department (‘the demand side’). The Works Department will be given priority as a subcontractor at the federal, state and municipal governments. The surplus labor pool, those who are not absorbed by the Works Department, will perform community service, receive skill-augmenting instruction and training—including military, first aid, and emergency response training. The point is to harness the labor surplus to augment national strength. In order to make the NLS an effective instrument of the national will, Congress will exercise oversight and authorize funding. (My last proposal addresses the question of public finance.)

Fourth, once unwanted unemployment is effectively abolished by the NLS, monetary and fiscal authorities will be freed from their mandate to maximize employment. The Fed’s mandate will change from ‘maximize employment subject to monetary-financial stability’ to ‘maximize real wage growth subject to monetary-financial stability’. The fiscal authority, ie Congress, will be freed entirely from macroeconomic stabilization. It will instead focus on negotiating traditional questions of redistribution (taxation and tax expenditures) and the new game of fine-tuning the NLS.

Fifth, in order to pay for the NLS, Congress will institute a wealth tax in line with Piketty’s proposal. For if robots do all the work, that’s where all the surplus of the society will be concentrated. (To find the money, you go where it lives.) In principle, one could increase corporate income or capital gains taxes instead. But Piketty’s tax proposal is less distortionary (since, unlike income tax, it doesn’t affect any agent’s allocative choice at the margin) and better targeted (a wealth tax is more progressive than income tax because wealth is an order of magnitude more concentrated than income). Congress will also need to abolish all unnecessary tax expenditures. These giveaways come to $1.5 trillion in the current fiscal and some 70 percent of them go to the top 40 percent. Closing these loopholes will free-up a trillion dollars of revenue. This will augment Congress’ ability to pay for the NLS without running up public debt.

In a work scarce world, it’ll be desirable to spread the work (and the leisure) around. My 4-day workweek proposal addresses that problem head-on in a straightforward and simple-to-implement fashion. Raising the minimum wage is necessary for the reduced workweek proposal to work. The NLS is my core proposal. In a truly work scarce world, some form of public works program will become indispensable. It would be best if we have a rational plan for it in advance. The pooling of risk creates value through diversification. The gain is systemically emergent in the sense that the source of value cannot be located in any of the units—the act of pooling of the risks faced by the units itself creates value. With the NLS as an instrument of national will, this gain would accrue to the nation-state. It will also free-up policy room at the Fed, which I suggest should then be issued a fresh mandate to maximize real wage growth subject to monetary-financial stability. Finally, the NLS will have to be financed from the public purse. I support Piketty’s tax because it is more efficient than the alternatives.

A bold combination of reduced workweek, work guarantee, minimum wage, and wealth tax can work even in the teeth of robotic competition in the labor market. Mass technological unemployment poses a significant threat to political stability. The solution to the problem of excess labor is to absorb it. Some form of work or income guarantee will be necessary for social survival in the nightmare scenario. The advantage over guaranteed income is that you are not paying for sloth. Is a modern civilization without work even possible? Shouldn’t we ask for something in the public interest in return for public money? And shouldn’t surplus labor be transformed from being a source of weakness and imbalance into a national asset? An instrument of national will? Surely the United States could not be hurt by training millions of men of military age in reserve battalions rather than incarcerating them?

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