Microeconomics reading questions

b) Summers suggests that instead of taxing robots, we might subsidize them. What reason does he give, and what is one example he provides?

c) Summers agrees that robots may be contributing to “job destruction and rising inequality”. Yet he also says that “staving off progress” [slowing or preventing it] by taxing robots would be a bad way to help workers whose jobs have been destroyed. Why does he think it would be better to subsidize the wages of affected workers and to invest in infrastructure and education? (The answer relates to the “most fundamental” of the three reasons Summers gives for not taxing robots.)

Should we tax robots?

By Tyler Cowen on March 6, 2017 at Marginal Revolution

The idea was suggested recently by Bill Gates, though I think you can debate with what degree of literalness. Put aside the revenue-raising issue that governments must raise revenue for their operations (which will require some taxes on capital, most likely, including on robots): is there a separate and additional argument for an additional robot tax? In this context, I would consider “robots” to be capital that is especially substitutable for human labor.

Presumably the claim is that there is either an income-distribution reason or a “happy human beings make other people better off” reason to want to slow the rate at which capital is substituted for labor, or to tax robots. But if we accept that assumption, should we tax robots or should we subsidize wage labor?

One reason not to tax the robots is that employers might substitute away from robots and toward natural resources rather than toward domestic human labor. Maybe that doesn’t sound intuitive, but think of the energy needed if we outsourced production to another nation and then transported the outputs back home.

But the main issue is probably one of tax incidence, meaning who would pay the tax, firms or workers? A general problem with a wage subsidy is that its value could be captured by employers. For instance if the subsidy is in the form of the EITC [“earned-income tax credit”, a reduction in taxes for low-income workers], employers could pay those workers less, because they’d be getting the EITC subsidy anyway.

Now consider the incidence of a tax on robots. If the elasticity of the demand for robots is high, there will be a big shift away from robots and toward labor (and land and other resources). It is at least possible that workers capture more of the gains this way than from the direct subsidy to their wages. On the downside, the employer fares less well under this scheme.

So it depends on how labor and robot elasticities relate to each other. Typically in these scenarios just about any elasticity values are possible. The robot tax would seem to do best when the elasticity of demand for robots is high, but the corresponding elasticity of demand for labor is low. As robots and labor become more substitutable, that difference in demand elasticities is likely to diminish. So if you are going to do this, maybe it is necessary to do it soon, precisely when it does not seem needed.

Picking on robots won’t deal with job destruction

By Lawrence Summers, Washington Post, March 5, 2017

Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Obama from 2009 through 2010.

I usually agree with Bill Gates on matters of public policy and admire his emphasis on the combined power of markets and technology. But I think he went seriously astray in a recent interview when he proposed, without apparent irony, a tax on robots to cushion worker dislocation and limit inequality. The Microsoft co-founder is right about the gravity of the problem and need for action, but he’s profoundly misguided in his proposed solution — and in ways that point up problems with the current public debate.

First, I cannot see any logic to singling out robots as job destroyers. What about kiosks that dispense airplane boarding passes? Word-processing programs that accelerate the production of documents? Mobile banking technologies? Autonomous vehicles? Vaccines that, by preventing disease, destroy jobs in medicine? There are many kinds of innovation that allow the production of more or better output with less labor input. Why pick on robots? Does Gates think anyone, let alone Congress, the Trump administration or a commission composed of his fellow technocrats, can distinguish labor-saving activities from labor-enhancing ones? Surely even if experts could draw such distinctions, the ability of the Internal Revenue Service to administer them is in doubt.

Second, much innovative activity, even of a robotlike variety, involves producing better goods and services rather than simply extracting more output from the same input. Autonomous vehicles will likely be safer than ones driven by humans. Robotics already help surgeons perform certain operations better than they can on their own. Online reservation systems are faster and more convenient than travel agents. Moreover, because of emulation and competition, innovators capture only a small part of the benefit of their innovation. It follows that there is as much a case for subsidizing as taxing types of capital that embody innovation.

Third, and perhaps most fundamentally, why tax in ways that reduce the size of the pie rather than ways that assure that the larger pie is well-distributed? Imagine that 50 people can produce robots who will do the work of 100. A sufficiently high tax on robots would prevent them from being produced. Surely it would be better for society to instead enjoy the extra output and establish suitable taxes and transfers to protect displaced workers. It is hard to see why shrinking the pie, rather than enlarging it as much as possible and then redistributing, is the right way forward.

This last point has long been standard in international trade theory. Indeed, it is common to point out that opening a country to international trade is like giving it access to a technology for transforming one good into another. The argument, then, is that since one surely would not regard such a technical change as bad, neither is trade, and so protectionism is bad. Gates’s robot tax risks essentially being protectionism against progress.

None of this is to minimize the problem of job destruction and rising inequality (although it is a major paradox that we seem to be seeing unprecedentedly rapid job destruction by machinery while at the same time observing extraordinarily low productivity growth). Rather, it is to suggest that staving off progress is a poor strategy for helping less fortunate workers. In addition to difficulties of definition and collateral costs, there is the further problem that in an open world, taxes on technology are likely to drive production offshore rather than create jobs at home.

There are many better approaches. Governments will, however, have to concern themselves with problems of structural joblessness. They likely will need to take a more explicit role in ensuring full employment than has been the practice in the United States. Among other things, this will mean major reforms of education and retraining systems, consideration of targeted wage subsidies for groups with particularly severe employment problems, major investments in infrastructure and, possibly, direct public employment programs.

This will be a major debate that I suspect will define a large part of the politics of the industrial world over the next decade. Little is certain. But we will do better going forward than backward. That means making America even greater, not great again. And it means embracing rather than rejecting technological progress.