Saturday, August 11, 2012

The Theory of Everything

Okay, maybe not everything but quite a bit of what is important.
You've got your comparative advantage, your manufacturing technology, mercantilism as policy, why the U.S. and Japan parted ways in 1990, inflation pressures, negative real interest rates and domestic asset bubbles along with hope and fear for Africa and what's up with China.
From Izabella Kaminska at FT Alphaville:

3D Printing: Rise of the machines
Cheap labour isn’t forever. The act of taking advantage of it enriches the work force over time. At least, that’s what should happen.

As America proved, a work force can, in effect, end up aiding its own overall decline due to a lack of competitiveness on wages and pensions. That sort of rigidity, whether good or bad, isn’t the only thing that can lead to a decline in manufacturing employment. Automation can too.
How would things have gone if the US, rather than taking advantage of cheap labour in China, had kept things at home and heavily invested in automation?

It’s a hypothetical that we will examine below. Not least because it’s a thought experiment that can get us thinking about the implications for China of the rise of 3D printers.

By way of introduction, we turn to Vivek Wadhwa over at Forbes last month. The technology entrepreneur explained eloquently why China stands to lose so much more than anyone else if automation keeps advancing. Indeed, forget about real estate bubbles and mis-allocated capital, the rise of automation could be the greatest Chinese black swan of all....MUCH MORE
Einstein's unified field theory work ran into problems with gravity, here my concern was gravitas.
Ms. Iz dances so lightly on some profound questions that I had to read it twice to make sure she was taking the subjects seriously and scan for any shortcuts in the logic. 
She does, there aren't.

Many of the commenters appear to have gotten caught up in the 3-D printing angle and are missing the forest for that one tree. The post isn't about 3-D printing in spite of its headline.

Here's someone who does get it:
billramsay | August 10 7:40pm | Permalink Izabella, your article presents what is one of our biggest questions about future economic prospects. Basically the question is what will low skill/intelligence folks do for income? Throughout history there have been manual labor jobs available, of course there has been a fairly big change from agriculture to manufacturing.

It does seem to me that continued automation can be highly deflationary, but are there other possibilities for the economy to distribute the gains? Capital and government seem to be obvious channels.

Of course with capital, a major problem is that exactly the ones who are most likely (or at least soonest) to be displaced by automation are also the same ones that are highly unlikely to have any capital. I wonder if we could develop something like Alaska's Permanent fund? That fund distributes "dividends" to every Alaskan citizen. The capital comes from royalties on oil so we'd have to have a different funding scheme.

I wonder if the acceleration of automation means that the traditional low taxation on capital to encourage capital formation and higher taxation on labor to compensate is now counterproductive?

Another possible outcome is that different jobs that we can't envisage will replace those lost to automation, which has obviously been the case in the past. However, it does seem like it could be different this time. 
The highlighting is mine. That part of the comment was exactly the point of one of our January posts,
Over the last few years I've come to believe that all income, earned and unearned, should be taxed at the same rate, that preferential taxation of capital no longer leads to the intended policy effects of job creation and increasing capital investment in plant. property and equipment but rather is a bought-and-paid-for scam perpetrated by the financier class....

...At the lower end of the income scale there should be some minimum tax. Everyone should have some skin in the game.
I'll be coming back to all these topics throughout 2012, in the meantime here's the granddaddy of Econ papers for folks interested in this stuff, sincere thanks to the reader who turned my vague recollection of the thesis into an actual PDF copy. It is as pertinent and fresh today as the day it was written, 34 years ago.

By Mason Gaffney
A paper delivered to the National Tax Association, Chicago, August, 1978.
Adapted for use in a course in Macro-economics, Winter, 1996.

We hear a lot these days about the need for more capital to make jobs. Some of what we hear and read we may discount as self-serving, lobbying for more preferential tax treatment of profits. Yet there is a case argued by sincere and public-minded people on objective grounds which we must take seriously.

It had better be a good case, because it goes far toward destroying the progressivity case, the one on which the American public has bought the income tax concept. Preferential income tax treatment of property income cuts off the top brackets of income receivers from tax liability, especially when we exempt capital gains. Preferential treatment exempts or favors the unearned increment to land values, especially again when we favor capital gains. The thrust of proposals being seriously advanced today is to convert the income tax into simply another payroll tax, socializing a large share of personal effort while eliminating the public equity in the land and capital resources of the nation....MORE (17 page PDF)
In our next installment we'll look at “Kaldor’s stylized facts”(Cambridge economist Nicholas, Baron Kaldor ) to judge whether the facts were just opinions or still hold true, how they influence the #Occupy folks and why I couldn't take #Occupy as seriously as many did and ended up with posts such as "Octopi Wall Street" and "Ossify Wall Street: Russell Simmons/Kanye West; Richard Trumka, Tim Robbins Swing By" along with the trilogy:
 Some Thoughts on the OccupySesameStreet Protests
#OccupySesameStreet Turns Violent
Breaking--From the OccupySesameStreet Protests: "Three Die After The Electric Company Privatized"--Breaking
Until then...