In our most recent episode, Things Have Changed had the opportunity to speak and learn from Dr. Seth Benzell, Digital Economist, Assistant Professor at Chapman, Fellow at MIT Initiative on the Digital Economy and the Stanford Digital Economy Lab, and a huge Sci Fi Fantasy aficionado. Automation has been a reoccurring theme in corporations quest to improve their bottom line and stay competitive. Seth is at the forefront of understanding Digital Automation and its implications on employment, growth, and inequality.
In ongoing research, he studies the effect of application programming interfaces and ‘firm inversion’ at the firm and macroeconomic level. He has worked on multiple studies of tax reform in computable general equilibrium models and has briefed legislative assistants at the U.S. Capitol.
Paradox of Robotic Productivity
Seth’s research has found that an increase in robotic productivity will temporarily raise output, but, by lowering the demand for labor, can lower wages and consumption in the long run. It’s difficult to look at how robots will help future workers because while outputs are increased with similar inputs, workers aren’t compensated equally while those that own the robots are getting the biggest piece of the pie. If the market response to robotic innovations does not lead to a positive result, then there may be a need for government intervention with redistributive policies of the state.
Labor share of GDP Decreasing
One way to look at how automation has increased productivity relative to wages is to look at labor share of national income. In the early 1980’s the labor market made up 65% of the national GDP. Today it’s a mere 50% with an enormous boom of wealth from Superstar tech companies and investor capital. It’s projected that 20 Million manufacturing jobs will be obsolete by 2030. This disruption in the labor market is not new and has been going through different iterations from the Industrial Revolution to the development of computer processors.
The Rise of Superstar Companies
Superstar companies are 10% of businesses that create 80% of economic value. You can already guess who these are… Amazon, Apple, Microsoft, Facebook, Google, and many more. Nearly all of these Superstar companies benefit from some form of automation that allows them to create maximum production with minimal labor forces. Due to heavy reliance on automation, Superstar Companies have been able to maximize profit for investors, and pay less to the labor market for it. This has created issues with local economies that lose tax income and economic activity of consumers.
Should Digital Businesses be Taxed?
While automation is designed to solve problems and create greater efficiencies for companies, it comes at the cost of inequality in wages, a decrease in tax income for governments, and higher barriers to entry for new entrants. A proposed solution that’s being explored is France’s plan to tax Digital companies revenue at 3%. The argument is that the tax proposals have the potential to shift billions of dollars from tech companies to local economies. This standard tax rate for digital companies attempts to capture the profits of tech companies benefiting from the savings that automation gives them while cutting the needed labor force down.