Saturday, February 21, 2015

Larry Summers And David Autor Ruin The Party At The Hamilton Project

The Hamilton project made the mistake of inviting Larry Summers and David Autor to speak at an event that was staged to celebrate The New Machine Age Report which is supposed to explain our current economic problems.  The New Machine Age Report argues that structural problems in advanced economies are the cause of high unemployment.  Robots and machines are being substituted for labor; consequently we can ignore the demand side of the business cycle.  We should focus our attention on education and skill development that prepares workers for the new machine age.   Larry Summers and David Autor destroyed that argument in their presentations.  Mike Konczal summarized the demolition.

David Autor changed his mind about the job polarization hypothesis that he favored in 2010 which implied that we had a shortage of workers with the required skills:

  • We have not seen an increase in the premium paid for college graduates over the last decade.
  • Many college grads are forced to take low-skill jobs.
  • Most of the rise in unemployment has been in low education service occupations.
  • If we have provided more technology to workers they should be more productive but we have not seen a rise in labor productivity.   Larry Summers followed up on that point:
  • If there are skill shortages we should see rising wages in skilled occupations.  Wage growth has been lower than one would expect in high skill occupations
  • The core problem is not a shortage of skilled workers, it is a shortage of jobs. Educating more workers will only increase the competition for a finite number of skilled jobs and reduce wage growth even further. 
Summers concluded by focusing attention on two other points:

  • Profits have been at record levels.  That implies a high return on capital which should also increase demand for investment capital and an increase in interest rates.  However, interest rates are very low.  The high profits must contain a high rent value which suggests a need for a more progressive tax and transfer system to reduce rents.
  • If income distribution today was the same as it was in 1979, the top 1% would have $1 trillion less income and the bottom 80% would have $1 trillion more income.  That amounts to $11,000 per family.  We have a $1 trillion dollar rent problem that can't be addressed by small bore changes.  Income redistribution has been going on since 1979 but it has been going from the bottom 80% to the top 1%.  Its time to reverse that process.

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