Q&A Larry Summers: Robots are hurting middle class workers

Technology is permitting large-scale substitutions of employees, but technology is not the only important factor affecting employment says economist Larry Summers. Photo / Thinkstock

Two weeks ago, the famous economist Larry Summers sat in a chair on a stage at the National Press Club, talked with several other smart people for an hour and briefly upended a major debate in economics.

The occasion was a forum, hosted by the Brookings Institution' Hamilton Project, on technological change and its effect on American workers. Summers, the former Treasury Secretary who is arguably the most influential economist in Democratic Party circles today, joined a discussion on whether rapidly advancing technology - like robots - is killing jobs and hurting incomes for the middle class.

Many economists say yes, because automated technology replaces the need for human labour and thus devalues it. And their answer is, at least in part, more education, so workers have better skills to earn jobs less replaceable by machines and algorithms.

But there's a loud group of liberal economists who argue that the answer is, for the most part, "no" - that other changes in the economy, such as the decline of unions and collective bargaining, are much more to blame.

In his remarks, Summers, who previously had endorsed the idea that technology and automation are threatening middle class wages, seemed, to some, sceptical of the idea that technology is a major driver of stagnating wages. He also appeared dubious that education policy could fix the problem. America needs more jobs and workers need more power, he said. Betting on more education and skills training to fix things would be an "evasion."

Liberal economists celebrated the argument. "Larry Summers demolished the robots and skills arguments," Mike Konczal, an economist at the Roosevelt Institute, wrote. Other economists, however, including Hamilton director Melissa Kearney, didn't agree, and a debate has erupted since.

So I called Summers and asked him to clarify what he meant.

Larry Summers is the former US Treasury Secretary and arguably the most influential economist in Democratic Party circles today. Photo / Getty

We talked for 45 minutes on the phone about technology, inequality and education. He reaffirmed the idea that more education won't solve the inequality problem. He also called technological change an important fuel for the rising economic share captured by the top 1 per cent of American earners.

His comments are lightly edited for length and clarity.

Tankersley: How do you think about the effects of technology and automation on workers today, particularly those in the middle class?

Summers: No one should speak with certainty about these matters, because there are challenges in the statistics, and there are conflicts in the data. But it seems to me that there is a wave of what certainly appears to be labour-substitutive innovation. And that probably, we are only in the early innings of such a wave.

Whether it is robots in manufacturing, automated check-out of retail establishments, e-shopping taking people out of distribution networks, information technology replacing what used to be done by low-level, white-collar managerial and clerical labour, the ability to take blood pressure and perform other medical tests with much less human labour input, automated call-centre systems - it appears that technology is permitting very large-scale substitutions.

As a rough estimate, if the income distribution was the same it was in 1979, the top 1 per cent would have about $1 trillion less, the bottom 80 per cent would have about $1 trillion more, and the middle 19 per cent would be in about the same place.

Larry Summers, economist

To take my sphere, in a university economics department when I started, there was one assistant for every two professors. Today, there are a couple of assistants for a couple of dozen professors. And the reasons are voice mail, word processing, spell checking and email.

Wages

Q. Do you see that wave spilling into effects on wages?

A. It would be surprising if this didn't show up in having consequences for some combination of the price of labour and the quantity of labour. In the 1960s, about 1 in 20 men between the age of 25 and 54 was not working. Today, the number is more like 1 in 6 or 1 in 7. So we have seen some troubling long-term trends, and they appear to be continuing trends.

Now, to say that technology is important is not to say that technology is the only important factor, or even that it is the dominant factor. Globalisation, which in substantial part has been made possible by technology, has also had an impact, particularly on the lowest-skilled. And I believe that a combination of softer labour markets and the growing importance of economic rents - excessive profits due to lack of competition - of various kinds have also contributed to rising inequality.

Technology in my judgment has likely been an important factor, and I suspect is likely to be a substantial factor pushing toward more inequality in the future.

It's important to recognise that a large part of the inequality patterns we observe have less to do with the differentials between more skilled and less skilled workers than they do with huge increases in the top 1 per cent, top 10th of a per cent and top 100th of a per cent, versus everybody else. As a rough estimate, if the income distribution was the same it was in 1979, the top 1 per cent would have about $1 trillion less, the bottom 80 per cent would have about $1 trillion more, and the middle 19 per cent would be in about the same place.

The rise of the top 1 per cent is likely very tied up with technology. When George Eastman had a fantastic idea for photography, he got quite rich, and the city of Rochester became a flourishing city for generations, supporting thousands of middle-class workers.

When Steve Jobs had had remarkable ideas, he and his colleagues made a very large fortune, but there was much less left over - there was no flourishing middle class that followed in their wake. So, understanding what's happened to the top 1 per cent is important in understanding the overall picture.

Education

Q. If we educated everyone below the 1 per cent better, would that help them capture some of those spoils?

A. It's important to be careful here. All of my reading of the evidence suggests that the returns to more and better education is very high. Raj Chetty's research demonstrates that having a better kindergarten or first-grade teacher can make an enormous difference of a few percentage points in wages across your lifetime. Eric Hanushek has presented calculations that suggest better teacher quality in American schools could be worth trillions of dollars down the road.

The evidence is that - just how it is trending may be a subject of debate - but the return to college education, as opposed to high school education, is vastly greater than ever before. So, education is an immensely worthwhile investment, and the project of improving education is hugely important for the United States.

That said, the main way in which strengthening education is desirable is that it will raise productivity and raise overall incomes in our society. It is not likely, in my view, that any feasible program of improving education will have a large impact on inequality in any relevant horizon.

First, almost two-thirds of the labour force in 2030 is already out of school today.

Second, most of the inequality we observe is within education groups - within high school graduates or within college graduates, rather than between high school graduates and college graduates.

Third, inequality within college graduates is actually somewhat greater than inequality within high school graduates.

Fourth, changing patterns of education is unlikely to have much to do with a rising share of the top 1 per cent, which is probably the most important inequality phenomenon. So I am all for improving education. But to suggest that improving education is the solution to inequality is, I think, an evasion.

When George Eastman had a fantastic idea for photography, he got quite rich, and the city of Rochester became a flourishing city for generations, supporting thousands of middle-class workers. This doesn't happen with inventions today. Photo / Wikimedia user Paul Nadar

Q. An evasion of what?

A. It's an evasion because it's unlikely to have a large impact on inequality. It's important to understand, though, that what's most important is raising middle-class incomes. And that, albeit with substantial lags, improving inequality will raise middle-class incomes. But insofar as the goal is to address inequality, I think we will need a combination of more substantially more progressive taxation than we have at present in the United States.

There is, for example, no reason why the estate tax should be so riddled with loopholes and sheltering devices, as is currently the case. We need to look at places where there are substantial economic rents being earned, whether those are property values protected by exclusionary zoning, franchises contributing to the politically fortunate, overly generous protections of intellectual property, or implicit subsidies to the financial system, as examples.

Third, we need a commitment to running a high-pressure economy. When jobs are scarce, companies have the power. When workers are scarce, they have the power. That's why I've put such emphasis in recent years on overcoming secular stagnation, by promoting demand, especially through public investment.

Taxation

Q. How should the country help workers displaced by technology?

A. More progressive taxation means they will have to pay a smaller share of tax burdens. And in the case of poorer workers, more support for their work through the earned income tax credit may be possible. Reduced economic rents mean lower prices, which mean higher real wages, and a larger share of a firm's revenues going to compensation.

Part of reducing rents is adequately empowering workers, whether it is through increases in the minimum wage, through giving collective bargaining a serious chance, or whether it is through promoting arrangements that give workers a share in profits.

Q. How will these issues play out in 2016?

A. I don't think there's a more fundamental question facing the United States than what happens to middle-class incomes. Responding to seismic changes associated to technology and globalisation is a central challenge of our politics. The transformation to our industrial economy brought about huge changes in society, with leaders like [Woodrow] Wilson and the two Roosevelts in the United States, [William] Gladstone in Britain and [Otto von] Bismarck in Germany.

I'm not sure - I think we are all groping towards the right ways of responding to contemporary challenges, and I suspect that this issue will be with us in the next presidential campaign, and several to come.