Danger / 153 CopyrightedMaterial–Paperback/Kindle available @ Amazon implement policies to address the situation. The natural incentives in the privatesector would tend to accelerate, ratherthanresolve,thecrisis. There is an ongoing trend toward concentration of incomethatisdrivenlargelybythecontinuingadvanceof automation technology and globalization, and also by a lackofprogressivetaxpolicies.Manypeoplemightargue thatincreasingincomeinequalityiscausedprimarilybya “skillpremium.”Inotherwords,inthemodern,technolo- gicaleconomy,peoplewhoarehighlyeducatedandskilled haveasignificantadvantageinthelaborforce.Whilethis hasbeentruesofar,itislargelybecauserelativelylowskill jobshavebeenthefirsttobeautomatedandalsothefirstto besubjectedtothefullforceofglobalization.Aswesaw in Chapter 2, advancing automation technology will in- creasingly threaten highly paid knowledge workers with collegeeducations.Thesejobswillalso,ofcourse,besub- jecttooffshoring.Clearevidenceofthesetrendsisalready apparentininformationtechnology(IT)jobs,andwecan expectthistobecomemuchmorebroad-basedinthefu- ture.Wecanexpect that income will becomeevenmore concentratedinthehandsofthosewhoarepositionedto benefitdirectlyfromtheincreasingvalueoftechnological capitalrelativetolabor. Extremeincomeinequalityisgenerallypresentedasa socialproblemoranissueofbasicfairness.Whileitmay be these things, it isalso—more critically—a mathematical problem in terms of the viability of the mass market. Whenpurchasingpoweristakenfromthousandsofaver- ageconsumersandconcentratedinthehandsofoneweal- THE LIGHTS IN THE TUNNEL / 154 CopyrightedMaterial–Paperback/Kindle available @ Amazon thy individual, that purchasing power is effectively steri- lized:itno longerplaysavibrantroleingeneratingmass market demand for products and services. As we have seen, this will ultimatelycause the market “river” to run dry. WeoftenhearthatincomeintheUnitedStatesisto- day moreconcentrated than atany time sincethe 1920s. The reality is that the risks from this concentration are probablyevenhigher today becausethe rise ofthemass market has changed the nature of our economy. Today, virtually everyone in industrialized society—including es- pecially the most wealthy individuals—derives his or her incomedirectlyorindirectlyfromthemassmarket. The social impact resulting from the permanent eli- mination of a large fraction of the jobs held by average people would obviously be dramatic. History showsthat onceunemploymentreachesacertainlevel,theveryfoun- dationsofdemocraticsocietymaybethreatened.During theGreatDepression,unemploymentreached25percent in the United States. Joseph P. Kennedy, thefounderof the Kennedy dynasty, famously said that during this pe- riod,hewouldhavegladlygivenuphalfofeverythinghe had, if he couldhave been certain of retaining theother halfofhisfortuneundertheruleoflaw.Clearly,therisks are very real, not just for the bulk of people whose in- comesmaybethreatened,butalsoforthosewealthyindi- vidualswhomaybelikelytoresisttheideaofgovernment policiesthatincludemoreprogressivetaxation. Mypurposeinwritingthisbookistotrytogivethese issues morevisibilityin thehope that aconstructivedis- Danger / 155 CopyrightedMaterial–Paperback/Kindle available @ Amazon cussionanddebatecanoccur.Perhapstheargumentsthat I have presented here will turn out to be wrong. But if theyareevenpartiallycorrect,thenwecannotaffordtobe takenbysurprise;itwillbeessentialtohaveaplan. Inthenextchapter,wewillfastforwardtoapointin thefuturewherethetrendtowardwidespreadjobautoma- tionhasbecomeclear.Oncethishappens,therewillreally benochoiceexcepttocomeupwithsomemodifications to our system so that the free market can continue to functionandthrive.   CopyrightedMaterial– Paperback/Kindle available @ Amazon Chapter 4 TRANSITION    Inthepreviouschaptersofthis book,wehaveseenthat machineautomationislikelytosomedayeliminateasub- stantialfractionofthejobsnowperformedbypeople.Au- tomationispoisedtoadvanceontwobroadfronts.First, machinesandrobotswillincreasinglytakeovertheroutine jobsinfactories,retailstores,officesandwarehousesthat arenowheldbyworkers. Second,theexistingtrendtowardtechnology-enabled self-servicewillaccelerate.Wealreadyseethistrendwith ATMs, automated checkout aisles, online banking, and automated telephone answering systems. All of these representareaswheremachinesallowconsumerstoinde- pendently perform tasks that once required the involve- mentofhumanworkers.Inthefuture,wecanexpectthat thistrendwillbeextendedtoincludecellphonesandoth- ermobiledevicessothatconsumerswillbeableperform tasksandgetautomatedassistancealmostanywhere. Inaddition,thedrivetowardself-servicewillalsooc- cur within businesses. New automation tools will enable managersinbothlargecorporationsandsmallbusinesses Transition / 157 CopyrightedMaterial–Paperback/Kindle available @ Amazon todirectlydothejobsandperformtheanalysisthatonce requiredhumanemployees. Aswesawinthelastchapter,ifthesetrendsbecome unambiguousandareallowedtoimpactinanuncontrolled manner,theresultislikelytobeasevereeconomicdown- turnasworkers(whoarealsoconsumers)begintofearfor their long-term employment prospects. In Chapter 3, I proposedsomeinitiativeswhichmighthelptostabilizethe situationanddelaytheonsetofthisscenario;however,we cannotescapethefactthattechnologicaladvanceisrelent- lessandthatfreemarketincentiveswillcontinuetopush theprivatesectortowardtheeliminationofjobs.Oncewe accept the fact that a large fractionofjobswill beauto- matedinthefuture,thenwereallyhavenochoicebutto alsoaccepttherealitythatoureconomicsystem,asitex- iststoday,cannotcontinuetofunctionindefinitelywithout modification. Inthischapter,wearegoingtofastforwardfarinto thefuture;wewillimagineatimewhenatleastthreequar- tersofthejobswhichexistinourcurrenteconomyhave been permanently automated away. In other words, the unemploymentratewillbeatleast75percent—analmost unimaginably high level—and there will be no realistic hope that more jobs will be created in the future. Is it possibletohaveaprosperouseconomyandacivilsociety insuchascenario? Ifwecandeviseasystemthatwouldworkinsuchan admittedlyextremesituation,thenweshouldalsobeable to figure out a way to gradually transition into that new system,sothatwecanmaintaineconomicstabilityasau- THE LIGHTS IN THE TUNNEL / 158 CopyrightedMaterial–Paperback/Kindle available @ Amazon tomationadvancesinthecomingyearsanddecades.To- wardthatend,let’sbeginbylookingatthebasicelements ofourexistingfreemarketeconomy. The Basis of the Free Market Economy: Incentives Thefreemarketeconomyisanaturalsystemthatpushes consumers, businesses, investors and workers to act in waysthatultimatelypropelsocietyasawholetowardad- vancementandgreaterprosperity.Inotherwords,aseach ofuspursuesourownself-interest,collectivelywe move everyoneforward.Throughthelogicofthemarket,these collective actions automatically allocate resources in the mostefficientwaysothateconomicoutputismaximized. This, ofcourse,is the“invisible hand” that Adam Smith spokeof. Wecandividethelogicofthefreemarketintothree broadsetsofincentives: 1. Individual consumers act to find the best values for products and services. In other words, consumers shop around. No one wants to overpay, and no one wantstoendupwithaninferiorproduct. 2. Theownersofbusinessesandcapitalcompetetomax- imize profits by providing the best possible value to consumers. As they do so, they invest in ways that driveinnovationandcreatenewproducts,servicesand industries. 3. Individualworkersacttomaximizetheirincome.They seek the best possible job, invest in education and Transition / 159 CopyrightedMaterial–Paperback/Kindle available @ Amazon trainingtoenhancetheir futurecareerprospects,and dotheircurrentjobtothebestoftheirability. Historically, these three incentives have worked in concerttodrivesocietytowardeverincreasingprosperity. Aswehaveseen,the problemwefaceifautomationeli- minatesalargefractionofthejobsheldbyworkersisthat consumers and workers are the same individuals. Without reliableincomefromemployment,therewillnolongerbe a critical mass of viable consumers. And it is consumers whoultimatelydrivethemassmarketeconomy.Without the expectation of sufficient market demand, no rational businessowner willinvest in increased production orin- novation. Preserving the Market Clearly,inordertopreservethemassmarketinalargely automatedeconomy,weneedtoprovideanalternativeto jobs.Weneedamechanismthatcangetareliableincome streamintothehandsofconsumers.Thisofcourse,isa propositionthatwillbeverydifficultformostofustoac- cept;theideathatwemustworkforalivingisoneofour most basic core values. The current alternatives to job- basedincome,suchasunemploymentinsuranceorwelfare payments,comewithhighlynegativeconnotationsandare purposelydesignedto provideminimalsupport so that a disincentivetoworkisnotestablished. Our current value system celebrates the importance of our labor. We believe that work is essential and that consumption is a privilege that derives from that work. However, this is a belief system that is fundamentally THE LIGHTS IN THE TUNNEL / 160 CopyrightedMaterial–Paperback/Kindle available @ Amazon based on the historical reality that human labor is indis- pensabletotheproductionprocess.Whathappenswhen technologyreachesthepointwheremosthumanlaboris nolongeressential? At that point, we will have to undergo a quantum shift in our value system. In order to preserve the free marketsystem,wewillhavetocometotherealizationthat while work (at least for most people) may no longer be essential,broad-basedconsumptionis essential.Inthedeveloped world, our mass market economy has grown farbeyond what isrequired to simplyprovideindividuals withbasic necessities.Inordertomaintaintheglobaleconomy and driveittowardfuturegrowth,wemust havea verylarge numberofconsumerswithadequatepurchasingpower— allofwhomhaveconfidenceintheirfuturecontinuityof income. Without that critical mass of viable consumers, economicdeclineismathematicallyinescapable. There is really no way to envision how the private sectorcansolvethisproblem.Thereissimplynorealal- ternativeexceptforthegovernmenttoprovidesometype ofincomemechanismforconsumers.Whilethisideawill initially,ofcourse,bevehementlyopposed,Ibelievethat intime,thiswillhavetobeacceptedasabasicfunctionof government. Considertheviewpointofaneconomicallyconserva- tiveorlibertarianthinker.Thispersonislikelytoadvocate thesmallestpossiblegovernmentandamarket thatisas free and unregulated as possible. Nonetheless, this per- son—if he or she is reasonable—is veryunlikelyto pro- pose eliminating government entirely because he or she Transition / 161 CopyrightedMaterial–Paperback/Kindle available @ Amazon understandsthatthereisonecorefunctionofgovernment whichis critical totheoperation of thefree market:the protectionofpropertyrights.Thegovernmentmustmain- tainanationaldefense,apoliceforceandajudicialsystem, and it must enforce and protect clearlydefined rightsto own and trade property. Without these governmental functions, the free market could not operate effectively andcivilsocietywoulderodeintojunglewarfare. Inafuture,largelyautomatedeconomy,thepreserva- tion of robust market demand by providing an income streamtoindividualconsumerswillalsohavetobecomea corefunctionofgovernment.Thisisanideathatwillno doubt initially elicit derisionor outrage. In the long run, however,Ibelievethattherewillsimplybenoalternative. Market demand powers our economy. No rational businessownerwillinvestinincreased productionin the absence of an expectation of demand. In the economic environment of 2009, consumerism is very much out of fashion,andthisisreallynotagoodthing.Themediais repletewithstories abouthow Americanshavegoneout andspenttoomuchonbigscreenTVs.Thesestoriesmiss thepoint.Whiletherewillalwaysbesomeindividualswho act irresponsibly, the overall problem is really not that Americanshavespenttoomuch.Theproblemisthattheir spendinghasbeensustainedbyborrowingratherthanby growthinrealincome.Andthisisbecause,formostaver- agepeople,therehasbeenlittleornogrowthinincome, while at the same time, health care costs have been ex- ploding. THE LIGHTS IN THE TUNNEL / 162 CopyrightedMaterial–Paperback/Kindle available @ Amazon Inthelongrun,onlysustainedconsumerspendingcan turn the economy around and return us to economic growth.Everythingproducedbyoureconomyisultimate- lyconsumed by individual people; we cannot have long- termprosperityunlessenormousnumbersofpeoplehave sufficient income—and sufficient confidence in the fu- ture—topowersustainedconsumption. Again,conservativeeconomicthinkersmayreflexive- lyobjecttothisview.Conservativestendtoemphasizethe importance of production (or the “supply side”) in the natural cycle that occurs between production and con- sumption. Conservatives generally favor low taxes and minimumregulationofproducersintheexpectationthat thiswillresultinincreasedeconomicactivityandjobcrea- tion, which will then lead to strong consumer demand. Theproblemwiththatwayofthinking,ofcourse,isthat, in an increasingly automated economy, the job creation willnot occur. Consumers will have littleopportunity to participateintheproductionprocessasworkersand will loseaccesstothewagesthatsustainthem.Intheabsence ofanalternateincomemechanism,acollapseinconsumer spendingmustbetheinevitableresult. Recapturing Wages Aswebegin toenvisionhowitmightbepossibletode- signanalternativeincomestreamforconsumers,let’sbe- ginbyconsideringhowthewagesfromajobthathasbeen automatedawaycouldberecapturedbythe government. Whenabusinesseliminatesajobastheresultofautoma- tion technology, the income that was previously paid to [...]... in two ways: (1) Some of the income accrues to the owners and managers of the business, and (2) some of the income is redirected to the consumers of the business’s products or services in the form of lower prices Therefore, the government can recapture the wages from the automated job with some combination of two types of taxes First, higher business taxes, capital gains taxes and more progressive income... improvement and little hope for the future It tends to result in a permanent underclass, and it certainly does not create the type of viable consumers that we need to power the economy of the future The Power of Inequality The idea of incentives is closely tied to the concept of income inequality In this book, I have made the point that extreme income concentration and inequality will ultimately undermine the. .. reliable stream of income into the hands of consumers, and as we have seen, that is absolutely essential in order to create sustained demand for mass market products and services and therefore drive the economy If we can do that successfully, then the free market economy can continue to operate and generate broadbased prosperity indefinitely Some people might object to the idea of incorporating environmental... system motivate individuals to do what is best for themselves and for society as a whole Where the Free Market Fails: Externalities While there is little question that the free market offers the best overall efficiency of any known economic system, it is nonetheless an imperfect system Perhaps the biggest shortcoming of the free market economy is in the area of externalities An externality is a cost (or... is professional journalism The framers of the U.S constitution recognized that the scrutiny of government provided by a free press was essential to freedom, and they acted to ensure that the press was protected from government tyranny The framers could not have anticipated, however, that it would ultimately be the Internet, rather than government, that would be the primary threat to the existence of. .. automation progresses, the portion of the unit cost allocated to wages falls to $10 Notice, however, that the “other costs” category also falls This represents the cost benefits of advancing technology, which are distinct from the elimination of wages The goal should be to impose a tax that recaptures the lost wages, without also capturing the additional non-wage related benefits of innovation In this... entrepreneurial skills and knowledge to participate actively in driving technological advancement and economic growth These individuals will require a high degree of education and training By emphasizing the idea of education for everyone, we will maximize the number of such individuals that will become available and, therefore, improve the prospects for continued advancement and prosperity Copyrighted... also either have to apply to services as well as tangible products, or service providers would need to be subject to a direct wage recapture tax.* The ideas I am presenting here, of course, represent only a basic framework The details and the tradeoffs between various types and levels of taxation would need to be worked out using extensive analysis and probably through computer simulation of the economy. .. products and services and creates entirely new and very lucrative markets Consider the case of a fully automated factory As technology progresses, the factory will continue to become even more efficient and produce products at lower prices, even though all the jobs have already been eliminated The taxes I have proposed are intended only to recapture the wages from jobs that have been automated away In other... raise legitimate fairness and discrimination concerns Another possibility would be to create incentives for healthy behaviors, but this would be difficult to track and verify In general, health-based incentives would require the government to have access to and track a lot of very personal information, and this would likely raise privacy concerns and the specter of Big Brother For these reasons, I have . redi- rectedintwoways:(1)Some of the incomeaccruesto the owners and managers of the business, and (2)some of the income is redirected to the consumers of the business’s productsorservicesin the form of lowerprices. Therefore,. a primaryproblemwithcurrentwelfareprograms.Welfare, asitiscurrentlyimplemented,providesfewincentivesfor selfimprovement and littlehopefor the future. Ittendsto resultinapermanentunderclass, and itcertainlydoesnot create the type of viableconsumersthatweneedtopower the economy of the future.  The. Amazon tomationadvancesin the comingyears and decades.To- wardthatend,let’sbeginbylookingat the basicelements of ourexistingfreemarket economy.  The Basis of the Free Market Economy: Incentives The freemarket economy isanaturalsystemthatpushes consumers,