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Wednesday, July 06, 2011

Rogoff: Technology and Inequality

In this column, I said:

... I’ve never favored redistributive policies, except to correct distortions in the distribution of income resulting from market failure, political power, bequests and other impediments to fair competition and equal opportunity. I’ve always believed that the best approach is to level the playing field so that everyone has an equal chance. ...
But increasingly I am of the view that even if we could level the domestic playing field, it still won’t solve our wage stagnation and inequality problems. Redistribution of income appears to be the only answer. ...
We’ve given the market economy 40 years to solve the problem of growing inequality, and the result has been even more inequality. Markets do not appear to be able to solve this problem on their own, at least not in any reasonable timeframe. Some people say education is the answer, but we have been trying to reform education for decades, yet the problems remain. The idea that a fix for education is just around the corner is wishful thinking. ...

However, Kenneth Rogoff disagrees: (those ideas are apparently "foolish" and "dangerous")

Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. ...
There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role. Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents. ...
My Harvard colleague Kenneth Froot and I once studied the relative price movements of a number of goods over a 700-year period. To our surprise, we found that the relative prices of grains, metals, and many other basic goods tended to revert to a central mean tendency over sufficiently long periods. We conjectured that even though random discoveries, weather events, and technologies might dramatically shift relative values for certain periods, the resulting price differentials would create incentives for innovators to concentrate more attention on goods whose prices had risen dramatically.
Of course, people are not goods, but the same principles apply. As skilled labor becomes increasingly expensive relative to unskilled labor, firms and businesses have a greater incentive to find ... substitutes for high-price inputs. ...
The next generation of technological advances could also promote greater income equality by leveling the playing field in education. ... Surely, higher education will eventually be hit by the same kind of sweeping wave of technology that has flattened the automobile and media industries, among others. If the commoditization of education eventually extends to at least lower-level college courses, the impact on income inequality could be profound.
Many commentators seem to believe that the growing gap between rich and poor is an inevitable byproduct of increasing globalization and technology. In their view, governments will need to intervene radically in markets to restore social balance.
I disagree..., the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends.

It seems to me that "the single biggest threat to social stability around the world" poses asymmetric risks. If he's right, then things might improve "in the coming decades." That doesn't help anyone today, and that's a problem, but at least it eventually goes away. But what if he's wrong?

I'm still really uncomfortable calling for government intervention for reasons beyond those listed above -- I don't think I've fully convinced myself even yet -- but with the "threat to social stability" hanging over us, do we have the time to wait and see if the problem fixes itself?

    Posted by on Wednesday, July 6, 2011 at 05:04 PM in Economics, Income Distribution, Technology, Universities | Permalink  Comments (57)


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