Eduardo Porter

These are the least of our worries. Reshaping the workforce, and distorting patterns of saving and investment, the aging of the U.S. population is carving an unexpectedly broad path of destruction across the economy.

It explains a lot about what’s wrong. Aging, according to recent economic research, is stunting the emergence of new businesses and sapping productivity. It is contributing to the rise in monopoly power and eating into workers’ share of national income. Many of our most intractable economic ills can be traced to some degree to this ineluctable fact: The United States is getting old.

Consider the bluntest measure of progress: economic growth. Comparing growth across U.S. states that are aging at different speeds, researchers from Harvard’s Medical School and the RAND Corp. concluded that a 10% increase in the share of the population older than 60 reduced the growth rate of per capita gross domestic product by 5.5%. They projected that aging would shave no less than 1.2 percentage points off annual economic growth this decade.

Part of this is because of a shrinking labor supply. As baby boomers move into retirement, leaving the workforce to the smaller cohorts behind them, the share of Americans who are working is shrinking, while the share of the elderly who depend on the fruits of their work is rising. By 2030, only 59% of Americans older than 16 will be in the labor force. That’s 3 percentage points less than in 2015.

As the share of the population at work shrinks, it stands to reason that economic growth per person will slow, too — a smaller proportion of Americans are engaged in income-generating work. But two-thirds of the growth shortfall comes from slowing labor-productivity growth.

It’s not obvious why the change in composition of workers (more workers in their 50s and 60s, fewer in their 20s and 30s) slows down innovation. It might be that older workers have a harder time learning new skills, so businesses with an older workforce could be less likely to deploy new tech.

Whatever the precise cause, the slowdown shows up in the data. Mark Zandi and colleagues at Moody’s Analytics concluded that aging during the past 15 years reduced productivity in the United States by 0.25% to 0.7% per year.

Other researchers suggest that an older, smaller labor force can also account for the sluggish rate of business startups. About half of U.S. companies are at least 11 years old, up from less than one-third in the late 1980s. For all the hype about Silicon Valley’s explosive entrepreneurship, there are fewer young companies entering the marketplace now than there were a generation ago. Hugo Hopenhayn of the University of California, Los Angeles, and colleagues argue that this is caused in large part by a declining labor supply.

As big, old companies come to dominate the marketplace, their increasing market power could mute their incentive to innovate. Hopenhayn and others have found that larger firms share less of their revenues with their workers, trimming workers’ share of national income.

The declining supply of workers might not even be the most intense headwind unleashed by our aging population. The most worrying feature of our time, instead, could be older workers’ high rate of savings and low rate of spending, as they build nest eggs to support themselves through what is likely to be a long retirement. During the past 20 years or so, this thriftiness has helped push interest rates — the price of money — down to near zero, making it hard for the Federal Reserve to cut rates further to stimulate the economy when needed.

More immigration might help address some of the shortcomings of our aging labor force. Yet in the current political environment, the odds that the United States will open the door to more foreign workers look, to put it mildly, slim.

Tax breaks, child subsidies, paid leave and other regulations have had some modest success in increasing fertility rates in countries like France, Canada and Sweden. But there is scant evidence that policy could slow aging significantly by encouraging Americans to have more children.

One great paradox of this predicament is that robots could help address some of these problems, replacing workers that age out of their productive lives.

It might seem counterintuitive to hope for more robots, given their track record of knocking workers without a college education from the middle-income jobs that once supported a middle class. But it would be different if workers were retiring anyway.

In a study of several advanced economies from 1990-2015, economists Daron Acemoglu and Pascual Restrepo found that aging was actually associated with rising living standards. As workers became scarce, businesses invested in automation to replace them, as well as in other new technologies, all of which raised productivity and incomes.

We may end up with too few robots rather than too many. Even the most aggressive projections of future automation, Acemoglu and Restrepo estimate, will not fill the hole that retiring Americans are projected to leave in the workforce. That could be a problem: For all the misgivings about a world in which machines perform most of the work once done by humans, how else can we afford to get old?

Americans are used to hearing dire warnings about aging. We are told it could bankrupt the social safety net as Medicare and Social Security run out of money. We are regularly admonished about the inadequacy of our nest eggs.

Help Wanted: Robots

When Bill Gates floated the idea of imposing a tax on robots a couple of years ago, Lawrence Summers, a former top economic adviser to President Barack Obama, called the Microsoft co-founder “profoundly misguided.”

How do you even define a robot to tax it? And taxing innovation is a sure way to make a country poorer.

Europe has also rejected the idea. In 2017 the European Parliament soundly defeated a draft motion, proposed by its committee on legal affairs, that recommended considering a tax on the owners of robots to fund retraining programs for workers displaced by the machines and shore up the finances of their social security system.

And yet properly constructed, a tax on automation may not be as destructive as it sounds. South Korea, the most robotized country in the world, instituted a robot tax of sorts in 2018 when it reduced the tax deduction on business investments in automation.

There are two sound arguments for taxing robots. The easiest is this: Governments need the money. In the United States, income taxes account for half of the $3 trillion collected every year by the Internal Revenue Service; payroll taxes account for another third.

Imagine that the fears about robots taking over jobs actually come true. Two years ago, the McKinsey Global Institute found that the job functions that are “most susceptible to automation” in the United States account for 51 percent of the activities in the economy and $2.7 trillion worth of wages.

The institute estimates “half of today’s work activities could be automated by 2055.” If that happens, hundreds of billions of tax dollars would be lost every year.

And at the same time that the rise of robots shrinks government tax revenue, the fallout from automation will place more demands on government services. The United States will probably need more money to retrain workers bumped from their jobs by automation, to give them a shot at a new one. Welfare rolls could grow, as millions of workers are displaced to the bottom end of the service economy, where wages are low and robots are scarce.

To afford any kind of government services in the robot era, governments will have to find something else to tax. Why not the robots themselves?

The case for taxing robots is stronger when you consider that a lot of automation these days is not deployed to enhance economic productivity. Instead, many businesses are investing in automation simply because the tax code is urging them to do so.

The purpose of taxing robots is not simply to stop them from killing jobs. It is to level the playing field, to ensure that investments in automation raise productivity.

“The tax system incentivizes automation even in cases where it is not otherwise efficient,” wrote Ryan Abbott and Bret Bogenschneider of the University of Surrey School of Law in Britain, in an analysis of tax policy toward automation in the United States and other rich countries. “The vast majority of tax revenues are now derived from labor income, so firms avoid taxes by eliminating employees.”

Daron Acemoglu, an economist at the Massachusetts Institute of Technology, explains that automation often produces benefits of dubious value to the business itself. More important, he suggests that the investment in technologies designed to replace workers has come at the expense of alternative investments that might find more productive uses for human labor. This may help explain the sluggishness in overall productivity growth across the economy.

One powerful reason that businesses deploy so many robots, despite their sometimes questionable contribution to the bottom line, is that automation is subsidized. “Subsidies induce firms to substitute capital for labor even when this is not socially cost-saving, though it is privately beneficial because of the subsidy,” Acemoglu and his co-author, Pascual Restrepo, wrote.

The tax subsidies to robots are varied. For starters, machines don’t incur payroll taxes, which are used to fund Social Security and Medicare. For every worker replaced by a robot, the employer saves on payroll taxes.

The federal tax code and many state governments allow companies to use “accelerated depreciation” for capital investments, which allows them to deduct the cost of their robots faster than they could deduct the wage of the payroll of the workers they replace.

This means that eliminating the tax break for robots would not hurt economic growth. It would, in fact, improve economic efficiency. By subsidizing capital investment, the government is encouraging businesses to use capital when they otherwise would not, to replace workers with machines.

That might be rational for the individual business reaping the tax benefits. But as Acemoglu put it, across the economy, this kind of spending on automation “shows up as a productivity loss.”

What’s more, curbing businesses’ pumped-up enthusiasm for robots might help mitigate the broader social costs of automation, which has flushed so many workers into unproductive occupations where cheap labor still holds an edge and knocked many more out of the labor force entirely.

What is the best way to change the tax incentives for robots? One solution would be to disallow accelerated depreciation for investments in automation. Abbott and Bogenschneider propose that businesses with high levels of worker automation could have their tax depreciation automatically reduced beyond a certain threshold.

Businesses that use robots to replace workers could also be required to cover the payroll taxes of workers knocked out by automation, as proposed by technology analyst William Meisel. A tax calibrated according to the ratio of a company’s profit to its employee compensation could match the wage taxes avoided by automation. Companies deploying robots could also be required to pay some kind of fee, just as employers that lay off workers must subsequently pay more into the unemployment insurance system.

In practice, taxing automation is likely to be difficult. Taxing robots would, first of all, require defining what robots are. Would a robot tax also apply to, say, machine tools? Regardless of where we drew the line, a robot tax could distort investment decisions in other ways.

Nonetheless, there is a wide gap between the way that the tax code treats human labor and the way it treats automation. The hole could be filled by reducing tax subsidies on capital investment altogether. Taxes on labor could also be reduced.

We may not want to tax innovation, but there is no reason to subsidize investments that are designed merely to take away jobs. At the very least, a tax on robots would force businesses to think harder about when and where to deploy them.

This article originally appeared in <a href="https://www.nytimes.com/2019/02/22/sunday-review/tax-artificial-intelligence.html" id="e33a95d7-4f36-3520-a034-820515e1b546">The New York Times</a>.

(Sunday Review) ; (News Analysis)

Don't Fight the Robots. Tax Them.

There are 60 million people, almost 1 in 5 Americans, living on farms, in hamlets and in small towns across the landscape. For the last quarter century the story of these places has been one of relentless economic decline.

This is, of course, not news to the people who live in rural and small-town America, who have been fighting for years to reverse this decline. But now, the nation’s political class is finally noticing. The election of President Donald Trump, powered in no small degree by rural voters, has brought the troubles of small-town America to national attention, with an urgent question: What can be done to revive it?

Rural America is getting old. The median age is 43, seven years older than that of city dwellers. Its productivity, defined as output per worker, is lower than urban America’s. Its families have lower incomes. And its share of the population is shrinking: The United States has grown by 75 million people since 1990, but this has mostly occurred in cities and suburbs. Rural areas have lost some 3 million people. Since the 1990s, problems such as crime and opioid abuse, once associated with urban areas, are increasingly rural phenomena.

Rural communities once captured a greater share of the nation’s prosperity. During the economic recovery of 1992 to 1996, 135,000 new businesses were started in small counties, a third of the nation’s total. Employment in small counties shot up by 2.5 million, or 16 percent, twice the pace experienced in counties with million-plus populations.

These days, economic growth bypasses rural economies. In the first four years of the recovery after the 2008 recession, counties with fewer than 100,000 people lost 17,500 businesses, according to the Economic Innovation Group. By contrast, counties with more than 1 million residents added, altogether, 99,000 firms.

The Economic Innovation Group measures “distress” as a combination of data ranging from joblessness and poverty to abandoned homes and educational attainment. Since the 1990s, there has been an “intensifying ruralization of distress,” said John Lettieri, the group’s president.

I’ve lived most of my life in big cities. I don’t pretend to understand what it’s like to live in a small town or on a family farm, or how it feels when all the jobs in a community seem to be fading away. I do spend a lot of time thinking about how the economic changes of the last several decades have undercut many American workers. One thing seems clear to me: Nobody — not experts or policymakers or people in these communities — seems to know quite how to pick rural America up.

States, municipalities and the federal government have spent billions to draw jobs and prosperity to stagnant rural areas. But they haven’t yet figured out how to hitch this vast segment of the country to the tech-heavy economy that is flourishing in America’s cities.

There are 1,888 counties in America in which more than half the population is rural, according to the Census Bureau, and they stretch from coast to coast. In Comanche County, a land of cattle, farming, oil and gas on the plains of southwestern Kansas, 1,790 people live in an area of nearly 800 square miles. In Perry County — home to some 26,500 people in Eastern Kentucky — no other industry has replaced once-mighty coal. Essex County in New York’s Adirondacks is three-quarters rural. So is Calaveras County in California.

After World War II, small town prosperity relied on its contribution to the industrial economy. The census considers Price County, Wisconsin, to be 100 percent rural. Still, over a third of the jobs there are in manufacturing, from building industrial machines to assembling trucks. Auto parts manufacturers in West Point, Georgia, draw workers from all over Troup County. Manufacturing employs about 1 in 8 workers in the country’s 704 entirely rural counties. That’s more than agriculture, forestry, fishing and mining combined, and second only to education, health care and social assistance, which includes teachers, doctors, nurses and social service counselors.

But factory jobs can no longer keep small-town America afloat. Even after a robust eight-year growth spell, there are fewer than 13 million workers in manufacturing across the entire economy. Robots and workers in China put together most of the manufactured goods that Americans buy. The high-tech industries powering the economy today don’t need cheap labor. They need highly educated workers. They find those most easily in big cities, not in small towns.

Consider Lake County, in Tennessee. Some 7,500 people live there, about 500 fewer than in 2000. Lake County is betting on a new industrial park on Cates Landing on the Mississippi River. But it will be tough to reverse years of declining employment. Between 2013 and 2017, the county averaged fewer than 250 manufacturing jobs, half as many as in 2000.

What to do? Since the presidential election in 2016, when small town voters enthusiastically endorsed the populist campaign of Trump, policymakers and academics have thrown themselves at understanding the economic backdrop to their frustrations. They have come up with no shortage of proposals for turning rural America around, from offering tax credits to employers that hire workers in distressed communities to designing investment funds to draw venture capital into rural areas.

In a report published in November, Mark Muro, William Galston and Clara Hendrickson of the Brookings Institution identify critical shortages bedeviling declining communities, and they have plans to address them: Information technology training and education initiatives, regulatory changes to expand lending to small businesses, incentives to invest in broadband.

Wisely, they suggest that any federal government effort must choose its targets carefully. Better to focus on middle-sized towns that are near big tech hubs and have some critical infrastructure, rather than scatter assistance all over.

Sound as these ideas may be, even the authors concede that they may not be up to the task. “I don’t know if these ideas are going to work,” Galston acknowledged when I pressed him on the issue. “But it is worth making the effort.”

This is the inescapable reality of agglomeration, one of the most powerful forces shaping the U.S. economy over the last three decades. Innovative companies choose to locate where other successful, innovative companies are. That’s where they can find lots of highly skilled workers. The more densely packed these pools of talent are, the more workers can learn from one other and the more productive they become. This dynamic feeds on itself, drawing more high-tech firms and highly skilled workers to where they already are.

“We have a spatial reorganization of the economy,” said Muro. “We have an archipelago of superstars in an ocean of low-productivity sectors.”

In hindsight, no amount of tax incentives would have persuaded Amazon to expand in a medium-sized city such as Columbus, Ohio, rather than Northern Virginia and New York City, which sit in some of the largest pools of talent in the country. If even medium-sized cities find it difficult to compete, what are the odds that, say, a small town like Amory, Mississippi, where 14 percent of adults have a bachelor’s degree and a quarter of its 2,500 workers work in small-scale manufacturing, have a chance to attract well-paid tech jobs?

Consider a recent Brookings Institution study by Benjamin Austin, Edward Glaeser and Lawrence Summers. They focus on the alarming rate of joblessness in the region roughly between the Mississippi River and the states on the Atlantic coast, where rural communities are doing particularly poorly.

They conclude that a targeted employment subsidy, such as the earned-income tax credit, is probably the most powerful tool available to revive employment. But they, too, are not sure it will work. “Our call for a wage subsidy is us saying, ‘We can’t figure this out, and we hope the private sector will,'” Glaeser said.

There are, to be sure, some rural communities with productivity as high as some big cities. But they rely on heavily mechanized and automated industries that support few jobs: oil extraction or large-scale agriculture, in which tractors talk to satellites and no drivers are involved. The livestock business on the vast pastures of Sioux County, Nebraska, for example, supports an economy worth $306,000 per worker, according to data from Muro and Jacob Whiton of Brookings. But only 1,200 people live there.

Excluding these places, the United States is still left with 50 million to 55 million people living in rural communities that no longer have much to offer them economically.

What if there is no solution? Is there really no option but to do nothing and, as some have suggested, return depopulated parts of rural America to the bison?

Instead of place-based policies to revitalize small towns, why not help their residents take advantage of opportunities where the opportunities are? Geographic mobility hit a historical low in 2017, when only 11 percent of Americans picked up shop and moved — half the rate of 1951. One of the key reasons is that housing has become too expensive in the prosperous cities that offer the most opportunities.

The most helpful policy for people in small towns could be to relax zoning rules in dense cities like New York and San Francisco, so that more affordable housing could be built to receive newcomers, and they wouldn’t need the income of an investment banker or a computer scientist to afford to live there.

Policymakers might not want to push too hard against agglomeration. It adds to American prosperity. As Enrico Moretti of the University of California, Berkeley, points out, a successful strategy to draw innovative firms away from mega-clusters to small-town America would reduce overall innovation. “If you put a tech company in a place like rural Indiana, it will be vastly less productive than if you put it in a tech cluster,” Moretti said. “The effect is quite large.”

Still, there are compelling reasons to try to help rural economies rebound. Many people — especially older people and the family members who care for them — choose to remain in rural areas. What’s more, the costs of rural poverty are looming over American society. Think of opioid addiction, of the spike in crime, of the wasted human resources in places where only a third of adults hold a job.

And if today’s polarized politics are noxious, what might they look like in a country perpetually divided between diverse, prosperous liberal cities and a largely white rural America in decline? As Galston warned: “Think through the political consequences of saying to a substantial portion of Americans, which is even more substantial in political terms, ‘We think you’re toast.'”

The distress of 50 million Americans should concern everyone. Powerful economic forces are arrayed against rural America and, so far, efforts to turn it around have failed. Not every small town can be a tech hub, nor should it be. But that can’t be the only answer.

This article originally appeared in <a href="https://www.nytimes.com/2018/12/13/sunday-review/jobs-rural-america-economy.html" id="a5146bb0-8005-323d-a86f-ed1185966e69">The New York Times</a>.

Abandoned America: The Hard Truths of Trying to 'Save' the Rural Economy

(Sunday Review: News Analysis)

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Eduardo Porter

Articles written by the author

Help Wanted: Robots

Don't Fight the Robots. Tax Them.

Abandoned America: The Hard Truths of Trying to 'Save' the Rural Economy