Jun 8, 2017 - Economy

Automation leads to globalization and inequality

Since Donald Trump was elected and before, economists and politicians have debated whether disaffected Rust Belt communities are struggling because of the impact of automation, globalization, or foreign trade. Which is the culprit?

None of them by itself, according to new research by economists Laura Tyson and Michael Spence. They argue that automation, trade and globalization are part of the same, sometimes brutal cycle: Automation first allows companies to contain and cut employee counts, and goes on to trigger a "turbo-charged" reverberation around the world.

Why it matters: If Tyson and Spence are right, the policy answer to rising income inequality and popular disaffection is more complicated than simply attacking robots or globalization. It's been the interplay of these forces that's in part driven a steady decline in labor costs as a share of company profits over the past generation or two.

Data: University of Groningen and University of California, Davis, Retrieved from FRED; Chart: Andrew Witherspoon / Axios

Automation, Tyson writes, leads to "turbo-charged globalization by enabling companies to source, monitor, and coordinate production processes at far-flung locations quickly and cheaply, in order to take advantage of lower labor costs."

What to do about it: Tyson suggests:

  • Spend more money on training and education programs;
  • Beef up "income support programs," like the earned-income tax credit and wage insurance. Under the logic that globalization's winners should compensate the losers, such programs would subsidize workers who lose high-paying jobs and are forced to accept lower-wage work, .
  • Lifetime loans for retraining, which workers can tap and only pay back in line with income.
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