The Future of Inequality according to Larry Summers

At a recent talk at Berkeley, Larry Summers asked us to engage in the following thought experiment.

Suppose that a new technology called “the Doer” will be created tomorrow. Doers can do anything flawlessly. They can build a house, give a massage, or make a guitar. What would the world of Doers look like?

1. Cheaper, high quality goods would proliferate.
2. The price of raw materials would increase as raw inputs for doers would become more scarce and thus more valuable
3. People who can think of new things for Doers to do or of new ways for Doers to do things will make a lot of money
4. For everyone else, the value of working for an hour will be nearly zero (since Doers can do everything already, no extra value is created). Therefore, hourly wages will go to zero.

Citing 3D printers and Google’s driverless cars, Summers argued that while we aren’t quite living in the world of Doers, we are perhaps 15 or 20% of the way there.

While his account likely overstates the role of skill-based technological change in increasing inequality (since it ignores institutional and tax policy changes for instance),  the Doer thought experiment provides a very compelling and stark framework in which we can think about the future of inequality.

For me, the trillion dollar question is what should policymakers do in the world of Doers?

A trillion dollar question merits a better answer and much more thought that this, but my initial approach would involve the following 3 things:

• Human Capital: Invest in education to make as many workers fall into category #3 rather than category #4*
• Social Insurance: Maintain and enhance the safety net in the US because regardless of how hard workers try to find work, category #4 will have a very hard time making due.
• Progressive Tax Policy: redistributive taxation will becoming increasingly important.

*In the words of Katz and Goldin, we should make sure education is outpacing technology.