The Lights in the Tunnel Automation Accelerating Technology and the Economy of the Future_6 pdf

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workforce,lostnearlytwomilliontextilejobstoimprov-
ingautomationtechnologybetween1995and2002.
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
It is easy to imagine factories of the future that are
almostentirelyautomatedandrunbyafewskilledtechni-
cians.Aslaborcostsfall,wecanexpectthatenergycosts
willberising.Nearlyallanalystsagreethatworldoilpro-
ductionwillpeakatsome pointinthecomingyearsand
decades.Beyondthispoint,intheabsenceofreplacement
energytechnologies,thecostoffossilfuelsislikelytorise
inexorably.Giventhis,wecanreasonablyexpectthatthe
primaryincentivesforlocatingthefactoriesofthefuture
will shift away from seeking lowlabor costs and toward
minimizingenergycosts.
Oneofthemostsignificantdriversofenergyexpend-
itureis,ofcourse,transportation.EconomistsJeffRubin
andBenjaminTalhavesuggestedthatsoaringtransporta-
tioncostsresultingfromhighenergypricesalonemaybe
sufficient to reverse globalization. They point out that
once oil reaches a price of $150/barrel, the additional
transportationcostsareessentiallyequivalenttothetariffs
thatexistedinthe1970s.
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
Inaworldwithautomatedfactoriesandhighenergy
costs, there will be clear incentives toward distributed
manufacturing. It will make sense to locate factories as

close as possibleto consumers and/or to the natural re-
sourcesusedasinputsintheproductionprocess.Aprima-
rymotivationinlocatingfactorieswillbetominimizethe
transportation costs associated with moving both inputs
andfinalproducts.Itisalsopossiblethatadvancingauto-
mationtechnologymayultimatelytransformthetradition-
Danger / 127

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aleconomyofscalemodelsothatmuchsmallerandmore
flexible factories located in direct proximity to markets
makesense.
Asidefrom energycosts, asecondcrucialconsidera-
tionwillbepoliticalstability.Theforcesunleashedbyac-
celeratingtechnologyarelikelytohaveahighlydisruptive
impactongovernmentsthroughouttheworld.Businesses
willplaceincreasingimportanceonminimizinginvestment
risk: they will seek to build factories and hold capital in
countriestheyperceiveasstable.Inthefuture,thosena-
tionswhichcanadapttochangesoastocontinuetosup-
portsustainedconsumption,maintainstabilityandruleof
law,andprovidereliableaccesstoenergy,aswellaseffi-
cient,energy-minimizingtransportationsystems,arelikely
to have a significant competitive advantage in terms of
attractingandretaininginvestment.
India and Offshoring
We’venotedthat Chinadoesnot yet haveanintegrated,
self-sustaining modern economy. This is equally true of
India.Indiaisessentiallyanimpoverished,developingna-
tionwithagovernmentthatisdemocratic,butalsooften

mired in bureaucracy. In the midst of this, India has an
isolated island of enormous growth and prosperity: its
softwareandoffshoringindustries.
Indiawillface exactlythe sametwo retardingforces
that are going to hold back China: First, automation is
goingtoinvadeitsoffshoringbusinesses(aswellasitstra-
ditionalindustries)andtakebackmanyofthosejobs.We
are likely to see “jobless repatriation” as technology ad-
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vances to the point where many lower-skill jobs can be
performedbycomputertechnology.
Indiancompanieswillprobablyrespondbytryingto
outrunautomation.Theywillseektoincreasinglycapture
highervaluejobsperformedbyhighlyeducatedandpaid
workersinWesterncountries.Aswehaveseen,however,
evenmanyhighskilljobswillultimatelybesubjecttoau-
tomation.Andanysuccessincapturinghighervaluejobs
willonlyexacerbatethesecondproblem,whichwillbethe
collapseindemandthatresultsfromfearofjoblossinthe
West.
Economic and National Security Implications
for the United States
WhatwouldallthismeanfortheUnitedStates?Thean-
swer to that depends entirely on how well the U.S. can
adapttothenewreality.Theconventionalviewsallpoint
toadeclineinglobalinfluenceandpowerfortheUnited
States.Thecatchphrasesforthecomingdecadeswillbe
“thepost-Americanera”and“theendofAmericanexcep-

tionalism.”
Onceagain,though,thoseconventionalviewsareall
basedlargelyondemographics—oncountingworkers.Amer-
icaisexpectedtodeclinebecausecountrieslikeChinaand
Indiahavedramaticallymoreworkers—andtheyarewill-
ingtoworkforless.Whatif,inthefuture,workersarenot
goingtobeasimportantasweimagine?Whatifmachines
advancetothepoint whereworkersbecomeincreasingly
superfluoustotheproductionprocess?Inthatscenario,it
Danger / 129

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isallabout whocontrolstechnology. Andasofthemo-
ment,thatcontinuestolargelybetheUnitedStates.
Inthatsense,thefuturefortheU.S.couldpotentially
bemuchbrighterthantheconventionalwisdomsuggests.
Butthatisonlyifwecanadapt,andthatwillbeaveryse-
riouschallenge.TheUnitedStatesisfundamentallyacon-
servativecountry. Theriskisveryhighthatwewill con-
tinuetoclingtoourexistingsystemsimplybecauseithas
alwaysworkedinthepast.Ifthathappens,agreatoppor-
tunitywillbelost,andothercountriesmaywellseizethe
initiative.
Ifthatopportunityisindeed lost,itwillclearlyhave
dire national security and military implications for the
United States.The obviousreality is thatAmerica’smili-
tarypowerisentirelydependentonitseconomicvitality.If
the trends projected here areallowed toimpact theU.S.
economyin anuncontrolledfashion,thelikelyresult will
begreatlydiminishedeconomicgrowth(orevensustained

decline) and widespread unemployment and social prob-
lems. This will clearly detract from the resourcesand at-
tentionthatcanbeallocatedtonationalsecurity.
Inthepreviouschapter,Isuggestedthattheremayal-
so be a trend away from college education and toward
tradejobsthatareperceivedasbeingsaferfromautoma-
tionandoffshoring.Thisimpactmayfallespeciallyheavily
on technical fields such as information technology and
computerengineeringbecausejobsintheseareasareper-
ceivedasbeingespeciallysusceptibletooffshoring.Clear-
ly, this will threaten the United States’ future leadership
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position in technology—and therefore its long-term na-
tionalsecurity.
Aswesawpreviously,thePentagonenvisionsafuture
inwhichtechnologiessuchasroboticsandartificialintelli-
gencearedeployedincreasinglyonthebattlefield.There-
alityisthatitisimpossibletosayexactlywhichtechnolo-
gieswillhaveimportantmilitaryandnationalsecurityap-
plicationsinthefuture.Thegeneralaccelerationofcom-
puterinformationtechnology iscertain to haveadisrup-
tiveimpactwithhighlyunpredictableresults.Wecanex-
pect that future technologies that emerge in commercial
settingswillrapidlyberedirectedintothemilitaryarena.It
iscrucial, therefore,thattheU.S.remains competitivein
virtuallyallareasoftechnologydevelopment.
Whileadvancingtechnologyseemslikelytoultimately
eliminatejobopportunitiesforalargenumberofaverage

people,maintainingcontrolofthattechnologywillrequire
thattheminorityofindividualswiththecapabilitytomake
significantcontributionstotechnicalfieldscontinuetobe
educatedandtrained.Thesepeoplecomefromavarietyof
backgroundsthroughoutsociety,andtherefore,thedisin-
tegration of broad-based incentives to pursue a college
education—especiallyinscientificandtechnicalfields—is
likely to be disastrous for the United States in the long
run.
Danger / 131

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Solutions
Nowthatwe’veidentified the dangerwe mightfaceand
someofthepossibleimplicationsforthefuture,let’sstart
thinkingaboutsomepossiblesolutions.Whatcouldwedo
toavoidthescaryeconomicscenariowediscussedatthe
beginning of this chapter? In order to answer that, let’s
startbylookingatthe ideaoflaborandcapitalintensive
industries.
Labor and Capital Intensive Industries: The
Tipping Point
We can place any industry somewhere on the spectrum
that runs from being extremely labor intensive to being
highlycapitalintensive.Inourcurrenteconomy,someof
themostlaborintensiveindustriesareintheretail,hospi-
talityandsmallbusinesssectors.Supermarkets,retailchain
stores,restaurantsandhotelsallhavetohirelotsofwork-
ers. Capital intensive industries, on the other hand, hire
relatively few workers and instead require investment in

technology:inadvancedmachineryandequipmentandin
computerizedsystems.Hightechindustriessuchassemi-
conductor manufacturing, biotechnology and Internet-
basedcompaniesareallcapitalintensive.
Over time, as technology advances, most industries
become more capital intensive and less labor intensive.
Technologyalsocreatesentirelynewindustries,andthese
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arenearlyalwayscapitalintensive.
*
Thishasbeengoingon
forcenturies,andhistorically,ithasbeenagoodthing.If
youcomparetheindustriesinadevelopednationlikethe
United States withtheindustries in a third-world nation,
youwillinvariablyfindthattheU.S.economyisfarmore
capitalintensive.Ithasbeentheintroductionofadvanced
technology that has increased productivity and made the
advancednationsoftheworldrich.
Thereasonforthisgoesbacktotheeconomists’ex-
planationforthe“Ludditefallacy”whichwediscussedin
the previous chapter. As new technology is adopted by
industries,productionbecomesmoreefficient.Thisresults
insomelossofjobs,butitalsoresultsinlowerpricesfor
goodsandservices.Inotherwords,itputsmoremoneyin
consumers’ pockets. These consumers then go out and
buyallkindsof things, andsotheresultisincreasedde-
mandfortheproductsproducedbyalltypesofindustries.
Some of these industries are very labor intensive, so as

theystrivetomeetthisincreaseddemand,theyareforced
to hire more workers. And so, overall employment re-
mainsstableorevenincreases.Sometimes,ofcourse,this
resultsinanunpleasanttransitionforsomeworkers:they
mayloseahighpayingmanufacturingjobandendupwith
alowerpayingretailjob.


*
Considerthecase ofYouTube,whichwasacquiredbyGooglefor
about$1.65billionin2006.Atthetimeitwasacquired,YouTubehad
onlyabout60employees.That’savaluationofover$27millionper
employee.Comparethatwithabout$100,000peremployeeforWal-
Mart.
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Laborv.CapitalIntensiveIndustries
44

Company Employees Revenue
per Employee

McDonalds 400,000 $59,000
Wal-Mart 2,100,000 $180,000
Intel 83,000 $456,000
Microsoft 91,000 $664,000
Google 20,000 $1,081,000
Canthisprocesscontinueforever?Aswesawinthe
previous chapter, automation technology is likely to in-

creasinglyinvadetheremaininglaborintensivesectorsof
theeconomy.Whenthishappens,whatindustrieswillbe
lefttoabsorballthedislocatedworkers?Lookatthetable
above. What happens when McDonalds begins to look
morelikeGoogle?
Asimpleapplicationofcommonsenseshouldshow
usthatthereissomethresholdbeyondwhichtheoverall
economy will become too capital intensive. Once this hap-
pens,lowerpricesresultingfromimprovedtechnologywill
no longer result in increased employment. Beyond this
thresholdortippingpoint,theindustriesthatmakeupour
economy will no longer be forced to hire enough new
workerstomakeupforthejoblossesresultingfromau-
tomation;theywillinsteadbeabletomeetanyincreasein
demandprimarilybyinvestinginmoretechnology.Aswe
sawinChapter2,thispointmarksthedownfallofecon-
omists’ faithin the Ludditefallacy,andit alsomarks the
beginning of adownwardeconomicspiralforthesimple
reasonthatworkersarealsotheconsumersofeverything
producedinoureconomy.
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Whatmightweexpecttohappeniftheoverallecon-
omy were approaching this tipping point, beyond which
industries would no longer be labor intensive enough to
absorb workers who lost their jobs to automation? We
would probablyexpect to see graduallyrising unemploy-
ment, stagnating wages and significant increases inprod-
uctivity(outputperhouroflabor)asindustrieswereable

toproducemoregoodsandserviceswithfewerworkers.
Thatsoundsuncomfortablyclosetowhatactuallyoc-
curredintheyearsleadinguptothecurrentrecession.
*
In
August,2003,TheEconomistwrotethat“theBureauofLa-
bour Statistics offered the latest evidence of America’s
productivityrevival:outputperworkersoaredby5.7%in
the second quarter, at an annualised rate. But in today’s
less exuberant times, the figure has raised the unhappy
prospect of growth without job creation.”
45
 Three years
later,inanarticleentitled“TheCaseoftheMissingJobs,”
BusinessWeeksaid:“Since2001,withtheaidofcomputers,
telecommunications advances, and ever more efficient
plant operations,U.S. manufacturing productivity, or the
amount of goods or services a worker produces in an
hour,hassoaredadizzying24%….Inshort:We’remaking
morestuffwithfewerpeople.”
46
Thereisnowaytoknow
for sure how close the economy might be to the point
whereoveralljobcreationwillpermanentlystall.However,
thesestatisticsarecertainlycauseforconcern.


*
AsInotedearlier,wedidnotseeanincreasingunemploymentratein
theyearsleadinguptothecurrentcrisis. Wedid,however,seestag-

natingwages,increasingproductivityandsomeevidenceofunderem-
ployment.
Danger / 135

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The Average Worker and the Average Machine
Anotherwaytoexpressthis ideaofa tipping pointisto
think of an average worker using an average machine
somewhereintheeconomy.Obviously,in therealworld
there are millions of workers using millions of different
machines.Overtime,ofcourse,thosemachineshavegot-
tenfarmoresophisticated.Imagineatypicalmachinethat
isgenerallyrepresentativeofallmachinesintheeconomy.
Atonetime,thatmachinemighthavebeenawaterwheel
driving a mill. Then it became something driven by a
steam engine. Later, an industrial machine powered by
electricity.Today,themachineisprobablycontrolledbya
computerorbyembeddedmicroprocessors.
As the average machine has gotten more sophisti-
cated, the wages of the worker operating that machine
haveincreased.
*
AsIpointedoutintheprevioussection,
moresophisticated machines also makeproductionmore
efficient and that results in lower prices and, therefore,
moremoneyleftinconsumers’pockets.Consumersthen
gooutandspendthatextramoney,andthatcreatesjobs
for more workers who are likewise operating machines
thatkeepgettingbetter.
Again, the question we have to ask is: Can this

processcontinueforever?Ithinktheanswerisno,andthe
veryunpleasantgraphonthenextpageillustratesthis.


*
The ideathatlong-term economicgrowthis,to alargeextent,the
resultof advancing technology was formalized by economist Robert
Solowin1956.Economistshavelotsofdifferenttheoriesabouthow
long-term growthand prosperitycomeabout,butnearlyall ofthem
agreethattechnologicalprogressplaysasignificantrole.
THE LIGHTS IN THE TUNNEL / 136

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Value Added (Wage) of Average Worker Operating Average Machine
Also: Overall Wealth of Society (GDP per capita will look similar)
















Theproblem,ofcourse,isthatmachinesaregoingto
getmoreautonomous.Youcanseethisinthegraphatthe
pointwherethedottedline(conventionalwisdom)andthe
solidline diverge. Asmoremachines begin to runthem-
selves, the value that the average worker adds begins to
decline.Rememberthatwearetalkinghereaboutaverage
workers.Togetthegraphabove,youmighttakethedis-
tributionofincomesintheUnitedStatesandthenelimi-
nateboththerichestandthepoorestpeople.Thengraph
theaverageincomeoftheremaining“typical”people(the
bulk of consumers) over time. If you were to instead
graph Gross Domestic Product (GDP) per capita, you
wouldendupwithasimilargraph,butthedivergencebe-
Time
Machines Becoming
Autonomous
Machines Fully
Autonomous
Conventional Wisdom
(Most economists
believe this)
Machines Getting
Better
Value
Danger / 137

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tween the dotted and the solid lines would occur some-
whatlater.Thisisbecausethewealthiestpeople(whoown
themachinesorhavehighskilllevels)wouldinitiallybene-

fitfromautomationandwoulddraguptheaverage.Recall
thatwesawthisinourtunnelsimulationinChapter1.
Once the lines diverge, things get very ugly. This is
because thebasicmechanismthatgetspurchasing power
intothehandsofconsumersisbreakingdown.Eventually,
unemployment,lowwages—andperhapsmostimportant-
ly—consumerpsychologywillcausea veryseveredown-
turn.Asthegraphshows,withinthecontextofourcur-
renteconomicrules,theideaofmachinesbeing“fullyau-
tonomous”isjustatheoreticalpointthatcouldneverac-
tuallybereached.
Some peoplemight feelthat Iam beingoverly sim-
plistic in equating “technological progress” with “ma-
chines getting better.” After all, technology is not just
physicalmachines;itisalsotechniques,processesanddis-
tributed knowledge.Thereality, however, is that the his-
toricaldistinctionbetweenmachinesandintellectualcapi-
talisblurring.Itisnowverydifficulttoseparateinnova-
tiveprocessesfromtheadvancinginformationtechnology
that nearlyalwaysenablesand underliesthem. Improved
inventory management systems and database marketing
areexamplesofinnovativetechniques,buttheyrelyheavi-
lyoncomputers.Infact,wecanconceivablythinkofnear-
lyanyprocessortechniqueas“software”—and,therefore,
partofamachine.
If you still have troubleaccepting this scenario, you
might try asking yourself a couple of questions: (1) Is it
THE LIGHTS IN THE TUNNEL / 138

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possiblefora machinetokeepgettingbetterforeverwith-
out eventually becoming autonomous? (2) Even if it is
possible,thenwouldn’tthemachinesomedaybecomeso
sophisticatedthatitsoperationwouldbebeyondtheabili-
ty of the vast majority of average people? And wouldn’t
thatleadrightbacktomakingthemachineautonomous?
Capital Intensive Industries are “Free Riders”
In Chapter 1, we used lights in a tunnel to simulate the
massmarket.Let’stryaslightlydifferentanalogynow.Im-
agine that themass market consists of a “river”of con-
sumerpurchasingpower.Alongthebanksofthisriverare
locatedindustriesofalltypes.
When anindustry sells a product or service to con-
sumersinthemarket,itpumpspurchasingpowerfromthe
river.Anindustryalsopumpspurchasingpowerbackinto
the river in two primary ways: first it pays salaries and
wagestoworkers,andsecondastechnologyadvances,the
pricesthattheindustrychargesfallandthisresultsinmore
moneyinconsumers’pockets.Aswehaveseen,however,
atsomepoint,theindustriesonthebanksofourriverwill
becometoo capital intensive(themachinestheyemploywill
begintorunthemselves).Oncethishappens,theywillcol-
lectivelybegintopumpmorepurchasingpowerfromthe
riverthantheyreturntoit.Theriverwillbegintorundry.
Inthecaseofareal-worldriver,wewouldneverad-
vocateallowingabusinessorindustrytopumpunlimited
quantitiesofwaterfromtheriverwithoutbearingtheap-
propriate costs associated with preserving thatpublic re-
source.Abusinessthatsomehowcircumventedtheregula-
Danger / 139

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tionsorcostsassociatedwiththeuseoftheriverwouldbe
considereda“freerider.”Ineconomicterms,afreerider
issomeonewhojumpsonthebus—orutilizesanypublic
resource—withoutpayingthefare.
Economistsdonotconsiderthemarketitselftobea
publicresource.However,Iwillarguethatthemarket(or
thecollectivepurchasingpowerofconsumers)isreallythe
ultimatepublicresource.Itistheresourcefromwhichvirtually
allwealthinafreemarketeconomyderives.Thinkofthe
wordsyou mightuseto describea businessthat youad-
mire: “well-managed,” “innovative,” “efficient.” Within
thecontextofourriveranalogy,allthesethingsamountto
building a better pump. Obviously, a great pump posi-
tioned next to a dry riverbed doesn’t have much value.
Whenabusinessbecomeshighlycapitalintensiveandem-
ploysfewworkers,it becomesafreeriderrelativetothe
marketresource.Thisistrueintermsofpurchasingpower
returnedtothemarketandalsointermsofitstaxburden.
Imagineafullyautomatedfactory.Theonlycontribu-
tionsuchafactorywouldmaketoourpurchasingpower
riverwouldbebycreatingproductsatalowerprice.No
wages would be paid. No payroll taxes would be paid.
While lowerpriceswould return some purchasingpower
totheriver,thiswouldsimplynotbeenough.Overtime,
asallindustriesbecomelesslaborintensive,theriverwill
rundry.
Inthefuture, wewillneedgovernmentpoliciesthat
recognize this reality. We will need policies that prevent

themarketriverfromrunningdry.Inthelongrun,ifad-
vancedmachineautomationpermanentlydisenfranchisesa
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significant fraction of the work force, we will have no
choice except to make some significant changes to our
economicsystemsothatthefreemarketcancontinueto
function.Thatwillbethesubjectofthenextchapter.In
themeantime,ourobjectiveshouldbetostabilizethesys-
temandensurethatthejoblossesduetoautomationare
asgradualaspossible.Themostimportantshort-termgoal
istoavoidtheseveredownturnandpotentiallycatastroph-
icspiralthatcouldresultifconsumerssomedaylosecon-
fidenceintheirfutureincomecontinuity.
The Problem with Payroll Taxes
Wheneverabusinesshiresaworker,ittakesontheaddi-
tionalburdenofpayrolltaxesonthewagesorsalarypaid
tothat worker.Payrolltaxesaretheprimarymethodfor
funding public retirement, unemployment insurance, and
in manycountries,health care. IntheU.S., payroll taxes
includeonehalfofthecontributiontoSocialSecurityand
Medicare, as well as state and federal unemployment in-
surance.
These taxes create a significant disincentive to hire
andretainworkers.Asthecapabilityofmachineautoma-
tion approaches that of workers, payroll taxes will give
employersanevengreaterincentivetoeliminatejobs—or
avoidhiringnewworkers—asquicklyaspossible.Thisis
especiallytrue in Europe, wherepayrolltaxesaresignifi-

cantly higher than in the U.S. and where it is generally
moredifficultforcompaniestolayoffworkersoncethey
arehired.
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The payroll tax-based system will come under tre-
mendousstraininthecomingyearsasademographicshift
resultsinalargenumberofretireessupportedbyrelatively
fewer workers. In the United States, nearly everyone is
awarethatSocialSecurity,andespeciallyMedicare,areat
highriskofbecominginsolventinthecomingdecades.In
EuropeandinJapan,thesituationisgenerallyevenworse.
Itisverydifficulttoseehowthegenerouspublicpension
programsin European countrieswillcontinue to besus-
tainable under a payroll tax-based system. The situation
willbefarmoredireifthe trendsprojectedin thisbook
comeintoplay.Ifinadditiontothesedemographicreali-
ties, broad-based automation of jobs unfolds simulta-
neously, the entire payroll tax-based system seems very
likelytofallapart.
As we saw in the previous section, capital intensive
industrieswhichenjoyaccesstothemarketwhileemploy-
ingrelativelyfewworkersarenotbearingtheirfairshare
ofthecostsassociatedwithmaintainingaviableconsumer
market. Such industries are also avoiding the costs asso-
ciatedwithpayrolltax-fundedsocialwelfareprograms.In
a very real sense, capital intensive industries are stealing
fromourpurchasingpowerriverandcircumventingtheir
responsibilitytosociety.

Wecanseethenthatthewholeideaoffundingsocial
programs via payroll taxes is fundamentally flawed and
outdated. It putsanunfairburden onlaborintensive in-
dustrieswhile allowingcapital intensiveindustries to free
ride. That, of course, creates a tremendous incentive for
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everyindustrytobecomemorecapitalintensiveasquickly
aspossible.
This problem also makes the funding of social pro-
gramshighlysusceptibletodemographicimbalances.The
solutionistogetawayfromtheideaofcountingworkersand
taxingbasedonworkers.Weneedtoinsteadfundsocialpro-
gramswithadifferentformof tax—a taxthatfallsfairly
on both capital and labor intensive industries and which
will be sustainable even as automation increasingly en-
croaches in the future. Taxation should be based on a
business’ssuccess in utilizing the market resource, rather
thanonthenumberofworkersithappenstoemploy.
The “Workerless” Payroll Tax
If we are going to get rid of payroll taxes, then we ob-
viouslyhavetocomeupwithaviablealternative.Weneed
ataxthatfallsfairlyoneverybusinessthatenjoysaccessto
the market—regardless of the number of workers em-
ployed.Asimplesolutionmightbetojustgetridofpay-
roll taxes and instead increase general business income
taxes. This is probably the right direction in which to
move,buttheproblemisthatbusinessesonlypayincome
taxes when they are profitable. Payroll taxes have to be

paidregardlessofyear-to-yearprofitability.Obviously,the
government needs a reliable revenue stream in order to
fundsocialprograms.
Forthisreason,Iwouldsuggestthatagoodalterna-
tive might be some form of gross margin tax. The gross
margin of a business is a measure of its basic operating
profitability.Essentiallyitisequaltorevenuelesscostof
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goodssold.Grossmarginsvaryagreatdealbyindustry,so
itwouldprobablybenecessarytoadjustthetaxbasedon
thedynamicsofindividualindustrysectors.Nonetheless,it
should be possible to come up with a relatively simple
formulaforagrossmargintaxthatwouldraisethesame
amountofrevenueasthecurrentpayrolltaxsystemwhile
distributingthetaxburdenfairlyamongindustries.Forthe
vastmajorityofbusinessesthegrossmarginwillalwaysbe
positive,andaminimumcouldbeenforcedifnecessaryto
ensureareliablerevenuestream.
Under this new system, businesses would pay two
typesoftaxesjustastheydocurrently:(1)Theywouldpay
agrossmargintaxinsteadofthecurrentpayrolltax,and(2)
they would continue to pay the normal business income
tax.Considersomeoftheadvantagesofthissystem:
 Sincepayrolltaxeswouldbeeliminated,theincentive
to automate jobs or move them overseas would im-
mediatelybereduced.Likewise,theprospectofhiring
anewworkerwouldimmediatelybecomemoreattrac-
tive.

 A business that did choose to automate or offshore
jobswouldnotbeabletoavoidcontributingtotheso-
cialprogramsthatsupportthepopulation.
 The demographic, or “baby boom,” issue would be
mitigated because wewould bemoving away from a
modelbasedoncountingworkersandtowardamodel
where overall economic activity supports social pro-
grams.
 The new revenue system would provide an obvious
mechanism for funding universal health care in the
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U.S. without creating yet another incentive to elimi-
nateworkers.
Itisimportanttonotethatagrossmargintaxwould,
ofcourse,onlyworkinthefor-profitsector.Inotherem-
ployment sectors a different scheme would need to be
used,orperhapspayrolltaxescouldberetained.
“Progressive” Wage Deductions
As this book is being written, there is significant public
outcryovertheissueofexcessivepaychecksforcorporate
CEOs.OneofthebasicmessagesIhavetriedtoexpress
is that extreme income inequality and concentration of
incomeisnotsimplyanissueoffairness.Infact,itdrives
attheveryheartofafunctionalmassmarket.Aswehave
mentioned previously, if you consider nearly any mod-
eratelypricedmassmarketproductorservice,anaverage
workercontributesnearlyasmuchtotheviabilityofthat
market as a corporate CEO. An extremely wealthy indi-

vidualmaypurchaseaverynicecar,orperhapsevensev-
eral cars. But he or sheis not going to purchase100 or
1000 automobiles. When income is too concentrated, it
undermines the mass market. That is a reality that ulti-
matelywillaffect everyone—andthe corporate CEOsof
the future are going to find themselves on the frontline
whenthewavehits.
Currently,businessesintheUnitedStatescandeduct
all wage and salary expenses when calculating corporate
income taxes.No consideration is given to howthat de-
ductionisdistributedamongworkers.Thissimplymakes
nosense.
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Iwouldsuggestthatasignificantjobcreationincen-
tive could be established if we instead used a progressive
schedule for deductions. This would work in a somewhat
similar fashion to the progressive
47
 tax brackets we now
have—exceptthatitwouldapplytodeductions.Hereisan
examplethatisintendedonlyasaverysimpleillustration.
Employers might be allowed to deduct twice the amount
paid to workers makingupto$50,000. From $50,001 to
$200,000 a full deduction would be allowed. From
$200,001to$400,000halftheamountcouldbededucted.
Andbeyond$400,000nodeductionwouldbeallowed.
Soforexample:
 For a worker earning $50,000, twice this amount, or

$100,000couldbededucted.
 Foraworkerearning$150,000,$200,000couldbede-
ducted(2×$50,000+$100,000)
 Foraworkerearning$400,000,$350,000couldbede-
ducted(2×$50,000+$150,000+$200,000/2)
 For a CEO earning $20million, amaximum ofonly
$350,000couldbededucted.
Thebasicproblemwithexecutivepayisthatitcreates
an excessive and wasteful incentive. Suppose that CEOs were
abletoearnamaximumofonly$10millionperyear(in-
cluding bonuses). Would there suddenly be an extreme
shortageofcorporateCEOs?Wouldnoonewanttobea
CEO?It’spossiblethatafewCEOswhohavealreadyac-
quired substantial wealth might decide to just play golf,
butbyandlarge,Ithinkitisevidentthatbeingacorporate
CEOwouldremainaprettyattractiveoption.
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Thefactisthatsuchenormouspaychecksaresimply
notnecessaryinordertoattracttalenttothesepositions.
The huge paychecks come about because of corporate
cronyism,whereexecutivessitontheboardsofeachoth-
er’scompanies,andalsobecauseofcompetitionbetween
companies.A board that does not offer an outsized pay
packagemaywellfearthattheCEOwillgotoacompeti-
tor.Thisisclearlynotahealthyornecessarydynamicfor
theeconomyasawhole,anditisreallynotsomethingthat
shouldbeencouragedbytaxpolicy.Obviously,ifprogres-
sivewagedeductionswereimplemented,thiswouldhave

an impact on the total amount of revenue collected. To
addressthatwemightneedtoadjusttheoveralltaxrateso
thatthechangesare,ataminimum,revenueneutral.
Defeating the Lobbyists
InChapter2,Imadethepointthatinformationtechnolo-
gy is advancing at a geometric (orexponential) rate. Un-
fortunately,thereisalsosomethingelsethatisaccelerating
geometrically: the number of lobbyists in Washington.
48

The federaltax codeoffersoneof the few availableop-
portunities to design specific incentives that might result
insignificantjobcreation.Thesystemofprogressivewage
deductionsthatI proposedearlierisjustoneexampleof
suchanincentive;otherswithexperienceintaxationcould
nodoubtsuggestotherideas.However,anysucheffortto
leverage the tax code seems very unlikely to survive the
influenceofthespecialinterestgroupsthatnowdominate
thelegislativeprocess.
Danger / 147

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InhisbookTheFutureofFreedom:IlliberalDemocracyat
HomeandAbroad,FareedZakariamakesthepointthatthe
ever increasing power that lobbyists and special interests
wieldisatleastinpartduetolawswhichforceeveryas-
pectofthelegislativeprocessintotheopen.While,onthe
surface,itmayappearthatopennessingovernmentisal-
waysdesirableandmoredemocratic,therealityisthatvery
fewofushavethetime,energyorattentionspantotake

anactiveinterest in the intricateand mundanedetailsof
thelegislativeprocess.Thepeoplewhodotakeactivead-
vantageofthistransparencytendtobetheoneswhohave
a very significant vested interest in the legislation being
considered. Lobbyists are able to follow every vote in
every committee and can immediately exert influence
whenever they see the slightest hint of something they
don’tlike.Thishasledtodramaticallyreducedopportuni-
tiesforthetypeofbehindthescenesbargainingandcom-
promise that was once an integral part of the political
process.TheendresultisamorepartisanCongressanda
lotlessconsensus.
Oneveryinterestingideathatoffersatleastapartial
solutiontothisproblemhasbeenproposedbyeconomist
AlanS.Blinder.
49
Hehassuggestedthecreationofanin-
dependent agency, similar to the Federal Reserve, which
wouldhavetheauthoritytospecifythe detailsofthetax
code. Congress would maintain its overall constitutional
authorityovertaxation,butthedetailswouldberemoved
fromthepoliticalprocessandinsteadhandledbyaboard
ofhighlyskilledprofessionals.
THE LIGHTS IN THE TUNNEL / 148

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Thecurrentfinancialsituationhasclearlydemonstrat-
edtheabsolutenecessityofhavingacentralbankwiththe
authoritytorespond rapidlyintimes ofcrisis.While not
everyonemayagreewiththewisdomofeachspecificac-

tion taken by the Federal Reserve as the crisis has un-
folded,veryfew would dispute thefact that theseinitia-
tiveshavebeenextraordinarilycreativeandhavebeenex-
ecutedwitha timelinessthatfew other branchesofgov-
ernmentcouldhopetomatch.Wewouldnotwanttoim-
agineascenarioinwhichtheactionsundertakenindepen-
dentlybytheFedinsteadrequiredavoteinCongress.
Inthefuture,technologicalchangeislikelytocontin-
uetocauseincreasinglydisruptive changes intheecono-
my.Wehavealreadyseenhowtheavailabilityofpowerful
computersmadeitpossibleforWallStreettechniciansto
create new, exotic forms of tradable securities and how
thisleddirectlytotheseverityoftheglobalfinancialcrisis.
Unanticipatedeconomicandfinancialimpactssuchasthis
willalmostcertainlybecomemorecommonastechnology
continuestoprogress.Giventhis,wesimplycannotafford
tohaveagovernmentthatrunsononlyonecylinder.We
needa government withthe flexibilitytoleverageallthe
toolsatitsdisposalintimesofrapidchangeorcrisis.Get-
tingthedetailsofthetaxcode,andperhapsothercritical
facetsofgovernmentoperation,awayfromthedirect,de-
tail-level influence of Washington lobbyists would be a
veryimportantfirststepintherightdirection.
Danger / 149

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A More Conventional View of the Future
Manyoftheideaspresentedsofarinthisbookareuncon-
ventional;manypeoplemayevenfeelthattheyareradical.
Ifyouvisitanybookstoreorlibrary,youcaneasilyfinda

dozen or more books, often written by well-known au-
thors,thatpresentanentirelydifferent,andperhapsmore
palatable, forecast of the future. Before you dismiss the
ideas presented here, perhaps it would be worthwhile to
lookinalittlemoredepthatsomeofthemostwidelyheld
conventionalassumptionsaboutthefutureandseeifthey
arereallyreasonable:
 Theprimaryforcethatwillshapethecomingdecades
willbeglobalization.Offshoringofjobsandthecon-
tinuingmigrationofmanufacturingtolowwagecoun-
tries will be the major threats to the job market in
Westerncountries.Technologywillcontinuetoenable
globalization,andjobswillmoveacrossborderswith
increasingease,butautomationtechnologywillnotre-
sult in broad-based, permanent elimination of jobs.
Under pressure from globalization,jobsinthe devel-
oped economies will evolve increasingly toward pro-
vidingservicesthatareanchoredlocally—andneither
automationtechnology nor globalization will succeed
inpenetratingtheseprotectedemploymentmarkets.
 Technology will improve the way we communicate
and collaborate. It will increasingly allow us to work
fromhome,andmanyofuswillhavetheopportunity
toofferouruniqueskillsdirectlytotheglobalmarket
onapiecemealorfreelancebasis,joiningad-hocteams
ofotherworkersfromaround theworldtowork on
THE LIGHTS IN THE TUNNEL / 150

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specificprojects.Technologywillchangeourjobsand

thewaywework;itwillallowustoworktogetherin
new ways, but it will never become capable of autono-
mouslydoingourjobs.
 Even as artificial intelligence becomes far more so-
phisticatedandasrobotsareincreasinglydeployedfor
military applications and perhaps even as consumer
products,theroutineandrelativelyrepetitivejobsheld
by millionsof workers in offices, warehouses, super-
markets, retail chain stores and small businesses will
remainsecure.
 To the extent that any average workers are, in fact,
displacedbyautomation,theywillberetrainedorre-
educated—and the economy will always create jobs
thatwilltakeadvantageofthosenewlyacquiredskills.
 Futuretechnologywillresultinthecreationofentirely
newindustries,andtheseindustrieswilloffernewem-
ployment opportunities. History has shown that the
moretechnologicallyadvancedanindustryis,themore
capital intensive it typically is; as a result, it employs
relativelyfewpeople.Thiswillsomehowchangeinthe
future,sothatmillionsofnewjobswillbeavailablefor
averageworkers.
 As technology advances, manufactured products will
becomefarmoresophisticatedandincreasinglyminia-
turized. Specifications and tolerances will be tighter.
Automation will have to be introduced to make this
possible.Nonetheless,factoriesthroughouttheworld
willcontinuetoberelativelylabor intensive, and un-
told millions of third-world workers will continue to