The Older, the Better: Aging Nations in the Automation Era

In 1938, Alvin Hansen—the “American Keynes”—introduced a phrase that would form the basis of worry for policymakers in developed nations the world over. In the face of plunging birth rates and ever-increasing life expectancies, OECD nations were soon to face a “secular stagnation,” with waves of retirees withdrawing from both the labor force and investment markets to live off pension savings. From an economics perspective, this huge shortfall in labor and capital in markets would make it more and more difficult for companies—the proverbial engine of national GDP growth—to find the workers and money they need to start up and grow. It was argued, in short, that developed nations were facing a fiscal cliff, with no reprieve in sight.

And yet, today we know this is not the case. Nations such as the United States, Germany, and Japan continue to sport high economic growth rates, and markets are projected to continue expanding despite the impending mass market exodus of the Baby Boomer generation. The question then becomes: what changed?

In a recent paper, Acemoglu and Restrepo of MIT confront this quandary and find that innovations in robotics and automation have effectively accelerated the pace of economic growth. Their analysis compares national GDP growth per person across the world over the past 30 years. To capture the impact of changing demographics, the analysis looks at the relative proportion of senior citizens (aged 50+) within each country’s labor force. The authors consider differences in GDP growth between OECD countries—commonly referred to as the “developed world” —and still developing nations. Through these instruments, it becomes apparent that “older” nations with a higher level of life expectancy not only continue to thrive as the population ages, but that they also seem to be growing faster than developing nations with vibrant young workforces. They conclude that these rapid demographic changes spur the adoption of significant workplace automation, and that this shift may in fact lead to higher levels of growth than previously possible in a labor-dependent market.

Automation is not a novel concept. Since the Gutenberg printing press, the Fords, Carnegies, and Stanfords of industry have embraced technological improvements to replace human labor with cold machine efficiency. A recent wave of technological innovation in automation (think only of Uber’s recent foray into driverless cars in Tempe) has only increased the range of occupations that may be under threat of robot replacement. As discussed in previous Science & Tech articles, this revolution is expected to have massive impacts on how we travel, work, and learn.

Yet, while popular culture has been fascinated by the prospect of robotic workers for hundreds of years, actual adoption has been somewhat lackluster. The problem lies with just how costly automation can be. A recent market analysis by an industry monitor finds robots for even the simplest tasks still cost, at minimum, $30,000—well above the cost incurred to simply hire another worker. Time and again, the comparatively low cost of labor, paired with high interest rates on capital loans, have made it impractical to pursue largescale robotic adoption. However, Acemoglu and Restrepo find that in high-income OECD countries, increasing labor shortages and access to cheap loans have fostered a new status quo, where robot replacement is not only feasible, but cost-effective.

The authors argue that fears of stagnation are not only unfounded, but that an aging workforce may actually lead to superior market outcomes. Their analysis of GDP growth finds that as nations age, they tend to adopt higher levels of robotic technology to effectively replace previously human-held jobs, keeping the economic engine running. This study even plays with the concept that this transition may bring higher levels of growth than were previously possible, though it is difficult to definitively say. Key to this finding is the ready access to capital; high-income OECD nations were far more likely to find success in automation versus developing nations, where businesses have limited access to low-interest loans.

While secular stagnation may now reside in the definite hypothetical, this analysis leaves broad implications for domestic policymakers. The United States tax system relies heavily on revenues from worker salaries, with a Center on Budget and Policy Priorities report estimating payroll and income taxes to account for over 80 percent of the federal budget. As industries continue to transition to automated work, both federal and state governments are projected to see their budgets decrease under the current system. As such, it may then be time to seriously reconsider where our tax burden should be placed, replacing human capital sources with more tangible automated assets. Instead of embracing the latest corporate tax break, it will soon be necessary to consider a system that accurately reflects productivity in the economy of tomorrow.

Article source: Acemoglu, Daron; Restrepo, Pascual. “Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation.” American Economic Review 17(5):174-179, May 2017.

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