Nathan Gardels is the editor-in-chief of Noema Magazine.
When Silicon Valley venture capitalists look at ChatGPT and generative AI, they see their bank accounts becoming flush with returns from startup investments that one day will become unicorns. When a wage-earner, including in the cognitive class, looks at AI, they fear a disappearing paycheck.
Herein lies the driving dynamic of accelerating inequality in the age of digital capitalism.
When intelligent machines displace gainful occupations and depress wages by divorcing productivity growth and wealth creation from employment, those who only labor for a living, mentally or physically, will fall further and further behind those who own the robots.
This looming issue was front and center in Davos last week at the World Economic Forum. Another new study, this time by the International Monetary Fund, laid out the stakes. As Managing Director Kristalina Georgieva wrote in her blog, “We are on the brink of a technological revolution that could jumpstart productivity, boost global growth and raise incomes around the world. Yet it could also replace jobs and deepen inequality.”
Analyzing the IMF study, she writes:
Historically, automation and information technology have tended to affect routine tasks, but one of the things that sets AI apart is its ability to impact high-skilled jobs. As a result, advanced economies face greater risks from AI — but also more opportunities to leverage its benefits — compared with emerging market and developing economies.
In advanced economies, about 60% of jobs may be impacted by AI. Roughly half the exposed jobs may benefit from AI integration, enhancing productivity. For the other half, AI applications may execute key tasks currently performed by humans, which could lower labor demand, leading to lower wages and reduced hiring. In the most extreme cases, some of these jobs may disappear.
In response, the IMF calls sensibly for a safety net and upskilling of labor to augment AI, an approach as unimaginative as it may be necessary. But it does not respond to the driving dynamic of inequality by addressing how the vast wealth created by AI productivity leaps can be shared more equitably.
What is rarely put forward is that those whose livelihoods from labor are at risk should seek to capture a greater share of the wealth generated by AI that may displace them through the same kind of investments that have propelled those who own tech stocks into the highest ranks of the economy. One simple example tells the whole story: If you invested $1,000 in Google at its 2004 IPO, it would have been worth $1,164,133.88 in 2023.
Rather than settle for bargaining over wages in jobs that AI might do better, labor should also aim to participate in capital gains from investments in the companies that are integrating AI into their production capacity, especially to the extent it will be human-augmented.
James Manyika, a Google senior vice president who formerly led the McKinsey Global Institute’s research on AI’s impact on work, has put it succinctly: “It’s crucial that we have more people participating in the capital income pathway, because, while labor income remains the most important for the majority of people, capital income is a bigger and bigger part of where the value is going.”
It would be a monumental lost opportunity at this early juncture for the average worker to miss out on the coming boom of AI wealth creation the way those other than the richest today missed the earlier waves of personal computing and the internet.
Universal Savings/Investment Funds
If a bigger and bigger portion of the value AI creates is going to capital income, the core policy challenge is how to provide savings/investment platforms that enable the most widespread constituencies to share in capturing that value.
There are some relevant models that are applicable going forward as the AI-powered economy takes off.
Australia has among the highest median wealth in the world, which stands at $247,500, more than twice that of the U.S. and a third more than even Switzerland. That status is partly due to the establishment in 1992 of a superannuation system, savings/investment accounts that supplement basic pensions. Superannuation is funded by a compulsory contribution by employers as a percentage of employee pay and can be supplemented further (up to $27,500 a year) by employees. Up to that limit, contributions by employees are only taxed at the concessional rate of 15%. Most withdrawals by retirees after age 60 are tax-exempt.
It is the compounded returns on their investments through superannuation funds that have helped make Australians so prosperous.
Today, 15 million Australians are members of different funds with total assets in 2023 of $2.3 trillion, greater than the $1.6 trillion national GDP.
Another model that fits the bill is a new twist on the Nippon Individual Savings Accounts just introduced in Japan this month with the aim of boosting household wealth and assets through investments in the stock market. Under that plan, which the prime minister calls “new capitalism,” individual contributions to the fund up to 3.6 million yen ($24,400) are not taxed, and all capital gains are permanently exempt from Japan’s 20% rate. Another alternative within NISA provides for less risky investments through mutual funds that are more diversified.
Such a scheme could be adapted in the U.S. Already, Roth Individual Retirement Accounts allow tax-free withdrawals of investment earnings at the time of retirement. A state like California could amend that plan to make both an initial contribution of up to $25,000, as well as all capital gains, tax-exempt for those with incomes of, say, $120,000 or less. The point is to create incentives for long-term investments so value grows over time. Withdrawals need not be limited to retirement, but after a certain vesting period of, say, 20 years, could be used for other purposes such as education or home improvements or even starting a business.
In that income bracket, likely contributions would not exceed $1,000 or $2,000 a year, and thus would not inordinately dent the state’s general fund budget. Because of California’s progressive tax system in which the top 1% account for nearly 50% of receipts from income and capital gains taxes, giving the small investor a break would not bust the budget.
These individual wealth accounts could be privately managed by a consortium of firms overseen by the state treasurer as part of already extant investment pools through programs such as CalSavers, a state-assisted 401K for employees of small businesses.
The AI boom ahead can either further exacerbate or help close the yawning inequality gap. Reducing that gap entails not just breaking up the concentration of wealth at the top, but building it from below through broadly expanding the investor class who will own the robots. In short, the best way to fight inequality in the digital age is to spread the equity around.