Automation, Taxes and Transfers with International Rivalry

Abstract

Continued automation and declines in low-skill shares of GDP have been widespread globally and linked to inequality. We examine the long-term, global consequences of policies that foster automation or address the distributional consequences of it, using a six-region global macro model. Results depend on whether welfare criteria are Rawlsian, emphasizing the performance of low-skill households, Benthamite, which aggregate pecuniary measures, capital-owner friendly, or simply based on real GDP. Even where automation delivers only bias against the low skilled, we find that the fostering it is a dominant strategy under all but the Rawlsian criterion. We then consider a post automation scenario in which worker displacement is significant, examining inequality constraining but balance-preserving fiscal interventions, such as tax-financed “earned income tax credits”. These generate only small international spillover effects and are for the most part not preferred under all criteria except the Rawlsian one.