This week, Project Syndicate catches up with Dalia Marin, Professor of Economics at the University of Munich and a research fellow at the Centre for Economic Policy Research (CEPR).
Project Syndicate: "The digital economy,” you observed in 2017, “is carving out new divides between capital and labor” by allowing a few firms to capture an increasingly large market share. Two years later, leading US Democrats seeking to challenge President Donald Trump in the 2020 election are calling for major tech companies to be broken up for precisely this reason. What’s your take on this approach?
Dalia Marin: Breaking up major tech companies could address one problem: the excessive power that some tech firms have amassed. By suppressing competition – including obstructing market entry by new players – these firms have undermined economic dynamism, innovation, and productivity growth.
But breaking up these companies will not necessarily resolve the problem of labor’s declining share of GDP. Research suggests that this trend – which began in the 1980s – is driven largely by digital technology’s network effects, which have enabled tech giants to amass enormous power, but it would persist even if more smaller firms were competing.
According to Daron Acemoglu and his colleagues, the digital revolution is different from previous revolutions, because it destroys more jobs than it creates. Once a digital platform is established, firms can expand without employing much labor. Moreover, as artificial intelligence progresses, all kinds of firms can automate a growing number of existing jobs. This reduces labor’s clout and, thus, its share of GDP (and income).
To help counteract this trend, governments should develop incentives programs, aimed at shifting the direction of AI research and development (R&D) away from labor substitution and toward job creation.
PS: You advocate government intervention to help Europe’s automotive industry cope with intensifying competition from China. What form should that intervention take, and how likely is it to be introduced?
DM: Such intervention should focus on creating a sector that produces electric-vehicle (EV) batteries. This would have an agglomeration effect, with more car and EV battery companies moving production to Europe to be closer to other auto firms and their suppliers. This would lead to more job creation, higher wages, and lower car prices (because batteries wouldn’t need to be imported from Asia), thereby boosting real incomes. The result could be a European industrial renaissance.
Without government intervention, this is unlikely to happen, because an individual auto company does not internalize sector-wide agglomeration effects. Fortunately, the European Commission, together with the French and German governments, has already begun implementing policies aimed at fostering the establishment of a competitive battery industry in Europe. This includes the BATTERY 2030+ initiative, focused on long-term research into battery technologies.
Moreover, Germany’s government is coordinating with its auto industry to dismantle demand-side barriers to the EV sector’s growth. At a recent summit, they agreed to increase joint subsidies for EV buyers, offering them €6,000 ($6,600) in cash (electric cars cost about €30,000) until 2025.
The government also announced that it would invest €3.5 billion in rapidly increasing the number of publicly accessible EV charging stations. These actions should give Germany’s EV market a major boost.
And, in fact, the agglomeration effects are already emerging. Volkswagen has begun production of a new fully electric car at its electric-only factory in the eastern Germany city of Zwickau. And the electric carmaker Tesla has just announced plans to build a European car and battery factory near Berlin.
PS: You’ve called Germany’s dismantling of the Treuhandanstalt – which fueled economic convergence after reunification by selling eastern assets to western companies – its “biggest mistake,” and urged the government to reintroduce incentives for investment in the east. But you also acknowledge that eastern Germans hated the Treuhandanstalt, which the far-right Alternative für Deutschland still demonizes to win votes. How can incentives be designed to avoid exacerbating Germany’s psychological divide?
DM: By exporting western Germany’s high wages to the east, the government prevented eastern Germany from following the development path that has worked for so many other countries, from the formerly centrally planned Central and East European economies (the Czech Republic, Hungary, Poland, Slovakia, and Slovenia) to China. Without a low-wage comparative advantage, eastern Germany struggled to attract foreign investment.
The Treuhandanstalt helped to counteract the effect of high wages, effectively compensating western German investors for increased labor costs, by selling them eastern German assets for the symbolic price of one Deutsche Mark, plus local job guarantees. A new institution would have a similar effect, but it would not give away eastern German assets – the main reason for the backlash against the Treuhandanstalt. Instead, it would offer tax breaks and subsidies to investors, as some Central and East European countries have done. The best way to heal Germany’s psychological divide is to spur growth in the east, and that is what such a policy would do.
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We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Marin's picks:
by Paul Collier
This book analyzes the failures of contemporary capitalism, anger and anxiety over which are tearing the fabric of our societies. In Collier’s view, the deepest divides are between more and less educated, and between burgeoning metropolises and declining rural provinces.
From the PS Archive
Marin suggested that skilled workers would become increasingly unable to compete with AI. Read the commentary.
Marin answered questions about Germany’s unique brand of political populism. Listen to the podcast.
Around the web
Marin explains how international trade has reshaped the organization of firms. Watch the video.
In a VoxEU eBook, Marin explores what enabled Germany’s exceptional transformation from the sick man of Europe in the 1990s into the economic powerhouse that it is today. Read the eBook.