Rise of the Robots
It has been awhile since I last posted on my blog. Quite a bit has happened in the interim at Arrow and in my personal life – but things are sorted and I am happy to be back posting some of my thoughts on markets and other things that I hope you will find interesting. In the past I wrote quite lengthy pieces – I am going to try and add smaller posts in conjunction with more tweets (@jimmymcgovern).
As some of you may know, I am now running a small portfolio that is akin to a Global Macro mandate in hedge fund parlance. I have always had an interest in trading (and investing!) and in the interconnectedness between all kinds of securities. The added degrees of freedom from accessing opportunities from more than just one asset class is both more intellectually stimulating and challenging but also a great deal more enjoyable (fun is a word seldom used in managing personal or client capital but yes, it is more fun because it is competitive!).
I will be sending out our June 30th Q2 report shortly but this week I wanted to highlight a book I recently finished reading entitled Rise of the Robots by Martin Ford – subtitled Technology and the Threat of a Jobless Future. I was drawn to this book by 13D’s Kiril Sokoloff’s recommendation – Kiril circulates a wonderful weekly report entitled "What I Learned this Week". For me, this book was a fascinating and disturbing update on technology and its continued profound and growing impact on the global economy - especially the work force.
The book identifies two major themes, the first of which is that advanced technology is likely to threaten jobs across all industries and a wide range of skills. Advanced technology comes in two main waves – automation and artificial intelligence (“AI”). Automation is focussed on computers and robotics (especially cloud robotics) and clearly these have had a meaningfully impact those “blue collar” jobs which are both repetitive in nature and low skilled. Many agricultural, industrial and manufacturing companies shifted jobs in North America to the Asian Tiger economies over 20 years ago due to lower wage bills. Many of these companies are now “onshoring” but the workforce has not followed – they have largely been replaced locally by technological alternatives. Computers and robots are no longer simply productivity enhancing for labour – they are a viable substitute for labour. But what I found more interesting is the impact that AI is and will have on “white collar” / skilled labour. Here the development of algorithms, cloud computing, big data, machine learning, “deep learning” (e.g. your friend Siri or IBM’s “Watson”) will all threaten the higher wage earners (and by definition consumers). In particular, Ford notes two industries that have been relatively immune – healthcare and education – are now likely to show major changes with the victim being high wage, white collar workers. Finally, those who believe that the technology companies themselves will help off-set job loss, hereto Ford highlights the difference between the old tech leaders (IBM, HP etc.) and the Amazons, Googles and Apples of the world. Many of the most valuable companies of tomorrow in technology are “winner take all” types operating with a fraction of the workforce of former heavy weights. As Marc Andreesen famously said, “Software is eating the world” – the white collar world!¹
The assumption of most economists is that technology and innovation both improve productivity and foster increasing real wage growth and real output. Those workers displaced will be retrained and find even higher wages with their new skills. The author challenges this assumption. He mentions the 1964 report to President Johnson by the Ad Hoc Committee on the Triple Revolution written by Linus Pauling, Gunnar Myrdal and Freidrich Hayek (all Nobel laureates)². Martin Luther King coined the term ‘Triple Revolution’ in his final sermon before his assassination. This term referred to the three great revolutions taking place in the 60’s: Technology (automation), Weaponry (nuclear) and Human Rights. In a preview to the author’s recommendation on future policy, this report predicted that ‘cybernation’ would result in “massive unemployment, soaring inequality, and, ultimately, falling demand for goods and services as consumers increasingly lacked the purchasing power necessary to continue driving economic growth”³. Hayek et al would recommend a radical solution – a guaranteed minimum income to replace welfare and solve poverty – funded by the “economy of abundance”. Surprising to me was that Hayek – the champion of individual freedoms – came to this conclusion. I am going to research this some more.
Clearly this scare in the 60’s did not come to pass. Technology and labour worked well together to lift real GDP with the bulk of the gains in productivity passed to workers via higher real wages. That is until the start of the 21st century and the “jobless recovery” we have witnessed; especially post the 2008 Great Recession. Ford identifies the ‘Seven Deadly Trends’ that have brought the benefits of technological advances into question and raises the concern that this time it is different:
1. Stagnant Real Wages
2. Declining Share of Labour in National Income
3. Declining Labour Force Participation Rate
4. Declining Job Creation & Long Term Unemployment
5. Soaring Inequality
6. Declining Income & Underemployment of Recent College Graduates
7. Polarization & Part-Time Jobs
Ford argues that advanced technology is a compelling economic force that is either at the root of many of these trends or at the very least a significant contributor. I won’t go into the facts associated with these seven trends as many of you are well aware of their existence. He is not a big believer in the “retraining” of those workers displaced by technology. He believes that all the ‘low hanging fruit’ has been picked is long expired. He is also particularly concerned about the prospects for recent college graduates – technology that is in fact dramatically impacting the less experienced, white collar “wannabees”. As a parent of a young adult in university, with another on the way, this is disturbing. It is not getting easier for these kids. Ford cites a paper by several Canadian economists4 to back his claim. But we all sense this or know other parents in the same predicament. As he states, the Masters degree is the new Bachelor’s degree. In the US “overall about 20% of US college graduates are considered overeducated for their current occupation” – the figure is 27% in Canada5.
The second major theme stems from Ford’s view on the poor employment outlook. As noted earlier in the discussion on the “Triple Threat”, Ford is an advocate for government policy that fosters a minimum income policy. Now before you brand him some kind or radical socialist or communist, Ford is quick to point out the pitfalls and the practical reality that such a policy will not be soon implemented. He is also aware of the moral hazard created by such a scheme and in getting the incentives right. However, he feels that many of the welfare programs currently in place (such as food stamps etc.) are better and more efficiently replaced with such a scheme. Ford references Hayek who also believed that a guaranteed income had “nothing to do with equality or ‘just distribution’ – it was about insurance against adversity as well as efficient social and economic function”6.
I can hear all my friends at the Fraser Institute and generally in business having a field day with this line of thinking. It is difficult but when one looks at the data and considers how poor final demand has been, one needs to consider all points of view. I for one am open to the idea with many caveats. I have been interested in the concept of “inequality” of incomes and capital and I plan to put a good deal of personal time researching the issue – it is likely an issue that will be with us for quite some time to come.
1. Martin Ford, Rise of the Robots, page 107
2. Martin Ford, Rise of the Robots, page 30
3. Martin Ford, Rise of the Robots, page 30
4. Paul Beaudry et al., The Great Reversal in The Demand for Skill and Congnitive Tasks, 2013
5. Martin Ford, Rise of the Robots, page 251
6. Martin Ford, Rise of the Robots, page 259