Summary: The FM website attempts to show you the future at work today. But sometimes we forecast but forget to update you when it arrives. Consider this post an update to the world terminal’s Arrivals board. Trains are coming; we still have time to prepare.
- Quote of the Year showing America’s broken OODA loop
- Europe tries another solution, but still refuses to see the core problem
- The next wave of automation: the robot revolution
- The Generation Gap is Back (for real this time)
(1) Quote of the Year showing America’s broken OODA loop
OODA: Observation, Orientation, Decision, Action. The key to a nation’s survival.
“you foolish and senseless people, who have eyes but do not see, who have ears but do not hear”
— Jeremiah 5:21
A demonstration of our geopolitical experts’ inability to learn, as their minds are locked into the worldview of our ruling elites. Two failed wars, expanding conflicts across the world, US tactics empowering our enemies — and they cannot even see the failure. From “Can’t We All Just Not Get Along?“, Michael A. Cohen, Foreign Policy, 22 June 2012:
In the view of Peter Feaver, who writes at the Shadow Government blog for FP and teaches at Duke University, alternative viewpoints have been rejected because they’re not very good ideas: “Radical critiques of American foreign policy are known and given lots of air time proportional to their influence. You can’t swing a dead cat without hearing a serious critique of American foreign policy at an academic conference, for example. These views are known, considered, and rejected. It’s not that no one had a chance to know about the movie — they didn’t want to see it.”
(2) Europe tries another solution, but still refuses to see the core problem
Everything the EU has done to date does nothing but buy time, time which they’ve wasted. “The tragedy of the commons at the European Central Bank and the next rescue“, Aaron Tornell (Prof Economics, UCLA) and Frank Westermann (Prof Economics, University Osnabrueck, VOX, 22 Jun 2012 – This cannot be said too often, until they eventually must confront reality.
Each of these non-standard ECB policies, in isolation, has succeeded in stemming a particular funding crisis. However, with few exceptions, these ECB policies have not been accompanied by structural and fiscal reforms. The lack of reform has been reflected in persistent current-account deficits, which record the excess of spending over income of a country. When private capital inflows reverse in a persistent way, a country should respond by reducing its expenditures, via a reduction in its fiscal deficit, consumption or investment.
Historically, either the country implements the adjustment or the market forces such an adjustment on the country. This pattern, however, is not what we see in the Eurozone’s periphery. With the exception of Ireland, the current accounts of the periphery are still in deficit, almost 4 years since the onset of the 2008 crisis. The persistence of the current-account deficits has been made possible by the continuous expansion of central bank credit in the periphery. As we can see in Figure 4, over 2007-2011, the cumulative current-account deficit in each country is very close to the cumulative increase in central bank credit (with the exception of Ireland).
For more information see the FM Reference Page about Europe.
(3) Demographics — the age wave sparks generational war in America (so far waged by only one side)
“The Generation Gap is Back – Old vs. Young“, New York Times, 22 June 2012
If there is a theme unifying these economic and political trends, in fact, it is that the young are generally losing out to the old. On a different subject, Warren E. Buffett, 81, has joked that there really is a class war in this country — and that his class is winning it. He could say the same about a generational war.
Younger adults are faring worse in the private sector and, in large part because they have less political power, have a less generous safety net beneath them. Older Americans vote at higher rates and are better organized. There is no American Association of Non-Retired Persons. “Pell grants,” notes the political scientist Kay Lehman Schlozman, “have never been called the third rail of American politics.”
Over all, more than 50 percent of federal benefits flow to the 13 percent of the population over 65. Some of these benefits come from Social Security, which many people pay for over the course of their working lives. But a large chunk comes through Medicare, and contrary to widespread perception, most Americans do not come close to paying for their own Medicare benefits through payroll taxes. Medicare, in addition to being the largest source of the country’s projected budget deficits, is a transfer program from young to old.
Meanwhile, education spending — the area that the young say should be cut the least, polls show — is taking deep cuts. The young also want the government to take action to slow global warming; Congress shows no signs of doing so. Even on same-sex marriage, where public opinion is moving toward youthful opinion, all 31 states that have held referendums on the matter have voted against same-sex marriage.
For more information see Demography – studies & reports.
(4) The next wave of automation: the robot revolution
Courtesy of Zero Hedge, Hugo Scott-Gall of Goldman Sachs discusses the next wave of automation. Analysis followed by a faith-based conclusion. Don’t worry; be happy!
Who does automation benefit more? Low-cost producers in Asia or high-value manufacturers in the developed world? In the near term, it’s likely that we’ll see an accelerated adoption of automation in Asia, and in China in particular, as companies there face rising wages, increasing competition and slowing global demand and pricing pressure that necessitates higher efficiency. And to add to it, financing such capital investment is perhaps most convenient (and quickest) in a place like China in the current environment. Wrapping up that argument is the economy’s conscious effort to industrialize and move up the manufacturing value chain. When higher levels of automation materialize, it should lead to a pick up in productivity (off a low base – China has c.90 robots per 10,000 workers compared to more than 300 in Japan). But will it provide a sustainable advantage?
Transforming a factory teeming with people to an automated assembly line of complex machinery is easier said than done. It not only requires highly skilled talent and experience to manage the process (tough to acquire even through global recruitment), but also a much deeper shift in the way the manufacturing process is planned and executed. We think the advantage here lies with the West, together with Japan and South Korea, which is why they should be able to maintain their lead on higher-value exports (which includes robotics), for most of the coming decade. Does this mean manufacturing facilities will move back to the West? Taking cheap labour out of the equation, manufacturing facilities must stay close to end consumers (which is Asia for some sectors like autos, smartphones etc.), having balanced out the transportation costs and IP risks with associated infrastructure costs.
Companies that incorporate automation in their manufacturing process should see the labour intensity of their operations fall at the expense of capital intensity, though this may not be a 1:1 match and the payback could take time – lower asset turn versus higher EBITDA margin. Also, setting up industrial robots (with average life-spans of 12-15 years, but no pension costs!) requires management to have longer-term visibility and sound forecasting skills. Automation should also reduce working capital as production lead times fall, thanks to scheduling flexibility (i.e., if inventories have been built, or demand is weakening, it’s easier to run the machines for fewer hours or even shut them temporarily, at the expense of lower capacity utilization, than to reduce the number of employees – the cash cost of production falls and this advantage should be weighed against debt servicing if any). In essence, automation most likely works for a company with a healthy balance sheet, good demand visibility and superior industry positioning.
Automate and eliminate
Finally, we address the potential impact of automation on human capital. It’s easy to be wholly negative in the current environment and conclude automation would drive structural unemployment, leading to lower disposable incomes and weaker consumption. And this would not be completely wrong – we think the sticky unemployment we are seeing in the US and in Europe has a lot to with jobs permanently eliminated by technology. The average duration of unemployment in the US has never been as high as in this downturn, and this follows the relentless export of jobs to lower-cost countries over the past decade or so, making it particularly painful (and for a period slowing down the penetration of automation). And, ceteris paribus, you could envision a world dominated by a machine-to-machine economy, where most things are done by intelligent technology, leaving only highly skilled people with the lion’s share of the limited jobs. This would lead to further income inequality. Would estimates of global population growth remain the same if we did not need 10 bn people, and if we didn’t have the means to feed them? And could automation then be seen as a driver of globalisation that through its success provokes de-globalisation?
In mankind, we trust
But we take a more positive view than the bleak dystopian one outlined above. The global workforce has been able to adapt to the advent of machines since the industrial revolution, and the subsequent evolution in the types of jobs that a typical economy has to offer. When more and more women entered the workforce in the 1960s and 1970s, particularly after automation in the home, the developed countries could handle the boost that gave to their workforce, since they were transitioning from a physical, manufacturing-based economy to a services-based one. We could see something similar happen with automation too. Twenty years from now, it’s more likely that there will be different sorts of jobs to fill in the gap that technology is creating now. But this will not happen without short-term dislocations, as the current workforce needs to be better trained, not for a particular type of job, but to be nimble enough to evolve along with the changing needs of the world. This will take time, perhaps even a generation, and until then automation could continue to hurt the labour market.
To conclude we think automation is spawned from innovation and technological advancement. Things that the West and the developed world have been very good at. Automation can bring with it a productivity surge for industries that employ it, and those that could potentially employ it. Initially automation is an attractive way of reducing labour costs and the risks associated with labour. However, increasingly it is a more meaningful driver of product quality and process, and therefore an important part of competitive advantage.
Wall Street loves Robots, and wants them everywhere (because rising real wages for the poor are bad):
- “Robots can solve China’s labour problem“, Financial Times, 16 April 2012
Posts about the robot revolution:
- The coming big increase in structural unemployment, 7 August 2010
- The coming Robotic Nation, 28 August 2010
- The coming of the robots, reshaping our society in ways difficult to foresee, 22 September 2010
- Economists grapple with the first stage of the robot revolution, 23 September 2012
- The Robot Revolution arrives, and the world changes, 20 April 2012