Category: economy

Peak employment and the political challenge

The current angst about employment in an age of automation is a political, not technological, problem

This week’s edition of The Economist asks about the Future of Employment and where the jobs are in a society where work is increasingly done by machines.

For the Economist the conclusion is that the future of employment is ‘complex’ and observes economists and politicians haven’t given enough thought to the effects of the changing workplace and the dislocation of many workers.

Much of the Economist’s story is based around the ideas of professors at MIT Erik Brynjolfsson and Andrew McAfee in their upcoming book “The Second Machine Age”.

The race with the machines

Professor Brynjolfsson gives his view at TED 2013 in the key to growth? Race with the machines, a presentation countered by Robert Gordon in the ‘death of innovation, the end of growth’ and followed by an excellent debate between the two.

Brynjolfsson cites the dilemma of bookkeepers being displaced by software applications such as Intuit Turbotax as an example of where service sector staff are being displaced.

“How can a skilled worker compete with a $39 piece of software?” Brynjolfsson asks.

“She can’t. Today millions of Americans do have cheaper, faster, more accurate tax preparations and the founders of Intuit have done very well for themselves. But 17% of tax preparers no longer have jobs.

“That is a microcosm of what’s happening not just in software and services, but in media and music, in finance, manufacturing, in retailing and trade. In short, in every industry.”

The great decoupling

Brynjolfsson’s key point is that workers’ wages have been decoupled from productivity and that the workforce isn’t sharing the rewards of improved practices and increased wealth.

That is certainly true over the last forty years, however that may not be a technological effect, but the business consequences of liberalising the financial sector which has seen massive pay increases to the banking industry and managerial classes that has been way out of kilter with the rest of the workforce.

It may well be the current golden era of high executive salaries is a transition effect of an evolving economy, albeit one where our grandchildren will puzzle over an era where a failed executive can receive a $100 million payout on being fired.

As The Economist points out technological change itself tends to create new jobs that make up for those displaced in old industries, this is a view supported by GE’s Chief Economist Marco Annunziata.

The main problem that Brynjolfsson identifies is the medium term issue of dislocated workers finding themselves out of work with superseded skills and, as The Economist point out, it’s clear the developed world’s political leaders haven’t though through the consequences of that transition.

In almost every sense, the current crisis of confidence about employment prospects is more a political and social problem rather than technological.

Helping displaced workers is going to be the greatest challenge for today’s generation of business and political leaders, the real question is are they up to that task?

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Regional pains – what happens to communities when industries close?

Upstate New York and rural Australia may give us some clues to how regions will evolve in the 21st Century

Yesterday’s post on Chobani Yoghurt rescuing a town in Upper New York state raises some questions about what happens when a major industry leaves.

For South Edemston, the question went unanswered as Hamdi Ulukaya and Chobani saved the day, but other towns haven’t been so lucky.

Australia’s Goulburn Valley, about a hundred miles north east of Melbourne, may be about to find out as the main local fruit cannery will close down unless the state and Federal governments each contribute $25 million to an investment plan.

Closing the region’s major cannery will have dire consequences for the local economy as the industry has been a major customer for the local fruit industry. Without the cannery, many of those peach, pear and apple growers have nowhere to sell their produce.

Already farmers are bulldozing their trees and grubbing up the roots as the market works against them.

So what happens to the Goulburn Valley if the canning industry leaves? Do the orchards get turned over to goats?

There is a precedent in Australia for this, in Tasmania the ‘Apple Isle’ has seen its orchard industry steadily decline from the days of peak production in 1964.

A touching story in The Griffith Review by Moya Fyfe, the daughter a former Tasmanian apple farmer, describes when her father’s orchards were ripped up.

So in the winter of 1974, his life’s work, and that of his father, was bulldozed into windrows of gnarled stumps and roots. Acre after acre of once productive apple trees, captured in a photograph hanging on my parents’ dining room wall as picture-book hills awash with blossoms above North West Bay, were twisted and torn from the ground and left in undignified heaps to rot.

Moya’s father was given an exit package – a cash payment to find something else to do – by the state government. Something that many agricultural communities around the world have become familiar with.

The problem for Tasmanians was that there wasn’t really much else to do. At the time Moya’s farm was ripped up there was a belief the state would become an industrial powerhouse on the back of cheap hydroelectricity, but that never happened.

Tasmania’s economy continues to struggle and Moya’s article was part of a Griffith Review edition focusing on the state’s struggles.

The most pubilicised essay was a scathing analysis of the state’s culture by Professor Johnathan West, who identified the real problem for Tasmania as being a dependency mindset.

These numbers suggest that as little as a quarter to a third of Tasmanian households derive their livelihood from the genuine private sector. Of them perhaps a third gain their income from wholesale and retail trade and associated logistics, another third from residential and commercial construction and maintenance. The clients of both these groups depend largely on public-sector incomes, leaving only about 10 per cent of all households making a living from the traded private sector.

Interestingly both Johnathan West and Moya Fyfe are employed by the University of Tasmania, which probably proves the Professor’s point.

Overall Tasmania relies upon Federal government funds to survive, receiving over $1.50 in payments for ever dollar remitted in taxes; in that it joins half of Australia’s states and territories in being economically dependent on the Federal taxpayer.

That’s not a good sign for the Goulburn Valley or for the state of Victoria which increasingly is appearing to be to Australia what Spain was to the European Union circa 2007 or Miami to the US in 1927. When the Melbourne property market pops, the region could be in deep trouble.

For much of regional Australia – like disadvantaged parts of the European Union or the United States – communities have become dependent on transfers from the central government, the sustainability of that is being tested now.

It may well be that South Edmenson’s experience with Chobani illustrates the most sustainable way governments can support these regions, attracting entrepreneurs and new industries into communities that are being left behind is far better than leaving them on welfare.

Image courtesy of elcapitain through Flickr

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Chinese earthmovers move up the value chain

The Chinese construction equipment industry shows how the nation is moving up the value chain

After yesterday’s post on the motor industry’s relevance in the 21st Century, a related article about Chinese construction equipment appeared in The Economist.

According to CLSA – formerly Credit Lyonnais Securities Asia and itself now fully owned by Chinese investment house CITIC – the quality of Chinese construction plant is rapidly approaching that of the Japanese and US industry leaders.

The Chinese have achieved this in a short period through a combination of joint ventures and strategic takeovers and that should worry its more established competitors.

How the Chinese have moved up the value chain in construction plant is a small, but important example, of how the country is positioning itself as a higher level producer as its economy and workforce matures.

For trading partners and competitors it’s worthwhile thinking how a more affluent and higher tech China is going to affect their businesses, thinking of China as just a cheap source of low quality labour isn’t going to cut it for much longer.

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Does the motor industry matter in the 21st Century?

Is the automobile industry the driver for 21st Century economic growth?

One of the key drivers of Twentieth Century industrialisation was the motor industry. Today it’s an industry plagued by over production, distorted by government subsidies and increasingly dominated by a small group of major players.

In Australia, the Productivity Commission examined how the motor industry was evolving and its preliminary report (PDF) is a good snapshot of the current state of play in the global automobile sector.

Chronic worldwide overcapacity is what stands out most starkly in the report with most of the world’s manufacturers operating at less than the 80% production break even point that’s assumed in the industry.

global-motor-industry-overcapacity

Australia is a good example of how the motor industry was held as being essential to a country’s development. Like most of the world, the early Twentieth Century saw dozens of small automobile manufacturers pop up in the backyards of enthusiastic tinkerers – it’s like the surge in smartphone apps today.

Eventually only a handful survived the industry shakeout following the Great Depression and by the end of World War II the industry was largely dominated by US, British and European manufacturers, today that consolidation has increased with East Asian producers replacing the UK carmakers.

The lessons of World War II

One of the lessons from World War II was that having a strong domestic manufacturing industry was a nation’s strategic advantage. So governments around the world protected and subsidised their automobile industries along with other factories.

For Australia, bringing in the required labour to run those manufacturing industries was a seen as a key to the nation’s post World War II growth and it was one of the contributors to the country’s ethnic diversity that started to flower in the late 1970s.

Today the echoes of those policies remain with governments around the world still subsidising their motor industries despite the economic and strategic military benefits of automobile manufacturing being dubious at best.

Australia’s failure

In Australia the modest incentives provided by governments hasn’t been enough to keep local car plants operating, which was the reason for the Productivity Commission’s report into the future of the industry.

The report’s message is stark for Australia, as a high cost nation that hasn’t invested in skills or capital equipment there’s little reason for the world to buy Australian technology as there’s little being built that the world wants or needs.

With the nation’s advantages in agriculture and mining – not to mention solar power – Australia should be leading in technologies that exploit these advantages but instead the nation is a net technology importer in all three of those sectors.

To be fair to Australian industrialists, they responded rationally to government policies that favour property and share speculation over productive investment. Coupled with the drive to create duopolies in almost every sector of the Aussie economy, it didn’t make sense to invest when they could exploit domestic markets rather than invest in new technologies.

Becoming high cost economies

For nations moving up the value chain such as China, Thailand and Brazil; Australia’s failure to develop high tech manufacturing and inability in adapting to being a high cost economy is a powerful lesson in the importance of framing sensible long term economic policies.

The Australian Productivity Commission report illustrates how the motor industry does have a role in helping countries move into being industrial powerhouses, but once a nation becomes a high cost economy it takes more than dumb subsidies to maintain a competitive advantage.

Germany and the US illustrate this, and the fact both countries’ motor industries are running at greater than 80% capacity shows how their automotive sectors are evolving. It’s no co-incidence that electric car manufacturer Tesla Motor’s plant in Fremont, California was a former GM-Toyota joint venture factory.

As motor vehicles become increasingly clever so too are their manufacturers; unless car builders and governments are prepared to invest in the brains of their workers and modern technology then they have little future in the 21st Century.

For nations, the question is whether the Twentieth Century model of building a car industry is relevant in this century. It may well be that other industries will drive the successful economies of the next hundred years.

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Reflections on our good fortune

The UN Millennium goals are still some way off being achieved and it’s something we should all think about.

In his Christmas message, investment analyst John Mauldin quotes GaveKal’s Louis Gave on the good news in the global economy, that the UN has achieved some of its Millennium goals of alleviating global poverty.

The UN has eight goals that were set out at the beginning of the century and in a progress report issued in September, United Nations Secretary-General Ban Ki-moon laid out the program’s successes.

Of the eight goals, Ban Ki-moon cites reducing poverty, increasing access to safe water, improving the lives of slum dwellers and achieving gender parity in primary schools as being successes under the plan, although there’s much room for improvement.

“The picture is mixed,” Mr. Ban said. “We can do better. The best way to prepare for the post-2015 era is to demonstrate that when the international community commits to a global partnership for development, it means it and directs its resources to where they are most needed.”

A sad statistic is that aid to the 40 poorest countries fell by 7.9% in 2012 and the Doha round of global trade talks, where the hope is trade liberalisation will help the most disadvantaged economies, remains stalled.

From a technologist’s point of view the adoption of the internet and IT is of interest with the report claiming the number of internet users in the developing world grew 12% while broadband penetration increased by a quarter.

While those numbers are encouraging, it’s hard though not to think that in the poorest countries access to more fundamental agricultural technologies and infrastructure – such as reliable electricity, water and roads – is more critical to development than the internet and ICT.

At Christmas, it’s worthwhile those of us in the affluent developed world consider how fortunate we’ve been to be born in a place and time that makes us the best fed and most comfortable humans that have ever lived.

That good fortune isn’t shared by everyone on our planet and that’s something we should be considering when we look at the consequences of our personal economic, political and technology choices.

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When entrepreneurship gets old

As the baby boomers retire, the cruel reality of demographics is forcing them back into business

As part of their series on America’s aging population, Bloomberg looks at the story of 61 year old Lee Manchester who lives in a friend’s basement.

While the Bloomberg story focuses on the contrast between Lee and her father who benefitted from the post World War II economic boom, the real story is Lee’s work history.

Key to her work history is her setting up a business in 1986, that business failed in the late 1980s recession and Lee ponders what might have been had she not made that investment.

Lee sometimes can’t help dreaming about the trips she’d be planning if she’d invested the $150,000 she spent to start a construction company.

This is the downside setting up your own business that those currently peddling the cult of the entrepreneur don’t mention. If the business fails, and many do, then the costs can be high in lost savings and damaged career opportunities. Being an entrepreneur is high risk, hard work.

We may well find though that more people find themselves launching businesses in their older years as the economic realities of the post baby boom era start to be felt by communities.

In many respects though Lee is ahead of the curve, the generation behind her have no expectations of a long and affluent retirement, “the government will abolish the pension about two years before I retire” is the common theme among Gen Xer and Ys.

For GenYs and Xers this attitude is realistic, the demographic sums that worked for Lee’s father are now working against them while the post war economic system that guaranteed Lew Manchester a safe job and company pension ceased to exist in the 1980s.

Had boomers like Lee been thriftier, they would have still been hurt by a shift to 401(k) accounts from pensions in the 1980s. Thirty-seven percent of the elderly in the U.S. collect pensions, which provide some guaranteed income until they die. Fewer than 10 percent of boomers collect pensions, and that number is quickly shrinking.

Lew’s generation were the lucky ones, while the boomers – particularly the early boomers born between 1945 and 55 – believe they are entitled to similar benefits as their parents, their reality is going to be a much harder and precarious existence into old age.

While Lee is paying the price for interrupting her career with a stab at running her own business, in many ways she’s better prepared for a future that is going to require people of all ages to be more entrepreneurial.

In fact, many of those baby boomers forced to become entrepreneurs may well enjoy it, “launching the business was the most fun I ever had and my way to fight a frightening medical diagnosis” says Lee.

As the reality of their financial situation dawns upon them, many of Lee’s contemporaries are going to find themselves launching businesses long after the age they thought they were going to settle into a sedate retirement – lets hope they have fun too.

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Britain’s smart cities agenda

Can Britain’s national innovation strategy give the UK leadership in the smart city movement?

Yesterday the UK government held its first Smart Cities Forum on what it sees are the economic opportunities for the British economy and its cities.

The Smart Cities Forum is part of the British government’s innovation policy that’s seen £50 million allocated to smart city projects including £24 million for Glasgow’s Future City showcase.

While the British government sees this as being an investment in grabbing the nation a share of what they believe to be a £400 billion global market, it’s also an opportunity to rejuvenate the county’s cities, as this video clip explaining what being a smart city has to offer Birmingham.

Like Barcelona and San Francisco tech and smart city policies, the UK initiative was born out of the 2008 Global Financial Crisis which forced the British political and business establishment to rethink the nation’s economic position and policies.

A key part of that rethink is how infrastructure spending can be co-ordinated with new technologies and this is something Barcelona is doing with its own smart city project in rolling out fiber networks as part of scheduled maintenance around the town.

The Glasgow pilot project is probably one of the more ambitious smart city projects, as the UK’s Technology Strategy Board says in its media release;

The Glasgow Future Cities Demonstrator aims to address some of the city’s most pressing energy and health needs. For example, developing systems to help tackle fuel poverty and to look at long-standing health issues such as low life expectancy.

Glasgow’s objectives go beyond the usual open data and parking spot strategies and attacking low life expectancy and poverty are strong social challenges.

With buy-in from the national government, the UK is making a strong big to lead the smart city industries. The challenge now is for British businesses to step up and find the commercial opportunities.

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