Trump on trade: unintended consequences?

A straightforward analysis of what Mr. Trump is doing would be:

–tariffs slow overall growth and rearrange it to favor protected industries.  There’s no reason I can see to believe something different might happen in the US

–apart from the third world, protected industries tend to have domestic political clout but to be in economic trouble.  In my experience, these woes come more from bad management than from foreigners’ actions

–the go-it-alone approach is a weak one, since it provides ample scope for a target country to shop tariffed goods through an intermediary

–the apparently arbitrary way the administration is acting will cause both domestic and foreign corporations to reconsider future capital investment in the US.

 

There are, however, two other issues that I think have long-term implications but which aren’t discussed much.

–tariffs may cause industries that have moved abroad to retain labor-intensive work practices (and continue to use dated industrial machinery) in a lower labor-cost environment to return to the home country.  If such firms come back to the US, it won’t be with the old machinery.  New operations will be very highly mechanized. In other words, one likely response to the Trump tariffs will be to accelerate the replacement of humans with robots in the US.

–as I see it, China is at the key stage of economic development where, to grow, it must leave behind labor-intensive work and develop higher value-added industries.  This is very hard to do.  The owners of low value-added enterprises have become very wealthy and powerful.  They employ lots of people.  They have considerable political influence.   And they strongly favor the status quo.  The result is typically that the economy in question plateaus as labor-intensive industries block progress.  In the case of China, however, the threat that the US will effectively deny such firms access to a major market will kickstart progress and deflect blame from Beijing.

 

If I’m correct, the effect of trying to restore WWII-era industry in the US will, ironically, achieve the opposite.  It will accelerate domestic change in the nature of work away from manual labor.  And it will run interference against the status quo in China, allowing Beijing’s efforts to become a cutting-edge industrial power to gather speed.

 

 

economics in the US vs. identity

The Financial Times has recently added an interesting new Opinions columnist, Rana Foroohar.  In her column yesterday, she writes that while the Democrats believe that they lost the presidential election because of misogyny and racism, the more likely cause is wage stagnation and job insecurity.  In other words, long-time Democrats voted Republican in the last election in spite of the victors’ abhorrent social views, not because of them.  Further, she implies that by continuing to seek favor from large corporates as well as by taking up the former Republican mantle of mindless legislative obstruction, the Democratic party risks further establishing itself as part of the economic problem, not the solution.

Clearly, the Democratic leadership doesn’t believe this, although personally I think Ms. Foroohar is correct.  Moreover, as Ms. Foroohor notes, the issue of job insecurity and wage stagnation is a dynamic one, not static.  As recent research from the University of Cambridge suggests, and the emergence of self-driving cars illustrates, the range of human tasks subject to replacement by machines is continuing to expand, putting more blue-collar jobs as well as some white-collar occupations as risk.

So this central issue is not going to go away.  It’s going to get bigger.

 

Social issues aside, a stock market investor must, I think, address two questions:

–how to participate through stock selection in the substitution of hardware/software capital for labor, and

–how closely continuing political dysfunction in the US resembles the situation in Japan thirty years or so ago, in which a foolish political defense of the status quo in the face of structural change has resulted in a decades-long impairment of GDP growth there.

 

 

unemployment and robots

robots are everywhere

Like just about everyone else (except my wife, who is a former president of the local chamber of commerce in our small home town), for years I’ve gone to the ATM instead of a bank teller. I don’t photo checks into our account, however, although close to 10% of American check volume is now processed this way.

I see the car commercials where computer-controlled cutting and welding machines are the ultimate symbols of manufacturing excellence.

I saw IBM’s Watson trounce those two guys on Jeopardy.

So, yes, I know that robots are taking over some tasks previously done by humans.

jobs at risk

What I didn’t know is how many jobs are potentially at risk.

Then I read an opinion piece by Martin Wolf, the chief economist of the Financial Times. It’s titled “Enslave the Robots and Free the Poor.”   Like anything Mr. Martin writes, the article is worth reading. But I mention it here because it references a paper by two professors from Oxford, Carl Frey and Michael Osborne, “The Future of Employment:  How Susceptible are Jobs to Computerization.”

The answer is “very.”  The paper concludes that 47%–that’s right, just about half, of the jobs now done by humans in the US are likely targets for replacement by robots.

How can this be?

Mssrs. Frey and Osborne divide work tasks into a matrix, according to whether the they require manual or cognitive skills, and whether they are repetitive or are non-repetitive, i.e., require some creativity, judgment or persuasive ability.

What we see in the ATM and the welding machines is repetitive manual tasks already being done by robots. We;re all used to that. The Frey/Osborne assertion is that while robots may increase their penetration of this segment of the matrix, computer scientists have become skillful enough in their algorithm fashioning that robots can now replace humans doing routine cognitive tasks. These include cashiers, waiters, tickettakers, manners of information kiosks, legal writers, medical diagnosers, truck drivers…

Is anyone safe?

Thank goodness, yes. On second thought, “Thank goodness” may not be appropriate.

–one set of “safe” jobs consists of service work that pays so little that savings don’t cover the cost of building the robot. Ouch.

–the other “safe” jobs re the ones that require a high degree of education, or that depend on creativity, or the ability to lead/persuade others, or the flexibility to respond effectively to novel situations.

fending off the robots

In the Frey/Osborne research, the two most effective ways to prevent your own robotization are to have a college degree or to be paid very poorly. Those lucky enough to qualify on both counts can breathe a sigh of relief.

timeframe

The Oxford paper gives no timeframe for this displacement. But even if the authors are off by a mile in their 47% and even if the process they describe takes half a century, substitution of capital for labor will continue to be a drag on job formation for a long while.

Frey and Osborne point out that ten years ago academics maintained that the safest possible job was being the driver of a motor vehicle.  And then along came the Google car.

IBM is refocusing itself to emphasize development of Watson, which is already being used to help make medical diagnoses.

 

Ironically, the current ultra-low interest rate regime in the US lowers the cost of investment capital—and therefore also lowering the breakeven point that must be reached to make the investment in robots.

investment significance?

Mr. Wolf’s op ed imagines the possible long-term societal implications of further mass replacement of humans by robots.  As an investor, my thought is that it may be wrong to look for the usual cyclical signs of vigor returning to the economy–signs that may never come.  Safer to focus on secular growth ideas,