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THE LIGHTS IN THE TUNNEL / 126 workforce, lost nearly two million textile jobs to improving automation technology between 1995 and 2002.42 It is easy to imagine factories of the future that are almost entirely automated and run by a few skilled technicians. As labor costs fall, we can expect that energy costs will be rising. Nearly all analysts agree that world oil production will peak at some point in the coming years and decades. Beyond this point, in the absence of replacement energy technologies, the cost of fossil fuels is likely to rise inexorably. Given this, we can reasonably expect that the primary incentives for locating the factories of the future will shift away from seeking low labor costs and toward minimizing energy costs. One of the most significant drivers of energy expenditure is, of course, transportation. Economists Jeff Rubin and Benjamin Tal have suggested that soaring transportation costs resulting from high energy prices alone may be sufficient to reverse globalization. They point out that once oil reaches a price of $150/barrel, the additional transportation costs are essentially equivalent to the tariffs that existed in the 1970s.43 In a world with automated factories and high energy costs, there will be clear incentives toward distributed manufacturing. It will make sense to locate factories as close as possible to consumers and/or to the natural resources used as inputs in the production process. A primary motivation in locating factories will be to minimize the transportation costs associated with moving both inputs and final products. It is also possible that advancing automation technology may ultimately transform the traditionCopyrighted Material – Paperback/Kindle available @ Amazon Danger / 127 al economy of scale model so that much smaller and more flexible factories located in direct proximity to markets make sense. Aside from energy costs, a second crucial consideration will be political stability. The forces unleashed by accelerating technology are likely to have a highly disruptive impact on governments throughout the world. Businesses will place increasing importance on minimizing investment risk: they will seek to build factories and hold capital in countries they perceive as stable. In the future, those nations which can adapt to change so as to continue to support sustained consumption, maintain stability and rule of law, and provide reliable access to energy, as well as efficient, energy-minimizing transportation systems, are likely to have a significant competitive advantage in terms of attracting and retaining investment. India and Offshoring We’ve noted that China does not yet have an integrated, self-sustaining modern economy. This is equally true of India. India is essentially an impoverished, developing nation with a government that is democratic, but also often mired in bureaucracy. In the midst of this, India has an isolated island of enormous growth and prosperity: its software and offshoring industries. India will face exactly the same two retarding forces that are going to hold back China: First, automation is going to invade its offshoring businesses (as well as its traditional industries) and take back many of those jobs. We are likely to see “jobless repatriation” as technology adCopyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 128 vances to the point where many lower-skill jobs can be performed by computer technology. Indian companies will probably respond by trying to outrun automation. They will seek to increasingly capture higher value jobs performed by highly educated and paid workers in Western countries. As we have seen, however, even many high skill jobs will ultimately be subject to automation. And any success in capturing higher value jobs will only exacerbate the second problem, which will be the collapse in demand that results from fear of job loss in the West. Economic and National Security Implications for the United States What would all this mean for the United States? The answer to that depends entirely on how well the U.S. can adapt to the new reality. The conventional views all point to a decline in global influence and power for the United States. The catch phrases for the coming decades will be “the post-American era” and “the end of American exceptionalism.” Once again, though, those conventional views are all based largely on demographics—on countingworkers. America is expected to decline because countries like China and India have dramatically more workers—and they are willing to work for less. What if, in the future, workers are not going to be as important as we imagine? What if machines advance to the point where workers become increasingly superfluous to the production process? In that scenario, it Copyrighted Material – Paperback/Kindle available @ Amazon Danger / 129 is all about who controls technology. And as of the moment, that continues to largely be the United States. In that sense, the future for the U.S. could potentially be much brighter than the conventional wisdom suggests. But that is only if we can adapt, and that will be a very serious challenge. The United States is fundamentally a conservative country. The risk is very high that we will continue to cling to our existing system simply because it has always worked in the past. If that happens, a great opportunity will be lost, and other countries may well seize the initiative. If that opportunity is indeed lost, it will clearly have dire national security and military implications for the United States. The obvious reality is that America’s military power is entirely dependent on its economic vitality. If the trends projected here are allowed to impact the U.S. economy in an uncontrolled fashion, the likely result will be greatly diminished economic growth (or even sustained decline) and widespread unemployment and social problems. This will clearly detract from the resources and attention that can be allocated to national security. In the previous chapter, I suggested that there may also be a trend away from college education and toward trade jobs that are perceived as being safer from automation and offshoring. This impact may fall especially heavily on technical fields such as information technology and computer engineering because jobs in these areas are perceived as being especially susceptible to offshoring. Clearly, this will threaten the United States’ future leadership Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 130 position in technology—and therefore its long-term national security. As we sawpreviously, the Pentagon envisions a future in which technologies such as robotics and artificial intelligence are deployed increasingly on the battlefield. The reality is that it is impossible to say exactly which technologies will have important military and national security applications in the future. The general acceleration of computer information technology is certain to have a disruptive impact with highly unpredictable results. We can expect that future technologies that emerge in commercial settings will rapidly be redirected into the military arena. It is crucial, therefore, that the U.S. remains competitive in virtually all areas of technology development. While advancing technology seems likely to ultimately eliminate job opportunities for a large number of average people, maintaining control of that technology will require that the minority of individuals with the capability to make significant contributions to technical fields continue to be educated and trained. These people come from a variety of backgrounds throughout society, and therefore, the disintegration of broad-based incentives to pursue a college education—especially in scientific and technical fields—is likely to be disastrous for the United States in the long run. Copyrighted Material – Paperback/Kindle available @ Amazon Danger / 131 Solutions Now that we’ve identified the danger we might face and some of the possible implications for the future, let’s start thinking about some possible solutions. What could we do to avoid the scary economic scenario we discussed at the beginning of this chapter? In order to answer that, let’s start by looking at the idea of labor and capital intensive industries. Labor and Capital Intensive Industries: The Tipping Point We can place any industry somewhere on the spectrum that runs from being extremely labor intensive to being highly capital intensive. In our current economy, some of the most labor intensive industries are in the retail, hospitality and small business sectors. Supermarkets, retail chain stores, restaurants and hotels all have to hire lots of workers. Capital intensive industries, on the other hand, hire relatively few workers and instead require investment in technology: in advanced machinery and equipment and in computerized systems. High tech industries such as semiconductor manufacturing, biotechnology and Internetbased companies are all capital intensive. Over time, as technology advances, most industries become more capital intensive and less labor intensive. Technology also creates entirely new industries, and these Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 132 are nearly always capital intensive.* This has been going on for centuries, and historically, it has been a good thing. If you compare the industries in a developed nation like the United States with the industries in a third-world nation, you will invariably find that the U.S. economy is far more capital intensive. It has been the introduction of advanced technology that has increased productivity and made the advanced nations of the world rich. The reason for this goes back to the economists’ explanation for the “Luddite fallacy” which we discussed in the previous chapter. As new technology is adopted by industries, production becomes more efficient. This results in some loss of jobs, but it also results in lower prices for goods and services. In other words, it puts more money in consumers’ pockets. These consumers then go out and buy all kinds of things, and so the result is increased demand for the products produced by all types of industries. Some of these industries are very labor intensive, so as they strive to meet this increased demand, they are forced to hire more workers. And so, overall employment remains stable or even increases. Sometimes, of course, this results in an unpleasant transition for some workers: they may lose a high paying manufacturing job and end up with a lower paying retail job. Consider the case of YouTube, which was acquired by Google for about $1.65 billion in 2006. At the time it was acquired, YouTube had only about 60 employees. That’s a valuation of over $27 million per employee. Compare that with about $100,000 per employee for WalMart. * Copyrighted Material – Paperback/Kindle available @ Amazon Danger / 133 Labor v. Capital Intensive Industries44 Company Employees McDonalds Wal-Mart Intel Microsoft Google 400,000 2,100,000 83,000 91,000 20,000 Revenue per Employee $59,000 $180,000 $456,000 $664,000 $1,081,000 Can this process continue forever? As we saw in the previous chapter, automation technology is likely to increasingly invade the remaining labor intensive sectors of the economy. When this happens, what industries will be left to absorb all the dislocated workers? Look at the table above. What happens when McDonalds begins to look more like Google? A simple application of common sense should show us that there is some threshold beyond which the overall economy will become too capital intensive. Once this happens, lower prices resulting from improved technology will no longer result in increased employment. Beyond this threshold or tipping point, the industries that make up our economy will no longer be forced to hire enough new workers to make up for the job losses resulting from automation; they will instead be able to meet any increase in demand primarily by investing in more technology. As we saw in Chapter 2, this point marks the downfall of economists’ faith in the Luddite fallacy, and it also marks the beginning of a downward economic spiral for the simple reason that workers are also the consumers of everything produced in our economy. Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 134 What might we expect to happen if the overall economy were approaching this tipping point, beyond which industries would no longer be labor intensive enough to absorb workers who lost their jobs to automation? We would probably expect to see gradually rising unemployment, stagnating wages and significant increases in productivity (output per hour of labor) as industries were able to produce more goods and services with fewer workers. That sounds uncomfortably close to what actually occurred in the years leading up to the current recession.* In August, 2003, The Economist wrote that “the Bureau of Labour Statistics offered the latest evidence of America’s productivity revival: output per worker soared by 5.7% in the second quarter, at an annualised rate. But in today’s less exuberant times, the figure has raised the unhappy prospect of growth without job creation.”45 Three years later, in an article entitled “The Case of the Missing Jobs,” BusinessWeek said: “Since 2001, with the aid of computers, telecommunications advances, and ever more efficient plant operations, U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour, has soared a dizzying 24%….In short: We’re making more stuff with fewer people.”46 There is no way to know for sure how close the economy might be to the point where overall job creation will permanently stall. However, these statistics are certainly cause for concern. As I noted earlier, we did not see an increasing unemployment rate in the years leading up to the current crisis. We did, however, see stagnating wages, increasing productivity and some evidence of underemployment. * Copyrighted Material – Paperback/Kindle available @ Amazon Danger / 135 The Average Worker and the Average Machine Another way to express this idea of a tipping point is to think of an average worker using an average machine somewhere in the economy. Obviously, in the real world there are millions of workers using millions of different machines. Over time, of course, those machines have gotten far more sophisticated. Imagine a typical machine that is generally representative of all machines in the economy. At one time, that machine might have been a water wheel driving a mill. Then it became something driven by a steam engine. Later, an industrial machine powered by electricity. Today, the machine is probably controlled by a computer or by embedded microprocessors. As the average machine has gotten more sophisticated, the wages of the worker operating that machine have increased.* As I pointed out in the previous section, more sophisticated machines also make production more efficient and that results in lower prices and, therefore, more money left in consumers’ pockets. Consumers then go out and spend that extra money, and that creates jobs for more workers who are likewise operating machines that keep getting better. Again, the question we have to ask is: Can this process continue forever? I think the answer is no, and the very unpleasant graph on the next page illustrates this. The idea that long-term economic growth is, to a large extent, the result of advancing technology was formalized by economist Robert Solow in 1956. Economists have lots of different theories about how long-term growth and prosperity come about, but nearly all of them agree that technological progress plays a significant role. * Copyrighted Material – Paperback/Kindle available @ Amazon