Technology

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13
Jun 11

The New York Times Finally Discovers Structural Unemployment

We have visited the issue of structural unemployment several times.  See, e.g. Unemployment and the Fall of Labor, Why this May be Worse than the Great Depression and The New Reality: Permanent Job Loss.   Let’s define it again:

Joblessness caused not by lack of demand but by changes in demand patterns or obsolescence of technology, and requiring retraining of workers and large investment in new capital equipment. Source:  Business Dictionary

How incredulous that it took until June 9th, more than three years into the current recession, for The New York Times to finally discover this “new” reality. Companies Spend on Equipment, Not Workers.

What Did the Times Discover?

Workers are getting more expensive while equipment is getting cheaper, and the combination is encouraging companies to spend on machines rather than people. See Companies Spend on Equipment Not Workers

The article at issue focuses on a Minnesota plastic products manufacturer which hired only two workers, but spent almost three times more on new labor saving machinery. The Times attempts to draw from this example some larger societal and economic points:

  • American workers just can’t compete with Chinese and other low cost foreign workers.
  • Since the recovery began, equipment prices have declined 2.4% while labor costs are increasing about 6.7%.
  • The four newly purchased machines mentioned in the article all come from foreign suppliers.
  • Much of the labor cost increase arises from increasing health care costs and other benefits.
  • Hiring has hidden costs:  including days spent culling the resumes of unqualified applicants.
  • Many applicants lack basic writing, mathematical, technical or computer skills.
  • New employees must go through a federally required safety program, be drug tested at a cost of $150 and require ongoing training, which diverts management from other work.
  • “You don’t have to train [or drug test] machines.”  Generous depreciation allowances and tax credits favor investment in machinery rather than people.

I would argue that The Times article misses one key point, zero interest rates.  Holding interest rates at artificially low levels further encourages equipment purchase rather than new employment.

Complete Lack of Journalistic Insight?

The Times has an amazing lack of self awareness.  Perhaps reporters and editors forget their own editorial stance on key issues:

  • Free Trade – We were implored by The Times to support free trade and open our borders to foreign goods.  These goods are often produced by workers earning less than a dollar a day without employment, safety or environmental protections. How could American business hope to complete with this?
  • Economic Stimulus – Among other incentives, The Times has advocated liberal tax breaks for equipment purchases.  Is it surprising that employers indeed invest in labor saving equipment?
  • Zero Interest Rates – Krugman and other Times editorial and op-ed writers have favored Bernanke’s zero interest rate policy.  With ultra low borrowing rates, of course employers purchase equipment rather than higher cost labor.
  • Obamacare – Once again, The Times has supported a government initiative that effectively has put a stranglehold on employer benefit costs.
  • Other Pro-Worker Legislation – The Times has long promoted employment and labor law reforms which make hiring expensive: The Family and Medical Leave Act, The Americans with Disabilities Act, The Older Workers Benefit Protect Act all have hidden costs which make hiring unattractive.  Couple that with attempts to expand union involvement, and employers are compelled to favor machines over people.

Late to the Party Again

Once again, the pre-eminent New York Times is not reporting the news, but rather restating the obvious. Why have they missed another major economic trend?  Their reporters are smart but ideological.  They are ideologically and emotionally wedded to Keynesian nostrums of economic stimulus and ultra loose monetary policy.  If instead they took a holistic view of what is happening in the real economy, following real business people making real hiring and investment decisions, they would be forced to reassess their adherence to old and dubious politics and theory.

If The Times is about all the news that’s fit to print, it should be least be subjected to  intellectual rigor, and critical and honest thinking.  And let’s not forget timeliness; do we really need to clutter Page One with what we already know?

 

 

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22
Feb 11

People Who Need People

To begin my one course in demography, the professor cheerily introduced the subject: “it is not that we are living longer, it is just that we are dying at a slower rate.”  Until recently, this was the last time that I thought about demographics. A blog post by David Goldman for the Asia Times explores the generational factors affecting our currently depressing housing trends. See Housing Prices and Demographics

Baby Boom Retirement and New Families

Demographers have been warning about a generational oversupply of homes.   Baby boomers are retiring, seeking to sell their current residences and move into smaller digs.  At the same time new family formation has plunged, weakening demand for the homes those retirees are leaving.

Sometimes it helps to look at the world with a kind of simplicity. Think of it this way: Credit markets derive from the cycle of human life.  Young people need to borrow capital to start families and businesses; old people need to earn income on the capital they have saved.  We invest our retirement savings in the formation of new households. All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old. See Housing Prices and Demographics

Two parent families with children are the driving force in housing demand.   While US population has jumped from 200 million to 300 million since 1970, two parent families have remained at 25 million. Housing units with three or more bedrooms were 36 million in 1973 and72 million in 2005.   Thus, the growth in home ownership for affluent two-parent families is lagging behind that for relatively poorer childless and single parent families.

Implications

In David Goldman’s world the cycle has gone wrong, with negative implications for our capital markets:

….something different is in play when investors are reasonably panicked. What if there really is something wrong with our future–if the next generation fails to appear in sufficient numbers? The answer is that we get poorer.

The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still–no matter what economic policies we put in place.  See Housing and Demographics

Completing his thesis, unless we restore the traditional family to a central position in American life, we cannot expect the same level of wealth accumulation we experienced in the 1980’s and 1990’s.  Immigration and foreign investment cannot sufficiently compensate for the lack of family formation and capital.  The end result:

We are going to be poorer for a generation and perhaps longer. We will drive smaller cars and live in smaller homes, vacation in cabins by the lake rather than at Disney World, and send our children to public universities rather than private liberal-arts colleges. The baby boomers on average will work five or ten years longer before retiring on less income than they had planned, and young people will work for less money at duller jobs than they had hoped. See Housing and Demographics

The Job Corollary

I have the highest respect for David Goldman, but one area that he did not touch on is jobs or the lack thereof.   It is a bit like the chicken and egg problem.  Do secure jobs come first, so that workers start families, have children and ultimately buy houses?  Or are families formed, children born, houses purchased and jobs created and procured as an outgrowth of this cycle?  I think that a secure job environment must come first.

Jobs are critical to any analysis of societal wealth.   One could expand upon Mr. Goldman’s thesis and posit that we have too many people in the modern labor force. As we have discussed in this blog, technology and changing societal patterns have created a surplus of labor:

Right now the supply of people is too high.  How has this happened?  Medical technology has slowed infant mortality.  Better medical care and pharmaceuticals lengthen lives.  Women can control their own reproduction.  They can enter the workforce rather than tend to large families.

On the demand side, technology has dramatically changed the nature of work. A modern factory no longer has thousands of people producing cars or steel.  Gone are the Dickensian portraits of 19th century factory life. Computers, robotics and other labor saving devices allow smaller factories to produce cheaper and better products.  Brains have trumped brawn, but the result is a surplus of labor.  Combine improved productivity with a surplus of people and large scale unemployment ensues.  To offset declining incomes households piled on debt over the last 20 years. Income can no longer can support the ever expanding amount of debt in society.  See Are There Too Many People?

The trend to substitute capital for human labor has only been worsened by the Fed’s radical zero interest rate policies:

Low interest rates reduce the cost of capital, hence increase the propensity of employers to use capital-intensive technologies, substituting capital for labor wherever possible. Conversely high interest rates, by making capital more expensive, increase the propensity of employers to hire more labor and train its existing workforce to produce more output rather than investing in capital-intensive equipment….While the Greenspan/Bernanke monetary policies have increased recorded productivity growth, therefore, they have reduced job creation, in this recession creating a pool of long-term unemployed that will remain a miserable underclass until they pass on, decades in the future. See Paradise Regained

Where Are We Now?

We are in the worst of all possible economic paradigms.  We have high structural unemployment, meaning that it will not be easy to reduce the unemployment rate as many jobs do not need doing.   With the combined problems of a lack of jobs and poor level of family formation, housing will continue to suffer.  We built too many houses with too much debt.  We have not let house prices fall to clear this market of its surplus.   Zero interest rates and federal supports to the banks continue to impoverish the middle class and impede job formation and hiring.  Finally, food and energy inflation require an ever greater percentage of family income, and reduce needed savings for house down payments and upkeep.

People who need people also need lower prices and secure jobs.  And they need them fast.

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3
Feb 11

A Perfect Storm in Egypt?

Much has been written about the Cairo demonstrations and the attempt to remove long-serving President Hosni Mubarak.  Pundits focus on rising democratic impulses, anti-Americanism and radical Islam.  In past blogs, I have pointed out a number of trends which create governmental instability, especially in the third world.   The confluence of these trends is at the center of the current turmoil in Tunisia, Yemen, Egypt and Jordan, and threatens to spread to other countries.

Before we begin, we must also remember the personal affront to their peoples perpetrated by the leaders of these countries.  In his thirty years in power the Mubarak family has accumulated a fortune estimated between $40b and $70b.  Contrast that with the average Egyptian family income of $2070 per year.  In Tunisia, the Ben Ali family was forced to flee the country for Saudi Arabia, but they took with them a family fortune estimated at 3.5 billion British Pounds.  So, on its face, a dictatorial power structure, which enriches a ruling family at the expense of an impoverished and disenfranchised citizenry, is an irrational structure doomed to fail.

Regime-Disrupting Technology

-          Costs of obtaining information have declined drastically.  Populations can widely and cheaply use the internet, computers and wireless communication.

-          Information now travels seamlessly between borders without central state control.

-          Social media such as Facebook and Twitter permit anti-government groups to organize quickly and outmaneuver government agents.

-          Wikileaks released documents showing cooperation between pro-Western Arab regimes and Israel.

-          Technology also permits the movement of work to the cheapest locations with the best-trained work force and developed infrastructure.  Thus, countries like Tunisia and Egypt are at a disadvantage in the game of global work force arbitrage. The small but vocal college educated middle class becomes more disaffected as they watch jobs migrate elsewhere.

-          Technology adds to structural unemployment.  As we have discussed in the past it  requires fewer people to operate a modern factory.  See Why This May be Worse than the Great Depression. Jobs available are highly specialized, eliminating much of the work force from hiring consideration.

-          As evidence of the above points, note that the first thing that the Egyptian government did was shut down cell phone and internet service.

All of these technologies operate in concert to fuse anti-government sentiment in autocratic, impoverished countries.

The Decline and Fall of the US Dollar

The US government’s response to the 2008 financial crisis has been to devalue the dollar.  This has been accomplished through a zero interest rate policy and money printing (quantitative easing).  The effect has been dramatic.  Basic food stuffs such as wheat, corn, rice, metals, cotton and energy have skyrocketed in price since the Jackson Hole, Wyoming, Federal Reserve Board announcement that QE2 would be instituted. See 1984 in 2010.  In countries such as Tunisia and Egypt these necessities constitute 40-50% of a family’s budget. A jump in inflation is felt immediately and triggers riots, protests and civil disobedience.

How ironic that in order to save the US economy we are exporting inflation and destabilizing long standing allies in the Arab world such as Egypt, Yemen, Jordan and Tunisia.

Anti-Americanism and Decline of Western Power

The Global Europe Anticipation Bulletin (GEAB) report (January 16, 2011) catalogues the decline of the international system and the diminishing power and influence of the West:

Just look at the inability of the international community to effectively help Haiti over the past year, the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d’Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, … to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless. GEAB No.51 (subscription required)

The West (and especially the United States) lacks the vision or willingness to shape events.  The corollary result of this vacuum is the failure of Arab leadership amicable to the West:

Tunisia and Algeria were rocked by riots and Jordan, Egypt and Lebanon are experiencing serious problems. Beyond the reactions to higher prices for basic necessities, it is the first political shock of the “fall of the Dollar Wall”. The regimes in question are typically powers supported at arm’s length by Western money, that’s to say basically the US Dollar. The rapid erosion of Western credibility and financial resources especially US is already beginning to make itself felt, just like European impotence outside its borders. These countries’ elite are accustomed to feel “untouchable” thanks to their US and European protectors: their fall will be brutal as they realize only now that the “West” can’t really protect them. GEAB No.51 (subscription required)

The Rise of Radical Islam

We read all the time about Al Qaeda but pay less attention to the Muslim Brotherhood movement in Egypt.  I must believe that the rise of radical Islam, fanned by Al Jazeera attacks on the ‘corrupt,’ pro-Western Arab dictatorships, has had a major role in the civil disturbances in Tunisia, Egypt, Yemen and Jordan.

Implications

The United States and Europe have missed the opportunity to reform their own financial and political systems.  Instead, we have implemented only palliative solutions such as zero interest rates, “extend and pretend” accounting, stimulus programs, currency devaluation and meaningless reform such as Dodd-Frank.

American policy makers have not made the connection that our weak financial system has endangered our Arab allies.  Perhaps we are at a historic turning point where technology, irrational political structures, radical Islam, a weakened international system and a financially weak United States combine to effect revolutionary change.  Maybe these changes were inevitable, but maybe not.   Perhaps it is time that American leadership becomes more self-critical and globally focused, examines the unintended international consequences of our economic and political policies, and effects real reform before it is too late.

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6
Sep 10

Labor Day 2010

In an earlier and different time in America, Labor Day was celebratory, a transition from the leisurely light-hearted summer to the more serious autumn, and a return to the busy rhythm of school.   This year, Labor Day is a grim reminder of an American economy that cannot produce new jobs.  How did we get here and how do we get out of this mess?

Lies and Statistics

Friday, the stock market rallied on a better than expected unemployment report.  But behind the statistics there was little reason for optimism.  Mike Larson of Money and Markets analyzes Friday’s Labor Department report:

  • The economy shed another 54,000 jobs in August after losing a similar number in July and 175,000 in June. If you strip out the impact of the Census, you see that private industry created a paltry 67,000 jobs last month. That’s far, far too low to bring down unemployment.
  • Speaking of unemployment, it rose to 9.6 percent in August from 9.5 percent in July, a three-month high. And if you include all unemployed and UNDERemployed workers, you get a whopping 16.7 percent of American workers who are discouraged, only able to find part-time work because full-time work isn’t available, and who have just given up looking entirely!
  • Then look at who’s hiring and who’s not! Education and health care continues to see reasonable growth, with 45,000 jobs added. But hiring health care workers to take care of an aging population isn’t going to drive your economy long term. See America’s Unemployment Nightmare

The problem is that higher paying economic sectors are either not growing or continuing to lay off workers:

Economically sensitive sectors are showing virtually no growth, with only 13,000 jobs added in leisure and hospitality and 19,000 in construction. Manufacturing shed 27,000 workers … trade and transport lost 9,000 jobs … and financial firms cut workers for the fourth month in a row. In fact, the “diffusion” index which tracks how many industries are adding jobs versus how many are cutting jobs sank to 53 from 56.7.

And let’s step back and look at the big picture for a minute. We’ve added just 650,000 jobs in the first seven months of 2010. We lost 8.4 million jobs in the recession that started in December 2007. It would take several YEARS to get back to even at this pace. See America’s Unemployment Nightmare

A Look at the Real World

Much reporting of the Great Recession (Depression) comes from New York, Los Angeles or Atlanta based media.  Few of these outlets examine what is really going on in most of the country. Michael Panzer in Financial Armageddon looks at who is really being hurt:

  • Two million workers over age 55 are looking for work.  Over a million have been out of work for six months or longer.  The unemployment rate in this age group is 7.1%, the highest rate since the 1940’s.
  • A sector of the work force denominated as “middle-skill, middle-wage” has been decimated.  These are entry level white collar jobs such as administrator or secretary, or blue collar jobs such as assembler or machine operator.   Instead of finding good paying jobs, these workers are taking massive pay cuts to work as wait staff or other service personnel, or health aides in homes or health care facilities.
  • Among young blue collar workers employment has fallen 18%.
  • Middle class and upper middle class managers and professionals are seeking assistance from social service agencies due to unemployment or underemployment.   Former donors to these agencies have become recipients of their services.
  • A recent Rutgers study found “that 73% of Americans have either been unemployed themselves (14%) or saw an immediate family member (12%), another member of their family (30%) or a close friend (17%) lose a job.” See Another Installment of ‘Scenes from a V-Shaped Recovery’

Why Intractable Unemployment?

Explanations of “we couldn’t see this coming” or “it was just bad luck” mask several reasons for our current state of unemployment:

  1. Technology is a “game changer.”  Technology will replace many lower skilled administrative and manufacturing jobs (postal workers, telephone operators, computer operators, etc).  See e.g. 23 Occupations That Will Never Recover from the Great Recession
  2. Outsourcing – Closely allied to technology is the outsourcing of jobs to other countries.  With high speed telecommunications, sophisticated software, larger faster ships and lax foreign labor and environmental standards, American companies will continue to outsource jobs.
  3. Financial Excess- The combination of financial engineering of mortgage back securities,  subprime loans and a zero interest rate policy misallocated capital to the housing sector.  With the inevitable housing bust, we destroyed construction jobs and supporting professions such as law, mortgage banking, appraisal, insurance brokers and real estate brokerage.  Moreover, until bad debt is completely recognized and restructured or defaulted upon, the banks will continue limiting new loans.
  4. Government Policy – Small business owners are the growth engines for new jobs.  Faced with new health care mandates and the prospect of heavy fines, new business owners are reluctant to expand.  A full description of the problem is outlined in “Angel Heart” and Obamacare.

Many of these issues were identified in The New Reality: Permanent Job Loss and Why This May Be Worse than the Great Depression.

Wall Street spokespeople and the Obama Administration have been less than candid with the American public about what the real prospects are for reducing unemployment.  While there is a certain inevitability about technological progress, poor government policy is not necessary.  We need to stop some of the self-inflicted wounds of zero interest rates, poor tax policy, wasted stimulus and new mandates, all of which impede economic growth and stymie new hiring.

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26
May 10

The Failure of the Technocrats

The Bible has some great story lines.  The inhabitants of Babel built a huge tower to the heavens to challenge the Master of the Universe.  Of course they failed; the tower first burned and then was swallowed up by the earth.  And the Master punished them with a fitting and eternal dilemma: the world’s people no longer were able to understand each other.  They would forever after have seventy different languages, live in different locations, and most importantly have different mindsets and worldviews.  My own additional take on the moral of the story:  when man believes he can control the entire universe and challenge the Deity, he is asking for trouble and retribution from the Master.

It is not unreasonable to postulate that we have made technology and its enhancements into a deity of sorts.  Without question, in several ways, man is pushing the ethical boundaries of its use of technology   This is not anti-technology rant, as there is much good in technological innovation,  but rather a comment on hubris and limits.  Perhaps it is worth thinking about whether or not we are courting some divine retribution of our own.

The Financial Crisis

At the core of the financial crisis is the naïve belief that we can control risk with numbers and computers. The inherently risky subprime crisis and debacle is the most spectacular example.  Look at the components: first, mathematical modeling of historical default rates.   Next, customer “choice” in risk level, when really the product carried risk level for everyone.  Then, bogus “protections” in the form of derivative “insurance” and “AAA ratings” that offered no protection at all.   Mathematicians used their own models to demonstrate the safety of their products.  Their marketing departments brilliantly sold us on core assumptions that were not true: US house prices would always increase in price; subprime mortgages would default at the same historical rates; homeowners would do everything possible to hang onto their homes; and counterparties underwriting the risk would be fine to pay creditors in the event of massive default.

As we now know, these assumptions were horribly wrong.  Mathematicians and Wall Street learned little from the 1998 failure of Long Term Capital Management where interest rate, equity and currency modeling diverged from historical patterns.  The result was near destruction of the financial system.

Deepwater Horizon

It is now more than five weeks after the Deepwater Horizon oil spill, and we appear no closer to staunching the spill at the source.   Americans have given little thought to the complexity of drilling in 5000 feet of water into 13000 feet of rock.  Oil and gas pressures are enormous and literally destroyed the blow out preventers.   The US Coast Guard has characterized the process to cap the well as challenging as the Apollo 13 rescue.  We do not even have a good estimate how much oil is spilling each day.  The original 5000 barrel per day estimates have been supplanted by scientific estimations of 40,000 to 100,000 barrels per day; a disaster the magnitude of the Exxon Valdez occurring every couple of days.

Our thirst for oil has led us to the outer boundaries of man’s capability to control the consequences.

Enter the Technocrats

Perhaps it is time to re-think the role of technocrats in society.   We have believed the mainstream media’s propaganda that with the right science, math or technology we can control the universe.   This attitude is no more in evidence than in the hubris of Bernanke, Geithner, Summers and Obama that they have conquered natural economic cycles and protected us from another depression.

In fact, we do not know if we have entered a second downturn.  However, we should be highly skeptical if not outright disdainful of any all-knowing group of technocrats.  Man is having trouble controlling “smaller events” like one oil well or one country’s subprime market.  Our own economy is complex and exists within a more complex backdrop of global events like a crashing Euro, Chinese inflation, diminishing energy resources, conflict in the Middle East and other interlocking problems.

Adjusting a couple of economic dials through deficit spending, bailouts and artifice will probably end in tears.   The European Commission and the Obama Administration would be better served re-reading the Tower of Babel story and holding off self-congratulations in any language.

We have heard “mission accomplished” one too many times.

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27
Oct 09

Can You Lend for Thirty Years?

Financial news from CNBC and Fox Business focuses investors on the micro picture while overlooking the macro picture.  When I started investing in the early 1970’s as a graduate student the world looked quite linear.  It seemed reasonable to look at a 30-year investment horizon.  Banks, insurance companies and governments assumed they could either loan or borrow money with a 30 year investment horizon.  Conversely, employees could look forward to 30 year careers and generous pensions from the iconic companies of the time: GM, AT&T, Sears and others.  What changed?

The Financial World Becomes Non-Linear

There is no longer a linear 30 year path for either investors or employees.  Look back to the early 80’s and the Route 128 research highway around Boston.  Revolutionary companies were spawned at the time that threatened the old IBM order:  Prime Computer, Digital Equipment, Wang, Data General, Bowmar and others.  Where are these companies today?  Either out of business or subsidiaries of giant technology conglomerates. Even outside the technology arena, look at traditional manufacturing companies that previously dominated the economic landscape: GM, Chrysler, Bethlehem Steel, and National Steel, to name a few.  Where are they now?  Bankrupt! My own career exceeded 30 years with a Fortune 25 company.  My former company has laid off employees each and every year since 1981 and has frozen its traditional defined benefit pension plan.

Oh To Be A Long Term Investor in Early Twentieth Century!

If we go back to the early twentieth century, an investment banker surveying the financial landscape would feel pretty confident about loaning money for 30 years to a large American company.  For example, a US Steel or General Motors had formidable barriers to competition:  large plants with sophisticated machinery needing large numbers of workers, plentiful and cheap local natural resources such as oil, iron ore and coal, two oceans as barriers to imports, proprietary technology and the ability to attract capital.  Lending for 30 years in a burgeoning American consumer market was like shooting fish in a barrel.

The Investment Landscape Today

A 2009 investment banker surveys an entirely different scene.  Technology and freely available capital have democratized business formation.  Anyone with an idea can go into business. Until the current recession business seed money gushed from pension funds and venture capitalists.  Technology has made it easier to establish a virtual company. You no longer need large plants with heavy machinery and thousands of employees to produce goods. Regulatory barriers have been reduced so anyone with capital and some ingenuity can start a telephone company, bank or airline.  But the inverse side of this phenomenon is that businesses and careers are unlikely to be around for 30 years.  Technology has the capability to destroy companies as well and at the speed of light. see Why All Irrational Structures Fail? Would you want to lend money to Dell or Cisco over a 30 year period and bet they will be the survivors?

Implications

To those who started investing more than 30 years ago the implications of the new landscape are pretty radical:

  • investors should invest in equity rather than debt and expect higher returns over a shorter period of time
  • debt of any duration should carry a higher risk premium than is now being accorded in the credit markets
  • pension funds and insurance companies that have written annuities are going to have a hard time matching long lived liabilities with suitably safe and predictable long term investment vehicles
  • concomitantly shortfalls in pension plans will be a drag on corporations and governments
  • employees can no longer count on 30 year careers and a guaranteed pension at the end
  • employees will have to save more for their own retirement and reduce consumption
  • the government is being unrealistic in thinking that there will be a recall of large numbers of workers to their jobs as employers have learned to substitute technological capital  for labor.

In short, all of our time horizons have become much shorter and the expendable factor in all of this is human labor.

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7
Oct 09

Is the Internet Deflationary?

In the early-1990’s Arthur Andersen Consulting visited our company and put on a small demonstration of the power of the internet.  This was at the beginning of the browser era.  Netscape had simplified the ability to go online and Yahoo had started its search engine.  For demonstration purposes, Arthur Andersen created a search program to find the lowest price for the Top 50 compact discs.  Brick and mortar stores and Tower Records, one of my favorite locations for music shopping, were selling the Top 50 CDs for about $14.  As I remember we searched online for a 1993 Mariah Carey Album, Music Box, and the search engine came back with prices ranging from $8.95 to $16.  CDs are the ultimate commodity; that is, they are uniform, shrink wrapped and need little service (just return the CD for an exact replica if it arrives damaged).  The winning bidder on the search was a no-name distributor in Nevada who was cheapest, even including shipping.

The Internet as a Deflationary Force

I had an “Aha!” moment.  The internet was the ultimate force of deflation.  In economics, price is a function of information. The internet made price information available to everyone simultaneously and in real time.  Why would I spend more than $8.95 for the CD?  Do I care who sells me this CD? Am I going to need a lot of after care for the CD?  Do I care if the seller is in Nevada or India?  All I want is the CD at the lowest price.

On the retailing side, the game changed as well.  I don’t want a large brick and mortar store, too expensive.  How do I win the new retailing game?  I need to buy in bulk from the record company to obtain the lowest wholesale price. I need the lowest cost warehouse space, the cheapest packing and shipping and little or no returned merchandise.

If this model works for CDs, it works for all standardized manufactured goods from cars, televisions and home goods to running shoes and clothing.  This puts enormous pressure on the entire supply chain to produce the lowest price goods.  FedEx and UPS and high speed telecommunications via the internet enable manufacturing and shipping from anywhere in the world.  Labor and capital are now squeezed in totally new ways.

This natural evolution of the internet unmasked true price information in services, as well.  With the click of a mouse, consumers can now see the real and hidden pricing on everything from travel (Priceline, Travelocity, Expedia) to mortgages (Quicken Loans, Lending Tree) to insurance (IntelliQuote, Insure.com).   The consumer can also utilize online professional or customized services such as law, medicine and tax preparation.

Deflation is Inevitable

The Federal Reserve and Treasury’s attempts to offset the deflationary effects of massive credit destruction are sailing straight into the headwinds of the new internet driven deflationary force.  Despite the cheerleading on CNBC, many consumers and retailers are suffering their own personal Great Depression.  Every consumer dollar counts and consumers now must avoid impulse purchases and become savers.   Inevitably, they need to migrate from the pleasant surroundings of the local shopping center to lower cost, no frills internet commerce.  Judging by the growth in Amazon sales and the decline in traditional shopping centered retailers’ sales this trend is well under way.

Implications

Do you want to hold a 30 year mortgage on the Mall of America or the Garden State Plaza?  Do you want your law or medical practice in an expensive office building in mid-town Manhattan?  Do you want to be a pension fund holding signature shopping malls and expensive office space? The specter of declining real estate values and lower profit margins for traditional retailers does not bode well for the equity markets or the chimerical economic recovery.

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25
Sep 09

Are There Too Many People?

The population of the earth is now approaching 7 billion with projections for 2.5 billion more people by 2050.  With rapidly depleting natural resources, there is a general recognition that the planet cannot support its current population, let alone future growth.  A dichotomy exists between the Western world with its declining birth rates and the burgeoning populations in the developing world.  The recognition of the limits of population growth has occurred in the Western world first. The response has been a change from societal support for procreation to one of indifference.

Radical Societal Changes

Post World War II, radical societal changes have occurred in America.  We have shifted from an agricultural to an urban and suburban culture.  Rapid advances in computer technology, communications, and pharmaceuticals have lengthened life. The population has increased and the need for labor has decreased.  The subconscious societal response has been a shift away from supporting procreation.

Thus, what do euthanasia, feminism, no fault divorce, legalized birth control, abortion, pornography, and gay marriage have in common?  Through legislation and case law we recognize that procreation no longer needs protection.  Why? It is unnecessary.

History and Evolution

In agrarian and early industrial societies large numbers of people performed work to sustain themselves and the economy.  Large farming families provided a cheap source of labor for planting and harvesting.  High levels of infant mortality and early death from wars, injuries and disease buttressed the need for large families.   Observe pictures of a 19th century factory and notice that it teems with workers, especially large numbers of women and children.  Society put a large premium on reproduction and intact, monogamous families with large numbers of children.

The early Abrahamic religions supported the family and reproduction.  In the Five Books of Moses there are prohibitions against killing (in virtually any form), homosexuality, bestiality, harlotry and strictures limiting divorce. These religious proscriptions have been imported into modern legal codes; the state has a monopoly on marriage and divorce.  Until recently, divorce was difficult to obtain and “no fault divorce” did not exist. In most states, bans against homosexuality, oral sex, bestiality, adultery and euthanasia are still on the books but rarely enforced.

Why now have we accepted or contemplated radical changes in our legal codes to accommodate gay marriage, abortion or euthanasia?  We are no longer a society that promotes procreation.  Are we now a society of death?  We no longer care whether couples marry or divorce. Women enter the workforce in large numbers, and gay couples marry because we no longer value reproduction.  Below the collective consciousness we recognize our burgeoning population and shrinking resources.

Economic 101: Supply and Demand

Reduce all of the above to Economics 101, that is, supply and demand.  Right now the supply of people is too high.  How has this happened?  Medical technology has slowed infant mortality.  Better medical care and pharmaceuticals lengthen lives.  Women can control their own reproduction.  They can enter the workforce rather than tend to large families.

On the demand side, technology has dramatically changed the nature of work. A modern factory no longer has thousands of people producing cars or steel.  Gone are the Dickensian portraits of 19th century factory life. Computers, robotics and other labor saving devices allow smaller factories to produce cheaper and better products.  Brains have trumped brawn, but the result is a surplus of labor.  Combine improved productivity with a surplus of people and large scale unemployment ensues.  To offset declining incomes households piled on debt over the last 20 years. Income can no longer can support the ever expanding amount of debt in society

Implications

Since there is no longer an economic mandate to produce large families, American society will tolerate, if not accept, living arrangements which do not support procreation.  More states will recognize gay marriage and alternative domestic partner arrangements.  Going forward we will also face higher rates of unemployment and declining tax revenues.  The “green shoots” that the current US administration trumpets will not include a return to full employment, because there are just too many people.

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