A More Automated Future? by Gerstein Fisher
As the US bull market celebrated its fifth birthday in March, I was struck by the wide chasm in sentiment between Wall Street and Main Street. The S&P 500 Index has returned almost 200% since the market bottom in March 2009; corporate earnings are at record highs and companies are flush with cash. Yet for many Americans, the story of the US economy feels quite different, as unemployment remains elevated, the labor force participation rate has declined, consumer confidence is still well below pre-Great Recession levels, and gaps in income and wealth have become a politically charged topic. Reflecting a dour mood, a March poll by Bloomberg revealed that nearly 80% of Americans felt that the five-year bull market in stocks has had little or no effect on their financial well-being (I hope our clients at Gerstein Fisher feel differently!)
I have often felt that perusing media headlines is an interesting way to take the pulse of the current beliefs of society and the market. In recent weeks, I happened to catch a number of articles about how the ever-quickening pace of technological advancements is raising concerns over increasing automation taking jobs away from (or suppressing the wages of) middle-income workers. There’s Baxter the Robot, who looks friendly enough (see photo) but tirelessly toils in factories for an estimated $4 an hour (well below the minimum wage in every state) and takes no coffee or bathroom breaks. Bloomberg noted recently that foreign exchange traders are rapidly being replaced by computers, and in March ran a story entitled: “How to Keep Your Job When Your Boss is a Robot.” A recent study at Oxford University estimates that professions employing nearly half of the American workforce may be automated within 10 to 20 years.
In this column, I would like to discuss some of these important technology, employment and economic trends. In a follow-up piece, I will address some of the investing aspects of these trends and describe some ways in which we at Gerstein Fisher harness technology to hone our investing.
The Challenge of Intelligent Machines
At the same time that brilliant new technologies are creating great wealth, they are also exacerbating gaps in income and wealth in society, and this conundrum has become a subject of study for academics and social commentators alike. In their book The Second Machine Age, Erik Brynjolfsson and Andrew McAfee of the MIT Center for Digital Business write, “There’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots and other digital technologies are acquiring these skills and abilities at an extraordinary rate.”
By now most of us are familiar with the swath automation is cutting in factories. For instance, from 1998 to 2012, the number of workers in US factories fell by a third, even as US value- added in manufacturing rose by more than 40% due to productivity gains (see graph below). But now the jobs lost to robots and computers are no longer just routine, repetitive task positions like assembly-line labor, bank tellers and supermarket cashiers. That exponential increase in processing power and improving artificial intelligence in machines means that a great deal of work that is “rules-based”, including purely cognitive work, is (or will soon be) automated.
Winners and Losers
For instance, machines are now operating cars, recognizing speech, writing technical articles, translating for businesses, making medical diagnoses, conducting document reviews for law firms, replacing bank lending officers and completing tax forms. Interestingly, mechanized intelligence is still poor at sensory tasks that require fine motor skills, such as gardening, cooking, hairdressing and housecleaning. Of course, historically, innovation has killed some jobs but created new and (the theory goes) better ones. Those who are concerned about the effects of automation in the workplace are not Luddites: the problem now is that in many ways the dislocating effects of technology (combined with globalization) are happening faster than the benefits. In many areas, demand is rising for low-skill jobs while falling (and in some professions even disappearing) for mid-wage jobs.
So who are the winners? The developers and owners of intellectual property that can be commercialized have been huge beneficiaries. For example, in the shift from analog to digital photography, old photography companies that directly or indirectly employed hundreds of thousands of workers have been replaced by some internet-based outfits with just a few thousand workers and a relative handful of very rich owners. The same dynamic has played out for the owners of tax, travel agency and many other software and internet site developers.
Other winners are workers with digital skills in high demand—for instance, those with strong math and analytical abilities who are comfortable harnessing the power of computers. This would include statisticians who are able to mine big data for industries ranging from movies to doughnuts, or marketing folks able to combine the cognitive strengths of humans and computers.
In the next installment, I will discuss some of the implications of these powerful trends for investors.
Brilliant new digital technologies are creating great wealth but also generating angst in society due to effects on the labor market. In the digital divide, demand is strong for highly skilled workers but weakening for many middle-income, white-collar jobs characterized by routine, repetitive tasks.