Economics

Today’s Technological, Monetary, And Political Forces Are Raising A Perfect Economic Storm

Identifying incentives is key to analyzing trends and forecasting what different players will do next.

Those who control the tech are intent on bringing the era of superautomation forward as fast as possible. That’s obvious. But between dicey Federal Reserve policies and possible tax reforms, all kinds of businesses seem to get new incentives to automate sooner rather than later.

Let’s take a look at the key forces that are speeding up automation adoption and what that means for employment.

[REITs]

Federal Reserve Jeffery Lacker
skeeze / Pixabay

First, the Fed.

I’ve made the case (read it here) before that I think they waited too long to end quantitative easing and begin normalizing interest rates.

Their delay created our present weird situation where we have little or no inflation according to the indexes. But the cost of living for people at the median income level and below is outpacing wage growth and leaving the average household struggling to stay even.Real wages, that is wages after CPI growth, have advanced only 0.2% a year since 1973. And as I noted above, real wage growth is now decelerating.

Diminished earning power has, in turn, robbed businesses of pricing power and forced them to cut costs ruthlessly. And one way you slash costs is by automating.

In this week’s Outside the Box (subscribe here), I shared a story about how Amazon is now hiring robots faster than it is human employees. Amazon is in the lead, but other companies aren’t far behind.

This trend limits wage gains even more, and the situation is getting worse as the technology gets better and cheaper.

Of course, there’s absolutely nothing wrong with making your business more efficient. You have to survive against the competition. But in this case the competition is not happening naturally or according to market forces.

The Fed has kept market forces from working and has created an environment that would never have occurred otherwise. You can argue whether a laissez faire market would have worked better or worse, but it’s pretty clear we haven’t had one.

Now Add in Tax Policy

I explained early this year in my open letters to the new US president (you can read the series here) that we would all be better off with a consumption tax like a VAT rather than we are currently with the income tax.

Alas, I did not get my wish. Congress is right now “improving” the tax code in ways that may actually accelerate the automation trend.

For instance, one proposal is to allow equipment purchases to be expensed immediately instead of amortized over time. That’s not a bad idea on its own. However, it effectively subsidizes companies to upgrade their equipment and technology to the latest state of the art.

And, as we saw above, the state of the art is automated devices that need little human help.

The accelerated shift to automation may help explain a Business Roundtable survey that showed some odd results.

As reported by the Wall Street Journal last week, CEOs say their plans for capital investment have risen to the highest level since the second quarter of 2011. That’s good news: Businesses see growth opportunities and want to add production capacity to meet them.

But the same survey shows CEO hiring expectations going in the opposite direction. Hiring is not plummeting by any means, and many do plan to increase hiring over the next six months; but the majority say they will keep their headcount where it is or lower it.

General Electric will cut 12,000 jobs from its power business, roughly 18% of that division’s total employment, in order to cut costs and reduce overcapacity.

How do we explain a situation in which capital spending rises but employment stay the same or falls? Automation is one answer. It lets you increase capacity without increasing headcount and expenses – you may even reduce them.

Not coincidentally, the new tax bill may remove the Obamacare individual mandate, but the employer mandate is staying in place—and healthcare costs are still rising. That too incentivizes businesses to use machines instead of people wherever possible.

So where do all these factors leave human workers?

A Perfect Storm Is Coming at Us

The McKinsey forecasts fall more or less at the midpoint of those in other reports I am reading. We’re facing a perfect storm: Technological, monetary, and political entities are joining forces to stir up a maelstrom of change that is going to bombard all of us. I’m not an exception, and neither are you.

We can’t control these giant forces, but we can control our responses.

Whatever your job is now, you need to think about how vulnerable it may be and what else you might do. If you need to acquire new skills, start doing it now. If you have young adult or teen children, help them with their education and career choices.

That art history degree may not be much in demand in 2030. Or even in 2020.

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