Economists are currently involved in a spirited debate over whether the current high level of unemployment results from a severe cyclical downturn or from a structural change in the American economy. The Federal Reserve has forcefully adopted the cyclical downturn mantra, committing $500 billion per year to the assumption that with more financial stimulus the jobs will come back.
But what if the Fed is wrong and we are truly involved in a structural change that significantly reduces the need for labor in the western economies as they are currently configured. The chart below just published by Felix Salmon indicates this is clearly the case. Labor income has been declining in relation to capital income since the 1960s, but the trend accelerated dramatically with the financial crash and appears to be continuing.
Source: Cleveland Federal Reserve
Such trends do not continue forever. Forces are building within the U. S. to reverse this trend. We have expressed our own opinion that the better solution would be to put more of the workforce productively to work. If not we would expect to see a continuation of the drift back to a dole system that has been proven highly destructive in many countries, including the U. S. Both the continued move to digital efficiency and the process of getting Americans off the dole and putting them back to productive work will present interesting investment opportunities over the next decade.
The Robot Revolution
Steven Hansen recently produced a rather depressing chart showing that, despite a period of steady economic recovery, civilian employment in relation to population flatlined beginning in late 2009, after a very sharp drop from 63% to 58% during the financial crisis.
Source: Steven Hansen
The American economy has entered into a new era, a robot revolution that will dramatically transform the nature of work. Most likely we will witness something akin to Moore's law as increasingly powerful physical robots and automated service systems take over former blue-collar and white-collar jobs throughout the American economy. While there will be beneficial effects from this transformation, including a resurgence of manufacturing in North America, we have only begun to see the amount of dislocation that this transformation will ultimately bring to the American workforce.
This bodes quite well for the profitability of those industries that either power the transformation, such as robotics, SaaS software and cloud computing. Other industries will benefit from substitution of robots for humans, particularly manufacturing and certain personal service industries, including health care, where robotic care can replace many services such as pill dispensing currently provided by high price professionals.
We've only begun scratching the surface. In the next few years millions of jobs will be lost as SaaS (software as a service) systems replace the need for human interaction to address routine tasks such as license plate renewals, provision of banking services, and production delivery of digital information formerly incorporated in physical media such as books, newspapers and magazines. Look around your industry. If you don't know how this trend is going to impact you, you're in trouble. As an investor, it makes sense to focus on those companies that are rapidly adopting the new technologies. One of the best ways to target such companies is to look for those that are showing a rapid and continued increase in revenue per employee. Earlier this year Amazon (AMZN) doubled down on this trend through its $775 million acquisition of Kiva Systems.
Globally around 250 publicly traded companies are involved in the manufacture of robots. The Everything-Robotic Blog has published the following listing of some of the more interesting companies:
Defense, Security and Space Applications:
Industrial and Co-robot Applications:
Continued Stagnation in Employment
According to the Bureau of Labor Statistics, over the past decade we have seen labor productivity grow at a 2.5% annual rate. At that rate in 28 years we will be able to produce the same amount of goods and services as we do today with only 50% of the current workforce. Assuming that the acceleration of the current efficiency gains from the digital revolution continue (and the pace is likely to accelerate as robots increasingly replace human workers in fields ranging from manufacturing to home healthcare services), it is not a stretch to assume we could reach a 4% annual rate of productivity improvement within the next few years. At that rate our current output will be generated by half the workers we employ today in only 18 years. That should be good news for those panicked over our ability to support a large increase in retired baby boomers over the next 2 decades, but it also implies that an increasing portion of the American population may not be able to find jobs in that future economy unless there is a radical change in our definition of work.
While many will assume that the increased productivity will automatically convert to a higher level of consumption, there is ample evidence that this may not be the case. MacMansions are not all the rage they were in the early 2000s and the increasing digitization of numerous products that formerly consumed a great deal of physical output is far from its end. Publishing once supported a large paper production industry that has witnessed a steady drop in demand in recent years. Entertainment, which traditionally supported the giant pleasure palaces of the movie industry, is now delivered via my iPhone. It's easy to find other examples. Personal computers were once large heavy boxes. Today they fit in your pocket. That means less demand for steel, copper and the logistics industry that once supplied them. The 50 percent decline in Dell's stock value since the 1990s tells the story. To address the unemployment problems of the United States and the rest of the developed world is going to require more than monetary stimulus. We have to literally reinvent work, providing funding for tens of millions of unemployed Americans to address national needs that require societal action to address. Don't get me wrong, I'm a libertarian at heart and no fan of government. My focus is on the business and investment opportunities that addressing these issues will create.
Despite public pronouncements to the contrary, unemployment in America is likely increasing, not decreasing.
The chart above shows 3 measures of unemployment:
- U-3 (in red) is the measure most popular with politicians because it minimizes the apparent problem. U-3 shows U. S. unemployment peaking at 10% in 2009 and heading down since to a current level around 8%. Unfortunately U-3 is increasingly misleading as it depends upon defining away a large amount of the nation's unemployment problem by excluding discouraged workers and those working part-time who would like to work full-time.
- U 6 (in gray) is a more realistic measure that includes part-time workers and short-term discouraged workers.
- The Shadow Government Statistics alternative unemployment rate includes a measure of long-term discouraged workers as well. Based on this gauge, we are faced with an unemployment problem in the U.S. fully comparable with that of the Great Depression.
None of these measures fully account for PhDs waiting tables because they cannot find jobs in the fields for which they were trained. Whatever your political bent, it is certainly not a stretch that 20% of the potential U.S. workforce is not currently productively employed at the level for which it has been trained. This is roughly double the comparable rate prior to the economic crash.
Matching Needs to Unused Resources
If we were to poll everyone in America with the question "can you identify 10 unmet needs in our society", every respondent would be able to identify at least that number. Each list would be different, but everyone would agree that there are many things that can be done to improve life in our nation.
As the extent to which we are wasting human productive resources becomes increasingly obvious, it is likely that the current national debate over entitlements will move to a discussion as to how unemployed Americans can be put to work addressing pressing national needs. Increasing pressure to address infrastructure deficiencies is an often-cited example, but the conversation will expand to other needs as time goes on. We have significant excess productive resources in our society that are not being utilized to fulfill many needs they can be easily identified. As productivity gains accelerate, this gap will widen and it will likely be accepted by both political parties that our greatest national challenge is to find ways to marshal the nation's unused resources in a productive way.
Almost certainly this is a problem that can only be solved through the combined efforts of government and the private sector. We have many good examples from American history of how this might work, such as the building of national transportation networks, including the railroads, airports and interstate highways, which would have only been possible with government intervention. Similarly national communications networks, starting with the post office, telegraph, wireless and cable television networks and more recently the Internet would have been impossible to create without governmental support and investment.
Entrepreneurs who identified these earlier needs and received governmental incentives to fill them created massive wealth and millions of jobs. Similar opportunities exist in the current environment. Identifying the opportunities and picking those companies that can support relevant governmental initiatives can provide investment opportunities. Obvious candidates are companies focused on bringing healthcare costs in line, those that will profit from infrastructure reconstruction and those that provide more effective approaches to workforce retraining. Domestic energy production will likely be high on the list as well. There will certainly be many others not yet foreseen, which will create the global industries of the future and this decade's 50X stock market winners.