The Impact of Technology: Unemployment May Be More Stubborn This Time

by: Thomas Barnard

Economists come at the current situation with their supply and demand tools, telling us that with the low interest rates of the Bush years, demand for homes and autos (among other things) were stolen from future years, and now those years are here. And we must face the fact that it will take years to restore demand.

And that is true enough, but I don't believe things are quite so static.

I come at this from a technology point of view, which suggests to me that unlike the Great Depression of the 1930s, we are in a new era, and unemployment may never again reach the low levels achieved in the years before the collapse.

Take the insurance business. Initially, brokers placed business with agents who had contracts with the insurance companies. Some clever people, State Farm and Allstate (NYSE:ALL), figured out that if they sold through their own agents they could eliminate the cost of the broker and offer lower rates. Then comes GEICO who eliminates the commission structure of both brokers and agents, and hires instead a bank of fixed-paid telephone service representatives.

Buffett gets several economies from his bank of service reps. He can hire them wherever labor in the country is cheapest, and probably rent will be less, too. He offsets the local touch with 24/7 availability.

Now comes the next step...

And I'm talking about the astounding performance of the IBM computer Watson, which beat the two best human players of the TV game show Jeopardy early in 2011. IBM's Deep Blue was amazing beating the world's best chess player, Kasparov, but Jeopardy-winning Watson is a whole order of magnitude more astounding. Here is a machine navigating human language with extraordinary results.

And how might that language technology be used? In the insurance example cited above, we have gotten to the point that GEICO (and Warren Buffett) have eliminated the agent with a bank of interchangeable telephone service representatives. But now, for example, GEICO might decide to replace their bank of service reps with IBM's Watson. It answers the phone, it asks you a few questions, and poof: you get your quote. And very fast. It works 24/7. It doesn't have a nettlesome union, or need health benefits or pension.

You think: Oh, that's insurance, that's a no-brainer, it won't happen to me, I'm a carpenter. Well, okay, maybe you're indispensable, but the unrelenting press of technology has affected you, too. Your nail gun is four times faster than your old hammer, so the number of hours you are needed has been gutted. And if you watch your Modern Marvels, you can see how fast a pre-fab house can be built in the factory. Today you watch the carpenter racing down the line with his nail gun, but how long will it be before a robot runs down the same line with a nail gun built into its high-tech arm?

While it may not repatriate jobs to America, such technology may staunch the flow of dollars to India or the Philippines, when IBM, say, can nail down computer service repair calls, for example. Why wouldn't Dell (DELL) want one of these machines? The algorithm (the step-by-step process to achieve a goal) is already written to a large extent. What do you think the tech guy is doing when he says, "Wait just a minute"? He is consulting the manual (which is an algorithm), to see what step to try next. And the IBM Watson computer will not keep you waiting as long, so that will be another selling point for the system. Watson will be able to present a voice easy to understand. No more accents to deal with. The voice can sound like a news announcer from the Midwest, if you want.

Ironically, "Smaller, faster, cheaper, better," was the line of an ex-IBM employee in the movie Disclosure. But get a load of this: Skype, a quite sizeable telephone company now owned by Microsoft (NASDAQ:MSFT) with 20% of the international long distance market (that is, 190 billion minutes), is only 1,000 people. What will happen to jobs in the other telephone companies? I'd say continual downsizing, as it's called, is a trend that will become more pronounced in the years to come.

Booksellers have been adversely affected by Amazon (NASDAQ:AMZN), and certainly Borders was a victim. Goodbye Borders, goodbye jobs. First, Jeff Bezos got rid of the middle man, but now he'd like to get rid of physical books altogether. Kiss your jobs goodbye, printers. The music industry was changed forever by the digital file. Music industry profits have never recovered. You could say that even Warren Buffett's purchase of Burlington Northern was a technology buy. He likes two men driving a train of a hundred railcars, and will be quick to remind you that on the road every trailer requires its own power unit and driver. But he is not immune to the new advantages of technology - double decker trains, and GPS management of railcars. The diesel engines that run these trains reminds me of the difference between the 1930s and now.

All during the 1930s and 1940s the diesel engine was coming on, and the steam engine was on its last legs. They were gorgeous beasts, those old locomotives, like the Allegheny with its 20 wheels (and another 14 wheels on the tender). But they're gone. And so is the caboose. And so are: pipe fitters and boilermakers and firemen. Goodbye jobs.


Obama came at healthcare from a social and political point of view, but with a nod to digitized records. And once again, I'm coming at it from the onrush, nay, the firehose gusher of technology. I'm talking about more than digitized records, I'm talking about diagnosis.

Pilots, once the brave commanders of the sky have been reduced to switching on the automatic pilot. Maybe that should have been named the algorithmic pilot. And their wages and benefits have been adversely affected accordingly. Doctors have been watching this unhappily from the sidelines. But now the tricky business of diagnosis may, to some extent, be removed from Dr. House by the soon to be ever-present Dr. Watson.

In this particular case, I welcome Watson. He will be able to comb the vast medical literature and find facts the doctor has not come across and prevent unwarranted and unproductive treatments. To some extent, the Veterans Administration already has employed some of this technology with happy results.

Kaiser Permanente has recently inked a $500 million deal with IBM that will eliminate 860 jobs, but I suspect this is just the tip of the layoff iceberg. This looks like an old technology deal. When Watson can do most of the doctor's job, what is his compensation going to look like? Which may be a happy thing for Medicare, or national healthcare.

A Jeopardy-winning Watson type computer could be made available to the public by the government, and individuals can read up and maybe figure out what they should do in most cases, and only go to the doctor when they need a second opinion or a drug prescription (as is the case in the U.S.; there are countries that don't require a gate-keeper doctor to get a prescription drug).

I Am Writing the Expert Program to Replace Me

It could end up that there will be only two classes of people, those that write the programs that eliminate jobs, and those who work at McDonald's - the legions in the service industries.

Programming jobs will continue to be good, though even that has been automated: Blocks of code that have been written and work don't need to be rewritten again, so in the end you are coding the expert program that will replace you. And what I am suggesting is that normal supply and demand in the labor markets will be disrupted. Demand for employees will drop off, while supply continues to increase.

Underemployment Benefits

Such a situation suggests that unemployment benefits will get renewed and extended and extended again until it morphs into the Negative Tax, backed by Milton Friedman.

What will happen to jobs? Of course, no one knows how such a scenario will play out, but it could be that jobs will be dissected and divvied up - three days for one worker, three days for the other. A six day week altogether. That would seem to be the humane thing to do. And that suggests the kind of thing they've been doing in Germany to keep people employed and government handouts to a minimum. Some combination of government assistance perhaps to be called Underemployment Benefits, which may be how the negative tax plays out.

Investment Implications

Some may still deny these conclusions, saying it's pie in the sky, or as someone might have said during the Great Depression, it would be like landing a man on the moon. Just plain whacky. Well, we know how that turned out.

As an investor, do I think IBM has good prospects? In a word, yes. It appears that IBM has excellent long-term prospects, which is a hard thing to say about any investment these days. And I would give it a strong recommendation.

This new Jeopardy-winning technology has a customer in Wellpoint (WLP), which announced Sept 12, 2011, that they will use the new IBM algorithms called machine learning, and its improvement in understanding English technology to improve patient care.

Back when IBM sold off its personal computers division to Lenovo, it looked like they couldn't compete, but maybe now we have to re-write history to say Palmisano had the foresight to see where they should be, and perhaps making commoditized computer boxes was not that place. That move looks more and more like a deft move for a giant.

Warren Buffett

It is interesting to note that Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) did not initiate his position until March following after the Jeopardy IBM Challenge of February 16. Certainly he he would never acknowledge it if it were true. His stated reasons include: its stickiness to IT departments, its consistent earnings, the achievements of Louis Gerstner and Sam Palmisano, its sensible stock buy-back, its potential international sales. But it certainly seems possible that Jeopardy event might have triggered his interest.

Because Warren Buffett only uses his PC to play bridge online, people accuse him of being a non-techie. But I think the deepest understanding of Buffett demands that you understand that he lives for efficiencies, especially efficiencies that create a moat between him and the next tycoon. Maybe he is not as thrilled by coolness of the new toys, but a profound efficiency will have his attention.

So it seems possible that if he also bought into Intel (NASDAQ:INTC) that Boeing's (NYSE:BA) 787 carbon fiber Dreamliner might have efficiencies that might also appeal to him, plus a large backlog, a wonderful brand name, a large market cap. Hey, I'm just saying...


It is the natural inclination of managers to remove even reliable employees with 24/7 technology of computers and robots. But sure, they're a schizophrenic lot, because they'll take all their profits, like Bill Gates, to improve the education system, because, after all, that is the best bet, even if it only allows one the privilege of working half a real job.

I don't know how the science fiction people would handle it, but it does look like we headed, pell-mell, into inventing our species replacement, piece by piece, skill by skill, and algorithmically, step by step. In fact, I would use the acronym HAM (Human Algorithm Machine) for computers, just to remind the computers of tomorrow whence they came. But it should be noted, silicon is right below carbon in the periodic table, and by far more plentiful, making up something like 24% of the earth's crust.

We are entering into a wonderful astonishing whirling thrilling intoxicating dizzying era of new products and services, but also a wounding disheartening terrifying era of low paying junk jobs and unemployment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.