Trouble Brewing

On multiple levels, in both the Third World and the developed world.



It doesn’t have to be a catastrophe, however, since Western governments can implement a large-scale industrial policy to bring back manufacturing and reverse the trend of de-industrialisation.

The mass unemployment that will result must be solved by government programs to create socially and economically useful work for decent wages, and maintenance of aggregate demand by fiscal policy.

The Future before your Eyes

What happens as the few workers we see in these videos below are no longer needed? And, even more importantly, when middle class and professional jobs get hit by the same trend through AI and more sophisticated software?

Capitalism has both a supply-side and demand-side. As more and more work is done by machines or software, the relationship between aggregate demand growth and private sector employment growth will start to break down – or at the very least become very weak. Eventually, a government will not be able to stimulate aggregate demand as an effective solution to unemployment, because this will tend to cause more use of machines, not human beings.

The solution to this is obvious: governments need to do much more to manage the demand-side. They need to find economically and socially useful work that can still be done by human beings and also move towards a guaranteed basic income. If you want income above the guaranteed basic level, you will still need to do some work of value to human society and civilisation (e.g., science, medical and technology research, helping development in the third world, human social services etc.).

A Brighter Future for the US?

It is looking that way for these reasons:

(1) the news that the US may become an exporter of energy and have energy independence in the coming decades, perhaps even with an era of cheap energy for the US itself; and

(2) the revolution in automation and robotics, and the return of manufacturing to the West from East Asia.

In brief, a report from the International Energy Agency (IEA) predicts that, with domestic oil production soaring, the US will possibly become the largest oil producer in the world by 2020, and by 2035 it could become virtually energy independent.

That also means that the US trade deficit will fall significantly.

The cheap energy will also feed into and reinforce the second factor above: the return and invigoration of domestic manufacturing, which will be effected by the increasingly cheap and effective forms of industrial automation, especially robotics.

There should be some return of manufacturing to the US and Western nations from East Asia and other developing, low wage countries, as production costs – above all, labour costs – fall significantly. If cost of production differences are not great, why not produce in the huge consumer markets of North America and Europe?

A third related issue is what this means for the rise of China. It was always nonsensical to suppose that superpower status has no relation to economic power. And the US’s status as the world’s superpower will be strongly reinforced, not weakened, by the emergence of energy independence and the return of manufacturing.

It has got to the point now that the idea that China is somehow destined to be the world’s new superpower is assumed by many people when discussing this issue. The RMB is touted as soon to be the world’s new reserve currency, and so on. But there is no inevitability about any of this, and there are many reasons to be rather sceptical.

For one, how can China be a superpower with a domestic currency functioning as a reserve currency when its financial and real asset markets are severely closed off to outside investors? Why hold RMBs, if you do not have a wide range of assets to buy with them, in order to get a return, and to repatriate your money quickly and easily?

The strength of the US is precisely its relatively free and vast financial and real asset markets that provide resting places for savings held in US dollars.

And here is the paradox: if China allows a highly liberalised capital account, liberalised asset markets, and deregulated finance sector, it could be digging its own grave, for the tight control of these things is actually the foundation of its economic stability.

In trying its hand at superpower status, a country like China could be setting itself up as new “lost decade” Japan.


LINKS
Oil and Energy
“US is on Fast-Track to Energy Independence: Study,” 11 February 2013
http://www.cnbc.com/id/100450133

“IEA Report: USA set to become Number One Oil Producer by 2020–Energy Independent by 2035, ” http://www.forbes.com/sites/rickungar/2012/11/12/iea-report-usa-set-to-become-number-one-oil-producer-by-2020-energy-independent-by-2035/

Robert J. Samuelson, “The U.S. may become energy-independent after all,” 11/14/2012
http://www.washingtonpost.com/blogs/post-partisan/post/the-us-may-become-energy-independent-after-all/2012/11/14/ef8624e4-2e7d-11e2-89d4-040c9330702a_blog.html

US Manufacturing
“Coming home: A growing number of American companies are moving their manufacturing back to the United States,” 19 January, 2013
http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united

China
Matias Vernengo, “Is China the new #1?,” April 9, 2012
http://nakedkeynesianism.blogspot.com/2012/04/is-china-new-1.html

Matias Vernengo, “Is China Buying the World?,” October 20, 2012
http://nakedkeynesianism.blogspot.com/2012/10/is-china-buying-world.html

Matias Vernengo, “Is China really opening the capital account?,” March 6, 2012
http://nakedkeynesianism.blogspot.com/2012/03/is-china-really-opening-capital-account.html

Matias Vernengo, “Michael Pettis on the Chinese Growth Model,” March 28, 2013
http://nakedkeynesianism.blogspot.com/2013/03/michael-pettis-on-chinese-growth-model.html

Matias Vernengo, “On China and Jobs,” October 4, 2011
http://nakedkeynesianism.blogspot.com/2011/10/on-china-and-jobs.html

Matias Vernengo, “Is Growth in China Investment-Led?,” June 17, 2011
http://nakedkeynesianism.blogspot.com/2011/06/is-growth-in-china-investment-led.html

Automation and Robotics: The Future of Manufacturing?

First, let me offer a caveat: this post contains some speculative musings of mine on the future of manufacturing. No doubt various criticisms of it could be made.

Countries like the US and the UK are badly in need of trade and industrial policies to rebuild manufacturing. Very large trade deficits are potentially unsustainable. Such deficits often make a country dependent on foreign investment for the capital account surpluses needed to pay for current account deficits.

The crucial factor now, however, is that technology must be used to increase manufacturing productivity and cut costs.

If we want to decrease the trade deficits of the US or the UK, I would suggest an industrial policy to domestically manufacture things imported from China and East Asia.

Strong use of automation and technology to increase productivity and to lower price is necessary. This process can be made faster and more efficient through public R&D programs, and state transfer of new technology to domestic manufacturers.

In an earlier post, I drew attention to a very interesting initiative in the US called the “Save Your Factory movement,” launched by a company called Fanuc Robotics America Inc.

There is an absolutely excellent analysis of this in a 2005 issue of Manufacturing Engineering magazine. It shows how automation can cut costs and even beat low wage countries like China::

Rick Schneider, “Robotic Automation can cut costs,” Manufacturing Engineering 135.6 (December 2005): 65–72.

The US federal government needs to take up these ideas and implement this sort of policy at a federal level – which would make it more effective.

Moreover, the article cited above points out that from 1995 to 2002 the global labour force actually lost 22 million manufacturing jobs because of labour-reducing productivity gains through automation and robotics.

I would argue that it is extremely likely that the 21st century will see manufacturing employment as a percentage of the world labour force decline to a level as low as agricultural employment in most developed nations (2 or 3%).

Will this be a bad thing? Not necessarily. If output massively increases, prices are much lower and Western current account deficits fall or go into surplus, this will be a very good thing, and we will have an abundance of cheap goods.

But we will have to face the fact that, because of automation and technology, employment in tradable goods and services in many countries will probably fall dramatically. Our employment future will probably be mainly in services, education, and most probably in government-sector jobs or employment programs funded by government. There will probably be a great reduction in the hours that people need to work as well.

No doubt additional jobs will be created in new private industries as well, but government can step in and provide employment for those who are unemployed. It might well be that much of the government-funded labour force will be in education (e.g., universities), research or other services. A much greater labour force working in basic sciences and applied R&D in physics, chemistry, geology, biology, genetics, engineering and medicine would mean a much more rapid advancement of science and technology too – a virtuous circle.

In other words, in the face of massive productivity and output gains and cost reductions in many goods and services through technology, the government must use policies for full employment to maintain demand for such goods. The point is that should production go down the route of radical automation in the course of this century, then equally radical Keynesian demand management will be necessary to maintain demand for goods and services and ensure continuing rises in living standards.