Automated Factory Machines

Fear of technological progress can be observed throughout history. From British textile workers rioting against labor-economizing techniques in 1811 to John Maynard Keynes warning of “technological unemployment” in 1930, many have worried that new technology would lower wages and eliminate jobs. In reality, while some people lose work temporarily, most are reallocated to new, higher-paying jobs. In the words of French philosopher Frederic Bastiat, “to curse technology is to curse the human mind,” and in the face of these Luddites’ worries, technological process has consistently led to increased productivity, higher incomes and more jobs: all three of these statistics (GDP, median income, total employment) have increased steadily through the end of the twentieth century.

There is intense debate, however, over whether this trend will continue. A recent Pew survey revealed that barely half of technology experts believe that automation will continue to create more jobs than it replaces. The other half believe it will displace “significant numbers of both blue- and white-collar workers” over the next decade, and that it will leave “masses of people who are effectively unemployable.” They think we have reached a point in technological progress where human skills are finally becoming obsolete. Former Treasury Secretary Larry Summers, for instance, compared American workers today to horses in 1910, whose jobs were permanently replaced by automobiles and tractors.

Recent trends in the aforementioned data are indicative of these worries. While GDP has steadily risen over the past sixty years, employment has been mostly stagnant since 2000. Similarly, GDP per capita has more than doubled since 1975 while median household income has barely increased. As MIT economist Erik Brynjolfsson notes, “productivity is at record levels [and] innovation has never been faster,” yet the benefits of the growing economy have not been felt by average workers. Technology, it seems, may be reducing the demand for human labor.

Historically, the victims of technological unemployment and dislocation have been low-skill, low-wage workers. From 1979 to 2010, the number of Americans working in factories declined from 19.5 million to 12 million while total U.S. population increased by almost 100 million. Similarly, the agricultural industry that employed 41 percent of the American workforce in 1900 only employed two percent in 2000.

This historical trend may be coming to an end, however, as technology now poses a huge threat to mid-skill, mid-wage jobs as well. Today, most at risk of automation are well-paid jobs requiring repetitive tasks, such as the work involved with accounting, law, clerical work, medicine and even education. The recession of 2007 likely sped up the destruction of these types of jobs. They “fell off a cliff in the recession” states Henry Siu, an economist at the University of British Columbia, “and there’s been no large rebound.” According to Siu, this type of work, ranging from white-collar jobs in sales and administration to blue-collar jobs in assembly work, makes up about 50 percent of employment in the U.S.

High levels of income inequality in the U.S. today are indicative of the loss of these middle class jobs. In what is termed the “polarization” of U.S. employment, the middle class is “hollowing out” as demand increases for not only high- but also low-level work. Most of the new employment opportunities afforded by recent technological advances have been high-wage jobs, such as software engineers and executives, which require high levels of education. This trend is evident in the growing income gap between high school- and college-educated Americans, which has more than doubled since 1965. Demand has also increased for low-skill jobs such as restaurant workers, janitors, and other service workers, whose work cannot yet be automated. The effects of these changes are exemplified by trends in inflation-adjusted incomes from 1970 to 2010. The upper class share of income has steadily increased and the lower class share has remained stagnant, while the middle class share has decreased nearly to the point of becoming equal to that of the lower class.

MIT economist David Autor argues that this trend does not seem likely to continue and that the scope of technological substitution in middle-skill work is “bounded.” To explain this, Autor cites machines’ inability to acquire tacit knowledge, which involves judgment, common sense and flexibility. He says, “there are many tasks that people understand tacitly and accomplish effortlessly but for which neither computer programmers nor anyone else can enunciate the explicit ‘rules’ or procedures.” Speaking a language, for instance, is learned at a young age without significant instruction in grammar. Yet programming a computer to understand a language (not to mention the nuances of voice inflection and body language) is extremely difficult. Autor uses this concept to argue that the increasing polarization of jobs that has been occurring in the past couple decades may be coming to a close because machines are nowhere near the level of sophistication that would be required to perform a task requiring tacit knowledge.

Recent advances in areas such as machine learning, however, could prove Autor wrong. Computers today are able to accomplish tasks that were once considered impossible to automate, even high-level tasks like writing this article. Such machines are called advanced natural language generation (NLG) platforms and are sold by companies such as Narrative Science. Their program, called Quill, is given data (such as a sports box score or company annual report) and can produce complex, engaging stories that are, based on surveys by the company, indistinguishable from human writing. While this technology is relatively new, it is gaining prominence quickly. Large content producers like Forbes and the Associated Press are already using the service, with many others planning to incorporate it in the future.

Similarly, computers can now drive cars, stock shelves, clean buildings, diagnose illness, detect fraud and prepare briefs for lawyers. Jobs that require tacit knowledge, Autor’s alleged saviors of the middle class, are becoming increasingly easy to automate, begging the question: what is the future of the middle class? In addition to the income stagnation that we have already witnessed, some experts predict widespread unemployment, a long-term displacement of as much as 50 percent of the work force.

It is impossible to accurately predict how dramatically technological progress will affect the labor market, and there are still many experts who doubt the scale of its impact. Nonetheless, evidence suggests that technological progress may permanently supplant a significant portion of the workforce in the future, and it has already replaced a substantial number of American middle class jobs and driven inflation-adjusted income downwards.

Despite the threat it poses to the American labor force, however, the truth remains that technological progress makes work easier and more efficient and that its continuation is a reality of our modern economy. This is best explained by Milton Friedman. When visiting the construction site of a canal in which workers were using shovels instead of modern earth moving equipment, Friedman was told that the project was a jobs program. His response was: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”

This article was co-published by Seeking Alpha on Jun. 15, 2015.

Last year, the International Monetary Fund (IMF), the most prestigious international financial institution in the world, ranked China as the largest economic superpower in the world (IMF, 2014). With a 2014 GDP estimate of $17.6 trillion dollars ($300 billion higher than the United States), China has witnessed recent economic growth that has placed it in the center of global economic conversation (IMF, 2014). Companies and businesses around the world have suddenly redirected their energy to cracking Chinese markets, opening up branches and boutiques all around China’s modernized cities. In the 1950’s, American consumerism transformed the global economy. Now, it appears it is China’s turn. Reaching $3.3 trillion dollars, China’s private consumption currently makes about eight percent of the world’s total (Economist, 2014). Walk the streets of Hong Kong at 10 A.M on a Saturday and you’ll see lines of Chinese shoppers eagerly waiting outside luxury boutiques to splurge on goods. Luxury car sales in China have risen 450 percent in the last year and Chinese consumption of expensive Swiss watches now equals more than the United States, U.K and Japan combined (Raconteur, 2015).

Income by age in the United States and China (O'Brien, 2014).
Income by age in the United States and China (O’Brien, 2014).

The unique dynamic of Chinese consumerism has made the Chinese market even more enticing to foreign companies. Not only do the youngest age bracket of the Chinese population make the most money, but they are also the most willing to spend it. Many Chinese migrant workers are engaging in a growing trend called “buying up,” in which they use some of their savings to buy similar luxury goods that the upper class buys. Research by the IDEO, a consultancy, found that many young migrant workers earning less than $830 a month would spend a entire month’s wage on an Apple IPhone (Economist, 2014). This phenomenon has triggered huge growth in companies catering to the lower class’s demand for luxury goods. Alibaba, a Chinese company centered in providing “budget smartphones” to China’s mobile users, is now the fourth largest tech company in the world with a net worth of $215 billion dollars (WSJ, 2014). The future of consumerism and the global economy, it would seem, rests in cracking the market of the new Chinese generation.

Yet, many economists are overlooking a growing trend in the Chinese population that could stalwart private consumption and diminish China’s future influence in the global economy. Despite their recent explosion of wealth, the new Chinese generation is saving more than ever. In the last 15 years, China’s average rate of urban household savings has risen 11 percent (Business spectator). At a current 51.5 percent of net income, China’s saving rate is ranked second in the world, only under oil-rich Qatar (World Bank, 2015). To put that in perspective, the average Chinese citizen saves more than three times as much as the average American. This growing savings rate is, without a doubt, a result of a feeling of instability trigged by the recent political and economic events in China. In an effort to defuse this feeling, the Chinese government has tried to enhance education, healthcare, and other public sectors etc., in hopes of loosening the wallets of Chinese consumers. Yet, savings as a percentage of GDP has continued to rise as spending’s percentage continues to fall.  The inescapable reality is that this trend in savings will only get worse. The wind steering the direction of this course has nothing to do with any of these mentioned public sectors, but rather, one of China’s defining initiatives: the one child policy.

Chinese consumer spending and savings as shares of GDP (Ritholtz, 2009).
Chinese consumer spending and savings as shares of GDP (Ritholtz, 2009).

In the next few decades, China will undergo the world’s largest demographic shits. To begin, China’s population growth has already begun to slow. From 2001-10, China’s population inched up at just 0.57 percent annually—only about half the level of the previous decade, and only one-fifth of the level in 1970, when controlling population growth first became a priority (Wang, 2012). The driving force of China’s slowing population growth rate is its low fertility rate, which has languished well below the replacement level of 2.1 births per 100 citizens for two decades. China’s fertility rate is only 1.4 births per 100 citizens, one of the lowest in the world and well below the developed country’s average of 1.7 (Wang, 2012). In the past few decades, China has repeatedly failed to reach population targets put in place to control growth. For the 10th Five-Year Plan, the National Population and Family Planning Commission set a population growth target of 62.6 million, but China recorded an actual population gain of just 40.1 million. For the 11th Five Year Plan, the population gain of 34.2 million was far below the 52.4 million target (Wang, 2012). This sustained low population growth will cause the number of young workers to decline tremendously.

By 2020, the number of people aged 20-24 is expected to fall 20 percent in China (Wang, 2012). Not only that, but the labor participation rate in this age group will also fall due to rising participation in higher education. Annual higher-education enrollments tripled from 2.2 million to 6.6 million in 2001-10, while the number of college students (mostly aged 18 to 21) rose from 5.6 million to 22.3 million (Wang, 2012). In short, China’s labor force, the foundation of its profound economic growth, is disappearing. At the same time, China will see a surge in the rise of older aged citizens. By 2030, China is expected to see its percentage of people over 60 in total population double (Economist, 2011). China’s ratio of workers to retirees will change dramatically, dropping from roughly 5:1 to just 2:1 (Wang, 2012). This huge shift in demographic will have far reaching effects beyond just labor supply. For example, tax burdens for each working-age person will have to increase more than 150 percent (Wang, 2012).

Estimated net changes in Chinese labor force (The Economist).
Estimated net changes in Chinese labor force (The Economist).

Most members of the new Chinese generation are actually saving in response to this problem. The population is getting older, and the one-child policy places huge economic strain on the new generation. Commonly referred to as the “4-2-1,” the members of the new generation will have to save enough money to singlehandedly look after themselves, their two parents, and their four grandparents (China Outlook, 2014). The most common, and expensive, purchase of the new generation will not be designer handbags and luxury cares, but rather, healthcare to help aid their family. The effect of this profound economic pressure is visible all around China. A decade ago, impoverished migrants gathered outside factories in cities like Dongguan, desperately searching for work. Now, Dongguan’s streets are full of banners and notices advertising jobs as workers protest in demand for higher wages  (Economist, 2014). As diminishing labor supply and increase in labor activism continue to pressure employers, wage rates in China are actually beginning to increase. Yet, this increase in wages represents only half of the new generation’s woes.

Factory workers protest for higher wages outside the Yue Yuen Shoe factory in Dongguan (The Guardian).
Factory workers protest for higher wages outside the Yue Yuen Shoe factory in Dongguan (The Guardian).

The price of healthcare in China has remained inaccessibly high. At the same time, China’s poor living conditions, high rates of pollution, and general crowdedness have caused it to have one of the world’s highest rates of chronic diseases among high-income countries (Strong, 2005). Specifically, China has seen a rise in the rate of cancer as a result of intensive air pollution, now estimated at an index 20 times higher than the maximum safety limit (Nelson, 2014; ABC, 2013). In a recent statistical analysis by Lancet, one of the world’s leading medical journals, China now contributes to 25 percent of cancer deaths globally (Strong, 2005). As a result, China’s expenditure on health care has increased by more than 600 percent since 2000 (BBC, 2014). The Chinese government, to little avail, has attempted to lower the cost of public health care through pledging more funds. In 2009, Beijing allotted $173 billion dollars to help alleviate the cost of public healthcare (Time, 2014).

Yet, to most of the general population, health care prices still remain too high and most health insurances may only reimburse up to 40 percent of the cost for treatment (Time, 2014). While Chinese health care spending has jumped up two percent of total GDP, China’s health care expenditure by GDP has yet to surpass many developing countries like Afghanistan (Time, 2014). As much of the population continues to wait for health care prices to fall, there are those who have simply run out of time.  Zheng Yanliang, a local of the town of Dongzang, for example, took to performing his surgical amputation himself, sawing off his own limb with a hacksaw (Time, 2014). A testament to the inaccessible prices of health care, Yanliang’s story also speaks to why so many Chinese citizens have begun to fear the uptake of sickness and have consequently raised their rate of savings. In a time of increasingly inaccessible healthcare, illness entails death for many of those who cannot afford to treat it.

Chinese citizens in Beijing wearing facemasks to prevent sickness and the inhalation of smog (ABC).
Chinese citizens in Beijing wearing facemasks to prevent sickness and the inhalation of smog (ABC).

In the next few decades, China could lose all of its key advantages that make it “the world’s next superpower.” If the population growth rate continues decrease, China’s cheap labor supply will disappear. Manufacturing companies, one of the greatest contributors to GDP in China, will find themselves scrambling to find workers and forced to raise wages even higher. Those who do work will be forced to save more to not only purchase healthcare, but also to pay off the incredibly high tax burdens. As a result, private consumption will drop, and the consumption of healthcare will increase even more dramatically then it already has. Foreign companies that invested their assets in exploiting Chinese markets will begin to find themselves stuck in slowly crumbling private market and China will find itself in the economic chokehold of a dwindling population that is become ever more frugal.

Yet, the solution to all of these problems couldn’t be clearer. A modification of the one-child policy, more affordable and accessible public healthcare, and an initiative to reduce tax burdens on future workers sprung by the huge increase in retirees would alleviate the effects of this demographic shift. But, it is the execution and implementation of these changes that will pose the greatest challenge to the Chinese government. If the health care crisis in China isn’t effectively solved, then the future of Chinese consumerism lies in the sector of global healthcare. Therefore, the future course of Chinese consumerism, and the many economies reliant on it, rests not in the hands of the new Chinese generation, but rather, the Chinese government.