Brad Feld Reviews The Lights in the Tunnel_4 pdf

THE LIGHTS IN THE TUNNEL / 126 CopyrightedMaterial–Paperback/Kindle available @ Amazon workforce,lostnearlytwomilliontextilejobstoimprov- ingautomationtechnologybetween1995and2002. 42  It is easy to imagine factories of the future that are almostentirelyautomatedandrunbyafewskilledtechni- cians.Aslaborcostsfall,wecanexpectthatenergycosts willberising.Nearlyallanalystsagreethatworldoilpro- ductionwillpeakatsome pointinthecomingyearsand decades.Beyondthispoint,intheabsenceofreplacement energytechnologies,thecostoffossilfuelsislikelytorise inexorably.Giventhis,wecanreasonablyexpectthatthe primaryincentivesforlocatingthefactoriesofthefuture will shift away from seeking lowlabor costs and toward minimizingenergycosts. Oneofthemostsignificantdriversofenergyexpend- itureis,ofcourse,transportation.EconomistsJeffRubin andBenjaminTalhavesuggestedthatsoaringtransporta- tioncostsresultingfromhighenergypricesalonemaybe sufficient to reverse globalization. They point out that once oil reaches a price of $150/barrel, the additional transportationcostsareessentiallyequivalenttothetariffs thatexistedinthe1970s. 43  Inaworldwithautomatedfactoriesandhighenergy costs, there will be clear incentives toward distributed manufacturing. It will make sense to locate factories as close as possibleto consumers and/or to the natural re- sourcesusedasinputsintheproductionprocess.Aprima- rymotivationinlocatingfactorieswillbetominimizethe transportation costs associated with moving both inputs andfinalproducts.Itisalsopossiblethatadvancingauto- mationtechnologymayultimatelytransformthetradition- Danger / 127 CopyrightedMaterial–Paperback/Kindle available @ Amazon aleconomyofscalemodelsothatmuchsmallerandmore flexible factories located in direct proximity to markets makesense. Asidefrom energycosts, asecondcrucialconsidera- tionwillbepoliticalstability.Theforcesunleashedbyac- celeratingtechnologyarelikelytohaveahighlydisruptive impactongovernmentsthroughouttheworld.Businesses willplaceincreasingimportanceonminimizinginvestment risk: they will seek to build factories and hold capital in countriestheyperceiveasstable.Inthefuture,thosena- tionswhichcanadapttochangesoastocontinuetosup- portsustainedconsumption,maintainstabilityandruleof law,andprovidereliableaccesstoenergy,aswellaseffi- cient,energy-minimizingtransportationsystems,arelikely to have a significant competitive advantage in terms of attractingandretaininginvestment. India and Offshoring We’venotedthat Chinadoesnot yet haveanintegrated, self-sustaining modern economy. This is equally true of India.Indiaisessentiallyanimpoverished,developingna- tionwithagovernmentthatisdemocratic,butalsooften mired in bureaucracy. In the midst of this, India has an isolated island of enormous growth and prosperity: its softwareandoffshoringindustries. Indiawillface exactlythe sametwo retardingforces that are going to hold back China: First, automation is goingtoinvadeitsoffshoringbusinesses(aswellasitstra- ditionalindustries)andtakebackmanyofthosejobs.We are likely to see “jobless repatriation” as technology ad- THE LIGHTS IN THE TUNNEL / 128 CopyrightedMaterial–Paperback/Kindle available @ Amazon vances to the point where many lower-skill jobs can be performedbycomputertechnology. Indiancompanieswillprobablyrespondbytryingto outrunautomation.Theywillseektoincreasinglycapture highervaluejobsperformedbyhighlyeducatedandpaid workersinWesterncountries.Aswehaveseen,however, evenmanyhighskilljobswillultimatelybesubjecttoau- tomation.Andanysuccessincapturinghighervaluejobs willonlyexacerbatethesecondproblem,whichwillbethe collapseindemandthatresultsfromfearofjoblossinthe West. Economic and National Security Implications for the United States WhatwouldallthismeanfortheUnitedStates?Thean- swer to that depends entirely on how well the U.S. can adapttothenewreality.Theconventionalviewsallpoint toadeclineinglobalinfluenceandpowerfortheUnited States.Thecatchphrasesforthecomingdecadeswillbe “thepost-Americanera”and“theendofAmericanexcep- tionalism.” Onceagain,though,thoseconventionalviewsareall basedlargelyondemographics—oncountingworkers.Amer- icaisexpectedtodeclinebecausecountrieslikeChinaand Indiahavedramaticallymoreworkers—andtheyarewill- ingtoworkforless.Whatif,inthefuture,workersarenot goingtobeasimportantasweimagine?Whatifmachines advancetothepoint whereworkersbecomeincreasingly superfluoustotheproductionprocess?Inthatscenario,it Danger / 129 CopyrightedMaterial–Paperback/Kindle available @ Amazon isallabout whocontrolstechnology. Andasofthemo- ment,thatcontinuestolargelybetheUnitedStates. Inthatsense,thefuturefortheU.S.couldpotentially bemuchbrighterthantheconventionalwisdomsuggests. Butthatisonlyifwecanadapt,andthatwillbeaveryse- riouschallenge.TheUnitedStatesisfundamentallyacon- servativecountry. Theriskisveryhighthatwewill con- tinuetoclingtoourexistingsystemsimplybecauseithas alwaysworkedinthepast.Ifthathappens,agreatoppor- tunitywillbelost,andothercountriesmaywellseizethe initiative. Ifthatopportunityisindeed lost,itwillclearlyhave dire national security and military implications for the United States.The obviousreality is thatAmerica’smili- tarypowerisentirelydependentonitseconomicvitality.If the trends projected here areallowed toimpact theU.S. economyin anuncontrolledfashion,thelikelyresult will begreatlydiminishedeconomicgrowth(orevensustained decline) and widespread unemployment and social prob- lems. This will clearly detract from the resourcesand at- tentionthatcanbeallocatedtonationalsecurity. Inthepreviouschapter,Isuggestedthattheremayal- so be a trend away from college education and toward tradejobsthatareperceivedasbeingsaferfromautoma- tionandoffshoring.Thisimpactmayfallespeciallyheavily on technical fields such as information technology and computerengineeringbecausejobsintheseareasareper- ceivedasbeingespeciallysusceptibletooffshoring.Clear- ly, this will threaten the United States’ future leadership THE LIGHTS IN THE TUNNEL / 130 CopyrightedMaterial–Paperback/Kindle available @ Amazon position in technology—and therefore its long-term na- tionalsecurity. Aswesawpreviously,thePentagonenvisionsafuture inwhichtechnologiessuchasroboticsandartificialintelli- gencearedeployedincreasinglyonthebattlefield.There- alityisthatitisimpossibletosayexactlywhichtechnolo- gieswillhaveimportantmilitaryandnationalsecurityap- plicationsinthefuture.Thegeneralaccelerationofcom- puterinformationtechnology iscertain to haveadisrup- tiveimpactwithhighlyunpredictableresults.Wecanex- pect that future technologies that emerge in commercial settingswillrapidlyberedirectedintothemilitaryarena.It iscrucial, therefore,thattheU.S.remains competitivein virtuallyallareasoftechnologydevelopment. Whileadvancingtechnologyseemslikelytoultimately eliminatejobopportunitiesforalargenumberofaverage people,maintainingcontrolofthattechnologywillrequire thattheminorityofindividualswiththecapabilitytomake significantcontributionstotechnicalfieldscontinuetobe educatedandtrained.Thesepeoplecomefromavarietyof backgroundsthroughoutsociety,andtherefore,thedisin- tegration of broad-based incentives to pursue a college education—especiallyinscientificandtechnicalfields—is likely to be disastrous for the United States in the long run. Danger / 131 CopyrightedMaterial–Paperback/Kindle available @ Amazon Solutions Nowthatwe’veidentified the dangerwe mightfaceand someofthepossibleimplicationsforthefuture,let’sstart thinkingaboutsomepossiblesolutions.Whatcouldwedo toavoidthescaryeconomicscenariowediscussedatthe beginning of this chapter? In order to answer that, let’s startbylookingatthe ideaoflaborandcapitalintensive industries. Labor and Capital Intensive Industries: The Tipping Point We can place any industry somewhere on the spectrum that runs from being extremely labor intensive to being highlycapitalintensive.Inourcurrenteconomy,someof themostlaborintensiveindustriesareintheretail,hospi- talityandsmallbusinesssectors.Supermarkets,retailchain stores,restaurantsandhotelsallhavetohirelotsofwork- ers. Capital intensive industries, on the other hand, hire relatively few workers and instead require investment in technology:inadvancedmachineryandequipmentandin computerizedsystems.Hightechindustriessuchassemi- conductor manufacturing, biotechnology and Internet- basedcompaniesareallcapitalintensive. Over time, as technology advances, most industries become more capital intensive and less labor intensive. Technologyalsocreatesentirelynewindustries,andthese THE LIGHTS IN THE TUNNEL / 132 CopyrightedMaterial–Paperback/Kindle available @ Amazon arenearlyalwayscapitalintensive. * Thishasbeengoingon forcenturies,andhistorically,ithasbeenagoodthing.If youcomparetheindustriesinadevelopednationlikethe United States withtheindustries in a third-world nation, youwillinvariablyfindthattheU.S.economyisfarmore capitalintensive.Ithasbeentheintroductionofadvanced technology that has increased productivity and made the advancednationsoftheworldrich. Thereasonforthisgoesbacktotheeconomists’ex- planationforthe“Ludditefallacy”whichwediscussedin the previous chapter. As new technology is adopted by industries,productionbecomesmoreefficient.Thisresults insomelossofjobs,butitalsoresultsinlowerpricesfor goodsandservices.Inotherwords,itputsmoremoneyin consumers’ pockets. These consumers then go out and buyallkindsof things, andsotheresultisincreasedde- mandfortheproductsproducedbyalltypesofindustries. Some of these industries are very labor intensive, so as theystrivetomeetthisincreaseddemand,theyareforced to hire more workers. And so, overall employment re- mainsstableorevenincreases.Sometimes,ofcourse,this resultsinanunpleasanttransitionforsomeworkers:they mayloseahighpayingmanufacturingjobandendupwith alowerpayingretailjob.   * Considerthecase ofYouTube,whichwasacquiredbyGooglefor about$1.65billionin2006.Atthetimeitwasacquired,YouTubehad onlyabout60employees.That’savaluationofover$27millionper employee.Comparethatwithabout$100,000peremployeeforWal- Mart. Danger / 133 CopyrightedMaterial–Paperback/Kindle available @ Amazon Laborv.CapitalIntensiveIndustries 44  Company Employees Revenue per Employee McDonalds 400,000 $59,000 Wal-Mart 2,100,000 $180,000 Intel 83,000 $456,000 Microsoft 91,000 $664,000 Google 20,000 $1,081,000 Canthisprocesscontinueforever?Aswesawinthe previous chapter, automation technology is likely to in- creasinglyinvadetheremaininglaborintensivesectorsof theeconomy.Whenthishappens,whatindustrieswillbe lefttoabsorballthedislocatedworkers?Lookatthetable above. What happens when McDonalds begins to look morelikeGoogle? Asimpleapplicationofcommonsenseshouldshow usthatthereissomethresholdbeyondwhichtheoverall economy will become too capital intensive. Once this hap- pens,lowerpricesresultingfromimprovedtechnologywill no longer result in increased employment. Beyond this thresholdortippingpoint,theindustriesthatmakeupour economy will no longer be forced to hire enough new workerstomakeupforthejoblossesresultingfromau- tomation;theywillinsteadbeabletomeetanyincreasein demandprimarilybyinvestinginmoretechnology.Aswe sawinChapter2,thispointmarksthedownfallofecon- omists’ faithin the Ludditefallacy,andit alsomarks the beginning of adownwardeconomicspiralforthesimple reasonthatworkersarealsotheconsumersofeverything producedinoureconomy. THE LIGHTS IN THE TUNNEL / 134 CopyrightedMaterial–Paperback/Kindle available @ Amazon Whatmightweexpecttohappeniftheoverallecon- omy were approaching this tipping point, beyond which industries would no longer be labor intensive enough to absorb workers who lost their jobs to automation? We would probablyexpect to see graduallyrising unemploy- ment, stagnating wages and significant increases inprod- uctivity(outputperhouroflabor)asindustrieswereable toproducemoregoodsandserviceswithfewerworkers. Thatsoundsuncomfortablyclosetowhatactuallyoc- curredintheyearsleadinguptothecurrentrecession. * In August,2003,TheEconomistwrotethat“theBureauofLa- bour Statistics offered the latest evidence of America’s productivityrevival:outputperworkersoaredby5.7%in the second quarter, at an annualised rate. But in today’s less exuberant times, the figure has raised the unhappy prospect of growth without job creation.” 45  Three years later,inanarticleentitled“TheCaseoftheMissingJobs,” BusinessWeeksaid:“Since2001,withtheaidofcomputers, telecommunications advances, and ever more efficient plant operations,U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour,hassoaredadizzying24%….Inshort:We’remaking morestuffwithfewerpeople.” 46 Thereisnowaytoknow for sure how close the economy might be to the point whereoveralljobcreationwillpermanentlystall.However, thesestatisticsarecertainlycauseforconcern.   * AsInotedearlier,wedidnotseeanincreasingunemploymentratein theyearsleadinguptothecurrentcrisis. Wedid,however,seestag- natingwages,increasingproductivityandsomeevidenceofunderem- ployment. Danger / 135 CopyrightedMaterial–Paperback/Kindle available @ Amazon The Average Worker and the Average Machine Anotherwaytoexpressthis ideaofa tipping pointisto think of an average worker using an average machine somewhereintheeconomy.Obviously,in therealworld there are millions of workers using millions of different machines.Overtime,ofcourse,thosemachineshavegot- tenfarmoresophisticated.Imagineatypicalmachinethat isgenerallyrepresentativeofallmachinesintheeconomy. Atonetime,thatmachinemighthavebeenawaterwheel driving a mill. Then it became something driven by a steam engine. Later, an industrial machine powered by electricity.Today,themachineisprobablycontrolledbya computerorbyembeddedmicroprocessors. As the average machine has gotten more sophisti- cated, the wages of the worker operating that machine haveincreased. * AsIpointedoutintheprevioussection, moresophisticated machines also makeproductionmore efficient and that results in lower prices and, therefore, moremoneyleftinconsumers’pockets.Consumersthen gooutandspendthatextramoney,andthatcreatesjobs for more workers who are likewise operating machines thatkeepgettingbetter. Again, the question we have to ask is: Can this processcontinueforever?Ithinktheanswerisno,andthe veryunpleasantgraphonthenextpageillustratesthis.   * The ideathatlong-term economicgrowthis,to alargeextent,the resultof advancing technology was formalized by economist Robert Solowin1956.Economistshavelotsofdifferenttheoriesabouthow long-term growthand prosperitycomeabout,butnearlyall ofthem agreethattechnologicalprogressplaysasignificantrole. [...]... at the point where the dotted line (conventional wisdom) and the solid line diverge As more machines begin to run themselves, the value that the average worker adds begins to decline Remember that we are talking here about average workers To get the graph above, you might take the distribution of incomes in the United States and then eliminate both the richest and the poorest people Then graph the. .. however, at some point, the industries on the banks of our river will become too capital intensive (the machines they employ will begin to run themselves) Once this happens, they will collectively begin to pump more purchasing power from the river than they return to it The river will begin to run dry In the case of a real-world river, we would never advocate allowing a business or industry to pump unlimited... section, capital intensive industries which enjoy access to the market while employing relatively few workers are not bearing their fair share of the costs associated with maintaining a viable consumer market Such industries are also avoiding the costs associated with payroll tax-funded social welfare programs In a very real sense, capital intensive industries are stealing from our purchasing power river... system, businesses would pay two types of taxes just as they do currently: (1) They would pay a gross margin tax instead of the current payroll tax, and (2) they would continue to pay the normal business income tax Consider some of the advantages of this system: Since payroll taxes would be eliminated, the incentive to automate jobs or move them overseas would immediately be reduced Likewise, the prospect... supports social programs The new revenue system would provide an obvious mechanism for funding universal health care in the Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 144 U.S without creating yet another incentive to eliminate workers It is important to note that a gross margin tax would, of course, only work in the for-profit sector In other employment sectors... makes the point that the ever increasing power that lobbyists and special interests wield is at least in part due to laws which force every aspect of the legislative process into the open While, on the surface, it may appear that openness in government is always desirable and more democratic, the reality is that very few of us have the time, energy or attention span to take an active interest in the intricate... Paperback/Kindle available @ Amazon Danger / 141 The payroll tax-based system will come under tremendous strain in the coming years as a demographic shift results in a large number of retirees supported by relatively fewer workers In the United States, nearly everyone is aware that Social Security, and especially Medicare, are at high risk of becoming insolvent in the coming decades In Europe and in Japan, the. .. circumventing their responsibility to society We can see then that the whole idea of funding social programs via payroll taxes is fundamentally flawed and outdated It puts an unfair burden on labor intensive industries while allowing capital intensive industries to free ride That, of course, creates a tremendous incentive for Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL... to adjust the tax based on the dynamics of individual industry sectors Nonetheless, it should be possible to come up with a relatively simple formula for a gross margin tax that would raise the same amount of revenue as the current payroll tax system while distributing the tax burden fairly among industries For the vast majority of businesses the gross margin will always be positive, and a minimum could.. .THE LIGHTS IN THE TUNNEL / 136 Value Added (Wage) of Average Worker Operating Average Machine Also: Overall Wealth of Society (GDP per capita will look similar) Value Conventional Wisdom (Most economists believe this) Machines Fully Autonomous Machines Getting Better Machines Becoming Autonomous Time The problem, of course, is that machines are going to get more autonomous You can see this in the . to decline.Rememberthatwearetalkinghereaboutaverage workers.Toget the graphabove,youmighttake the dis- tributionofincomes in the UnitedStatesandthenelimi- nateboth the richestand the poorestpeople.Thengraph the averageincomeof the remaining“typical”people (the bulk. capital intensive (the machinestheyemploywill begintorunthemselves).Oncethishappens,theywillcol- lectivelybegintopumpmorepurchasingpowerfrom the riverthantheyreturntoit. The riverwillbegintorundry. In the caseofareal-worldriver,wewouldneverad- vocateallowingabusinessorindustrytopumpunlimited quantitiesofwaterfrom the riverwithoutbearing the ap- propriate. prevent the marketriverfromrunningdry. In the longrun,ifad- vancedmachineautomationpermanentlydisenfranchisesa THE LIGHTS IN THE TUNNEL / 140 CopyrightedMaterial–Paperback/Kindle