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... 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 of. .. future and see if they are really reasonable: The primary force that will shape the coming decades will be globalization Offshoring of jobs and the continuing migration of manufacturing to low wage countries will be the major threats to the job market in Western countries Technology will continue to enable globalization, and jobs will move across borders with increasing ease, but automation technology. .. would be beyond the ability of the vast majority of average people? And wouldn’t that lead right back to making the machine autonomous? Capital Intensive Industries are “Free Riders” In Chapter 1, we used lights in a tunnel to simulate the mass market Let’s try a slightly different analogy now Imagine that the mass market consists of a “river” of consumer purchasing power Along the banks of this river... 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... have the authority to specify the details of the tax code Congress would maintain its overall constitutional authority over taxation, but the details would be removed from the political process and instead handled by a board of highly skilled professionals Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 148 The current financial situation has clearly demonstrated the. .. that the historical distinction between machines and intellectual capital is blurring It is now very difficult to separate innovative processes from the advancing information technology that nearly always enables and underlies them Improved inventory management systems and database marketing are examples of innovative techniques, but they rely heavily on computers In fact, we can conceivably think of. .. 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. .. river are located industries of all types When an industry sells a product or service to consumers in the market, it pumps purchasing power from the river An industry also pumps purchasing power back into the river in two primary ways: first it pays salaries and wages to workers, and second as technology advances, the prices that the industry charges fall and this results in more money in consumers’ pockets . 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 of . 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. 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