Productivity: Blessing or Curse

THE BOTTOM LINE: The digital revolution will eliminate or substantially change most of our jobs. Yet history says we will end up better off if we just stick with the often painful process of change.

Will the Jedi Knights End Up on the Unemployment Line?

The proliferation of digital tools, a phenomenon still in its formative stage, has raised questions about the elimination of so many current jobs and the difficulty of reemploying the affected people. Will we end up with a permanent unemployed class? Automatic trucks are an obvious example, as are related jobs in warehousing—a  revolution already well underway. Between the two, we are talking about something close to 8 million jobs, ranking the combination right up there with health care workers as the most numerous occupations in our economy. By 2040, most of those jobs will be toast. Where will the people go?

What Does History Tell Us?

I’ll start this commentary on the productivity challenge with a simple historical fact. The United States has experienced similar bursts of labor productivity numerous times since the beginning of the Industrial Revolution. I’ll demonstrate that with two examples (of many). In 1800, 73% of American workers were farmers. Today that share is 1.3%. That reduction translates to the elimination of 103 million jobs (and counting). Second, a single modern railroad train crew produces the equivalent of the daily work of 68,000 Teamsters in the 1800s. And yet, despite these and a host of other similar revolutions in productivity, the U.S. is currently at “full employment.” Somehow the market reassigns workers made redundant by improvements in productivity.

In the remainder of this column, I will discuss how those reassignments work and, importantly, how long they take. We will see that the process works. However, it takes time to work and may be quite painful while it is working. Those conclusions tell us clearly that we needn’t agonize about a job-less future, although we may have to help the people caught in the painful adjustment process.

Productivity Is a Form of “Creative Destruction”

For better or worse, the organic universe we inhabit has a competitive model. When one species improves its survivability, it crowds another species out. Homo Sapiens Sapiens (us) eventually crowded out several other forms of early human existence. It is from this biological imperative that capitalism takes its competitive basis, where an improvement in the performance of one product or process often destroys jobs in another. So, duh! Digital productivity will destroy jobs just like tractors, jet airplanes and word processors destroyed jobs before it. Seen a mule skinner, a flight engineer¹ or secretary recently?

Capitalism Is Also Constructive

I did, however, ride in a horse-driven wagon this past December. The pair of one-ton Belgian draft horses pulling it was magnificent! That’s the point: I rode on that wagon out to a field to cut a Christmas tree for the pure pleasure of seeing those magnificent horses. I can do that because the necessities on my life are so cheap now, and an entrepreneurial farmer has created a new product to satisfy my pleasure in nostalgia. Productivity in other products allows me to purchase other things. In the same way, I drive a lovely German car even though a much cheaper Toyota or Subaru would meet my basic transport needs just as well. Finally, I put up my Christmas lights this past season using twice the strings of light I used to and still had a full box of lights left. Why? Due to productivity, Christmas lights sell for a fraction of what they did when I first put lights up on my house in Indiana in 1977.

Productivity allows me to buy more of the things I like. Oh, yes, I went out for that tree on a working day, because the productivity of my work allows me to take working time off, if I so choose. You too! Finally, in two years or so, I won’t be writing for you anymore, at least not about truckies and choo choos. I will be retiring. The productivity of my work life and the low cost of things I purchase will allow me to live well without working 9 to 5.

How the Economy Copes with Productivity Gains

If you consider my examples carefully, you will see four basic adjustments to the creative destruction of productivity; all have to do with the reduction of the cost of the goods and services in question. The mechanism is a core function of economics. If the cost of something I usually buy goes down, I have some money left over to spend elsewhere. There are four fundamental ways economies have spent that money:

1. Buy More of the Same Thing: Remember back in Econ 101 what they taught us about a shift in the supply curve? If that shift is downward, as it is with a cost reduction, there is an increase in the quantity demanded. In 1930, despite the romantic images in the rail-fan press, relatively few Americans could afford long-distance train travel, then the only practical way to move from city to city. Now, after the labor cost of intercity travel has dropped by 99%, long-distance travel by air is a common occurrence at levels more than 10 times the rail travel of 1930. That is a shift in the quantity demanded.²  These economics imply, then, that Americans will purchase a bunch more trucking; purchases that will require jobs of some sort.

2. Buy More of Other Things: In 1800, American families spent more than half their incomes on food. Even in the 1960s, the proportion was 25%. The share is now less than 15% and far less if one corrects for the dramatic improvements in food quality since 1800. What has happened to the 40% – 50% budget now set free? It allows us to purchase more of other commodities and services in the same way the drop in the price of manufactured goods does. Lest you despair at the value of labor among the things we will purchase with the productivity bonanza, consider that our economy has been shifting toward labor-intense consumption since its inception.

     In 1800, labor-intense services consumed more than 20% of GDP. The figure is now almost 80%. As technology has already automated many things, including agriculture and manufacturing, consumers use the extra money to purchase services, i.e., paying people to do something for them: heal me; fix up my garden; entertain me; care for my elderly mother; or hit a home run for me. As we apply this process to trucking, one need only to consider what two or three million well-motivated, flexible people could do other than drive trucks, particularly if some significant portion are willing to be away from home for weeks at a time.

3. Work Less: Although recent productivity gains have not resulted in shorter work weeks, at least as normally measured, gains prior to the current era enabled shorter workdays and workweeks. In the 19th century, 84-hour workweeks were common. Before World War II, many jobs still required half a day’s work on Saturday. Today in nursing, 36-hour (three 12s) is a regular practice.³ In the same way, teachers are less likely to work during the summers today than in prior eras. Finally, early retirement is a common occurrence today. An economist would say that a person with modest consumption needs will usually choose to work less if his or her market basket falls in price. It takes that person fewer hours to pay for what he or she needs. For brokerage work, it is easy to imagine a time when many people will work part-time, at least by today’s definition of part-time.

4.  Not Work at All: There are two ways to look at this phenomenon. One is to consider the working population as a percentage of the total population. The second is simply to measure the working population as a percentage of the total population of working-age people. With both metrics, the ratio in the U.S. had been rising as the percentage of children has fallen, and the percentage of women in the workforce has risen. That still left more than 80 million working-age Americans not working. However, since peaking in 2000 at 64.76%, the employment/population ratio (working age) has fallen to 61%, an addition of 8.9 million non-working people dependent on those of us actually working. With the impending retirement of the baby boomers, that number will increase. Were I a socialist, I would recommend that the government tax a portion of all productivity gains to help pay for the increases to Social Security and Medicare. In Europe, where labor regulations work against the employment of young people, many of the young remain dependent on their parents well after historical norms for going out on their own. The same thing happens here to a lesser degree, as most parents know. In 1800 children worked.

The Great Depression Teaches Us Much

While financial economists focus their attention on the Federal Reserve’s reaction to the 1929 crash, “real-side” economists—like myself—focus our attention on what happened to productivity. If you have read my writing on recession, you will know that the dramatic downturn which started in late 1929 was the result of ferocious overbuys of all manner of long-lasting goods during the “Roaring Twenties.” The bubble thus created was made worse by a related bubble in stock values. The two bubbles burst at about the same time, resulting in a dramatic reduction in the consumption of durable goods that lasted a full four years.⁴

Enter Productivity

The 1920s were an era of rapid productivity gains in farming, transportation and manufacturing. Those gains produced a large economic surplus that was consumed during the good times by buying more of the same things and even more of other things. For instance, that’s when auto ownership took off, along with the introduction of radios, clothes washers and refrigerators. It was also a time for the paving of rural highways. Unfortunately, when the bubbles burst, the economy changed its choice about managing the productivity gains to the third and fourth options above, creating record unemployment. Employers found they could survive with fewer workers—and did so. When the economy recovered in 1934, employers also discovered they could supply a full economy with fewer people. The economic depression was over, but the unemployment problem remained. You can see that in the previous graph. The economy began growing in 1934, averaging more than 7% growth through 1940, while unemployment did not approach healthy levels until 1941.

Why? While the economy (and governmental policy) will eventually consume the excess labor through the four methods outlined above, it takes time for the adjustments to take place. In the 1930s case, it took a decade, and that timing may have been shortened by the stimulatory effects of rearmament leading up to World War II.⁵

It Wasn’t Just World War II That Ended Unemployment

Much has been written about the stimulatory effect of World War II military spending, claiming that it ended the Great Depression. Yes, that process had a short-term stimulatory effect. However, the underlying, sustainable mechanisms were already working before the war and continued—even accelerated—after the Allied victory. We can see that in each of the adjusting mechanisms. Buy More of the Same: Once the economy settled down after World War II, the auto industry started an expansion that quickly topped the 1929 record of 4 million auto sales, leading to the 17 million annual sales common in good times today. However, it took more than 12 years of peacetime economy to produce that increase. Buy More Other: The late 1930s and 1940s heralded an explosion in new technology: in communications, entertainment and transport. Long haul trucking, commercial air travel, limited access highways and televisions all made their debuts in the late 1930s, but waited for the war to end before exploding. Work Less: The 40-hour workweek became a standard after a 1938 law, its primacy codified by federal labor laws to include the payment of overtime for hours in excess of 40 per week, or eight per day. Not Work: In 1935, the Social Security law appeared; a law that encouraged aging workers to retire. It even had provisions to discourage working once a person began receiving payments. We saw further steps after the war with the institution of the GI bill and other benefits for veterans, especially the beginning of a trend toward more liberal disability payments that continues to this day. My brother, the Viet Nam Marine veteran, would be working today at age 74, were it not for his Agent Orange disability benefits. Such benefits would not have been possible without a productive economy that generated the required taxes.

Given the pace of change in the supply chain industry during the next 20 years, the existence of every current participant is in question. Plugging that  risk into a discounted cash flow calculation changes its parameters dramatically.

Have We Run Out of Jobs?

Most of the contemporary angst about productivity job loss is based on the belief that we have run out of additional jobs. The engineers are automating everything! The purpose of this article is to demonstrate that each generation makes the same assumption, only to be proven wrong again. The miners living since 1880 in the picturesque stone homes visible through the woods behind my house despaired over the introduction of air-powered drills, larger steam engines, dump trucks, conveyor belts and electric-powered hoists. Those tools were examples of the advances in productivity that have “destroyed” most of the iron mining jobs here in Cornwall, Pennsylvania and elsewhere in the world. And yet those miners, whose dangerous work enabled them to be well-fed, have six-room, snug houses and a bevy of nicely dressed children, would be amazed at the wonders contained in those same homes 140 years later. Given the fact that virtually every sector of our economy, save perhaps for government, has achieved the same creative destruction and construction since 1800, many times over, why would we assume that the current wave of productivity gains is the BIG ONE that breaks the mold? Because,  if you were a bargeman in 1840, the railroad seemed like the BIG ONE. If you were a railroader in 1950, the interstates and jet aircraft seemed like the BIG ONES. If you were a secretary in 1990, the PC seemed like the BIG ONE.

Do You Mean That the Next 20 Years Is Just More of the Same?

OK, I am an economist. My answer is: “it depends.” In the broad scope of history, this is just another round of the same. Maybe global warming is the BIG ONE; but digital automation? No! However, creative destruction and construction are not orderly phenomena, appearing in easily manageable magnitudes and timing. The invention of the steam engine, the railroad, electricity, the tractor, mobile road-building equipment, the television, the limited access highway, the jet aircraft, solid-state electronics, arthroscopic surgery—all have appeared on their own rhythm. Sometimes several powerful changes occur at once; sometimes the pace slows. What we face during the next 20 years is an enabling innovation that has an unusually broad application. It will produce a once-in-50-year jump in productivity. That means, almost certainly, that the creative destruction will outpace the creative construction for a while, producing an unusual dose of the pain of change. What’s worse, the alarming growth of the U.S. federal deficit is very likely to cause economic problems sometime during that change, accelerating the destruction and slowing the construction, like the Great Depression did in the 1930s. Let’s hope the destructive cycle doesn’t lead to fascism and a bad war like it did for an unfortunate world back then.

What Do We Do Then?

As an Austrian economist, I say, “let the changes happen.” Sadly, that must include much of the pain, because some people react more to discomfort than opportunity. Consider, for instance, the coal-based economies of West Virginia and Wyoming. It is pretty certain that coal is on a severe downslope, perhaps headed for the same fate as wood as a high-volume fuel. Governmental policy to slow the decline in coal will only delay the constructive response. At the same time, it may force the market to use a suboptimal fuel. As to the unfortunate people of Gillette, Wyoming? I have been to the Powder River Basin. Without coal, it ceases to be economically sustainable. Government policy to prop up that economy will create a population permanently dependent on subsidy because of a lack of constructive innovation possibilities. Lest one thinks that bituminous coal has some permanent essential role in our economy, consider the history of the anthracite coal region just to the north of where I live.

In the mid-1800s, that region dominated American fuel provision, especially the urban centers of the Northeast. Nine different railroads served it. Now, steel making uses very little anthracite, as do the urban homes that once demanded its smoke-free, slow-burning characteristics. All but a small fraction of the mines are now closed; only one major railroad remains and the two principal cities, Scranton and Pottsville, Pennsylvania, have gone bankrupt. Generations of desperate, rearguard action by the incumbent businesses and governments have failed to prevent the inevitable decline of an 1850s economic engine.

Can We Help the Victims?

The prime principle is to speed the transition from old technology to new. Obviously, that means NOT protecting the old from the new. In the 1850s, Philadelphia had an ordinance that prevented railroads from the north connecting with railroads from the south. Goods and people traveling through the city had to load up in carriages and wagons for a two-mile trip along city streets. Those regulations certainly helped the draymen but did nothing but harm to the city.⁶ We saw the same thing before deregulation in trucking. Those regulations were the result of railroad defensive lobbying in the 1930s when low-cost trucking first began to eat away at
rail share.

A policy of permissive “destruction” is unpopular politically, but has the major benefit of being very economically efficient. Fortunately, it applies to so many American businesses that government intervention seldom gets fundamentally in the way. There are just too many businesses to keep track of. Consider, for instance, the acres of vacant shopping mall space. Unfortunately, large economic sectors sometimes have the power to delay change, like the Philly draymen.

Can We Help the Innovators?

In contrast, a policy of encouraged “construction” is popular politically, but has the major drawback of being very economically inefficient. That is because knowing which new technologies to help is uncertain, since the right answers are seldom known until the changes are already well along. Three things have proven some value. First, is letting the market work through permissive regulation and limited patent protection. Second, is the time-honored American practice of subsidizing basic research, an investment that has produced useful outcomes from farm research, the space program and some military investment.⁷ Such generic background subsidy also bore fruit in the GI Bill, a program that dramatically expanded investment in post-high-school learning. The third beneficial policy is to direct governmental infrastructure investment to follow the dictates of the market. Let the market identify the answers and then hop on the bus. 19th century investment in railroads is a good example, as is the 20th century investment in superhighways and airports. A 21st century investment in trolley lines and high-speed rail
is not.⁸

Businesses Are Subject to the Same Pressures & Foibles

Such public policy arguments may seem abstract to participants in the supply chain industry. They are useful, however, in identifying similar, much smaller-scale policy within our industry. Several stand out.

Business routinely clings to a successful past rather than risk an uncertain future. Railroads are currently the darlings of Wall Street based on the belated perfection of highly traditional operating practices. They have proven much better at optimizing 1890s technology than implementing the “positive train control” technologies (PTC) that are clearly part of the digital revolution.⁹ In 2020, we have the same challenge in the automation of the truck-driving function. A host of actors will certainly petition government to restrict or outright forbid truck automation. As the technology proves its dependability, our industry should invest in it rapidly. Given the potential advantages, somebody will, including finding a way around restrictive regulation. Restriction will simply delay the inevitable, like with the elimination of the fireman on diesel railroad locomotives.

Who Cares About Next Year?

Businesspeople are also routinely guilty of a single-minded focus on short-term results. We see that today in the insistence of high-rate-of-return hurdles for investment. Such hurdles favor well-understood, near-term investments that build on safe, known technologies. We see that behavior in most of the existing large, American industries. Contrast that with the rates of return of the start-up darlings of the online world. Each hopes to be a spectacular winner in a high-margin future. Yet, even the best go years before making a profit. This contrast between the safe, established Walmart and the risky, upstart Amazon, is explained by the inclusion of the risk of the future in Jeff Bezos’ calculations and the focus on the present among Sam Walton’s heirs. I put this conclusion starkly.

Given the pace of change in the supply chain industry during the next 20 years, the existence of every current participant is in question. Plugging that risk into a discounted cash flow calculation changes its parameters dramatically. A strategy that includes no radical new investment beyond 2025 has a certain probability of failure, and negative cash flow. Remember that many, if not most of the 19th century investors in the railroad lost money before the E.H. Harriman’s¹⁰ and J.P. Morgan’s¹¹ of the world cleaned things up. We are playing to the same odds here.

To shorten the delay between destruction and construction, we—as individuals—must be quick to abandon the old and embrace the new.

How About Our People?

The key for them is the same for businesses. We are, after all, each an independent business within the larger system. To shorten the delay between destruction and construction, we—as individuals—must be quick to abandon the old and embrace the new. That requirement means employers, as leaders, should be including and encouraging our employees to share in the learning and brainstorming about new technologies. Consider, for instance, the qualifications of young, new workers, who are usually the least skilled and knowledgeable of our employees. They may, however, be the best informed about new technologies—especially how to use them. They are the generation raised on that technology.

Note also that in times of stress, job-hopping increases. Companies must become more tolerant of such behavior, understanding that having employment options is an important hedge for people in a fluid, uncertain environment. Such turnover is a well-understood cost of doing business in Silicon Valley. It has always been understood in managing long haul drivers. We are entering an era when high turnover will characterize most of our job categories.

Evolution Is Painful

The catch to all this advice is that with big bursts of productivity, the adjustments take time—and people are caught in the delays. That is partly because constructive innovations may be slow to appear and partly because many people resist change. That happened in the 1930s. In response, the already established and highly productive economy encouraged the government to care for the victims of the crisis. Franklin Roosevelt’s New Deal attempted—without success—to stimulate constructive innovation, but did successfully establish the Federal Government’s role as a caregiver of last resort. Since then, that role has expanded to apply to every recession, every major loss of jobs and every natural disaster. Whichever party comes to dominate Washington during the next 20 years, their legislators will take on the care of the newly unemployed and raise taxes to pay for it—your taxes.

Here’s the Real Risk

It comes from two things. First, is the short-run mentality of the human psyche. With little historical awareness, much of the public will despair of a fix within the democratic system and demand a dramatic alternative government. Vladimir Putin owes his power to Russian impatience with the difficult market-based reforms of the profoundly dysfunctional remains of the Soviet Union. The second problem, is the confrontation between a record need for stimulus and the already over-extended borrowing power of the Federal Treasury. As Greece has shown us, a bankrupt treasury leads to a reduction in social spending, not an expansion. In the 1930s, FDR is credited with maintaining our capitalist, democratic system despite pressures that produced fascism elsewhere. The rise of nationalist populism in much of the developed world now suggests that we may already be on the road to something very troubling.

The View from the Top of the Mountain Is Glorious; Keep Climbing

I paint this bleak picture to help identify the big stakes in play here, and to remind us that the same dynamics occur in the smaller-scale world of business. Our people will need encouragement to change, reassurance that they are being treated fairly, and reminders that a solution is on the way. The digital productivity revolution is, in the end, a powerful improvement in the conditions of people, just as the steam engine, airplane, and smartphone have benefited us. It will just take a lot of work and relationship management to get there.   

Noël Perry is Principal at Transport Futures, located in Lebanon, PA. He can be reached at [email protected]

References

¹ You caught me, there are still flight engineers on a few airliners, a practice dictated by contract language not economics.
² My hair cutter has been to Cancun three times over the last four years. In 1930 a Lebanon, Pennsylvania-based barber might make it to Philly, 90 miles away, once in a lifetime.
³ The 36-hour week is standard for most jobs in France.
⁴ Most recessions last about a year.
⁵ Employment would have fully recovered without World War II, despite Keysian historians’ love affairs with its stimulatory benefits. Their logic predicted a second depression after the War when the stimulus disappeared. Instead, the winners of that war (combatants and workers) founded the greatest economic expansion in American history.
⁶ When departing Philadelphia on Amtrak traveling towards New York, the route from the Schuylkill River across North Philadelphia to the sharp curve at Frankford Junction is known to historians as the “Philadelphia Connector,” befitting its construction as the belated solution when the drayage regulations were finally overturned.
⁷ World War II dramatically accelerated the development of aviation and electronics while its industrial infrastructure contributed to the post-war boom in machinery.
⁸ If Los Angeles and San Francisco really need better passenger service, the construction of two new airports would provide the capacity at a fraction of the cost of the proposed trillion-dollar high-speed rail link.
⁹ PTC exists only due to a federal mandate, a circumstance reminiscent of the 1893 mandate that required the instillation of airbrakes on railroad equipment 24 years after George Westinghouse invented the device.
¹⁰ E.H. Harriman a banker and railroad executive made famous in the Butch Cassidy and Sundance Kid movie, acquired a string of poorly constructed, bankrupt railroads and built them into well-run profitable enterprises.
¹¹ J.P. Morgan, the famous banker, cut his teeth on railroad lending and was instrumental in the rationalizing of the late 1900s railroad mess.

Images credits: iStock.com/wildpixel, VectorMine/Shutterstock.com. Graphics courtesy of Transport Futures