Flippy

Walmart is testing a new robot called “Flippy.” Flippy is the un-personification of truth in labeling: It flips hamburgers.  There are about 25,000 fast-food hamburger restaurants in the US.  If Flippy can replace an average of two employees at each restaurant, then 50,000 American jobs will eventually disappear.

I doubt that MacDonald’s and Burger King are worried about that.

Automation Nation

It seems to us that a magnificent new product made in Silicon Valley is announced every day in the press, on television, and via social media outlets around the world. From an historical perspective, there’s no doubt that many of these innovations have improved the productivity of governments and the profitability of corporations, and they’ve enhanced the lives of everyday, garden-variety folks like you and us. But we wonder if we aren’t approaching a point in time when advances in AI (artificial intelligence) and robotics will destroy jobs faster than the economy can replace them.

Note: We’ve made no attempt here to estimate the COVID-19 pandemic’s impact on the labor market. The job loss is already devastating, and some of the jobs lost will never come back. This article examines one reason why they’ll disappear, and why they’ll keep on disappearing long after COVID-19 been consigned to dark pages of history.

In the near future, self-driving cars, SUV’s, trucks, and buses will be cheap and reliable enough to be sold in volume. Driving will be safer, and commuters will be more entertained and less stressed, but operators of commercial vehicles will be made obsolete because their vehicles won’t need them anymore.

According to the Bureau of Labor Statistics (BLS), there are 2.4 million commercial truck drivers in the United States who on average make about $50,000 per year. In the near future, those jobs will be lost to automation, and that’s the tip of the iceberg.

A recent report by the McKinsey Global Institute forecasts that as many as 73,000,000 American jobs may be lost to automation by 2030. If their forecast is in the ballpark, then the US economy will lose a number of jobs that’s approximately equal to 45% of the nation’s current workforce. (See Note 1.) But the McKinsey report isn’t as foreboding as it would seem at first glance, because it also suggests that an overhaul of the economy could more than offset the 73,000,000 job losses.

Here’s the rub: The labor-force overhaul would have to rival our transformation from an agriculture-based economy to the Information Age, which took 165 years. We have only twelve this time, which means we have to move 14 times faster than last time. (See Note 2.)

We have a few questions:

1) Is the overhaul a simple training/retraining problem (as McKinsey suggests), a social problem, a political problem, a financing problem, or all of the preceding? (Hint: It’s a rhetorical question.)

2) If politicians are even remotely involved, what are our chances? Dodd-Frank wasn’t passed until after the Great Recession. Our bridges, ports, railways, and highways are crumbling, but as of this writing Congress has yet to bring an infrastructure renovation bill to the floor of the House or Senate. When was smoking in public places outlawed? Was it before or after millions of Americans died from lung cancer?

3) Who’s going to pay for the retraining of the existing labor force: the public sector, the private sector, or the displaced workers themselves? We expect it’ll be all three, but will government move quickly enough (see the above), will corporations be more disposed to retrain their employees than hire trained ones, and how much money will the unemployed have to invest in retraining themselves? (Hint: They’re unemployed.)

4) What’s the real-world scale of the problem? How many bus drivers, bank tellers, and baristas will have to be taught to write software, mine data, and repair robots, how long will it take, and what percentage of them will make the grade?

We could go on, but you get the point.

At South by Southwest this year, Elon Musk said, “Mark my words: AI is far more dangerous than nukes, by far, so why do we have no regulatory oversight? This is insane!” (See Note 3.)

Notes:

1) According to Wikipedia, 161,000,000 Americans held part or full time jobs in the US at the beginning of 2018. Seventy-three million divided by 161 million is 45.3%.

2) One-hundred and sixty-five divided by twelve is 13.75. We rounded up.

3) The quote from Elon Musk was from ZDNet, a high-tech website. We didn’t change a word, but we did edit the punctuation.

The Trickle-Down Myth

At one time or another, most of us have heard the phrase “trickle-down economics.” It is, in the conservative mind, the best way to stimulate the economy, thus it was the basis for the 2018 tax reform bill authored by Congress and signed into law by the president. But, before accept that “trickle-down” works admirably well, let’s examine how it works.

In an economic context, “trickle down” means that tax incentives aimed at the wealthiest of the economy will work their way down to the middle and lower classes. However, a tax break for a wealthy man, or more rarely a woman, is discretionary. He can spend it on an American-made business jet or a Norwegian yacht. She can invest the money in an asphalt plant in Pittsburgh or Vietnam. He can buy 1,000 acres of farmland in Nebraska or in Suriname. She can invest in an American hedge fund, or Eurobonds, or bitcoin.

Moreover, the wealthy need never be in a hurry because, well, they’re wealthy. Hence the phrase “trickle down,” which, to review, means that a lot of money is given to the wealthy in the form of tax breaks, and then it trickles down to the middle and lower classes, except for the parts that are invested overseas or put aside for a rainy day, possibly in the Caymans.

It would seem from a cursory examination of trickle-down economics that there’s room for improvement. Let’s imagine for a moment that instead of giving another tax break to the wealthy, Congress voted to cut taxes for the middle class and to increase subsidies like food stamps and Medicaid for the economically disadvantaged. Unlike the rich, the lower classes don’t have any money to save, and the middle classes don’t bother (with few exceptions). Instead, they spend it on essentials like heat, healthcare, video games, and pop tarts, and they can’t afford to wait.

In other words, the money enters the economy quickly, and then it gushes up the economic food chain: from the retail stores to the companies that own the retail stores, to the hedge funds that own most of the stock in retail store companies, and on to the men and women who invest in hedge funds. In the end the wealthy get it anyway, but at least the middle and lower classes had it for a while––and pop-tart sales skyrocketed.

Sadly, the phrase “gush up” sounds too much like vomit. It never caught on, which must explain why the rich get all the tax breaks.

The Privatization Myth

Between April and June of 2019, more than 2,000 immigrant children were sent to internment camps without due process because their parent or parents purportedly entered the country illegally, which, by the way, is a misdemeanor. Some of the camps were hastily constructed by private-sector firms, which has again raised the question of whether some government services—no matter how reprehensible—should be outsourced to for-profit corporations.

The justification for outsourcing, typically made from the right side of the aisle, is that capitalism is inherently more efficient than bureaucracy, therefore less costly. Our politicians are rarely if ever wrong, but let’s test the assertion anyway. To the extent we can, let’s apply our collective intellect to examining (in four easy steps) whether outsourcing government services to privately-owned companies is more cost efficient than continuing down the old-school, “deep-state” bureaucratic path.

Step 1: The classic motive for creating profitable companies is maximization of shareholder wealth. Profits vary from industry to industry, but, in our (lengthy) experience, a pretax profit of 15% per annum is generally considered healthy, therefore a workable assumption.

For those of you who forgot to take accounting in college, that means that fifteen cents out of every dollar a private company makes are set aside for profit and taxes.  Government agencies don’t make profits and don’t pay taxes.

Step 2: By definition, efficient markets are competitive, which in turn requires privately-owned companies to promote and sell their services. The cost varies from as little 10% of revenue to as much as 30%, again depending on the industry. Since we’re a conservative bunch, let’s assume that the average cost of promoting and selling services in competitive markets is circa 15% of revenues on an ongoing basis.

In other words, fifteen cents of every dollar a private company earns are used to pay for a sales force, advertising, media relations, and similar functions. Some government offices, the US Army for instance, also advertise, and they have sales forces (called recruiting offices), but the cost in minuscule in comparison. As far as we know, no one in Washington is considering the privatization of the US Army, although mercenaries were used in Iraq—at a cost of as much as $1,500 per day.  In comparison, an Army captain makes about $180 per day.

Step 3: Outsourcing isn’t free. In order to ensure delivery of quality, low-cost services to the public, government agencies are required to manage their for-profit service providers. Since everything the government does is inefficient, let’s assume for our purposes that the cost of oversight is about 5% of the overall cost to the taxpayer.

To summarize: We’ve estimated so far that private service providers have to be about 35% more efficient (15% + 15% + 5% = 35%) than government agencies, just to break even on a cost basis. We can argue about the numbers all day, but the logic is indisputable.

Step 4: Since private companies exist to maximize shareholder returns, the provision of services can be no more than a means to an end. In other words, the act of privatization subordinates the provision of service to the production of wealth. Government agencies are intended to make service provision their top priority, and the conscientious, properly funded ones do.

The bottom line: Privatization of public-sector services is a structurally inefficient and counterproductive way to put tax dollars in the pockets of private-sector shareholders. There are exceptions—Elon’s Musk’s Spacex for one—but they’re few and far between.

Disclaimer: We believe that capitalism is more than just a good thing; it’s essential to the well-being of the planet and its inhabitants. Before those of you on the left collapse into foaming-at-the-mouth fits of apoplexy, here’s the but: We doubt that capitalism is good for everything, just as we doubt that everything tastes better with ketchup.

 

The Wage Gap

One of the Democratic Party’s top priorities in 2020 will be to reduce the pay gap between lower-income workers and America’s CEOs, hedge-fund managers, famous entertainers, and cosmetic surgeons (to name a few). In all fairness, but let’s test the thesis before we jump on any bandwagon.

For illustrative purposes, let’s assume that our low-end wage earner is a retail salesperson who makes $20 per hour (circa twice the minimum wage depending on the state), and our high-end wage earner is a large-company CEO who makes $100 million per year. (See Notes below.) If our exemplary CEO works 80 hours per week 50 weeks per year, then he or she makes $25,000 per hour.

That’s a pretty big gap, so let’s grow a conscience and fix it. Because we’re politically aware, therefore incrementalists, let’s increase the retail salesperson’s hourly wage by 6% per year, or about two times inflation, and the CEO’s by 1.5% per year, or about half the rate of inflation. (That seems awfully unfair to the CEO and is contrary to recent history, but let’s run the numbers anyway, just to see what happens.)

In the first year, the salesperson’s wage increases by $1.20 per hour. The CEO’s income increases by $375 per hour, so the wage gap increases by $373.80 per hour. Lest we forget, though, we’re raising the salesperson’s wage four times faster than the CEO’s, so the gap will eventually begin to close. In this instance, it takes 134 years.

Fortunately, there are other ways to close the gap. We could, for instance:

• Pay everyone the same wage, which sounds a lot like communism before the usual corruption sets in.
• Freeze CEO wages until retail salespeople catch up, or for about 123 years (using same-case assumptions).
• Replace inflation with deflation. (Ask your local economist about that idea!)
• Increase taxes on the one percent, which has been politically impossible in this country since the rich were rebranded the “Donor Class.”
• Declare war on a well-armed sh*thole country, draft the rich, and send them to the front lines in orange jump suits.

The bottom line: We’re not going to close the wage gap, so…

Let’s stop raging about the wage gap and focus on what matters, which is raising the incomes of workers on the lower rungs of the ladder. If we can find a workable solution, they’ll be healthier, more productive, and less dependent on Medicaid, SNAP, and other government programs––and a handful of CEOs may feel less guilty about the fact that they earn 2,000 times more than some of their less fortunate employees.

Notes:
1) The top 200 hundred wage earners in the US had an average income of slightly less than $97 million in 2017.
2) Also in 2017, top 1% incomes grew 4 times faster than bottom 90% incomes. That’s not counting the tax break.
3) We checked the dictionary. Incrementalist is not a word, but it seemed to fit the bill, so to speak.
4) SNAP stands for Supplemental Nutritional Assistance Program, formerly known as food stamps. About 1 in 8 American workers qualify for the program.