The silver lining for labour markets
Offshoring jobs makes less sense when technology can help speed products to local markets
Rana Foroohar
Much of the news of the past few days has come to us from the global level — climate change battles at the G20; doubts about the future of the World Trade Organization; Russian president Vladimir Putin’s assertion that liberalism has “become obsolete”. But to really understand why the world is so fractured today, you have to go local and look closely at why labour’s share of the economic pie has been squeezed so much in recent years, particularly in the US and western Europe.
Globalisation usually gets the blame for the declining labour share and the subsequent discontent among working-class and, more recently, middle-class voters. But a recent report into the US labour market conducted by the McKinsey Global Institute found that globalisation was actually bottom of the list of the top five reasons that labour’s share of national income has declined since the turn of the 21st century.
In fact, the biggest reason for the declining labour share, according to the study, is that supercycles in areas such as commodities and real estate have made those sectors, which favour capital over labour, a larger part of the overall economy. But reason number two — a rise in the importance of intangible assets in our economy — tells us much more about worker (and voter) discontent.
Intangible assets including computers and software depreciate much faster than tangible ones such as machinery and factories. The shorter lifecycle and continually falling price of new technologies — as well as their productivity enhancing effects — mean more money goes towards investing in them, leaving less for labour. That, combined with the fact that automation has damped incomes, represents 38 per cent of the total decline in labour share since 1999, according to MGI’s calculations.
This is where the local picture within countries starts to matter quite a lot. As most of us know, automation and the speeding up of capital substitution because of technological shifts have hurt traditional industrial areas disproportionately — that is one of the reasons the US ended up with a president like Donald Trump.
But in the future it will also radically favour a few regions: according to a second McKinsey report to be released on July 11, a mere 25 cities and regions could account for 60 per cent of US job growth by 2030. They will not all be the ones you would think. Tech hubs will benefit, of course, as will commodity-rich areas and tourism centres catering to the wealthy. But so will any number of other cities and regions with economic development plans designed to capitalise on a silver lining to the declining labour share story. When labour makes up less of the overall cost of producing goods and services, then offshoring jobs starts to make less sense.
What does make sense is being closer to customer demand, a trend that was growing for a decade before today’s trade wars led companies to start reconsidering supply chains for political reasons. For a good 10 years, says MGI chairman James Manyika, “the importance of cheap labour has been declining relative to the importance of demand signals”. MGI’s own figures show that less than 20 per cent of goods trade today is from a low-wage country to high-wage one. This is in part due to the fact that China and other emerging markets consume more of what they make themselves and are developing their own domestic supply chains, a process increasing speed because of trade tension.
Western companies are also eager to locate production closer to their customers, a trend enabled by a “just-in-time” culture and enabled by technologies including 3D printing and artificial intelligence. As social media drives trends, consumers do not want to wait weeks for a product their favourite Instagram influencer is pushing today.
That dynamic favours speed to market above all else, which in turn favours localisation. Consider how companies such as Nike and Adidas have built highly automated “speed-factories” in the US, Mexico and Germany to roll out the latest styles faster and more cheaply.
Such trends could help turn back the declining labour share trend in the US, as well as in European countries including the UK, France, Germany and Italy. Yet unless the EU can maintain its single market unity over the long haul, it could lose out on the reshoring trend, since no single nation has enough demand or production capacity to support an entire regional supply chain on its own.
In the US, the risk is that the shifting labour market dynamics will sharpen the political divides that already exist. Many “left behind” cities are home to more Hispanics and African Americans. Job categories that will be automated fastest are entry-level positions typically done by the young. Meanwhile, the over-50s are at the highest risk of job loss from declining skills. One can easily imagine these shifting trends exacerbating the culture wars, age wars and political populism that already loom.
The solution: shift policy to support human capital investment, just as we do other types of capital investment. The US must change its tax code to allow companies to write off investments in workers in the same way they do those in machinery. If we continue to subsidise software without supporting people, the future looks grim.
THE SILVER LINING FOR LABOUR MARKETS / THE FINANCIAL TIMES OP EDITORIAL
THUMBS DOWN TO FACEBOOK´S CRYPTOCURRENCIES / PROJECT SYNDICATE
Thumbs Down to Facebook’s Cryptocurrency
Only a fool would trust Facebook with his or her financial wellbeing. But maybe that’s the point: with so much personal data on some 2.4 billion monthly active users, who knows better than Facebook just how many suckers are born every minute?
Joseph E. Stiglitz
NEW YORK – Facebook and some of its corporate allies have decided that what the world really needs is another cryptocurrency, and that launching one is the best way to use the vast talents at their disposal. The fact that Facebook thinks so reveals much about what is wrong with twenty-first-century American capitalism.
In some ways, it’s a curious time to be launching an alternative currency. In the past, the main complaint about traditional currencies was their instability, with rapid and uncertain inflation making them a poor store of value. But the dollar, the euro, the yen, and the renminbi have all been remarkably stable. If anything, the worry today is about deflation, not inflation.
The world has also made progress on financial transparency, making it more difficult for the banking system to be used to launder money and for other nefarious activities. And technology has enabled us to complete transactions efficiently, moving money from customers’ accounts into those of retailers in nanoseconds, with remarkably good fraud protection. The last thing we need is a new vehicle for nurturing illicit activities and laundering the proceeds, which another cryptocurrency will almost certainly turn out to be.
The real problem with our existing currencies and financial arrangements, which serve as a means of payment as well as a store of value, is the lack of competition among and regulation of the companies that control transactions. As a result, consumers – especially in the United States – pay a multiple of what payments should cost, lining the pockets of Visa, Mastercard, American Express, and banks with tens of billions of dollars of “rents” – excessive profits – every year. The Durbin Amendment to the 2010 Dodd-Frank financial-reform legislation curbs the excessive fees charged for debit cards only to a very limited extent, and it did nothing about the much bigger problem of excessive fees associated with credit cards.
Other countries, like Australia, have done a much better job, including by forbidding credit card companies from using contractual provisions to restrain competition, whereas the US Supreme Court, in another of its 5-4 decisions, seemed to turn a blind eye to such provisions’ anti-competitive effects. But even if the US decides to have a non-competitive second-rate financial system, Europe and the rest of the world should say no: it is not anti-American to be pro-competition, as Trump seems to have recently suggested in his criticism of European Commissioner for Competition Margrethe Vestager.
One might well ask: What is Facebook’s business model, and why do so many seem so interested in its new venture? It could be that they want a cut of the rents accruing to the platforms through which transactions are processed. The fact that they believe that more competition won’t drive down profits to near zero attests to the corporate sector’s confidence in its ability to wield market power – and in its political power to ensure that government won’t intervene to curb these excesses.
With the US Supreme Court’s renewed commitment to undermining American democracy, Facebook and its friends might think they have little to fear. But regulators, entrusted not just with maintaining stability, but also with ensuring competition in the financial sector, should step in. And elsewhere in the world, there is less enthusiasm for America’s tech dominance with its anticompetitive practices.
Supposedly, the new Libra currency’s value will be fixed in terms of a global basket of currencies and 100% backed – presumably by a mix of government treasuries. So here’s another possible source of revenue: paying no interest on “deposits” (traditional currencies exchanged for Libra), Facebook can reap an arbitrage profit from the interest it receives on those “deposits.” But why would anyone give Facebook a zero-interest deposit, when they could put their money in an even safer US Treasury bill, or in a money-market fund? (The recording of capital gains and losses each time a transaction occurs, as the Libra is converted back into local currency, and the taxes due seem to be an important impediment, unless Facebook believes it can ride roughshod over our tax system, as it has over privacy and competition concerns.)
There are two obvious answers to the question of the business model: one is that people who engage in nefarious activities (possibly including America’s current president) are willing to pay a pretty penny to have their nefarious activities – corruption, tax avoidance, drug dealing, or terrorism – go undetected. But, having made so much progress in impeding the use of the financial system to facilitate crime, why would anyone – let alone the government or financial regulators – condone such a tool simply because it bears the label “tech”?
If this is Libra’s business model, governments should shut it down immediately. At the very least, Libra should be subject to the same transparency regulations that apply to the rest of the financial sector. But then it wouldn’t be a cryptocurrency.
Alternatively, the data Libra transactions provide could be mined, like all the other data that’s come into Facebook’s possession – reinforcing its market power and profits, and further undermining our security and privacy. Facebook (or Libra) might promise not to do that, but who would believe it?
Then there is the broader question of trust. Every currency is based on confidence that the hard-earned “deposited” into it will be redeemable on demand. The private banking sector has long shown that it is untrustworthy in this respect, which is why new prudential regulations have been necessary.
But, in just a few short years, Facebook has earned a level of distrust that took the banking sector much longer to achieve. Time and again, Facebook’s leaders, faced with a choice between money and honoring their promises, have grabbed the money. And nothing could be more about money than creating a new currency. Only a fool would trust Facebook with his or her financial wellbeing. But maybe that’s the point: with so much personal data on some 2.4 billion monthly active users, who knows better than Facebook just how many suckers are born every minute?
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. He is the author, most recently, of People, Power, and Profits: Progressive Capitalism for an Age of Discontent (W.W. Norton and Allen Lane).
Forecast Tracker: 2019 Second Quarter Update
The trade war roller coaster, the economy's other shoe, the offensive against Iran.
By GPF Staff
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