“I can’t wait to see how the incoming administration deals with AI (artificial intelligence),” said US Secretary of State John Kerry, in a less-than-gracious reference to the fact that the Trump team hasn’t got a clue about the real driving force in the changing world economy.
What was striking was that Kerry didn’t have to clarify his remark for the 2,000 “global leaders” – politicians, bureaucrats, business representatives and public intellectuals – who are in the Swiss alpine town of Davos for the annual World Economic Forum (WEF). They all know what he’s talking about.
This year’s Davos gathering is actually focused on the rise of populism and simple-minded attacks on globalisation (Donald Trump, Brexit et al.). That’s only to be expected, since the world’s ultra-rich are potentially threatened by that sort of thing. But they didn’t get rich by being stupid, and they have a fairly sophisticated analysis of what’s causing it.
The headline event on the first day of Davos was an hour-long speech by China’s President Xi Jinping in which he laid claim to the leadership role on free trade, globalisation and the struggle to contain climate change that is being abandoned by the United States under Trump. His main concern was to fight the rise of protectionism: “No one will emerge as a winner in a trade war,” he said.
But Xi didn’t go into the sources of the anger that fuels the populist revolt (for China is not a democratic country, and it hasn’t happened there yet). John Kerry did get into it, and he went well beyond the usual platitudes about rising unemployment and under-employment, stagnating wages, and the widening gulf between the rich and the rest. “Trade is not to blame for job losses,” he said. Automation is.
Quite a few American manufacturing jobs did go abroad in the early stages of globalisation, in the 1980s and 1990s, but that’s old news. Eighty-five percent of the almost 6 million American manufacturing jobs that disappeared between 2000 and 2010 did not go anywhere; they just evaporated. The workers were replaced by tireless, uncomplaining machines that could do their jobs more cheaply.
Although Kerry did not mention it, the same thing is now happening in China: relatively cheap Chinese labour is still more expensive than the automation that replaces it. Even in India, where wages are lower still, there is now talk of “premature deindustrialisation”.
It’s a misleading phrase, because it suggests that India will never become fully industrialised. It probably will – but perhaps without ever creating a huge industrial working class with reasonably good and steady wages. Further industrial growth is likely to come mainly through automation, and employment in manufacturing may be peaking right now.
So Donald Trump is barking up the wrong tree, as are the other populists emerging all across Europe, and their emulators who are beginning to appear in the developing world. Why do they all persist in blaming free trade and globalisation instead of automation? Because you can’t do anything about automation.
It’s like the old story about the man looking for his car-keys under the street-light. “Where did you lose them?” “Over there.” “Then why are you looking for them here?” “The light’s better here.”
If you are a politician, then it’s better to blame globalisation because you can do something about that. You can build walls, impose tariffs, make all sorts of impressive gestures to stop the free trade that is allegedly destroying the good jobs. Or more precisely, you can win political power by claiming that you will do those things and thereby solve the problem.
Whereas nobody will believe you if you say that automation is what is really changing the economy, and so you are going to stop the automation. That’s Luddism, and everybody (or at least, everybody at Davos) knows that that doesn’t work. So the rich and the powerful are way out ahead of the pack in accepting that growing automation really is going to destroy large numbers of jobs.
A recent Citibank research note forecasts that automation will eliminate 57 percent of all existing jobs in the developed countries within the next 20 years. In China, 77 percent of manufacturing jobs are at risk over the same period. And the notion that the economy will create other, better jobs to replace them is just a comforting myth. Most of the new jobs that are being created are MacJobs.
If more than half the workforce ends up unemployed – and therefore humiliated and broke – then their anger will be so great that it could sweep away the comfortable world of the ultra-rich. Which is why there are sessions at Davos this year considering radical ideas like a “Universal Basic Income”.
To stop the populism, first you have to deal with the anger.
To shorten to 725 words, omit paragraphs 8 and 10. (“It’s…now”; and “It’s…here”)
The main message of 2016 was that we are entering a period of economic and political upheaval comparable to the industrial revolution of 1780-1850, and nothing expressed that message more clearly than Donald Trump’s appointment of Andrew Puzder as Secretary of Labour. Even though it’s clear that neither man understands the message.
Puzder bears a large part of the responsibility for fulfilling Trump’s election promise to “bring back” America’s lost industrial jobs: seven million in the past 35 years. That’s what created the Rust Belt and the popular anger that put Trump in power. But Puzder is a fast-food magnate who got rich by shrinking his costs, and he has never met a computer he didn’t like.
“They’re always polite, they always upsell, they never take a vacation, they never show up late, there’s never a slip-and-fall, or an age-, sex-, or race-discrimination case,” he rhapsodised. They also never take lunch or toilet breaks, they’ll work 24 hours a day, and they don’t have to be paid. So out with the workers and in with the robots.
It was not evil foreigners who “stole” most of those seven million American jobs, and will probably eliminate up to 50 million more in the next 20 years. It’s the ‘intelligent machines’ that did most of the damage, starting with simple assembly-line robots and ATMs. (”Every Automated Teller Machine contains the ghosts of three bank tellers.”)
But the automation keeps moving up the skill sets. The first self-driving cars are now on the road in the United States. That’s another four million jobs down the drain, starting with taxi drivers and long-distance truckers. In recent years eight American manufacturing jobs have been lost to automation for every one lost to “globalisation”, and it will only get worse.
A 2013 study concluded that 47 percent of existing jobs in the United States are vulnerable to automation in the next 20 years, and the numbers are as bad or worse for the other developed countries. This is what is really driving the “populist revolution” that caused two of the world’s oldest democracies to make bizarre, self-harming political choices in the past year. First Brexit, then Trump.
Leaving the European Union will hurt Britain’s economy badly, and putting a man like Donald Trump in the US presidency is a serious mistake. Yet half the voters in each country were so angry that they didn’t care about the likely negative consequences of their vote.
There is more to come. Beppe Grillo’s populist Five-Star Movement may win the next election in Italy. Marine Le Pen’s National Front (no longer openly anti-Semitic, but still basically neo-fascist) could win the French presidential election next spring. The Netherlands and Germany may see hard-right, anti-immigrant parties in governing coalitions after their forthcoming elections.
Some people fear that we are seeing a re-run of the 1930s. Economic growth has slowed since the crash of 2008, and unemployment is much higher than it looks. The official US unemployment figure is only 5 percent, but almost one-third of American men between the ages of 25 and 54 are “economically inactive”. So angry populist leaders are popping up again all across the developed world.
The ‘Dirty Thirties’ ended in the Second World War, and there are obvious parallels today. The European Union is fraying at the edges, and Donald Trump has talked about curtailing US support for NATO. He has also threatened to slap huge tariffs on Chinese exports to the US, and it’s probably a bad idea to push China too hard when it is already in grave economic trouble.
But this is not the 1930s. There are no ranting dictators promising revenge for lost wars, and government benefits mean that unemployment is no longer a catastrophe for most people in Western countries. The old white working class (and some of the middle class) are angry because jobs are disappearing and because immigration is changing the ethnic balance in their countries, but they are not angry enough to want a war.
Trump’s election means that we are in for a wild ride in the next four years, but he will ultimately disappoint his supporters because he is barking up the wrong tree. He cannot bring back the jobs that were lost, because most of them were not lost to his favourite culprits: free trade and uncontrolled immigration.
Even if Trump understood this, he could not admit it in public, because there is nothing he can do about it. He might ban immigrants coming in to “steal American jobs”, and he can tear up free-trade deals to his heart’s content, but his own cabinet contains people who have built their careers on eliminating jobs through automation.
This is change on the scale of the (first) industrial revolution, and you can’t fight it. But then, you really don’t need to. American industry has shed seven million jobs since 1979, but the value of US factory production has more than doubled (in constant dollars). It is only jobs that are being destroyed, not wealth.
It is not a disaster for a rich society to reach a point where the same goods are being produced and the same services are being provided, but most people no longer have to work 40 or 50 hours a week (in jobs that most of them hate). Or rather, it’s not a disaster UNLESS HAVING NO WORK MEANS HAVING NO MONEY OR SELF-RESPECT.
The main political task for the next generation (post-Trump) in the developed countries will be to ensure that those without work have an income they can live on, and don’t lose their self-respect. Other ways will doubtless be suggested, but one way of achieving this that is already getting attention is a Universal Basic Income (UBI).
The UBI would provide everybody with enough to live on. Since everybody got it, there would be no stigma involved in living on it. And 53 percent of today’s jobs will still be there in 2033, so those who really wanted to work could top up their UBI with earned income. There would still be millionaires.
The first national referendum on UBI was held in Switzerland last June. It was a radical new idea, so of course it was overwhelmingly rejected. But this idea will not go away, and there will be more like it. The rich countries can stay rich and stable if they understand the nature of the task – but the developing countries may face a grim future.
No UBI for them — they are not rich enough, not even China. But automation is eating into their newly gained industrial jobs too. A recent Citibank report estimated that 77 percent of Chinese jobs are at risk from automation, and in India there is talk of “premature deindustrialisation” (i.e. industrial jobs in India may be peaking right now, and will then go into decline).
That would not just mean continuing poverty for many, but huge political turmoil – populist revolutions and super-Trumps. The future (including the near future) will be quite interesting.
This article is longer than usual at 1175 words. To shorten to 850 words, omit paragraphs 7-11. (“Leaving…a war”)
To shorten further to 725 words, omit also paragraphs 5 and 13. (“But…worse”; and “Even if…automation”)
The chief source of new problems is solutions to old problems. The ammonia that we used in domestic fridges as a coolant in the early 20th century was poisonous if it leaked, so in the 1930s we replaced it with chlorofluorocarbons (CFCs), which you can breathe all day without harm. Problem solved.
Unfortunately, it turned out that CFCs, when they leaked, eventually rose into the stratosphere where they began destroying ozone. The ozone layer is the only thing protecting us from the Sun’s harmful ultraviolet radiation, so countries responded quickly in the 1980s when scientists discovered a spreading “ozone hole” over the Antarctic.
In only a few years the world’s nations negotiated the Montreal Protocol of 1987, which mandated the elimination of CFCs from all industrial processes by 1996. The deadline was met, and the latest projection is that the ozone layer will recover to 1980 levels between 2050 and 2070. Problem solved.
Unfortunately, the CFCs were replaced in most fridges and air-conditioning units by hydrofluorocarbons (HFCs). They don’t hurt the ozone, but they are very powerful warming agents – 10,000 times more powerful than the same volume of carbon dioxide – when they escape into the atmosphere.
Global warming was not seen as an urgent threat in the 1980s, so the negotiators were not much concerned by that. If the warming turned out to be a major problem, it could be dealt with later. But it did turn out to be a major problem, and later is now.
The rapid industrialisation of the warmer parts of the world (India, China, Brazil, etc.) has led to an explosion of demand for air conditioning and other cooling technologies. According to the Lawrence Berkeley National Laboratory in California, about 1.6 billion new air-conditioning units will be switched on worldwide by 2050.
HFC leakage from air conditioners alone will raise the global average temperature by half a degree Celsius by mid-century. When all the world’s government are pledged to stop the warming before it reaches plus 2 degrees C, and we are already well past plus one degree C,
an extra half a degree is a lot.
So we needed another miracle like the Montreal Protocol – and now we have it. On 15 October, in Kigali in Rwanda, almost 200 countries signed an agreement to curb the use of HFCs being used. US Secretary of State John Kerry called it “the single most important step we could take at this moment to limit the warming of our planet.”
Well, yes it is, but you are probably noticing a pattern in all this. It’s not so much that we keep getting it wrong. It’s the time it takes to put it right: a century so far, and we’ll still be at it for at least another 30 years before all the HFCs are out of the system.
When you read the fine print of the Kigali Amendment, it turns out that the United States (the second-biggest HFC polluter), the European Union, and some other rich countries will have to achieve their first 10 percent cut in HFC production by 2019 – but the schedule for further cuts is not clearly defined, apart from the fact that they must be down by 85 percent by 2036. (That’s twenty years from now.)
The majority of the world’s countries – including China, the biggest polluter – will only have to freeze their production level in 2024. (At the moment, their production of HFCs is going up by an average of 16 percent a year, which means it could almost triple by 2024.)
The first 10 percent cut by these countries is only due in 2029, and it will be 10 percent of whatever they are producing five years from now – possibly double the current amount. They will then make further cuts in 2030-2045, getting production of HFCs down by 85 percent by the latter date (three decades from now).
India, Pakistan and most of the Middle Eastern countries don’t even have to freeze production until 2028, and their target date for getting to 85 percent cuts in production is 2047. At a rough guess, global HFC production will peak some time in the late 2020s, and will be back down to the current level by the mid-2030s.
Don’t get angry. Countries don’t know how to negotiate any other way: nobody gives anything away if they don’t absolutely have to. But if you want to despair, go right ahead. The pace of the political process does not remotely match the speed with which the threat is growing.
We have to do much better than this if we are to avoid crashing through the plus-two-degree limit and tumbling into runaway warming. We are not ready to make those deals yet, but when we finally are we will have one small consolation. This deal has been far easier to make because it is an amendment to the 1987 Montreal Protocol, not a whole new treaty.
The more treaties we have on climate matters now, however imperfect they may be, the faster we will be able to move when we finally do take fright.
To shorten to 700 words, omit paragraphs 5, 6 and 13. (“Global…2050″; and “India…2030s”)
The picture of the two Asian giants that most people carry around in their heads shows China racing ahead economically while India bumbles along, falling ever further behind. People even talk about the 21st century as “China’s Century”, just as they called the 20th century the American Century. But it may turn out to be only China’s Quarter-Century.
The headline economic news this year is that India’s economy is growing faster than China’s. Not much faster yet, according to the official figures – a 7.5 percent annual rate for India vs. 7.4 percent for China – but there is good reason to suspect that the real Chinese growth rate is considerably lower than that.
Anybody who goes to both countries can see that India has a huge amount of catching up to do. The contrast in infrastructure is especially striking: China has 100,000 km of expressways (freeways, motorways); India has only 1,000 km. But the differences in income and productivity are also very big: Gross Domestic Product per capita in China is between three and five times higher than in India, depending on how you calculate it.
But that is a snapshot of now. It was very different thirty-five years ago, when per capita income in India was still higher than it was in China. It was then-leader Deng Xiaoping’s decision in 1978 to open up the Chinese economy that unleashed the spectacular economic growth rates of the recent past, and an economy growing at ten percent a year doubles in size every seven years.
That means (allowing for a little slippage) that the Chinese economy has grown more than twentyfold since 1978. That’s why it is so far ahead now. India’s growth rate was a quite respectable three or four percent for most of that period, but that gave the Indian economy a doubling time of around twenty years, so it has only grown around threefold during the whole period. India is not chronically poorer than China. It just missed that particular bus.
The next bus has now arrived: India actually could catch up with China if its economic growth rate is now really surging ahead of China’s. There is good reason to believe that it is, because China’s declared growth rate for this year is pure fiction.
China avoided the global recession after the 2008 crash by opening the credit taps to full and embarking on the largest spending spree on infrastructure (roads, housing, railways and airports) that the world has ever seen. But capitalist economies cannot avoid recessions forever. The country is now full of empty apartment buildings, the private debt load has doubled in five years – and the recession is coming.
More than that, China’s period of high-speed growth was probably always going to be limited. Japan enjoyed a quarter-century of ten percent annual growth in 1955-80 and became, for a while, the world’s second-biggest economy. But once its per capita income reached developed-world levels, the growth rate dropped down to developed-world levels too: between two and four percent. (Now it’s almost nothing.)
In fact, all the East Asian economies (except North Korea, of course) have followed the same pattern: a lengthy burst of ultra-high-speed growth, followed by a fall to the developed-state norm once a certain level of prosperity has been achieved. South Korea and Taiwan both did it – and then subsided to a growth rate not very different from that of the United States.
China has also had its quarter-century of ten percent growth, and it is probably over. The official figure for economic growth last year was still over seven percent, but the less easily manipulated numbers for rail freight, electricity production and bank lending suggest that the real growth rate was only around three percent. That is to say, less than half of India’s.
The other thing that will hold China back in future is a steady fall in the population of working age. India’s birth rate is still 2.7 children per woman (though it’s falling fast). China’s is at most 1.7, and the one-child policy means that it may even be lower than that. So fewer and fewer young Chinese are entering the work-force, whereas there will be no shortage of young Indians.
India’s total population will overtake China’s in less than five years (they are both around 1.3 billion), and after that the gap will steadily widen. While China’s population shrinks and its economic growth slows, India is only now entering the golden quarter-century of high-speed economic growth. In 25 years’ time, India may be back in the position it occupied for most of the past two thousand years: the biggest economy in Asia.
To shorten to 725 words, omit paragraph 9 (“In fact…States”)