Why Robots Are Not Going to Screw Humans-At Least Not Yet

Sony_Qrio_Robotot

If you are the kind who reads the inside pages of newspapers carefully, you would know that these days stories around robots replacing human jobs are quite common. Most of these stories are written in a way that suggest that doomsday is upon us.

But is it as straightforward as the newspapers and the media makes it out to be? I really don’t agree. I had first written about this issue a few months back in the weekly Letter that I write, but given the importance of the issue, I am sharing my thoughts with the Diary readers as well.

In the recent past, there have been a spate of headlines in the media on the capabilities of robots having reached a stage wherein they can take on human jobs. Here are a few news items, along these lines, which I have come across over the last few months.

1) In May 2016, the shoemaker Adidas announced that it would start manufacturing shoes in its home country of Germany after nearly two decades. But it shall use robots and not human beings to do the same. The company calls its robot factory the speed factory. A second such factory is being planned in the United States as well.[i]

2) In another similar case, Foxconn, a company which manufactures mobile phones for both Samsung and Apple, is replacing 60,000 workers with robots.[ii]

3) In July 2016, HfS Research, a research firm based in the United States, predicted that by 2021, India’s information technology companies will lose around 6.4 lakh jobs to automation. This is something that high ranking officials of Indian IT firms have also said.

4) In mid-September 2016, the textile major Raymond said that it was planning to slash 10,000 jobs across its manufacturing centres all across India and replace them with robots and technology. The company currently employs 30,000 employees.[iii] Hence, robots are likely to replace one-third of its workforce.

5) Driverless cars have already arrived. As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The most common job for American men is driving, and one forecast has driverless smart cars and trucks replacing them all by 2020.”[iv]

6) And if all this wasn’t enough, on October 3, 2016, the World Bank President Jim Yong Kim said in a speech: “Research based on World Bank data has predicted that the proportion of jobs threatened by automation in India is 69 percent, 77 percent in China and as high as 85 percent in Ethiopia.”[v]

These are just a few examples of the expectation that robots will take over human jobs that I have come across over the last few months. As can be seen, this threat looms not just over India but over large parts of the developed as well as the developing world.

As Rutger Bergman writes in Utopia for Realists: “Scholars at Oxford University estimate that no less than 47 per cent of all American jobs and 54 per cent of those in Europe are at the high risk of being usurped by machines. And not in a hundred years or so, but in next twenty years.” He then quotes a New York university professor as saying: “The only real difference between enthusiasts and skeptics is a time frame.”[vi]

Indeed, the threat of robots taking over human jobs is nothing new. So what makes the threat this time around so different from the previous ones? As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “This is not an entirely new question. Ever since the Industrial Revolution erupted, people feared that mechanisation [which is what robots are after all about] might cause mass unemployment. This never happened, because as old professions became obsolete, new professions evolved, and there was always something humans could do better than machines. Yet this is not a law of nature and nothing guarantees it will continue to be like that in the future.”[vii]

The question is: What has changed this time around?

Human beings essentially have two kinds of abilities: a) physical ability b) cognitive abilities i.e., the ability to think, understand, reason, analyse, remember, etc. As Harari writes: “As long as machines competed with us merely in physical abilities, you could always find cognitive tasks that humans do better. So machines took over purely manual jobs, while humans focussed on jobs requiring at least some cognitive skills. Yet what will happen once algorithms outperform us in remembering, analysing and recognising patterns?

Hence, the robots used until now essentially replaced the physical things that human beings did in factories. The trouble is that now the robots have also started thinking (in the form of algorithms) and hence, many more human jobs are on the line. Harari feels that “as algorithms push humans out of the job market, wealth might become concentrated in the hands of the tiny elite that owns the all-powerful algorithms, created unprecedented social inequality.”

This argument along with the evidence offered before seems to be pretty convincing, if seen in isolation. But there is a lot more to this than just the evidence that is currently being offered. As Sharma writes: “While the robotics revolution could come faster than most previous technology revolutions, it is likely to be gradual enough to complement rather than destroy human workforce. A huge gap still exists between the size of the world’s industrial robot population—about 1.6 million—and the global industrial labour force of about 320 million humans. Most of the industrial robots are currently unintelligent machines, committed to a single task like turning a bolt or painting a car door, and indeed half of them work in the car industry.[viii]

As per the International Federation of Robots, South Korea currently has the highest penetration of robots. The country has 437 robots per 10,000 employees. Japan and Germany come in second and third with 323 robots and 282 robots per 10,000 employees, respectively. China has 14 robots per 10,000 employees.[ix]

The point is that there aren’t as many robots going around as there are made out to be. Also, it is worth remembering here that large parts of the Western world and Japan are currently seeing their population decline. China will also soon reach that stage as well. Hence, in that sense the robots will arrive at the right time replacing the decline in the labour force. As Daniel Kahneman the Noble Prize winning psychologist (he won the Economics prize) told John Markoff, a journalist, who covers science and technology for The New York Times: “You just don’t get it…In China, the robots are going to come just in time.[x]

The point is that when it comes to big predictions like robots taking over human jobs, there are always a few ifs and buts. The trouble is that these ifs and buts are not being highlighted as much as the core argument of robots taking over human jobs, currently is.

Other than these factors there is a basic law in economics which goes against the entire idea of robots totally destroying human jobs. It’s called the Say’s Law. One of my favourite books in economics is John Kenneth Galbraith’s A History of Economics—The Past as the Present (In fact, anyone who wants to understand economics should mandatorily make Galbraith a part of his readings). In A History of Economics, Galbraith writes about the Say’s Law.

This law was put forward by Jean-Baptise Say, a French businessman, who lived between 1767 and 1832. As Galbraith writes: “Say’s law held that out of the production of goods came an effective aggregate of demand sufficient to purchase the total supply of goods. Put in somewhat more modern terms, from the price of every product sold comes a return in wages, interest, profit or rent sufficient to buy that product. Somebody, somewhere, gets it all. And once it is gotten, there is spending up to the value of what is produced.”

Say’s Law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is, “Supply creates its own demand.”

As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads to Disaster: French businessman and economist, Jean-Baptiste Say, discovered that “products are paid for with products,” not merely with money. He meant that you needed to produce things to buy things.”

So what does this mean in the context of robots destroying human jobs? If robots destroy too many human jobs, many people won’t have a regular income. If these people do not have a regular income, how are they going to buy all the products that robots are going to produce? And if they are not going to buy the products that robots are producing, how are these companies driven by robots going to survive?

This is a basic question that none of the analysts, who are predicting doom on the basis of robots taking over human jobs, have bothered to ask. For capitalism to survive, it is essential that human beings work and earn an income, only then can they go around buying everything that is being produced.

The basic problem with the robots taking over human jobs argument is best explained through this example. As Bergman writes: “When Henry Ford’s grandson [Henry Ford II] gave labour union leader Walter Reuther a tour of the company’s new, automated factory, he jokingly asked, “Walter, how are you going to get those robots to pay your union dues?” Without missing a beat, Reuther answered, “Henry, how are you going to get them to buy your cars?””[xi]

Also, another point that most analysts seem to miss is that if and when robots actually do start destroying many human jobs, it is stupid to assume that the governments will sit around doing nothing. There will be huge pressure on them to react and make it difficult for companies to replace human beings with robots.

To cut a long story short, it will be interesting to see how the robots taking over human jobs trend evolves in the years to come, but it will not be as straightforward as it is currently being made out to be.  If we are still in business, we will surely keep a lookout!

The column originally appeared in Equitymaster on January 25, 2017

[i] Agence France-Presse, Reboot: Adidas to make shoes in Germany again – but using robots, May 25, 2016

[ii] J.Wakefield, Foxconn replaces ‘60,000 factory workers with robots’, BBC.com, May 25, 2016

[iii] TNN and Agencies, Raymond to replace 10,000 jobs with robots in next 3 years, September 16, 2016

[iv] R.Sharma, The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World, Allen Lane, 2016

[v] Speech by World Bank President Jim Yong Kim: The World Bank Group’s Mission: To End Extreme Poverty, October 3, 2016

[vi] R.Bergman, Utopia for Realists—The Case for a Universal Basic Income, Open Borders and a 15-Hour Workweek, The Correspondent, 2016

[vii] Y.N.Harari, Homo Deus—A Brief History of Tomorrow, Harper, 2016

[viii] Sharma 2016

[ix] Ibid

[x] A Conversation With John Markoff. Available at https://www.edge.org/conversation/john_markoff-the-next-wave. Accessed on October 12, 2016

[xi] Bergman 2016

 

Bill Bonner: “We Have Got a Lot More Nonsense Coming”

bill bonner
Dear Reader,

This is the second part of the interview with Bill Bonner.

He founded Agora Inc. in 1979. With his friend and colleague Addison Wiggin, he co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster.

In this interview Bill tells us that “We have got a lot more, a lot more nonsense coming and I think it’s going to come first from Europe where Draghi is going to come up with a lot more QE like stuff.  We don’t know exactly what or when.”

Happy Reading!
Vivek Kaul
Iceland just sent its 26th banker to prison. As far as I know not a single US banker or someone from Wall Street has gone to jail. Rajat Gupta and Raj Rajaratnam have, but their cases were different. They had nothing to do with the financial crisis.

Ah! I am not sure, but as far as I know no banker specifically has been gone to jail as a result of the crisis.  I don’t know what to make of it.  I am hesitant to condemn the bankers.

I mean they were playing the game when in effect, they were the ones who made the rules. They bribed the politicians to make the rules and they played by those rules. Did they break the rules?  I don’t know.

Why do you say that?

I have been involved in the financial industry in America for a long time. What I do know is, those rules are very tough to understand. If anybody wants to put you in jail, they can put you in jail because it’s sure that you are violating some rule somewhere. There are too many of them.  So I am little bit sympathetic to the bankers in that particular aspect about being convicted of crimes. But I am not at all sympathetic to them in the broader sense because as I said they created that system. I don’t think they deserve to go to jail because I would bet those rules are pretty non-screwy. I do bet they deserve to go broke and that’s what would have happened and that’s the way the market works.

But these guys escaped…

The market doesn’t put you in jail just because you bet on the wrong banker.  But the market has a way of taking care of these problems and it was on its way to taking care of these problems in a big way in 2008, when half of Wall Street was exposed to bankruptcy. Half of those institutions probably would have gone broke and half would have been broken up and sold. That would be a punishment and getting what one deserves. That to me makes sense. Instead of that, the government came in and gave these people money. It gave the people who had made such bad bets even more money to make even bigger bets and then it claimed to be enforcing the law. The wrong doers were too close. They all were too cozy there.

That’s a nice way of putting it…

So my guess is that in Iceland their financial industry did not lobby correctly.  But the end of it was that the financial industry got away scot free and got away with all of their ill-gotten gains and went on to make even more money as the Fed gave them money in the terms of zero interest rate financing.  So the whole thing is absolutely preposterous in every sense and offensive.

Your new book is called “Hormegeddon: How Too Much of a Good Thing Leads to Disaster.”  So can you elaborate a little on the subtitle of the book, “How too Much of a Good Thing Leads to Disaster.”  Why do you say that?

Well there is a famous quote in America by Mae West, who said, “Too much of a good thing is wonderful.”  The thing that she was talking about might be the only thing that too much of is wonderful.  But most things are like sugar. You think, well, I will have a chocolate pudding for dessert and one chocolate pudding is wonderful, two chocolate puddings is okay.  By the time the third chocolate pudding comes around, you begin to say um, I am not sure about this and by the fourth you begin to feel a little sick. If you keep eating chocolate puddings, it is not going to be good for you. So that’s true of almost anything.

By the way the economists have a rule for this called the principle of declining marginal utility and it seems to apply to just about everything.  No matter what you try to do or what you think.

Can you give us an example?

It applies to money. When you have no money and somebody gives you 10 dollars, that 10 dollars, each one of those dollars is very very valuable to you and if you have a million dollars and somebody gives you 10 dollars you really are not going to be impressed at all because the value of that money has declined.  Each additional incremental dollar declines to the point where it is almost worth nothing. We read in the papers that multibillionaires like Zuckerberg have given away 50 billion dollars and that is such a great thing. But actually those 50 billion dollars really had no value.

What do you do when you already have the house that you want…you already have the car that you want… and you can’t eat any more chocolate desserts…no matter how much money you have…you cannot buy another car…what are you going to do with it?

You only have a certain number of hours in a day…you can only watch so many movies…you can only do this…you can only do that…so you reach a point where the extra money that you get has a marginal utility that has declined to zero and then below zero.  Because you have to take care of it, you have to think about it and you have to protect it.  And so when a billionaire has 100 billion dollars and he gives away 50, well I don’t know if he has given away that much.

But anyway, the principle applies to everything.

Can you give us some more examples?

It applies to security, one of the cases that I explained in the book.  Now you would say well security; you can’t be too safe and that’s what they tell you when you go through the line at the airport and there is a grandmother in front of you and they are checking her out thoroughly making her go through twice and panning her down and you are thinking in what way does she pose a threat to anybody and then a voice comes out that says, “you cannot be too safe.”

But in fact you can be too safe and because everything that you do in that direction involves expending money and time and resources that could be used for something else.

Can you give us an example?

In the extreme example that I used in the book—In Germany after the First World War, it felt very unsafe, you know they had capitulated in the war and the allies that is to say France, America and Britain were not at all sympathetic. So Germany felt terribly exposed and they were not allowed even to have an army. 

So along came Adolf Hitler and he said, “Enough of this, I am going have an army anyway.” And he began investing German money in the security industry and at first it seemed like the right thing to do.  And at first the viewers, especially the foreign viewers, who really didn’t know what was going on, they thought that this was great. Germany was getting back on its feet and their factories were hustling again. Everything seemed to be going in the right direction.

But Adolf Hitler did not stop with a little bit of security, he wanted a lot of security and more and more of the German economy, was shifted from domestic production to military production and the result of this was that it shifted people’s minds too, because pretty soon a lot of the German workforce actually worked for the defence industry and a lot of people had children, sons, daughters, nephews in the army. Everybody became very sympathetic to the army, to the defence industry and after years of propaganda to the idea that Germany needed its place in the sun and the way to get it was with military force.

So they launched on this adventurism which they started in 1939 and the result of that we all know.  It was disastrous. It ended in the worst possible way for Germany where all of that security bought them no security at all.  It was counterproductive. It was a negative pay off.  They had gone from when they had too much of a good thing, security being a good thing, to the point where they had no security at all.  And that’s true in a lot of things, I mean that principle.

How do you link this to the current financial crisis?

Well you could say almost exactly the same thing about credit.  A little bit of borrowing is a good thing and the credit has proven to be useful in many circumstances. In fact, credit is as old as the hills and even before there was money there was credit.

Credit right.

Yeah there was debt and people would remember in small tribes. Anthropologists have done a lot of study of this.  They found that people would remember that somebody gave them chicken or somebody gave them an arrowhead or somebody’s daughter was exchanged to one family and they owe them a daughter or something or another.  And they remembered.  They had long memories of this stuff.  So credit is basically something that has been around for a long time and surely a little bit of credit seems to help an economy, but too much credit and then you end up with these funny things happening as we have in the world today.

For sure…

And by the way world credit is astounding in its growth; in 1995, which is 20 years ago, the entire world credit was 40 trillion dollars; today it’s 225 trillion.  That’s in a period in which the GDP has risen like 2% per year.  This is a phenomenal separation of the real economy from the Wall Street economy; The Wall Street economy being an economy of debt, assets, financial instruments, etc.  So we have this huge diversion.

We have seen also the same sort of thing, a declining marginal utility of debt, where each additional dollar invested in debt has produced less and less GDP payoff.  And so at the end, in 2009, we were seeing huge increases in debt with no increase in GDP and that’s what is happening again today, where debt is still going up at a very high rate and the GDP growth has declined in America to about a zero. In fact, it might be zero and it might be negative, we are waiting for the figures for the last quarter to come out, but there are some people guessing that the next quarter is going to be a recessionary.

Given that the next quarter is going to be recessionary, how do you see Janet Yellen and the federal open market committee going about increasing the federal funds rate…

Oh! I don’t think they will and I don’t think they can.  I think that it’s…

Will they reverse the cut?

They won’t want to because you know they have staked their short term reputations on this idea that the economy is recovering and that therefore they can normalise interest rates.  They are all in cahoots by the way. Also, these guys talk to one another. I think what they are counting on is Mario Draghi [the President of European Central Bank] to reinvigorate the European economy with a lot of credit, because he has been generally not done as much.

So Draghi came out and said that he would do whatever had to be done and he said that there were no limits to what he would do.  And right after that the world stock markets went up.  Yellen would much prefer for Draghi to do the heavy lifting this time and my guess is that they have a lot more they can do and I don’t think we have reached the end of this cycle at all.  I think we have got a lot more, a lot more nonsense coming and I think it’s going to come first from Europe where Draghi is going to come up with a lot more QE like stuff.  We don’t know exactly what or when.

You see Yellen going back to QE?

I do, but not quickly.  First they are hoping that the Europeans will do enough. If the Europeans put out enough cheap money it ends up in America any way because the Europeans want to buy US treasury bonds in order to protect their money so that’s probably what will happen.  

I think it really depends on how effective the Europeans are. If the Europeans are not effective and we get another big wave downward in the US markets and we go into a recession in the first quarter, I think then first they will announce that they will not do any further hikes. Then maybe they will come with some QE program or something, but there is no way in which they are going to allow a real correction.  A real correction is the severe serious thing. All of their training and their institutional momentum, all of that goes towards solving these problems rather than letting them solve themselves.

Thank you Bill.

Thank you.

Concluded…

The interview originally appeared on the Vivek Kaul Diary on Equitymaster

You can read  the first Part of the interview here 

Bill Bonner: “It’s 100% impossible for the value of stocks to be divorced from the economy”

bill bonnerDear Reader,

This is a Special Edition of the Diary. In this I speak to Bill Bonner, whose books and columns I have admired reading tremendously over the years. He founded Agora Inc. in 1979. With his friend and colleague Addison Wiggin, he co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster.

Even though Bill writes largely on finance and economics, his writing style is close to literary fiction, and that is precisely what makes it so enjoyable to read him.

In this interview we talk about how the world of finance and economics has changed over the last few years. And how does Bill read the world that we live in. This paragraph summarises everything: “I just didn’t think it [i.e. the financial crisis] will go on this long but that’s also one of the realities that things that you think can’t last, actually do last longer than you expect and they get worse than you expect and then after they have gotten much worse and lasted much longer than you expect then you begin to think well maybe I don’t understand something about it and maybe there is something going on here that can last and then of course it blows up and you were right all along and then at that time of course you are not anticipating it.”

This is the first part of the interview. The second part will appear tomorrow.

Happy Reading!
Vivek Kaul

 

I guess the last time we spoke would probably have been sometime in 2011-2012.  So how have things changed?

It was surprising to me that the authorities were more aggressive than I expected coming in with the QE1, QE2 and QE3 and then the twist. And those things as expected didn’t do anything for the economy.

In fact, it may have actually slowed down the real economy.  But they did wonders for the stock market and the financial industry so they are very very popular and well those things were essentially reducing the cost of credit, making easy money even easier.

So naturally, there is more and more debt and it just seems to be a phenomenon or fact of life that when you make debt cheap, when you make it cheaper than it should be, you get people borrowing money for things they shouldn’t be doing and too much capacity, too many speculations, too many gambles, too many business expansions that don’t really make any sense.

And what did that lead to?

So we saw the effect of that in the commodity market, particularly the oil market which has been really laid low by this combination of cheap money which made it possible for American drillers to get out there all over the place and drill for oil and some marginal producers in Canada and otherwise in Brazil and everywhere to come up to increase the supply of oil. Meanwhile the actual demand for oil was going down because the world economy was actually not in a growth mode at all.

So we have those kinds of things happening and that’s all happening since the last time we talked and the huge expansion and explosion and implosion of the oil market, implosion of the commodity market and explosion in world debt which has gone up about 57 trillion dollars since 2008. So these things were really much bigger than I anticipated.

I just didn’t think it will go on this long but you that’s also one of the realities that things that you think can’t last, actually do last longer than you expect and they get worse than you expect and then after they have gotten much worse and lasted much longer than you expect, then you begin to think well may be I don’t understand something about it and maybe there is something going on here that can last and then of course it blows up and you were right all along and then at that time of course you are not anticipating it.

So why hasn’t all this debt lead to economic growth? Why hasn’t cheaper money led to economic growth because you know this was one of the beliefs that central bankers had and their actions in the last seven- eight years have been built on the belief that we will flood the markets with money, we will have low interest rates, people will buy, companies will do well and economic growth will return. Why hasn’t this happened?

Why doesn’t that happen?  And the answer is hard. I don’t really know. There is a Swedish economist named Knut Wicksell and Knut Wicksell noticed, that whenever the cost of money was too low, he said there were two interest rates.

He said there was a natural rate which is to say the rate that money should cost in a real properly functioning market and then there is the actual rate and the actual rate is jigged up by the authorities in the banking industry. Whenever the actual rate is too low, people do not invest in the kinds of things that will increase real production.

He said what they do, and I never have really fully understood this, but he said what they do when money is too cheap, they tend to go for easy things. So the banks take the easy money which is too cheap and then they invest it in US Governments Securities, you know the 10-year treasury bonds and that way they get guaranteed return, a guaranteed positive carry.

What else did he say?

And then he says that when money is too cheap people make cheap investments, one because they don’t really know what is going on.  You know the cheap money distorts the whole picture.  The cost of money is the critical number in all of capitalism You have to know what it will cost you really to borrow money. And once you know what the money really costs then you should decide whether you should build a factory, whether you should invest in this, buy that.  

You don’t know until you know the real cost of money and by distorting the real cost of money as Wicksell points out what it does is it drives out everybody away from real investment where they don’t really know what they should be doing. They don’t want to invest real money in a project where the returns are uncertain and the value of money is uncertain and everything is uncertain. So they go for these cheap investments.  These easy investments such as US treasury bonds where they know they will get paid and so you get a big increase in these debt investments. Hence, just the quantity of debt goes up where everybody is just counting on being able to borrow cheap and lend a little less cheap in order to pocket the difference without any real risk.

Even though the economies as such haven’t recovered, the stock market and the real estate markets in parts of the world have done very very well.  So how do you explain that dichotomy? Has the link between economic growth and stock market returns broken down?

Oh! It has totally broken down. We have a chart that we use. We go back to 1971, where we believe something fundamental happened when they changed the US money system. Since 1971 what you see if you look at US GDP growth, it looks more or less normal.  I mean the growth rate was higher in the 70s and it gradually went down decade after decade, it got lower and lower.

But you are talking about going down from five to three to four to three to two and now probably about zero percent, but that growth is real…that’s the real economy…that’s Main Street…that’s where people work…that’s where they spend their money…that’s where they earn their money.

When you put that on to that chart, and you put a chart of what the value of America’s stocks and bonds are, then that chart just goes right up after about 1995.

Yes that’s what the chart shows…

And so there is something going on where the stocks and the value of assets is being cut off completely from the value of the real economy that supports them, which is impossible of course.

I mean it is impossible for that to continue because ultimately any asset is only valuable in as much as the economy gives it value.  It’s not valuable in itself.  If you have a blue jeans factory and you are producing five thousand pairs of blue jeans a day but that is not worth a penny unless you have got people who are willing to buy five thousand blue jeans a day and they can only do that if they are earning enough to buy five thousand blue jeans a day.

And you know that was Say’s principle which was that “Supply creates demand”, which is a funny thing. I mean it’s easy for people to misunderstand that.  But what it really means is that it’s only because you have an economy that produces wealth that people have the money to buy what you are making.

So there is no way, it’s absolutely hundred percent impossible for the value of stocks and bonds to be divorced from the value of the economy itself.  And what we have seen is a separation and we call it a divorce. But the two have been separated for a long time and my guess is that they are going to get back together.

In the book ‘The Age of Stagnation’ Satyajit Das makes a very interesting point about how lower interest rates have not led to increased consumption and he gives a very interesting reason for it. What he says is that when the return on fixed income investments comes down, people put their money in the stock market and when they do that the pressure on companies to keep increasing their earnings so that they can keep giving dividends increases.

You know people are looking at stocks as a mode of dividend [regular income] than a mode of capital gains because the money they used to earn through the fixed income investments has come down [dramatically].  So when there is pressure on companies to give dividends in a scenario where the sales are not really growing, they fire their employees. They [also] borrow money so that they can buy back their stocks and when they buy back their stocks the earnings per share goes up and the dividend per share [as there are fewer shares than before] also goes up.  So that is why even with cheap money, easy money and low interest rates, consumer buying hasn’t picked up and hasn’t translated into economic growth.  Does this makes sense?

Well I think it totally makes sense. I saw an example of that just in today’s press which unfortunately I can’t recall. The company announced simultaneously that it was laying off 10,000 employees and had a big [stock] buy-back program. 

I think it’s just a shift that in America has been widely described as the ‘financialization’ where the money goes from Main Street to Wall Street. You can see that shift very clearly, if you look at the salaries paid on the Main Street, which have gone nowhere for decades and the salaries paid on Wall Street which have gone straight up and you could also look at the profit share of the economy.

The whole of the financial industry earned about 10% of the US profits in 1980 and by 2007 it was 40%. This is wealth that is going from Main Street economy where people work, live, eat, earn their lives, earn their retirements to Wall Street where its speculation, gambling, investing of sorts.  And that change has transformed the entire economy and eventually that is what I keep saying—trees don’t grow to the sky. I feel this cannot go on forever and how much longer it can go on of course is a subject of great interest.  But I really don’t know.

You know you talked about Wall Street, do you think Wall Street in 2015 -2016 has gone back to the way things were in 2006, 2005 and 2007. Would you say that?

Oh yes! I would say that that’s generally the case.  You don’t want to pin point and you don’t want to be too tied to historical rhythms but it certainly looks that way.  We don’t have a housing bubble of the same sort now in America.

But there is a bubble…

There is a bubble in housing but it is not the same sort.  But the bigger bubbles in the US today are the bubbles in the student debt and auto debt.  We have a heck of an auto debt bubble and the corporate debt bubble that we didn’t have before.

Corporate debt is huge because all the money that has been used to buy back shares…

It is mind boggling to think that a corporation would borrow money to buy some shares and you wonder what business is this corporation in.

Is the student bubble has big as the housing bubble?

No. It’s not that big. The housing bubble was worth $4 trillion or something and this is $ 1 trillion.

Which is big anyway. $1 trillion is not small.

It’s huge, but it’s not the same kind of huge.  It’s an entirely different thing because the housing bubble was exposed to the value of the collateral.  In the housing bubble there is something there and eventually it was obvious that what was there was not worth what they thought it was because at the end of it the typical house costs something like twice as much as the typical family could afford.  So it didn’t take a genius to figure out that cannot go on for much longer and by the way salaries were not going up.  There was no way that a person was going to catch up to that.  But now what is the collateral on a student loan?  It’s nothing.

There is some intellectual capital…

This student loan is interesting because the collateral is essentially worthless.  They have done studies to show that if people borrow money, get educated they don’t earn more money and it’s a bit of a fraud.  Its money that a bank lends, secured by the government, goes to the student, goes to the education industry, which is just lobbying Congress for the whole thing to continue.

How big is the auto bubble?

The auto bubble is big but I don’t remember the numbers. And there is a huge transformation of the auto sales system where it is all directed.

So essentially what we can say here is that low interest rates have had some impact on the auto industry, I mean people have been buying cars.

Big effect yes and without those low interest rates there wouldn’t be these car sales and the car sales like employment have been held up by the central bankers and the economists as evidence that the economy is healthy.

Why they are buying cars is because the interest rates are held down.  This is the equivalent of those low interest loans in the housing industry in 2007.  Now they have the auto industry that has loans that stretch out. The average loan goes more than four years.  And yeah four years for cars is a long time.

To be continued…

The interview originally appeared in the Vivek Kaul’s Diary on February 4, 2016

Why economic growth cannot be taken be for granted

safety-of-chit

Mrs. Lintott: Now. How do you define history Mr. Rudge?
Rudge: Can I speak freely, Miss? Without being hit?
Mrs. Lintott: I will protect you.
Rudge: How do I define history? It’s just one fuckin’ thing after another.

Alan Bennett, The History Boys


Economists these days do not give much importance to economic history. As Cambridge University economist Ha-Joon Chang writes in
Economics—The User’s Guide: “Many people consider economic history [emphasis in the original], or the history of how our economies have evolved, especially pointless. Do we really need to know what happened two, three centuries ago.”
Nevertheless, a good understanding of economic history is necessary to ensure that we don’t take things for granted. Take the case of economic growth. In the times that we live in we take rapid economic growth for granted. But for much of humankind that wasn’t the case. As best-selling author and economist Tim Harford put it in a column “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.”
Chang makes this point in his book. Between 1000AD and 1500AD, per capita income, or the income per person, grew by 0.12% per year in Western Europe. What this means is that the average income in 1500 was only 82% higher than that in 1000. “To put it into perspective, this is a growth that China, growing at 11 per cent a year, experienced in just six years between 2002 and 2008. This means that, in terms of material progress, one year in China today is equivalent to eighty-three years in medieval Western Europe,” writes Chang.
Further, at 0.12% Western Europe was growing at a very fast pace in comparison to other parts of the world. Asia and Eastern Europe during the same period grew at 0.04% per year. Hence, by 1500 the per capital income in these parts of the world would have been 22% higher than that in 1000.
Things did not improve in the centuries to come. Between 1500 and 1820, the per capita income in Western Europe averaged at 0.14% per year, which wasn’t very different from 0.12% per year, earlier. Some countries like Great Britain and Netherlands which were busy building a global empire and had also got a central bank going, grew a little faster at 0.27% and 0.28% respectively. So by modern standards the world was in a depression between 1000AD and 1820AD.
Things improved over the next 50 years. Between 1820 and 1870, the per capita income for Western Europe grew by 1% per year, which was significantly higher than anything the world had seen earlier.
One reason for this turbo-charged growth was the start of the industrial revolution. In the years leading to 1820 many new production technologies were invented. “In the emergence of these new production technologies, a key driver was the desire to increase output in order to be able to sell more and thus make more profit,” writes Chang.
Along with this, the evolution of banks and the financial system also helped. “With the spread of market transactions, banks evolved to facilitate them. Emergence of investment projects requiring capital beyond the wealth of even the richest individuals prompted the invention of the
corporation, or limited liability company, and thus the stock market,” writes Chang. And this helped enterprises raise the money required to start a business, something which is at the heart of capitalism.
After 1870, the production technologies kept improving. The economist Robert Gordon divides invention and discoveries into three eras. The second era came between 1870 and 1900 and according to him had the maximum impact on the economy in particular and the society in general.
As he writes in a research paper titled 
Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds “Electric light and a workable internal combustion engine were invented in a three-month period in late 1879…The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits…included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,” writes Gordon.
Based on Gordon’s research paper, Martin Wolf wrote in the Financial Times: “Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared.”
In fact, Gordon makes an interesting observation regarding this increase in productivity by comparing motor power to a horse. As he writes: “Motor power replaced animal power. To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses.”
And all these inventions drove economic growth. As Bill Bonner told me in an interview I did with him a few years back: “Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations.”
These game changing inventions are now a thing of the past. Harford explained this to me through a couple of brilliant examples when I interviewed him for The Economic Times a few years back. As he told me: “The 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn’t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.”
The same seems to be true for medicines. “Look at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven’t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn’t be worried about antibiotic resistance if we thought we could create new antibiotics at will,” Harford added.
So the basic point is that growth of economic productivity has petered out over the last few decades because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
Nevertheless, what these game changing inventions did was that they led to the assumption that economic growth will continue forever. But will that turn out to be the case? As Gordon wrote in his research paper: “Economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
And this might very well come out to be true. The core of Gordon’s argument is that modern inventions are less impressive than those that happened more than 100 years back. “Attention in the past decade has focused not on labor-saving innovation, but rather on a  succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,” writes Gordon.
And that isn’t happening anymore.

The column originally appeared on The Daily Reckoning on May 14, 2015

The ten best Nonfiction books of 2014

single-man-coverVivek Kaul

It is that time of the year when media houses go around writing about the best of the year that was. Given this, I thought it would be an appropriate time to put out a list of what I think are the best nonfiction books that I read in 2014. The list is biased to the extent of what I read, which are basically books in the area of finance and economics. Also, some of the titles were released earlier and I only happened to read them in 2014. The books are listed out in a random order. So here we go.

Saving Capitalism from the Capitalists by Raghuram Rajan and Luigi Zingales: I had read this book when it was first published in 2003. At that point of time I was basically trying to figure out what to do with my life, having finished an MBA in information systems in 2002 and at the same time having realized that the MBA degree was one big con job. In 2014, the book was published again with a new afterword. I read it again and appreciated the book much more than I had done in 2003. The book is a great read for anyone who believes in the idea of free markets. It tells you loud and clear that the incumbent capitalists are the greatest enemies of the free market. The book also helped me understand why so many big businesses in India manage to default on their bank loans without the industrialists having to face the consequences of the same.

After the Music Stopped by Alan S Blinder: This book was published in 2013, but I happened to read it only this year. The best books on historical events are written many years after the event has happened. Take the case of what I think is the best book on the Great Depression—The Great Crash 1929, written by John Kenneth Galbraith. The book was first published in the mid 1950s almost quarter of a century after the Depression started. One possible explanation for this is the fact that writing many years later, the author can leave out all the noise and concentrate on the most important issues. Over the last six years many books have been written on the financial crisis, but After the Music Stopped, in my opinion is perhaps the best book on it. It summarises the economic, the political as well as the legal angles of the financial crisis very well. If you are looking for a ready reckoner on the financial crisis, this has to be your go to book. Capital in the Twenty-First Century by Thomas Piketty: This was by far the bestselling title in economics during the course of this year, having been the number one book on Amazon.com for a while. It is very rare for an economics book running into 700 pages to be number one on Amazon. In this book the core argument offered by Piketty, who is a French economist, is that capitalism has led to greater inequality among people over the years. Piketty offers a lot of data from the developed countries to make his point. The book did not go down well with the American economists, and after it appeared many of them tried to discredit it by trying to find mistakes in the data and methodology used by Piketty. Who is right and who is wrong is too long a debate to get into here. Nevertheless, Piketty’s book remains a must read for the fantastically lucid way in which its written and the several original ideas that it offers. The Dollar Trap by Eswar S. Prasad: The United States is in a huge financial mess. Nevertheless, dollar remains the go to currency of the world at large. Whenever there is a whiff of a crisis anywhere in the world, money is pulled out and moves to the dollar. Ironically, even when the rating agency Standard and Poor’s cut the rating of the debt issued by the United States government from AAA to AA+, money moved into the US dollar. Prasad explains this “exorbitant privilege” of the dollar and the reasons behind it. While the US may not be in a great financial shape, but the world at large still has faith in the dollar. Prasad summarizes the situation well when he says: “It is possible that we are on a sandpile that is just a few grains away from collapse. The dollar trap might one day end in a dollar crash. For all its logical allure, however, this scenario is not easy to lay out in a convincing way.” The book is a great read for anyone trying to understand one of the most fundamental disconnects of the times that we live in. Flashboys by Michael Lewis: No one quite writes about finance like the way Lewis does. From his first book Liars Poker to the latest Flashboys, each one of his books on Wall Street and its ways has been a bestseller. One reason for the same is the fact that Lewis started as a Wall Street insider in the investment bank Salomon Brothers (which has since gone bust) and has managed to maintain his contacts since then. Flashboys is essentially a story of the people and systems that make up algorithmic trading that has taken Wall Street by storm. A majority of the trades on Wall Street are not driven by humans any more. They are driven by computers with a lot of processing power. And that is the fascinating story of Flashboys. If you are the kind who likes reading thrillers over weekends, this is just the right book for you.

Business Adventures by John Brooks: I first discovered Brooks in the process of writing and researching my books. Someone suggested that I should be reading Brooks’ version of the Great Depression called Once in Golconda: A True Drama of Wall Street 1920-1938. The book was a fantastic read and made me realize that Wall Street had a Michael Lewis even before the real Michael Lewis appeared on the scene. Early this year, Bill Gates wrote a blog on one of Brooks’ other books called Business Adventures. He called it the best business book that he and Warren Buffett had ever read. This blog pushed the book to the top of the Amazon charts. It was re-issued after this. The book is a collection of twelve long articles that Brooks wrote about the American businesses, government as well as Wall Street, for the New Yorker magazine. And it has tremendous lessons for almost everyone connected with business and finance.

Single Man—The Life & Times of Nitish Kumar of Bihar by Sankarshan Thakur: This book is the joker in the pack. In a list full of books on economics and finance, here is a book on politics. Having been born in erstwhile Bihar, I have always been interested in the politics of Bihar. And there is no better writer on Bihar in English than Thakur, who works as a roving editor for The Telegraph newspaper. Thakur chronicles the rather turbulent life of Nitish Kumar, starting a little before the Emergency, and goes on to chronicle the life of the Bihari politician over the next four decades. As he does that he also goes into the history of Bihar over that period. Unlike a lot of other biography writers, Thakur also goes into Kumar’s unhappy personal life. The book is an excellent model for how to write a biography of an Indian politician. What we normally get to read are either hagiographies or out and out criticism (as is the case with so many books on Narendra Modi which swing at both ends). There is rarely a biography of an Indian politician which takes the middle path. If I had to choose just one book to read this year, then Single Man would have to be it. And this would be more for Thakur’s andaz-e-bayan(the way he tells the story) than Kumar’s story per se. How Not to Be Wrong—The Hidden Maths of Everyday Life by Jordan Ellenberg: This is another joker in the pack. I absolutely love to read good books on Mathematics. Ellenberg in this book goes around explaining the practical aspects of Maths in everyday life. He explains in great detail how media often uses Maths incorrectly to draw wrong conclusions. He also tries to answer some really interesting questions: How early should you get to the airport? What’s the best way to get rich playing a lottery? And does Facebook know you are terrorist? If you are feeling a little adventurous and want to go a little out of your comfort zone, this is just the right book for you.

The End of Normal by James Galbraith: I am reading this book currently and am around half way through it. James Galbraith is the son of John Kenneth Galbraith, who I feel was one of the most lucid writers on economics that the twentieth century saw. Galbraith junior writes in the same lucid way as his father did. Since the financial crisis broke out, economists and politicians have tried to tell the world at large that “all is going to be well,” and that the financial crisis was just caused by bad policy and bad people. Galbraith challenges this world view and offers four reasons against it: the rising cost of real resources, the futility of military power, the labour saving consequences of the digital revolution and the breakdown of law and ethics in the financial sector. Long story short: The global economy will not see acche din(good days) any time soon. Hormegeddon—How Too Much Of a Good Thing Leads to Disaster by Bill Bonner: The regular readers of The Daily Reckoning would know by now that this has been one of favourite books of the year, given the number of times I have already quoted from it in my columns. I have been a big fan of Bonner’s writing since I first met him in late 2008. In this book Bonner goes about explaining how too much of a good thing in public policy, economics and businesses, leads to disaster or what he calls FUBAR (f***ed up beyond all recognition). Bonner offers many examples from history to make his point—from Napoleon’s decision to invade Russia to the outbreak of the Second World War to America’s War on Terror. He then goes on to show that these disasters cannot be prevented by well-informed people with good intentions because they are the ones who cause them in the first place. 

So that was my list of what I thought were the ten best books that I read this year. Happy reading. The India edition of The Daily Reckoning will be taking a year end break and will be back early next year on January 3. Here is wishing you a Merry Christmas and a Happy New Year. Meanwhile you can continue reading the international edition of The Daily Reckoning authored by Bill Bonner. The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 24, 2014