Readers: some of the dialogue in this blog is set in the future (sometime after the year 2020). Entries addressing events in the the future assume there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.
Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US. Most recent sense check, ENTRY #387.
Some of the entries are part of a series. Several series are available as easy-to-read booklets for download:
Prelude to the current series of entries: I’ve concluded Trump is a lunatic and the administration filled with lapdogs save a couple of people at CDC. Instead of wasting time commenting on actions by Trump, I thought it more productive to begin discussing what happens in the US once the coronavirus is more under control. #378 began the series. At this point not sure how many entries. Comments and suggestions welcome.
ENTRY #394: Note: Yikes, the craziness of the Trump administration has continued the last couple of weeks. Trump and a substantial portion at his staff contracted the COVID-19. After a few days hospitalization at Walter Reed Army Medical Center, and after taking a host of unapproved drug cocktails plus some steroids, Trump claimed that he was feeling better than any time in the last 20 years. Must have been a rough 20 years.
Then, in only Trump fashion, he claimed getting COVID-19 was a blessing from G_d. Of course, who else would G_d choose to save the world from this scourge? Mother Teresa? An epidemiologist? No, the Harvard/MIT grad, Trump. Well, maybe Trump didn’t go to Harvard or MIT but just ask and he’ll tell you he’s a stable genius and one of G_d’s favorites.
A bit of irony was part of Trump’s treatment at Walter Reed included cells obtained from an abortion. Where was the outrage from Trump and the far-right about stem cells from an abortion? Cat apparently got their tongue.
More seriously, and the focus of this entry is the major restructuring of the US economy that’s going to occur whether or not there is a vaccine or even cure for COVID-19. The US is faced with an economic upheaval that may rival what occurred during the first and second phases of the Industrial Revolution.
Industrial Revolution Phase I started in earnest around 1800 with the introduction of machines and devices that replaced handcrafting. These machines could complete a task in a fraction of the time and with higher precision than the work done by hand. Phase I also benefited from the refinement of the steam engine, which allowed the engine to power such mobile devices as a locomotive. The locomotive enabled the creation of a railroad network to deliver goods to more locations. Steam-powered tractors used in agriculture resulted in significantly higher output per man-hour of labor.
What I’ve labeled as Phase II of the Industrial Revolution started about 1900. Two major breakthroughs: (i) introduction of the internal-combustion engine, which was smaller and lighter than a comparable output steam engine, and (ii) standardization of parts. Standardizing parts, originally developed by the rifle manufacturing industry for easy replacement in the field, was later adopted by manufacturers of transportation – automobiles, locomotives and aircraft. Standardization enabled the use of assembly lines, which lowered labor cost per unit and increased quality.
Phase II also resulted in workers shifting from agriculture to manufacturing jobs. The shift required workers to have a different set of skills, although for most workers skills required for jobs in manufacturing were limited and could be learned on the job.
The vast majority of manufacturing companies, especially automotive, were based in the Northeast and Midwest, both of which experienced a major influx of immigrants and southern blacks leaving the farm. While the manufacturing companies made enormous profits, hourly workers were not well paid until the companies faced work stoppages as the UAW and other unions gained membership. Following WWII the economy steadily improved and wages for factory workers increased to the point that many enjoyed what could be called a “middle-class lifestyle.”
The plethora of well-paying manufacturing jobs began to erode in the 1980’s with the introduction of: (i) companies shifting production of goods to plants outside the US; (ii) robotics and somewhat later, artificial intelligence-based programs.
Rather than the disruption being caused by a change in required job skills, as seen in Phases I and Phase II of the Industrial Revolution, jobs were shifted outside the US due, in part, to: (i) US tax laws on corporations, which ended up favoring job shifts rather than penalizing job shifts; (ii) erroneous analysis of costs by the employer. Shifting jobs outside the US accelerated further in the 1990s and by the early 2000s, a substantial number of manufacturing jobs had been shifted outside the US.
The analysis of costs justifying the shift to plants outside the US often focused primarily on labor costs per unit rather than a more holistic approach that accounted for all costs associated with manufacturing. High labor costs were blamed on union contracts and therefore the only way to keep costs down was to move jobs to a different location. But were labor costs really too high?
Following is an example I experienced personally. While the story is a data point of one, my experience is the thinking of the Board was fairly typical among many companies, large and small.
One of my jobs post GM was running a company in northern California that assembled electric scooters. When I took the job the Board said to shift assembly out of northern California (Sonoma County) to China, where labor costs were much lower. I resisted and within seven months we had increased productivity (with virtually no capital expenditures) to a level where we could double the labor costs in California and pay the Chinese workers zero and it would have been cheaper to continue to produce in California. Why? When all related costs were considered, producing in Northern California – in the middle of wine country, no less – was cheaper. Such a holistic approach to calculating costs apparently was not considered by many companies.
In addition to being affected by jobs shifting elsewhere, many assembly and other semi-skilled workers in the US are facing another growing threat — robots. The increased use of robotics and AI represents a fundamental shift in how goods are designed, manufactured, assembled and processed for shipment. The shipment of these goods to the buyer’s location is going to be disrupted as autonomous vehicles migrate from testbed demonstrations to daily use.
As if implementation of technology were not enough of a formidable threat, these workers face yet another threat caused by COVID-19. To control the spread of the virus, many employers mandated that staff work from home. COVID-19 restrictions also forced many businesses to close, at least temporarily, although more and more businesses are closing permanently.
Within the service sector, the great unknown is to what degree travel and entertainment and supporting businesses will be changed post-COVID-19. By the time the threat of the virus subsides, will a substantial portion of the population have become less interested in traveling on crowded airplanes, sailing on petri-dish-like cruise ships with hundreds of others, eating in crowded restaurants, or attending sporting events with tens of thousands of others?
If so, then many assets supporting travel and entertainment will become obsolete – airplanes, hotels, restaurants, theme parks, cruise ships, large athletic stadia, etc. Some of the buildings can be repurposed but what does one do with a surplus jet liner, cruise ship or football stadium?
In the retail sector, the shift toward on-line shopping in not new. For several decades, the brick-and-mortar retail sector has been facing disruption. The shift toward internet sales, both personal and business, started to take hold in the late 1990s, early 2000s. While some of the shift to internet sales replaced transactions previously completed using 800#’s, most of the shift has been new.
Restrictions associated with COVID-19 have been like a rocket ship propelling the shift forward. In a manner of months, forced isolation may have accelerated on-line shopping patterns an amount that otherwise would have taken 10-20 years to achieve. The shift to the internet and the number of store closings generate the question, “What to do with all the empty retail space?”
Thus, any plan to stimulate the economy post-COVID-19 needs to address job creation as well as how to repurpose many assets associated with the service sector. One assumption seems certain – the mix of output in US economy will be different post-COVID-19 than pre-COVID-19. Making America great again will not be looking in the rear-view mirror and trying to recapture what once was. The Pre-COVID economy and valuation of assets is as long gone as Wally and the Beaver.
The US, and many countries worldwide, will have a blob of dislocated assets that have little or no value in their current configuration. Repurposing some of the fixed assets could be fairly straightforward. Office buildings, shopping centers, many factories could be converted into housing, assisted living facilities and schools. Converting shopping centers to housing seems ideal to help address the shortage of affordable housing in many cities.
What do we do with surplus airplanes and cruise ships? Beyond scrap metal, there’s not much use. What about surplus infrastructure supporting the air-travel industry? Some surplus airfields could become ideal recreation centers. Or, the airfield could be reforested to support wildlife and help address global warming.
The more difficult problem is how to repurpose human capital. Without significant training, how do you take someone who was in a semi-skilled job – say an assembly plant or sewing clothing – and have the person perform in a job requiring a more advanced skill set? How does society repurpose service workers, especially those in travel-related Industries?
Even many semi-skilled, white-collar workers will be displaced post-COVID-19. As organizations adjust to more remote working, some middle management jobs likely will be eliminated.
Repurposing the human assets is a daunting task for government and organizations. In terms of required job skills, Phase III of the Industrial Revolution will be the opposite of Phases I and Phase II. In Phases I/II new jobs often required less skill, or a skill that was relatively easy to learn on the job.
Phase III job skills will be more advanced. Robots and AI-based machines can replace many existing lower-skilled jobs. OJT will be very difficult. An example. There is a company in Fort Wayne, IN that makes exhaust systems for many auto OEM’s. The plant runs 24×7. Despite the high output, the plant has few employees.
At first glance, bending pipe a few ways for an exhaust system seems simple enough. However, the exhaust system might be different for the same model car/truck with a different engine. Plus there are at least three different auto OEM’s serviced by this plant, which complicates production schedules.
Bending pipe is a bit more complicated than it seems. When pipe is bent, one side becomes thinner and the other side of the bend tends to crinkle.
The Fort Wayne company’s solution to pipe bending and complicated production schedules is a highly automated process to bend the pipe and to change configurations automatically. Most workers at the plant are skilled in computer programming. There are no manual “pipe benders.” The only non-skilled jobs are the lift-truck operators moving raw material to the beginning of and off the end of the line. In a few years, the lift-truck operators could be replaced by autonomous lift trucks.
For the US, post-COVID-19 the training of unemployed workers for new skills will be more difficult than repurposing fixed assets. How do we approach solving this problem? More thoughts in the next entry. For some guidance, see the existing write-up titled “Technology Tsunami.” (https://usrevolution5.files.wordpress.com/2020/01/tech-tsunami-booklet-with-supplement-1.pdf)