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March 26, 2005

Don't Tax Him, Don't Tax Me, Tax That Robot Behind the Tree


The U.S. and Japan have vastly different roots, cultures, and presences.  No great people in the world, not even the English, has been as insular as the Japanese and as a result over the centuries they have built up an isolation from the ways of foreigners that has bred a particular strain of xenophobic antibodies no other successful society has been able to sustain into the 21st century. In contrast, just as they took over Chinese calligraphy flipping it 90 degrees, there is nothing in their culture that prevents them from adopting the most advanced science, technology, and learning from other societies while turning them into uniquely Japanese institutions.

The US, in contrast, has from its very beginnings, been a meeting place of cultures, modeled first on a mainly Protestant and European enlightenment blueprint but one, created and erected by African, Southern and Eastern European, and Asian labor and ingenuity. Just one hundred years ago, European science, art and technology dominated the world. At that moment, few would have predicted the devastating wars and unprecedented barbarianisms that dominated the life of that continent in the following half century.

Today, as the scientific and technological mantle has moved to the United States and Japan, now the first and second largest economies. much is being made of the aging of populations in the leading countries of the industrialized world.  The great baby boom population wave of the postwar years is moving towards retirement and contemporary birth rates have not kept pace.  In fact, in most of these countries birth rates have either stabilized or have continued to drop well below replacement levels.

Without doubt, the aging of the industrialized world's population is a major phenomenon but it is important to understand that in reality it has almost nothing to do with the kind of political nonsense that is being made the currency of the present debate on Social Security. Politicians who couldn't care less about anything but getting re-elected in the next two years suddenly have moved their gaze into the distant future as if they have license to clomp about where most futurologists fear to tread.  As if on cue, they wring their hands and exclaim from their talking points sheet, "in 2052 there will be only 3 workers for every retiree" as if this fact alone has any real meaning in the debate.

The industrialized societies have, of course, become the dominant countries mainly because of their ability to greatly increase something the economists call "productivity": what that means in plain terms is that by using ever more sophisticated tools more gets done by fewer workers; this goes from producing food on a farm to turning out widgets in a factory. Second, and equally absurd, this population calculation also assumes a hermetically sealed  US that will not absorb all those immigrants who would readily come here to fill any job openings that go untaken. Third, it misses the very present point no politician wants to face: we have already gone much further than people would have believed possible in the outsourcing of labor to other continents where the supply of cheap, young. trained and able workers is largely untapped. Finally, it doesn't even consider the kinds of advances that might occur through breakthroughs like molecular nanotechnology

And this leads us back to Japan --which coincidentally is hosting this week in Aichi the 2005 Robotics World Expo-- a nation that already has an older population than any other developed country and will not, without great dislocations, be able to absorb a large immigrant population to fill the void. No coincidence that Japan has become the country most focused on the development of advanced robotic devices. Whether they will be able to advance the technology as fast as they need to or whether they will have to have a mix of immigrants, outsourcing of their production capacity and robotics to meet their economic growth needs, is, of course, still an open question.

From an economic standpoint, productivity gains, whether through outsourcing or automation get reflected in corporate profits.  During the latest economic recovery cycle that began in 2002, the US economy has managed gains of 3 to 4 percent a year, despite the fact that fewer and fewer new jobs have been created. In fact, this recovery (mainly stimulated by massive debt and devaluation, though that's another story) has mainly been a recovery in corporate profits accompanied by a real estate bubble..

What we can safely defy anyone to argue against is that in 2052 or 2042 for that matter, that 3 workers will not be turning out the equivalent of what it took 12 workers to turn out in 1955. If robotics advance as fast as we think they will, it's much more likely that 3 live, breathing 2055 workers will be turning out the equivalent of 120 1955 workers.  Pushed by their own particular brand of necessity, the Japanese will go first in this area but the US and Europe will not lag that far behind.  In this country, the driving force will probably be the military; a recent look at DARPA's --the DOD agency that funds advanced research-- grants shows how their focus has shifted to robotics. The Air Force recently placed a major order for unmanned flying drones.  These robot planes are sometimes piloted by humans sitting in front of terminals but it is only a matter of time before more and more of the "decision" power is shifted to the onboard computers.  Meanwhile US Ground forces have been forced into a role of occupation; a posture in which robots are useful for any number of mainly defensive but highly vulnerable roles like defusing bombs and carrying out screenings for suicide bombers.

The Social Security debate like so many of the other prevalent debates these day, can result in making us all a little stupider.  Sure, there will be fewer workers per retiree and older humans will need more health care.  But if we insist on trying to tax only the human payroll factor in the economic equation because that worked in 1935, or worse, try to convince ourselves that we somehow deserve less because machines are doing more of the job, we are totally missing the point.

Posted by dymaxion at 01:41 PM

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March 11, 2005

The Slipping Dollar, Whispers and Sighs

Two weeks ago, it was the late night whisper by the Bank of Korea that they might start diversifying their reserve holdings --in central bank jargon, this means holding something (Euros) other than dollars -- that sent currency markets in a tizzy. But then the BOK cleared its throat and said that it really wasn't changing anything at all, folks had misheard. Once again, yesterday, some noises came out of the Bank of Japan that they, the world's largest holder of dollars, might be rethinking the composition of their reserve position and markets started to move.  By nightfall in Japan, the BOJ made its denials heard loud and clear and dollar slippage stalled.

So what's going on around here?  Let's start by calling it the dollar hot potato game and it's being played all over Asia.  John Mauldin in a piece called Why Trade Imbalances Really Do Matterr compared it to playing the card game Old Maid.  In Old Maid, if you remember, the idea is to get rid of the Queen of Spades.  In each round the players pull a card from the hand of the player on their left.  Pairs are discarded as the hand is narrowed down but there is no other black queen to match the old maid.

The Asian central banks hold several trillion dollars in their coffers. Since 1992 those dollars have lost more than 35% of their value in world markets.  But these same Asian countries' economies are dependent on selling goods to the US.  In some ways it's not the bloated old maid they're holding but the goose that laid the golden egg.  The problem is that egg is getting less golden every day the dollar sinks against the value of the euro and, more literally, gold.  The old maid analogy works because it becomes something of a nightmare for the central bankers in Asia to lose value on a day to day basis as the US trade imbalance widens.  Nobody wants to end up holding all the dollars but at the same time nobody wants to be seen as sloughing off the queen.

This leads us back to today's news that once again, for the umpteenth time the US trade balance for a single month --January 2005) has hit close to a new record high.   This time the deficit was 58.3 billion dollars.  On an annual basis this would be close to $700 billion. What should be ringing warning bells is that this trade imbalance occurred after years of US dollar devaluations.  Normally, when you devalue your currency it makes foreign goods more expensive and your own goods cheaper vis a vis the rest of the world.  Over time that's supposed to bring the deficits down and a country's trade back into equilibrium with the rest of the world.

So as long term interest rates finally (we say, finally not because we want them to move but because as the dollar falls US Treasuries will get harder to sell to those sleepless Asian bankers we talked about and they will demand higher rates of return) start to move up and mortgage rates start to follow, the housing well will dry up leaving a lot of debtors holding an empty bucket.

Of course trade deficits and budget deficits haven't mattered much up to now nor has rising consumer debt --and BTW, it too was way up in January-- so perhaps they won't matter going forward.  No one can say.  Perhaps we in the US can just go on borrowing and spending forever.  After all, the US is the world's strongest economy. As Treasury Secretary Snow said today, when faced with the trade figures, it's the rest of the world that's not pulling its weight.

Posted by dymaxion at 03:57 PM

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