The US economy has spawned a vicious cycle that few people are talking about, but it’s one that affects us all. You, right now, are likely caught in that ugly loop. In fact, it’s what may one day send you packing from your job. It’s called technology-enabled disruption. And the worst part? (There’s a worse part!?) You contributed to it in a big way, explains Robert S. Kaplan. Advancements in retail technology gave consumers the power to shop smarter and put pricing pressure on manufacturers. That pressure is “rippling back, through impacts on workers and their wages, and maybe encouraging businesses to increasingly replace workers with technology,” says Kaplan. In a nutshell: every time a consumer finds a bargain, a robot gets a job.
But tech-enabled disruption isn’t prominently on the public agenda. Currently a multitude of loud voices are blaming globalization for America’s waning job market but, as Kaplan explains, it seems to be a case of misdiagnosis. It is crucial to identify the correct cause of the coming job market crash because if the problem is globalization, policy makers will take one set of actions (like withdrawing from trade deals). However, if it’s technology-enabled disruption, that calls for an entirely different set of actions. The danger of this is most easily understood through US-Mexico trade, which Kaplan argues does not milk jobs from the US, but rather creates jobs, keeps US businesses competitive, and actually grows US GDP. It’s time to re-think America’s plan of action, and hopefully get the solution right the first time around. You can read Robert S. Kaplan’s latest essay at the Federal Reserve Bank of Dallas.
Robert S. Kaplan: So listen, during almost my entire lifetime globalization has been a key element of our economy. It started decades ago as many industries wound up—manufacturing in particular—off-shoring jobs to take advantage of lower labor rates in other countries. And so we lost manufacturing jobs in this country due to globalization. But the other part of globalization is increasingly the S&P 500, the 500 largest companies domiciled in the United States, are increasingly finding a larger share of their revenues and profits are coming from outside the United States.
And the other part is our trade relationships, the nature of them, are changing due to globalization. I’ll take Mexico as an example. Right now, of the imports to the U.S. from Mexico, 40 percent of those imports is U.S. content. So what is that about? It means these are not just trade relationships. These are integrated supply chains and logistics that, in our judgment at the Dallas Fed, are making the U.S. more competitive, likely actually adding jobs in the United States and keeping those jobs from going elsewhere, most likely to Asia.
The last part of globalization that we have to—a couple of more parts I’ll talk about is China is much bigger today than it was 10 years ago and 20 years ago, and I mean much bigger as a percentage of global GDP. China has been growing at much higher rates consistently than almost any other country in the world except for maybe India. It means they are a larger percentage of global GDP and they’re a much larger percentage of global GDP growth. Okay, what’s the impact of that?
They have been—in order to get that growth, and they’ve been growing recently, about 6.5 percent. Unfortunately in order to achieve that growth they’ve been growing debt to GDP. In other words they have been leveraging in various sectors to either build infrastructure or to build capacity in many state-owned enterprises. The impact of that is they’ve got dramatic overcapacity in a number of their industries which creates global overcapacity. And so China bears watching. The world is going to have to get accustomed to lower levels of growth from China and also because of currency outflows. That has the potential, because the world is much more financially integrated, currency outflows in China, which is what happened in the first quarter of 2016, have the potential to create ripple effects and spillovers throughout the world and this happened in the first quarter of 2016 where we saw financial turmoil in China translate into rapidly tightening financial conditions globally.
So those are a number of elements of globalization. What’s the point of it all? The point of it all is: you have to think about the economy in a much more global way. Globalization is likely putting downward pressure on prices because we have more overcapacity. And also our trading relationships have to be thought about differently because, particularly in this hemisphere, it’s actually helping U.S. companies become more globally competitive and therefore is likely growing jobs in the United States. So as a central banker, it’s no longer an option in thinking about U.S. monetary policy to think just about the United States. I have to understand economic conditions around the world and the inner relationships between economies and financial markets around the world because the ripple effects, the spillovers, are much more likely to happen.
And this is one reason why when we talk about the currencies, particularly the U.S. dollar, as a central banker I’m much more sensitive and aware of the impact on the dollar of central bank actions and also much more sensitive and aware of the potential ripple effects of either a strong or weak dollar not only on the United States but also on economies around the world. We’re just much more globally interconnected and so we have to think about the economy in a different way. It’s my view though, and I get to the third secular driver, the next one, which is technology-enabled disruption.
Increasingly I think globalization is sometimes now being confused with technology-enabled disruption. What do I mean by that? Twenty years ago, and in history, jobs were lost in a number of locations in the United States because they were lost overseas. And while there were a number of benefits of global trade and globalization in the United States, we did a poor job in this country helping local communities and workers adjust to the negative effects of globalization. And I’ll come back to that. Today, if you lose your job in a city in this country it’s probably as or more likely that the reason you’re losing your job is not globalization but it’s technology-enabled disruption. It’s changing. People are attributing it to globalization but it’s probably as or more likely to be due to the fact that businesses are increasingly replacing workers with technology. Whole industries are being disrupted out of existence. Think: the film industry, the camera industry. While it still exists it’s been dramatically disrupted by digital technology and by handheld phones. But this is going on in retail, even in higher education. It’s going on in every industry. And so what’s happening is, I think it’s accelerating. Workers are far more likely today to lose their jobs or have their functions changed because of technology-enabled disruption. Technology is replacing people.
And in addition, because of technology-enabled disruption, consumers have much more pricing power. They have the ability to shop with technology. That’s putting much more pressure on businesses in terms of pricing pressure. And businesses don’t have as much pricing power, and that probably is rippling back through impacts on workers and their wages, and it may even be encouraging businesses to increasingly replace workers with technology.
So the reason this diagnosis is important, if you think that this is happening because of globalization you might take one set of actions. If it’s happening because of technology-enabled disruption you might take a different set of actions and, in particular, back to the trade relationship with Mexico: I’ve been arguing that our trading relationship, as I said earlier, with Mexico helps improve U.S. competitiveness and keep jobs here. And if instead we misdiagnose that relationship and think that it’s actually hurting U.S. workers we might actually take steps to dismantle part of those trading relationships. And I think unfortunately that may actually hurt U.S. GDP growth. I don’t think it’s going to help workers locally or it may not help workers locally because technology-enabled disruption is a bigger issue that’s affecting our workforce.
On both those trends though, regarding both of them, it highlights the need for more workforce development. I think of the worker of today—if you’ve got a college education you have a better chance to manage this. If you have some college or your educational attainment is either high school or less than high school you are much more likely to be at the end of this impact and have much less ability to adapt to it. So much more likely in people’s careers—and when I was a professor at Harvard I used to tell my students: you are far more likely to get fired than I was. You will be. You’re far more likely to have to fire people than I was. And you’re far more likely to have the industry you start in not be the industry you end in, because the industry you start in may not exist or it’s going to be so different that you’re going to have to adjust.
So I think it’s critical, first because of globalization but now in particular because of technology-enabled disruption. We need to do much more to help workers adjust to these trends and help them improve their ability to adapt. And the more educational attainment, either college or some type of skills training, the more of that you have the much more likely you’re going to be able to adapt to these trends. So that’s the third trend, is technology enabled-disruption; but I think that and globalization are related, and today I think some of the effects of technology-enabled disruption are being attributed to globalization and I think in some cases inaccurately.