By Connected Wealth. Originally published at ValueWalk.
Last week, we began an analysis of Michael Mandel and Bret Swanson’s paper1 which is a response to Robert Gordon’s argument that the West is doomed to a prolonged period of slow productivity growth.
In Part I of this report, we examined the productivity issue and discussed Mandel and Swanson’s analysis of the situation, focusing on their specific division of industries. This week, we will look at six sectors of the economy that appear poised to digitize and how that could change the economy. We will also discuss the conditions necessary for Mandel and Swanson’s position to be correct. As always, we will conclude with market ramifications.
Also Read
- Absolute Return Partners – Oil Price Target: $0
- The Internet Killed Inflation And There Is Little The Fed Can Do To Change That
- Here’s The Case For An Upside Risk In The Global Economy
- Profit Margins Could Shrink by up to 25% as ‘Productivity-Wage’ Gap Narrows
The Six Sectors
Mandel and Swanson’s six sectors are transportation, energy, education and training, retail and wholesale distribution, manufacturing and health care. We will discuss them in that order.
Transportation: Personal transportation has been assisted by the application of Global Positioning Satellites which, combined with smartphones, have become the maps of choice for drivers. However, ridesharing is becoming increasingly important. The taxi industry has been rocked by the advent of Uber and Lyft. These firms have created the rideshare industry by addressing two factors.
First, the use of smartphone apps has made it much easier for riders to use the service; it even automates tipping. Second, both firms have been remarkably successful in overcoming local regulations that constrained the taxi industry. A study by Judd Cramer and Alan Kruger showed that rideshare firms are more efficient than taxis.
However, the next step in personal transportation is likely to be even more significant. The Bureau of Labor Statistics estimates that 15.8% of household spending goes toward the service and maintenance of motor vehicles; for a middle-income household, the number is 18.2%.3 Most of the time, motor vehicles sit idle in garages and parking lots. There have been tests of car owners lending out their vehicles to drivers who use apps to gain access to them. However, if cars become autonomous, the cost to households for procuring personal transportation could plummet. That alone could free up purchasing power for other items.
And, at the same time, it almost certainly will eliminate jobs. The two areas most vulnerable are delivery drivers and autoworkers. Autonomous vehicles will eliminate the need for drivers. If cars are used more continuously and intensively, the number of vehicles produced each year will likely decline as well. Simply put, we may not own cars anymore, but instead only use them as needed.
Although drivers and car manufacturing jobs may be lost, other positions will emerge. Obviously, the need to continuously upgrade software and protect cars from hacking will become critical. Since they will be used more intensively, maintenance will become much more important. Breakdowns will require fast responses to keep these cars on the road and to boost the return on the asset. This will boost demand for specially trained mechanics.
Energy: This revolution is already underway. Shale oil production and fracking have been utilized for some time. U.S. oil production, once thought to be in permanent decline, has recovered to levels not seen since the early 1970s.
This chart shows daily oil production. After touching 4.0 mbpd in late 2009, production has jumped since. However, what is most important is that even after prices dropped from over $100 per barrel into the high $20s per barrel area, the drop in production was quite modest. That’s because the oil industry is aggressively digitizing, using high-powered data tools to find and produce oil from a smaller number of wells. When Saudi Arabia boosted output to reduce oil prices, part of the goal was to cripple the U.S. shale industry. The kingdom failed; in fact, costs are continuing to fall.4 This development not only insulates the U.S. from significant geopolitical risk, but it has become a source of jobs and investment.
This chart shows the level of oil production and the number of workers in oil and gas extraction. Note that current production is just over 9.0 mbpd; when this level was last touched in 1984, the industry employed 240k workers. It’s now producing that much with 180k workers. On the other hand, employment troughed in 2003 just below 120k. Thus, the new technology has created more employment.
Education and Training: Education costs are a major concern for society. Higher education costs are creating major debt burdens for students and their parents, resulting in constant fear of spending lots of money only to see low returns on investment. Gordon and others have noted that educational attainment has slowed, in part, because the time required to complete a degree is taking too long.
Online courses and degrees offer the promises of reducing the cost and increasing the efficiency of education but, so far, returns have been slow to develop. Mandel and Swanson argue that the economy and its workers will require constant retraining. Lifelong learning will become the norm as opposed to separating one’s life into school then work. However, merely putting lectures on a computer won’t necessarily address the problem. Research suggests that, so far, online courses are not as effective as in-person lectures, at least at the community college level.5
However, it does appear that students with more extensive academic backgrounds have better success at current online courses. It appears that if a student has “learned to learn,” then online courses can be valuable. The authors also note that the fixation on degrees will likely need to change, with the potential for lesser “credential” accomplishments to have a greater impact. In addition, manual training might include augmented reality glasses to guide the student through a procedure.6 In my own experience, online courses can be quite effective, especially for learning specific tasks.7 Boosting the human capital of workers is a critical issue if Mandel and Swanson’s productivity revolution occurs.
Retail and Wholesale Distribution: Interestingly enough, this industry was a productivity star until the middle of the last decade. The authors argue that the productivity bottleneck in distribution has been the “last mile” problem. The delivery of goods eventually falls to a truck dropping off a package. This isn’t the most efficient way of delivering goods; in fact, a physical store where customers shop was a way to reduce the cost of the last mile by shifting the cost to the consumer. The authors don’t have much to say on how technology could improve this situation other than to offer that drones may deliver packages and software may allow customers to order directly from the manufacturers, bypassing retail storefronts completely.
Manufacturing: Although manufacturing is generally considered more productive than services, the authors argue that technology industries (the digital industries) are responsible for most of the productivity gains. They see manufacturing
The post A Productivity Boom: A Response To Robert Gordon, Part II appeared first on ValueWalk.
Sign up for ValueWalk’s free newsletter here.
