The purpose of this piece is to address an issue that has received increasing media coverage recently: the rise of automation and artificial intelligence (AI), and their impact on the economy and labor force. Before we do that, a few comments on the ‘State of the Union.’
For all of the trade bluster and mudslinging we’re about to endure in the lead-up to midterm elections, a bottom line remains: “the U.S. economy is in great shape.” Those are words from Federal Reserve Chairman Jay Powell’s June press conference, where he also said “if you look at household surveys, confidence is high, look at businesses, confidence is high.” He added that “most people who want to find jobs are finding them and unemployment and inflation are low.” In short, the U.S. economy is in fine shape.
Following Mr. Powell’s lead, the most straightforward assessment of U.S. economic health we can offer is summarized in a single chart:
Rather than spend pages detailing economic data to arrive at the same conclusion Mr. Powell offered—the U.S. economy is in great shape—we are going to use this communication to make the case for a more challenging, difficult-to-accept notion: why we think the U.S. economy will continue on its long-term upward trajectory for generations to come.
HISTORY’S MOST CONSISTENT JOB CREATOR: TECHNOLOGICAL INNOVATION
The constant noise surrounding trade wars, political divisiveness, populist uprisings, and geopolitical conflict can easily throw into question the wisdom of being a long-term optimist, and by extension, a long-term investor. But if everyone in 1968—when the US was in the midst of the Vietnam War—understood the value proposition of investing in the US economy for the following 50 years, the decision to buy stocks and other risk assets would have been straightforward and indisputable. The S&P 500 has risen more than +7,000% over that time, with dividends reinvested.
Today, one of the most widely perceived threats to the economy is the ‘rise of the robot,’ or the fear that automation, artificial intelligence, and other technological innovations are likely to supplant human workers. In short, the robots are coming, and they’re going to take our jobs in the process.
While we agree that automation is coming, history tells us that technological innovation will create more jobs over time than it destroys.
WHAT HISTORY TELLS US
Economic anxieties about the impact of automation and technological innovation go all the way back to the 1500’s. In 1589, Queen Elizabeth I refused to grant the inventor of a mechanical knitting machine a patent because she was worried that doing so would put too many manual knitters out of work and “reduce them to starvation.” The same debate continued even hundreds of years later, when protestors in Britain were smashing weaving machines during the Luddite movement because of the perceived threat to labor.
Of course, none of those dystopian visions of the future came to fruition—60 years after the Luddite protests, factory jobs in weaving had grown four-fold, with each worker making 20 times more cloth. In this case, technological innovation (weaving machines) led to productivity growth, which led to lower cost of goods, which led to higher profits and greater demand for goods, which led to higher wages and greater demand for workers to produce those goods. By its very definition, this is economic progress.
In the United States, over 50% of the workforce was employed in agriculture in the late 1800’sv, when machines like the cotton gin and threshers were already widely in use. But then came the invention of the tractor, combines, the crop duster, and later, fertilizers, logistics systems to move product, and more productive seeds. Job destruction in this case was significant—today, a little over 1% of the workforce is employed in agriculture.
Technology destroyed an entire industry’s labor force, but while it was destroying jobs it was also creating new ones at an even faster pace, while also delivering more, better, and cheaper goods to the marketplace. Between 1948 and 2013, total farm output more than doubled even as the amount of land and labor inputs declined substantially. Over that same period, total employment in the US soared (see chart on next page).
Then came the earliest days of computing technology; a group of economists once warned Lyndon Johnson of a “cybernation revolution,” where machines would stoke massive unemployment by taking service industry jobs. e resemblance to Queen Elizabeth’s warning in the 1500’s is stark, if not identical.
A perfect example from the 1970s was the ATM machine, which posed one of the biggest perceived threats to the bank teller profession at the time. The reality, as we now know, ended up being much different—bank tellers actually expanded their duties into “relationship banking,” taking on new roles of servicing customers, selling mortgages, issuing credit cards, and even moving into insurance and wealth planning. From 1988 to 2004, total bank branches soared by 43%x. When the scanner was introduced into supermarkets, cashiers feared the same fate as bank tellers. Today, there are more cashiers than ever.
In the moment, it is easy see the job-destroying effects and to project doomsday scenarios that could result from technological innovation. It is much more di cult to see what jobs, industries, and growth will flourish in its wake.
USING A HISTORICAL FRAMEWORK TO THINK ABOUT THE ‘RISE OF THE ROBOTS’
We think the lessons of history apply to the economy today. For many, automation, artificial intelligence, and robots are the equivalent of the weaving machine to the Luddites and the computer to just about everyone in the 1980s. Today, we see once again the view that automation and AI will supplant the need for human labor, potentially stoking massive unemployment in the not-too-distant future.
While a logical and reasonable argument on its surface, the data simply does not support such a conclusion—whether today or throughout history. Take Amazon for example. Over the last three years, the company has increased the number of robots working in its warehouses from 1,400 to over 45,000. Yet over the same period, overall hiring has continued to increase substantially:
Headlines tend to frame the Amazon/ecommerce revolution in terms of what’s being lost. You may have heard the term “retailpocalypse” recently, referring to the mass closure of brick- and-mortar stores like J.C. Penney’s, Sears, K-Mart, and Toys ‘R Us. Because of Amazon and the rise of ecommerce, 140,000 jobs in the brick-and-mortar space have disappeared over the last decade. Technology has been destructive.
Zooming out from this narrative, however, changes the reality completely. In the same decade that 140,000 brick-and-mortar jobs were lost, warehousing jobs have soared by 274,000 and total ecommerce employment has grown to 401,000. Not only that, but ecommerce jobs tend to pay better (on average 31% more), and employees often receive bene ts such as tuition aid, shares of stock, and comprehensive health care. e same 140,000 who lost their jobs may not have been ones to gain jobs in the process, and that can be a painful reality of economic transitions. But the macroeconomic reality is that there are higher paying jobs and cheaper goods in the economy. Again, the very definition of economic progress.
The investment implications tend to follow closely. For investors who actively monitored the shi ing landscape away from brick-and-mortar stores and towards shopping online, an investment approach could have been to sell big box retailers while looking to buy surging online retailers, like Amazon. In the last ve years, Sears Holdings has plummeted from around $35/share to now trading around $2. Meanwhile, Amazon has surged from around $260/share to currently trading over $1,800/sharexiv. Technology creates winners and losers, oftentimes quickly. Monitoring the shi ing landscape and identifying defining trends—and companies—is a crucial function of investment management today.
THE STRUCTURAL ISSUE FACING AMERICA
The problem we see is not that there will be a shortage of jobs for Americans, it’s that the country won’t have enough skilled workers to ll them. About one-third of jobs created in the US since 1995 did not exist or just barely existed 25 years ago. Literally no one could have known, fully, how the economy would evolve and what companies and jobs would be created in the process. e same can be said of the next 25 years, in our view.
The structural issue for America today is, how can we effectively train the labor force for these rapid changes and advancements?
In the examples given previously, we know the end result (more jobs). But the dislocations, job losses, and struggle endured by the labor force while trying to adapt was rarely easy. Many people lost jobs, others experienced wage depreciation, and many people suffered in the interim. We should expect a similar outcome in the future.
There are the mainstream ideas, like investing more in education, strengthening the social safety net (Elon Musk floated the idea of universal basic income), and/or broad expansion of career and technical (CTE) training programs for high schoolers and workers. Bill Gates even suggested taxing robots as we would normal workers, which could supply the government a new revenue stream for training human workers. The ideas are many, but the answers and the actions are less clear. Higher education is a problem we’ve been working on for decades.
e upshot is that human beings – and particularly Americans in our view – are creative, innovative, and good at finding solutions (even if it takes some time and error). And if history provides a useful example, which we think it does, the economy of the future will have higher-paying jobs with higher standard of living for workers engaged in the economy.
From an investment standpoint, as the economy evolves, some companies will be at the forefront of creating and adopting new technology into their business models. Those companies and industries may make for attractive, secular investment opportunities. But another feature to watch closely will be which of these companies are attracting the top talent – the best engineers, the best project managers, the best computer scientists. In an economy where high skilled labor will matter greatly, the companies with the top talent and the best technology stand to excel the most. It’s our job to nd them.
In a recent shareholder letter, Warren Bu et said that “the babies being born in America today are the luckiest crop in history.” The average investor today would probably scoff at such a statement. Whether it’s the threat of nuclear war, populist uprisings around the world, robots, climate change, or any other weighty narrative in the public eye today, there are always substantial hurdles to being an unbridled, long-term optimist like Warren Bu et (but history suggests that all long-term investors should be).
In the near term, the risks mentioned above do matter considerably, as do all of the market, political, and industry analysis that we conduct on a daily basis. Over the longer-term, we share in Buffett’s philosophy not because we are blind optimists, but because we recognize the hundreds of years of economic progress that has proven naysayers wrong time and again. From Queen Elizabeth, to the Luddites, to Lyndon Johnson’s advisors, it has rarely been correct to do anything other than embrace technological innovation and to try and gain economic opportunities from it. At a time when technological innovation is occurring at a record pace, one could even argue that future opportunities have never been greater.
If you have any questions or would like to discuss anything with us, please do not hesitate to reach out directly.
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