Automation & Jobs - Update:

Good material on policy for the anticipated changes in labour markets. Great for essays, micro and macro:

With rapid advances in automation and artificial intelligence in recent years, many are worried about a jobless future and sky-high levels of inequality. But the large-scale technologically driven shift currently underway should be welcomed, and its adverse effects should be managed with proactive policies to reinvest in workers.

Jan 16, 2018 CHRISTOPHER PISSARIDES ,  JACQUES BUGHIN, Project Syndicate

LONDON – Ever since early-nineteenth-century textile workers destroyed the mechanical looms that threatened their livelihoods, debates over automation have conjured gloom-and-doom scenarios about the future of work. With another era of automation upon us, how nervous about the future of our own livelihoods should we be?

 A recent report by the McKinsey Global Institute estimates that, depending on a country’s level of development, advances in automation will require 3-14% of workers worldwide to change occupations or upgrade their skills by the year 2030. Already, about 10% of all jobs in Europe have disappeared since 1990 during the first wave of routine-based technological change. And with advances in artificial intelligence (AI), which affects a broader range of tasks, that share could double in the coming years.

Historically, job displacement has occurred in waves, first with the structural shift from agriculture to manufacturing, and then with the move from manufacturing to services. But throughout that process, productivity gains have been reinvested to create new innovations, jobs, and industries, driving economic growth as older, less productive jobs are replaced with more advanced occupations.

The internal combustion engine, for example, wiped out horse-drawn carriages, but gave rise to many new industries, from car dealerships to motels. In the 1980s, computers killed typewriters, but created a host of new occupations, from call-center service representatives to software developers.

Because the far-reaching economic and social benefits of new technologies tend to receive less attention than job losses, it is worth noting that automation technologies are already demonstrating a capacity to improve lives. This past November, Stanford University researchers showed that an AI system outperforms expert radiologists in detecting pneumonia from lung X-rays.

In an era of stalled productivity growth and declining working-age populations in China, Germany, and elsewhere, automation could provide a badly needed economic boost. Higher productivity implies faster economic growth, more consumer spending, increased labor demand, and thus greater job creation.

onetheless, any discussion about AI-based automation must also take public anxieties into account. Even though new occupations will likely replace those lost to automation, wages may take time to catch up to the reality of higher labor productivity.

In the early nineteenth century, wages stagnated for almost 50 years before picking up again. That may have been an extreme situation. But for lower-skilled workers, the transition underway today could prove just as wrenching. With fears of increased inequality already growing, governments will need to rethink policies for providing income and job-transition support to displaced workers.

Looking ahead, policymakers and businesses should keep five imperatives in mind. The first is to embrace AI and automation without hesitation. Even if it were possible to slow the pace of change, succumbing to that temptation would be a mistake. Owing to the effects of global competition, hampering technological diffusion in one domain would simply dampen overall prosperity. In fact, we recently estimated that northern European economies could lose 0.5 percentage points of annual GDP growth if they do not keep pace with their neighbors in adopting AI.

The second imperative is to equip workers with the right skills. Future-of-work debates often overlook the question of how the labor market will evolve and either improve or exacerbate the skills mismatch that is already acute in developed countries. According to recent OECD research as much as one-third of workers in advanced economies are either underutilized or unable to handle their current duties.

The jobs of the future will require not just more cognitive skills, but also more creativity and social skills, such as coaching. We estimate that, unless workers’ skill sets are upgraded, today’s mismatch could double in severity within ten years, resulting in major productivity losses and higher levels of inequality.

Upgrading skills on a large scale will require coordination among parents, educators, governments, employers, and employees, with a focus on lower-skilled individuals. Unfortunately, in the past two decades, public spending on labor markets, relative to GDP, has declined by 0.5 percentage points in the United States, and by more than three percentage points in Canada, Germany, and Scandinavia.

The third imperative is to focus on augmented-labor opportunities. Unlike older industrial robots, newer technologies can interact safely and efficiently with humans, who sometimes need to train them and will increasingly have to work seamlessly with algorithms and machines. For example, a doctor’s practice will be greatly enhanced by diagnostic algorithms. Policymakers and businesses should seek to maximize this kind of complementarity across all sectors.

Fourth, businesses will need to innovate and capitalize on new market opportunities at the same pace that human tasks are being replaced. For example, in the first wave of robotics, countries such as Germany and Sweden displaced auto-sector jobs by adopting CAD (computer-aided design) robots; but they simultaneously brought other jobs back from Asia, and even created new downstream jobs in electronics. Similarly, AI offers countless opportunities for innovation and tapping into global value chains. By seizing these opportunities quickly, we can ensure a smoother transition from old to new jobs.

Finally, it is imperative that we reinvest AI-driven productivity gains in as many economic sectors as possible. Such reinvestment is the primary reason why technological change has benefited employment in the past. But without a strong local AI ecosystem, today’s productivity gains may not be reinvested in a way that fuels spending and boosts demand for labor. Policymakers urgently need to ensure that strong incentives for reinvestment are in place.

Automation has been given a bad rap as a job killer. Nevertheless, to ensure that its benefits outweigh its potential disruptions, private- and public-sector actors must exercise strong joint leadership – and keep the five imperatives for the new age of automation at the top of the agenda.

CHRISTOPHER PISSARIDES

1 Commentary

Christopher Pissarides, a Nobel laureate in economics, is Professor of Economics at the London School of Economics.

JACQUES BUGHIN

Writing for PS since 2016 
2 Commentaries

Jacques Bughin is a director of the McKinsey Global Institute and a senior partner at McKinsey & Company. 

Higher Interest Rates in US

Some nice little snippets on monetary policy impacts:

Feb 27, 2018 MARTIN FELDSTEIN on Project Syndicate

New savers in the United States stand to gain as returns on savings – which have been subject to severe financial repression for most of the last decade – begin to rise. But higher interest rates could leave homeowners and shareholders vulnerable to losses.

CAMBRIDGE – Long-term interest rates in the United States are rising, and are likely to continue heading up. Over the past 20 months, the yield on ten-year Treasury bonds has more than doubled, from 1.38% to 2.94%. Why is this happening?

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High and rising interest rates have important effects on the economy, especially on the prices of stocks and of homes. Because extremely low interest rates during the past decade caused equity prices to rise to unprecedentedly high levels, the shift to higher interest rates will slow and depress share prices. The level of real interest rates is particularly important for share prices, because higher inflation raises nominal profits in a way that offsets the inflation component of higher interest rates.1

The interest rate charged on home mortgages reflects the long-term yield on Treasury bonds, with the rate for 30-year mortgages rising a full percentage point during the past 20 months. House prices reflect nominal interest rates as well as real interest rates. Higher nominal interest rates limit the number of qualified homebuyers by increasing the monthly interest payments for any size of mortgage.

The US Federal Reserve’s monetary policy has an important effect on long-term interest rates. Although the Fed traditionally controlled only the short-term federal funds rate, investors’ response to a change in that rate depended on their expectation of how long the rate change would last. If an increase in the short-term rate were expected to persist or to be an indicator of further increases in the future, the long-term rate would also rise. During the period of monetary easing that followed the 2008 financial crisis, the Fed cut the federal funds rate to just 0.15% and declared that it would remain low for a long period of time. Not surprisingly, that caused the long-term rate to fall from 3% at the beginning of 2014 to 1.5% in mid-2016.

The Fed has now started to raise the short-term rate and has said that it will continue to do that gradually for the next few years, aiming at a rate of nearly 3% in 2020 and beyond. That doubling of the federal funds rate will pull up the long-term bond rate.

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During the past decade, the Fed also intervened in the long-term market as part of its “unconventional monetary policy” aimed at stimulating the economy. The Fed bought Treasury bonds and mortgage-backed securities, increasing its balance sheet from $900 billion in 2008 to about $4.5 trillion now. Those bond purchases bid up the price of bonds and caused their yields to decline. The Fed is now in the process of shrinking its balance sheet, forcing the market to buy more bonds and therefore raising interest rates.

Changes in expected inflation have a direct effect on long-term interest rates. Growing confidence in economic expansion and falling unemployment has raised investors’ expectation of future inflation, pulling up the nominal interest rate on ten-year bonds. Inflation has still remained very low, with the consumer price index up only 2.1% over the past 12 months. But with an unemployment rate of just 4.1% and a weakening dollar, investors’ expected rate of inflation is increasing. The expected inflation rate over the next ten years implied by the inflation-indexed bonds rose 0.3 percentage points in the 14 months after July 2016, but then increased 0.8 percentage points in the next five months. Future evidence of increasing inflation will be reflected in higher long-term interest rates.

The widening budget deficit and rising national debt will also push up long-term interest rates. The federal budget deficit is projected to increase from about 3.5% of GDP in recent years to 5% in 2018 and for the rest of the decade. The debt-to-GDP ratio has doubled in the last ten years, to 75%, and is projected to rise to nearly 100% during the coming decade. My own forecast assumes an even greater rise in the debt level, owing to continued increases in government spending and extensions of recent reductions in personal income tax.

As a result, the government’s net sale of bonds will rise from about $700 billion a year in 2017 to more than $1 trillion in 2019 and about $1.5 trillion in 2027. The cumulative increase in the debt during the decade will therefore be about $10 trillion. Getting the market to absorb those bonds will require higher real interest rates.

All of this could make new savers happy, as returns on savings – which have been subject to severe financial repression for most of the last decade – begin to rise. But higher interest rates could leave homeowners and shareholders vulnerable to losses.

IMF says Osbourne was right...

And to think they gave him 2 out of 10 for his austerity policy back in the day...

You need to be aware that this "surplus" does not mean we can stop borrowing:

 MARCH 2018 • 9:08PM

Britain is now running a current budget surplus as tax revenues cover all day to day spending, for the first full year since 2001.

This surplus, which excludes capital investment by the Government, came in at £3.8bn for 2017, the Office for National Statistics said.

George Osborne set this as a target in 2010 and hoped to achieve it two years earlier in 2015.

More good news is expected later this month as the Office for Budget Responsibility is set to upgrade its growth forecasts, giving the Chancellor a windfall of extra tax revenues.

Research published by the International Monetary Fund said Britain set an example for other countries to follow in slashing the deficit by cutting public spending, rather than raising taxes. 

“Following the financial crisis, the two countries that adopted spending-based austerity and did better than the rest of the sample were Ireland and the UK,” said economists in the IMF's Finance and Development publication.

“The result: growth in the United Kingdom was higher than the European average.”

It is increasingly important that other countries copy this approach, the researchers said, as Governments around the world have racked up too much debt which will harm growth and stifle productivity when interest rates rise.

The surge in global growth gives countries the perfect opportunity to cut their debt burdens - and they should do it by cutting spending rather than by raising taxes, before the economy slows down again and the debt burden becomes tougher to bear.

“Countries take a smaller hit to growth if they cut spending - including for entitlement programs - than if they raise taxes. In fact, the latter can be self-defeating, leading to even higher debt and lower growth,” said Camilla Lund Andersen, editor of the IMF magazine.

Britain's economy is growing faster than expected this year, giving Philip Hammond, the Chancellor, more money to play with in this month's Spring Statement - though he is not expected to use it to go on a spending spree CREDIT: EDDIE MULHOLLAND

“Governments should use the current upswing to put their house in order. And while each country must chart its own course, the global recovery presents a rare opportunity - rising interest rates will soon make it harder to refinance and service debt.”

Advanced economies have an average government debt of 104pc of GDP, which is close to the highest levels seen since the Second World War.

Political momentum behind deficit reduction has waned in many countries, as years of fiscal restraint led to policy fatigue and the economic recovery made debt reduction appear less important.

But the IMF warns that upbeat assessments of the global economy “ignore debt levels that remain close to historic highs and the inevitable end of the cyclical upswing”.

“Servicing debt will become a major burden,” it warns.

Spending cuts have been unpopular in some instances, but the new study from academics Alberto Alesina, Carlo Favero, and Francesco Giavazzi indicates they are less damaging than tax rises.

“Our conclusion runs against the basic Keynesian message, which implies that spending cuts are more recessionary than tax increases,” the trio found.

“On the contrary, our study confirms that expenditure-based plans generally were less harmful to growth than tax-based plans.”

Studying a range of deficit-cutting programmes, the economists found spending cuts of 1pc of GDP hit economic growth by 0.5 percentage points relative to the trend rate of growth, with the dent put in growth lasting for less than two years.

If this is done at a time of economic growth it has no negative impact, so the economy grows even at a time of austerity.

By contrast plans based on tax hikes resulted in a two percentage point fall in GDP relative to its previous path.

“This large recessionary effect tends to last several years,” they said.

This also indicates Britain did the right thing after 2010 by cutting spending to keep the public finances in line.

Trade Articles - a stunning week:

Try to stay on top of Trump's moves - what, why, consequences; you need to have some of this going into a trade essay:

Jeremy Warner in the Sunday Telegraph March 4th

Until last week Donald Trump’s bark on trade protectionism, as on many other things, had proved a good deal worse than his bite. On the campaign trail, he promised a protectionist blitz reminiscent of the notorious Smoot-Hawley tariff act, which helped plunge the world into the political and economic instability of the Thirties. But in practice, wiser counsel seemed to prevail. The promise to scrap the North American Free Trade Agreement (Nafta) has transmogrified into an attempt merely to update and tweak it.

We relaxed too soon, it now appears. The significance of last week’s announcement of tariffs on steel and aluminium was less the tariffs themselves, which in the scale of things are unlikely to make a huge difference. By making things more expensive they could even prove a faintly depressing influence on the US economy.

Rather, it was the way they were justified, which according to Linklaters’ senior counsel on trade, the Cambridge academic Lorand Bartels, breaks new and disturbing ground. Normally, some genuine or spurious economic reason is given as justification for import tariffs, anti-dumping being the most common.

The claims can then be tested through the World Trade Organisation, and thereby mandated by the international, rules-based system.

But Trump has played the far less usual “national security” card. Not to beat about the bush, he is basically saying that the US needs its own steel and aluminium industries for the purpose of military defence. Those of us who have lamented the virtual destruction of the UK steel industry know how he feels. The economy somehow feels less than complete without the capacity to press steel.

But by using a justification which is basically not recognised by the WTO, Trump is playing outside the rules. Legal challenge through the WTO may be pointless anyway, as the organisation’s judicial function is being rendered progressively dysfunctional by Trump’s refusal to sanction key appointments.

Protectionism has been on the rise ever since the financial crisis, but hitherto international adherence to the WTO system has at least managed to keep the lid on it. Trump is essentially saying that the rules-based system the WTO champions does not work for America. Others will be loathe to retaliate in the same manner, as if they too were to break with the system, it really would be the end of the WTO.

But if Trump continues to push his protectionist agenda, the dam will eventually burst. There is trouble ahead for sure; just how big depends on what Trump does next.

Ambrose Evans Pritchard looks at it in more detail, same paper:

The world is on the brink of the most dramatic trade confrontation of modern times after President Donald Trump openly threatened “trade wars” as a tool of US policy, prompting warnings of full retaliation by major powers across the world. 

Stock markets plunged in Asia and Europe for a second day as international investors digested the ominous implications of sweeping US tariffs of 25pc on steel and 10pc on aluminium. The measures are viewed universally as an impetuous and unprovoked assault on the trade system, evoking memories of the Smoot-Hawley tariffs of 1930.  

The International Monetary Fund warned on Friday that the tariffs on  would likely cause economic damage to the United States and its trading partners.

"The import restrictions announced by the US President are likely to cause damage not only outside the US, but also to the US economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel," the IMF said in a terse statement.

The shocking twist is that President Trump seemed to relish the chance for a dangerous showdown, tweeting on Friday that “trade wars are good, and easy to win”.

Countries that “get cute” and exploit the US market by running chronic trade surpluses may see their access cut off altogether.  A view has taken hold in the White House that deficit countries suffer less than surplus states in a trade rupture, which neglects the risk that events can spiral out of control. 

Japan’s Nikkei index dropped a further 2.5pc and Germany’s DAX was off 2.3pc on Friday as the correction threatens to become a full-blown rout. Wall Street opened sharply lower, with DOW off 300 points, led by falls of General Motors, Ford, and other big consumers of steel.

"For someone so obsessed with stock market performance, he's taking a big gamble with these tariffs," said Craig Erlam from Oanda.

The White House has exploited a ‘golden loophole’ dating back to the Cold War in the 1970s allowing the US to invoke national security to impose barriers, arguing that surging inflows of foreign steel leave the US arms industry and defence forces at the mercy of hostile suppliers. Use of this clause effectively blocks any future remedies at the World Trade Organisation by injured countries.

Bernd Lange, head of the European Parliament’s trade committee, called it a “declaration of war” and accused the Trump Administration of reverting the mercantilist doctrines of the early 19th Century.

French finance minister Bruno Le Maire said all options were on the table, vowing a “strong, unilateral and co-ordinated” riposte from Europe. “These unilateral measures are not acceptable,” he said.

The EU trade commissioner, Cecilia Malmstrom, warned of a “dangerous domino effect” as steel shipments diverted away from the US market flood the world and force Europe to take safeguard measures.

Brussels is adept at surgical retaliation against the US, picking targets intended to inflict the maximum political damage in tight electoral contests. It is already looking at Harley-Davidson motorbikes, bourbon whisky, and Florida oranges.

The Europeans are deeply frustrated because the US and the EU have much the same grievance against China, which has been subsidizing its steel industry with cheap credit and energy. The Chinese are almost single-handedly responsible for the 800m tonnes of excess capacity overhanging the global market over recent years.  

For Mr Trump, the dispute has become a visceral matter, scarcely amenable to reason. "What's been allowed to go on for decades is disgraceful. When it comes to a time where our country can't make aluminum and steel, you almost don't have much of a country. You'll have protection for a long time, " Mr Trump told business leaders.

The President has picked the toughest of three possible options presented by the US Commerce Department, opting for blanket tariffs rather than selective measures aimed at China and other countries deemed to be trade violators. It will not be clear until next week how much of this is bluster, and whether the White House intends to exempt close allies. The US Defence Department has urged caution in handling intimate friends such as Canada and Britain.

The British government was lobbying feverishly in Washington to try to head off sanctions in what is now becoming a painfully familiar routine. It failed to prevent a potentially devastating decision last year on the Canadian planemaker Bombardier that hits the operations of Northern Ireland’s biggest employer.

Richard Warren, policy chief of UK Steel, said: “there is still a lingering hope that these tariffs may not target the UK and EU.”

Reports are circulating that Gary Cohn is preparing to resign as Mr Trump's chief economic adviserCREDIT: AP

Britain exports £360m worth of niche “high-value” steel products to the US annually. Much of this trade would no longer be viable.

British officials had been given quite assurances over recent weeks that the UK would be spared but the White House itself is in chaos, with ultra-protectionists led by Peter Navarro in the ascendancy. There are reports that the director of the National Economic Council, Gary Cohn, is planning to resign in protest over the lurch towards protectionism.

Global markets have been complacent over the last year about the risk of radical moves by Mr Trump, deeming his bark is worse than his bite. They may have misread the politics of Washington, underestimating lag-times as the complex machinery of the US government slowly shifts direction.

The trade measures are suddenly hitting like a cannonade, with sanctions on Asian solar panels and washing machines already unveiled, and a highly-sensitive action over intellectual property theft and cyber-espionage expected soon. What is remarkable about the trade and aluminum tariffs is how indiscriminate they are. America’s aluminum producers had not even asked for help.

The conflict has escalated beyond the normal boundaries of trade diplomacy and risks taking the world into new Hobbesian order where rules give way to raw power.

Adam Posen from the Peterson Institute said the tariffs are plain “stupid” and will backfire in countless ways. “This is fundamentally incompetent, corrupt or misguided. Steel is just a tiny input in US GDP,” he said. Similar steel tariffs by the Bush administration in 2002 led to an estimated 200,000 American job losses and damaged US competitiveness. The measures were soon revoked, deemed an abject failure. 

Sweden's white goods producer Electrolux said it was freezing a planned $250m investment in Tennessee following Mr. Trump’s demarche, citing worries about trade flows.

Canada and Mexico are among two of the states that would be hit hardest by steel tariffs. Bank of America said they are likely to be exempted (for now) while NAFTA talks continue in parallel. Canada’s foreign minister Chrystia Freeland said any restrictions would be “totally unacceptable” and vowed  to defend her country's trade interests tooth and nail.

Mr Trump’s real target seems to be countries that run big surpluses with the US, which means chiefly East Asia but also Germany and Mexico. (Britain is in balance). Behind it is a bigger geopolitical struggle. The annual National Security Strategy report issued before Christmas took the fateful step of naming China as a rival that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity." It is a new Cold War.

Beijing responded to the Mr Trump's rhetoric with surprising caution on Friday, although the China Iron and Steel Association called it "a desperate attempt by Trump to pander to his voters, which runs counter to his ‘America First’ pledge. The US is now setting a very, very bad example.”

If China is the enemy in Mr Trump’s mind, the rival superpower has left no doubt it will hit back with equal force. It has even indicated that it might retaliate by dumping US Treasuries, just at the moment when the US bond market looks particularly fragile. This would blow up in everybody's face. We are entering a new era where great powers are implicitly threatening an economic variant of ‘mutual assured destruction’.

Fracking Going Nowhere

Useful to know current state of play with fracking - not a lot of government support, by all accounts:

Sunday Telegraph March 4th

Fresh fears for the nascent shale gas industry have emerged as freezing weather pushed Britain to the brink of running out of gas.

The Government has publicly backed the burgeoning industry as a new source of secure domestic gas supplies but last week, on the eve of Britain’s tightest gas supply squeeze in a decade, energy minister Claire Perry poured fresh doubts over its future.

Ms Perry said that figures suggesting there may be 155 wells across the UK by around 2025 are “now considered to be out of date”, despite being based on ­industry data that is less than two years old.

Ms Perry threw the potential of UK shale into doubt just weeks after Greg Clark, the Business Secretary, put the brakes on Third Energy’s plans to frack a well near Kirby Misperton in North Yorkshire. Development was halted to undertake financial checks on the company, which was four months late in publishing its accounts.

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“The secretary of state has not made any new estimates for the period to 2025,” Ms Perry said in response to a written parliamentary question from Caroline Lucas, a Green Party MP.

The meagre 155-well estimate itself falls well below early claims that 4,000 wells would emerge by 2032 to bring a multibillion-pound investment boom to the UK, including 64,000 new jobs.

The downgrade emerged in a Sunday Telegraph report last month after ministers had kept the findings under wraps for over a year.

The UK Onshore Oil and Gas group said exploration work was taking place at five wells across four sites, with 12 wells in the pipeline.