The Coming Clash between Man and Machine

How is innovation, notably the unrelenting march of automation and its broader challenges affecting society? A new report from Bruegel, a Brussels-based think tank, indicates that more than half of the jobs in the European Union are at risk of computerization. Technology never rests, in other words.

First, the good news: Innovation has long been a key ingredient of economic growth and prosperity, a critical variable supportive of ever-better lifestyles for the worlds 7 billion inhabitants. We dont see that changing anytime soon, with advances in healthcare, for instance, greatly reducing infant mortality rates while raising life expectancy levels in both developed and developing nations. Meanwhile, the marginal cost of computing power has dropped to nearly zero; the internetwhich is basically freehas fundamentally changed the lives of consumers and businesses.

Consider this: Todays rather cheap cell phone, which can be held in the palm of your hand, has thousands of times as much memory as the original Cray-1A computer of the late 1970s, which cost nearly $9 million and weighed over 12,000 pounds.[1] Now, the bad news: Innovation is usually highly disruptive, upending the status quo, creating winners and losers in its wake. While innovation is typically good for the general economy, there are always losers at the micro level.

Here is a case in point. According to a new study from Bruegel, more than half54 percentof the jobs in the European Union are at risk of advanced computerization. Recall also a September 2013 report from two economists at Oxford University (Carl Frey and Michael Osborne) who found that a whopping 47 percent of the jobs in the U.S. were at risk of computerization, or man being replaced by machine.

Putting the above into perspective, almost half of the jobs in the transatlantic economy are at risk of being downgraded or wiped out by the march of machines over the next few decades. Thats a terrifying prospect made even more terrifying given the fact that today, even before the onslaught of machines, nearly 40 million workers are already jobless in the U.S. and EU combined. If policymakers are finding it hard to create jobs today, how successful will they be tomorrow when automation kicks into high gear in such sectors as healthcare, logistics, finance and various manufacturing activities?

Robotics is not about just manufacturing; the advent and rise of new service robotics is poised to displace millions of service jobs over the next decade. And the clash between man and machine isnt just a problem for the developed regions like the U.S. and Europe. Its also a massive challenge for the developing nations, or in those economies that are overly dependent on low-cost labor that can be replaced by automation and machines. Think China, whose manufacturing workforce is about one-third the size of the entire U.S. population. As more and more Chinese enterprises (domestic and foreign) substitute capital for labor to drive down costs and to remain globally competitive, the end result could be a growing pool of frustrated and disenfranchised Chinese workers agitating for change and their chance at the good life. At the same time, interactive voice response systems could do away with or reduce demand for overseas call centers in India and the Philippines, reducing the demand for white-collar workers in these and other nations.

Locally, the Bureau of Labor Statistics (BLS) pointed to seasonal adjustments in the Washington labor force that saw the net loss of 1,500 jobs in August, primarily in government, and leisure and hospitality despite an added 1,500 manufacturing jobs. However, Washington has added only 1,000 net jobs to the manufacturing sector between August 2013 and August 2014 though the professional and business services sectors continues to grow, adding more than 10,300 jobs over the same period. This growth was led by professional, scientific and technical services, which accounted for 4,900 jobs. [2]

As technology decreases the relative value of human labor, owners of capital should capture a greater share of income from the production of goods and services. In general, capital wins and labor loses, or gets a declining share of the pie. Digital technologies can replicate valuable ideas, insights, and innovations at very low cost. Many workers will likely be displaced as a result; the big winners are expected to be innovators. Policymakers are behind the curve driverless cars, unmanned drones in U.S. airspace, robots capable of doing simple surgeriesthe evolution and implementation of these disruptive technologies have caught many governments flat-footed. The societal change wrought by many technologies has yet to be addressed by governments, which confront a rising mass of left-behind workers and reorder economic activity that may be more to the benefit of the few rather than of the masses.

The next disruptive wave is upon us; the clash between man and machine will only intensify in the years ahead, creating macro and micro risks and rewards for investors. Stay tuned.

Joe Quinlan is U.S. Trust Managing Director and Chief Market Strategist. Michael Brejda is Seattle U.S. Trust Managing Director and Regional Investment Executive

(Photo at the top is of Joe Quinlan.)

[1] The Zero Marginal Cost Society, Jeremy Rifkin. April 11, 2014.

[2] Monthly Employment Report for August 2014, U.S. Bureau of Labor Statistics (BLS). September 23, 2014.