Do Androids Dream of Electric Sheep?
By Roxane Googin, Chief Futurist, Group 11 and Dovi Frances, Founding Partner, Group 11
Someday a human being, named perhaps Fred White, may shoot a robot named Pete Something-or-other, which has come out of a General Electrics factory, and to his surprise see it weep and bleed. And the dying robot may shoot back and, to its surprise, see a wisp of gray smoke arise from the electric pump that it supposed was Mr. White’s beating heart. It would be rather a great moment of truth for both of them.
Dick, Philip K. “The Android and the Human” 1972
Getting Past COVID: Where are we Now?
As vaccines are administered and restaurants reopen, society seems to quickly be waking up from its COVID slumber. But just like after a bad hurricane, we are emerging from our quarantine bunkers into a surprisingly altered landscape, one that will be difficult to navigate. Our old maps no longer apply to the current reality. In earlier notes we have cautioned against assuming life will be like it was just a year ago, that in fact we cannot be the same economy or society we were before spending a year locked up as we collectively digitized every business process five years into the future.
This dilemma is playing out in the current inflation/deflation debate. Why the confusion over something so basic? Why do we have record open jobs with high unemployment? This confusion puts all eyes on the Fed, with their dual mandate of maintaining price stability and maximizing employment. But not only do we not know where prices are going, we would also ask what is the post-COVID definition of a “employment”? How do gig workers get counted?
Importantly, while COVID accelerated ongoing trends as much as it created new ones, not all of those trends are positive. Despite all the euphoria, two unpleasant trends that seem to have been accelerated are sovereign debt and GDP growth concerns, along with income inequality. They are actually related. As COVID hurt GDP and relief expenses expanded our debt, our debt to GDP ratio jumped to 129%, setting off alarm bells in the debt markets. This matters to equity holders because without healthy debt markets equity markets become unstable. Debt historians have observed that under 50% of GDP, sovereign debt can be benign, but over that amount it suppresses growth and tends to cause interest rates to rise as bond buyers begin to suspect the quality of those bonds. In keeping with this trend, between the late 1950s and the 2008 debt crisis, the debt to GDP ratio barely exceeded the 60% limit considered to be safe, and the economy grew.
However, once the debt to GDP ratio reached 100% post the 2008 debt crisis, we experienced the slowest “expansion” on record. Growth was anemic. Now, at 129% we face an even more uncertain future. The question becomes how much of a burden on the economy will our outsized debt balances become as we struggle to grow the economy and deal with the ever-present risk of a bond sell-off rising interest rates.
This dilemma goes far to answer the inflation/deflation question. As prices jump while we put new demand on COVID-quieted supply chains, the debate rages as to whether we have entered an inflationary or deflationary future. The quick answer is; yes to both.
Prices are currently being bid up for scarce resources. It could take the better part of 2021 for supply chains to equalize, especially for long lead-time items like semiconductors. But after equalization, we are hard pressed to see drivers of continued inflation other than in response to outright currency debasement. Rather, with historically depressing debt burdens, an aging population and large income disparities, (limiting effective demand), combined with continued strong efficiency gains from ongoing workflow digitization, (increasing effective supply) - a flat economic outlook holding down prices is more likely than spritely growth pulling prices up, sort of like Japan.
We believe these concerns are behind Fed Chairman Jerome Powell’s continued dovish stance on interest rates and his change in focus from the inflation to the employment side of his “dual mandate.”
The Abstraction Layer of Work
Compounding and interacting with the core debt to GDP growth issue are digitization and income inequality, which again go together. To understand this trend, we will review the critical importance of the abstraction layer in both computer science and in the larger economy as “software eats the world” and how this increases inequality. In software, the abstraction layer is the point at which any small task can be simply invoked by a larger task via an API (Application Programming Interface) call, rather than having to write your own subroutine. It completely encapsulates and automates a small task so that it works predictably. The beauty of this capability is that the sub-task is “just done”, exactly the same each time, without errors and with high quality and predictability. This allows the higher level organizing system to operate much more efficiently. Importantly the entire history of progress of computer science has been for ever higher abstraction layers calling on ever more sophisticated API calls, saving ever more work in the system.
This is all well and good for the system until it automates your job. The problem for workers in highly automated industries is that they are effectively subroutines. They live in a very commoditized world with strong price competition and no chance to stand out. Their job is to be part of that flawless API call and doing anything else causes unwanted upstream errors. That Uber driver will not move to a supervisor’s job. That Amazon warehouse worker gets repetitive motion injuries and stress problems because they must act for hours every day like the robots that will eventually replace them. The system works better because all the random noise has been streamlined out of the lower functions, resulting in perfect wage competition of fungible parts at the bottom, in exchange for more efficiency at the top. Thus, the further we automate, the more income disparity grows.
The Airplane Analogy
Moving to the entire economy this dichotomy is a bit like landing in a plane into a rainy city. At 35,000 feet life is good; the sun is out, white puffy clouds are evident below and the air is still. This is life above the abstraction layer. As you descend, you sort of brace yourself for some turbulence as things go dark. This is the abstraction layer. A lot is going on there and it separates “above” from “below”. As you further descend you enter another world, a dark, dreary one you sort of dread as rain hits your window and the blue skies become a distant memory. This is the Blade Runner world of the Amazon worker and Uber driver. You work hard but never stand out and never progress.
Importantly, as we make advance on automation the layer between the sun and the rain keeps getting higher. Ever more sophisticated jobs become subroutines in more sophisticated abstraction layers. Those jobs are usually done better with superior data and AI. You get the results you want instantly and at a better price and never get put on hold for hours trying to figure out a $200 error. In fact, efficiency jumps and errors vanish under this automation. However, as more jobs operate below the abstraction layer, fewer people operate in the sun above it. As the layer rises, those at the top get more benefit from larger economies of scale while the income divide just grows. Importantly, COVID just lifted that abstraction layer up by five years, putting ever more knowledge workers below the API layer. The question becomes then how to grow an economy if the very automation that can improve operations enough to grow GDP also creates enough income inequality to suppress growth overall? It is like we are in quicksand.
A Brave New World
So as we eagerly greet a new spring with shots in our arms, be careful what you wish for. While we fully expect travel to get white hot and lots of people to celebrate, not everything is rosy. We have indeed moved years into a digital future that is alien to us, and not good for everyone. Meanwhile ongoing demographic and debt burden problems have only been exacerbated COVID. We are burdened by relief debt even as an ongoing demographic slowdown just got accelerated by a loss of 600,000 extra souls and an income divide just driven wider by significant automation. While we lost “only” 100,000 working age citizens, our working age population was already shrinking. We are back to early 2016 levels after having formed a massive top. Importantly, partying will be fun but it will not help relieve our debt burden because that growth is not productive. What will help is, you guessed it, will be squeezing ever more productivity out of the flat economy we have via further automation. But this comes at its own cost. Back in September 2020 in our “Equities Gone Wild — Bubble or Beginning” we have actually predicted what we are now seeing far clearer — Make no mistake, after an inflation burst the trends we face are quite deflationary, placing us in an even more alien land.
In our upcoming pieces we will seek ask our brain trust of founders and CEOs to look further out into what may be an alien land and offer their insights as to the future.
