Outside the Box

What Uber Could Teach the American Economy

February 20, 2015

When I travel around the country, one of the questions that comes up often in conversation is, where will the jobs of the future come from? I have a stock answer that I glibly offer:

In 1980, the Japanese were beating our brains out. Inflation was well into the double digits, as was unemployment. Finding a job was hard (I know), as one industry after another was being reconfigured and jobs seemed to be disappearing left and right. The answer to the question “Where will the jobs come from?” back then was “I don’t know, but they will.”

And they did. Whole new industries were built around personal computer hardware and software; new service categories appeared; and eventually the Internet emerged. Some 25% of the job categories in the government statistics did not exist in 1970 (if I remember correctly – it’s somewhere in that neighborhood). If you go back to the late 1800s, farmers were still more than 40% of the labor force. Fast-forward 100 years and that figure was less than 3%, but the remaining farmers were producing vastly more, feeding not only the US but much of the rest of the world. Meanwhile, most of the people displaced from farms had to find jobs that had not been invented in 1900.

The twentieth century was a good time for middle America. A lot of the new manufacturing jobs paid reasonable middle-class wages. Like me, many of you grew up in those middle-class homes (though mine was decidedly on the lower end of the scale). It was a good life and a great time to grow up.

I had lunch yesterday with Travis Briggs, one of the partners in Robostox, an index and ETF firm that specializes in an index that tracks stocks in the robotics and automation space. As you might imagine, it is been a good space to be in over the last 15 years. (Full disclosure: I am a low-single-digit, very minority owner of the index firm.)

Prior to our lunch, I had just read the essay that is this week’s Outside the Box and was in a reflective mood. While it is easy for me to glibly talk about how entrepreneurs will create the jobs of the future, it becomes a little bit more personal when I think about my seven kids and now six grandkids and what their jobs might look like. We are clearly watching what we’ve called the “middle class” shrink. There appears to be a bifurcation between those jobs for which high-level skills are required and those that can be easily filled by just about anyone – or by a more or less intelligent machine.

Yes, there is a rise in small, artisanal, entrepreneurial businesses like bakeries and breweries, but those don’t create large numbers of middle-class or high-paying jobs.

Further, for the first time in American history we are now seeing more businesses close their doors than open them in a given year. We have made the barriers to creating new businesses so high that we are choking off the lifeblood of future employment, which is the wellspring from which a society creates value and opportunity for all of its citizens.

Travis and I talked about the tremendous opportunities in robotics and automation and the almost mind-boggling advances that are being made each year. We are truly entering a Brave New World, but it is one that is disintermediating jobs almost as fast as the McCormick reaper and the tractor and other agricultural technologies did.

In the past, increased productivity and new technologies created whole new areas of employment. While I am the most optimistic guy in the room about the future of the human experiment, there are times when I wonder whether the future might not look like something out of the novels of William Gibson, the creator of dystopian cyberpunk fiction. I hope not. I hope that Ian Banks is right instead, and the future holds fabulous opportunities and essential abundance for all. I certainly think that the basic necessities of life, including healthcare, are going to be relatively inexpensive in the future, much as our telecommunications have become, as costs have plummeted in the past couple decades.

Just as our phones became digital and cheap, healthcare will become digital and easily available. Maybe not as soon as we would like, but that is the future we’re heading toward.

But what do jobs look like in that world? In his essay called “What Uber Could Teach the American Economy,” my friend Sam Rines speculates that the world of work will look quite different in the future. His essay is not that long, but this week’s Outside the Box will really push you to think.

I am back in Dallas, and tonight I will go with Worth Wray to attend Kyle Bass’s Hayman Capital annual client dinner, where there will be lots of discussion about the future as well as about today’s markets. Tomorrow I give a speech for S&P here in Dallas, where we will be discussing the future of the investment industry. The glib, short take is that the industry will be better, cheaper, and faster, and in 10 years will look quite different. That’s good for customers but not so good for brokers and advisors who don’t change with the times. That automation I was talking about? It’s coming to an investment firm near you. The old models are going to give way to new ones. If you are in the business of running money, you need to be figuring out how to create the changes, not be run over by them. Stay tuned.

Have a great week. I am already thinking about this week’s Thoughts from the Frontline, where we’ll be talking about the growing amount of debt in the world and its impact on future global growth. It’s not just robots that we need to be worried about.

Your thinking about change agents analyst,

John Mauldin, Editor
Outside the Box

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What Uber Could Teach the American Economy

By Samuel Rines
January 26, 2015

America's employment picture has certainly improved — but major challenges related to wage growth and part-time work remain. Yet, one company has an employment and pricing model that might offer solutions. 

The ride-sharing technology company Uber understands more about the U.S. economy than it is given credit for. Consider Uber’s use of surge pricing. Sometimes you need surge pricing and surge pay to balance supply and demand. Surge pricing gets more drivers on the road, and makes people think twice before requesting a ride. It also allows the Uber driver to determine to a great extent when, how long and where they work. Traditional businesses do not have surge pay to adapt to increases in demand and attract workers—overtime and signing bonuses do not adjust supply in real time.

Unfortunately, the United States as a whole is not as nimble an operator as Uber. The labor market is an intriguing mix of good and bad news. On the positive side, the unemployment rate is 5.6 percent, employment is above the pre-Great Recession peak, and employment growth has been steadily increasing for a couple years. Worryingly, the JOLTS report indicates the United States has 5 million job openings, the United States is facing stagnant wage growth, a plummeting labor-force participation rate and part-time employment remains a stubbornly large portion of the labor force. There seems to be phenomena at play not receiving attention—the interaction between the contestability of jobs and the complacency of jobs.

The “complacency of jobs” refers to the lack of incentive to work for lower wages than a worker’s perceived skill set deserves. Someone who lost a relatively high-paying job during the Great Recession might be less likely to accept a low wage simply for the sake of having a job. A lack of motivation, or holding out for a higher wage may begin to explain the declining unemployment rate and the plummeting labor-force participation rate the United States has today. The lack of financial incentive to take a job leaves both the person out of work (and either in the ranks of the unemployed or out of the labor force) and the company with a job opening. A refusal to work for a perceived low wage should eventually have the effect of pushing wages higher, but this has not been the case so far.

There are other factors working against the numbers as well. In a “normal” economic recovery, there is the expectation that as the labor market tightens, wages increase. This encourages people to switch jobs or even reenter the labor force. Theoretically, the job opening above would increase the salary or hourly until it was filled. But wages do not seem to be moving even as the unemployment rate falls. This is why contestability matters.

Jobs are lost en masse during recessions. Companies shed workers to remain profitable (or solvent) in the downturn, and some get hired back. This may be changing, though. As a wide array of U.S. and developed-world jobs come under attack from automation, global high-speed internet connectivity, and the emerging cheap but highly educated labor force willing to perform skilled work for low wages, many people are simply not going to be paid as much to do what they are doing. This is exacerbated by a strengthening U.S. dollar that makes foreign labor appear more attractive. Labor is being priced on the world market, not the local market. And this suppresses wages below where they would be in a closed economy.

The global economy is setting a wage ceiling in many U.S. jobs, and recruiters and hiring managers understand that many jobs can be filled abroad. The contestability of labor is keeping wages low, even as unemployment falls, because many jobs can be automated or outsourced if wages rise too much. Wages are pressured, even as fewer workers are chasing the same job in the United States, because there is a global workforce chasing those jobs as well.

There is another factor at work in the United States—part-time employment—and its multidecade rise as a proportion of the labor force. Typically, the U.S. economy could rely on increased productivity to pick up the slack from fewer workers. The growth equation of more workers making more and more stuff per hour appears to be slowing. The shifting composition of the labor force with more part-time and fewer full-time employees could explain some of the slowdown in productivity. Part-time employees may be less efficient and have lower levels of productivity. And part-time employment increased during the Great Recession and remains high today.

In many ways, the United States is fertile ground for the kind of jobs created by Uber. Uber allows for part-time and flexible hours, the jobs are noncontestable (at least until there are self-driving cars), and the complacency factor is counteracted by surge pricing.

A recent Economist article suggested the world is divided “between people who have money but no time and people who have time but no money.” Without an emphasis on creating low-contestability jobs (like construction and those in the oil patch—you cannot replace an oil worker with a robot—yet) that are low complacency (oil-field jobs also pay a lot relative to other jobs requiring a similar skill set), it is difficult to see how this trend reverses. Instead, the U.S. labor market is reacting rationally to a changing world—one where wages feel little pressure and people hold out for better jobs. The equilibrium between wages, employment and participation will eventually be found. For now, though, the United States is becoming increasingly idle.

Samuel Rines is an economist with Chilton Capital Management in Houston, TX. Follow him on Twitter@samuelrines.
 

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donsoards@gmail.com

Feb. 21, 2015, 11:43 a.m.

Ethical Economics

The American middle class is suffering because of unethical economics.  Capitalism is the best producer of goods of any economic system ever tried, but it does so at the expense of everyone and every thing else.  One problem is that we are focusing on corporate bottom lines at the expense of worker bottom lines.  Game theory teaches us we can only optimize one variable at a time.  We have a choice between two bottom lines.  Articles like “What can XYZ Corp. Teach Us” are symptomatic of our bad selection.  Corporate layoffs to avoid paying retirements and heath care benefits are other indicators.  Tax forms give “owner sales” of corporate stock lower rates than worker wages.  Corporations can write-off business losses in appropriate periods while worker investment losses are capped at a ridiculous $3,000 per year.  Our laws are made by elected officials beholden to corporate financed campaigns with a promise of future wealth if they vote “the corporate way”.  Our adversarial legal system allows corporations “To Hire the Best, to Screw the Rest.”  We endure our education system in the hope that we may get into the “best” rather than “rest” category.  Our police rip-up tent cities of the unemployed.  We have switched from “politically correct” to “corporately correct”. 

But don’t worry capitalism will rescue us.  Perhaps those in a tent city can use their latest version iPhone to call Uber for a ride to the nearest latrine.

jack goldman

Feb. 21, 2015, 12:03 a.m.

The lower class (47%) and upper class (1%) are feeding on the middle class as vampire squid. The machines are replacing the middle class to feed the lower class and upper class. Who feeds the middle class? People don’t need slave wage jobs. People need living wage jobs. A living wage job means $25 per hour, $50,000 per year, or more. It takes a $100,000, taxed at 50% income tax, to live the middle class house, car, family, two kids in college life and save for retirement. Making free slaves with a money bubble to serve a ruling elite is not an economy. Creating $16 Trillion dollars in US Public debt from 1986 - 2015 is not an economy, it’s a failure to protect the future for the children. American children are being sold into debt slavery and no one cares. I hope the debt is defaulted on, Argentina style. Part time cab drivers and the ethnic cleansing of the American work force by machines and illegals is not a prosperous future for our nation. Good luck to us all.

jack goldman

Feb. 20, 2015, 11:52 p.m.

There is so much this article misses. First, humans no longer create wealth, machines create wealth. There should be a machine tax, not an income tax. Income tax has not changed since 1913. Federal income taxes are 15% to 25%, plus 15% social security. That makes federal income taxes 30% to 40%. Social security taxes make up 40% of the federal budget, income tax another 40%. Much of the federal budget is simply debt, kicking the can down the road. US Public debt is up from $2 Trillion in 1986 to $18 Trillion in 2015. Who pays the debt? There is a massive debt bubble. Wall Street, known as bankers, brokers, owners, and governments win by debasing the currency. Main Street, children, families, renters, employees are the losers by debasing the currency. Machines pay no taxes and are subsidized by worker bees who pay over 50% income taxes. Add the 40% federal tax to the 7% state income tax and 7% sales tax and we get 54% income taxes and machines pay ZERO income taxes when they create wealth. Main Street is subsidizing Wall Street. Wall Street prints $100 bank debt notes for five cents and Main Street works all day for five cents, a one hundred dollar bank debt note. Who will win this war? Main Street loses and Wall Street wins in this rigged casino. Forget skills. Main Street always loses and Wall Street always wins. Heads I lose, tails you win. We are all essentially free slaves.

Nick Proferes

Feb. 20, 2015, 7:07 p.m.

This topic or technology or automation replacing human tasks has been investigated in some depth recently.  In an article “THE FUTURE OF EMPLOYMENT: HOW SUSCEPTIBLE ARE JOBS TO COMPUTERISATION?” by
Carl Benedikt Frey and Michael A. Osborne September 17, 2013 the authors state that “We distinguish between high, medium and low risk occupations, depending on their probability of computerisation.  We make no attempt to estimate the number of jobs that will actually be automated, and focus on potential job automatability over some unspecified number of years. According to our estimates around 47 percent of total US employment is in the high risk category. We
refer to these as jobs at risk – i.e. jobs we expect could be automated relatively soon, perhaps over the next decade or two.”  The article is long and detailed, looking at some 702 specific occupations.  Here is the link to it for those interested in reading their work:

http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

Hubert Horan

Feb. 20, 2015, 5:53 p.m.

The Rimes article is based on willfully false claims about “surge pricing” and basic Uber economics.
Uber “surge pricing” does not transmit useful information to buyers or sellers, it does not balance marketplace supply and demand, nor does it drive any of the other operational efficiencies created by legitimate revenue management systems seen in other industries. Those systems (using airlines as an example) are calibrated on years of data about industry-wide demand patterns, convey contractually valid price information well in advance of actual travel. Massive efficiency gains result from the ability of price-sensitive/schedule-flexible passengers to use this high quality information to shift travel to off-peak periods. This fills empty seats at very low marginal cost and allows airlines to serve “full-fare” demand at much lower capacity/labor costs. Uber’s “surge pricing” is not based on any data about market-wide demand (it simply reacts to real-time service requests) and neither customers nor drivers have any way to determine fares in advance. Want to take the kids to visit Grandma in Chicago next month? You can instantly figure out your exact savings if you leave on Wednesday instead of Friday, and you have 100% certainty that the airline will honor the fare you purchased. Want to go to a dinner and a show on Saturday night? Uber does not allow you to lock in fares in advance, and if you suddenly discover they’ve imposed 7X surge pricing when the show is over, you are out of luck. Without reliable advance pricing information customers will not shift travel to periods when low-cost slack capacity is available.
Rimes makes ridiculously false assumptions about both “demand” and “supply”. A major portion of long-distance airline travelers have significant schedule flexibility, so variable pricing can balance loads, load factors have risen from 65% to 85%, so the same demand can be served with hundreds of fewer planes and thousands less staff. Intracity taxi/livery demand has almost no schedule flexibility. People use cabs to catch flights, make doctor’s appointments, get home after late overtime work shifts, or for that Saturday night on the town. Uber customers have no idea what their pricing options are, and no price differentials will get anyone to reschedule their Saturday night plans for midmorning Tuesday. Peak pricing has been used in urban transport for years, and as examples like the Long Island Rail Road demonstrate, it has almost no impact on demand patterns or operational efficiency. “Supply” under Uber’s business model depends on tens of thousands of “independent contractors” making massive investments (commercial standard vehicles, commercial licenses and insurance, intense vehicle maintenance, etc), and these “independent contractors” cannot recoup these costs unless they work long hours, and focus on the hours when demand is highest. Rimes falsely implies that Uber “supply” is highly discretionary and can be generated at very low marginal cost. Uber drivers already have ample incentive to drive on Saturday night; if demand suddenly doubles, Uber can “surge” prices all it wants but that isn’t going to magically double vehicle availability and thus isn’t going to magically balance supply and demand.
There have been hundreds of articles written about the wonders of Uber and surge pricing, but you will not find a single one written by anyone with independent expertise about urban transport, taxi industry economics, or modern variable pricing/revenue management systems, and none of these articles contains a shred of objective, verifiable evidence supporting the claim that Uber will improve general welfare by using resources more efficiently. If one is truly concerned about the future of the US economy, perhaps one might want to explore how Uber has managed to develop an army of slavish fanboys (like Rimes) and no one seems to be able to rationally explain the economics that might justify a $40 billion valuation in an industry that has never been able to generate serious economic profits?
P.S. I have no financial links with any urban car service operator or regulator. I have run airline pricing departments and designed airline revenue management systems.