Trump’s Automated America

Since Trump was inaugurated this week, I figured it would interesting to delve into the obstacles he will face in his next four years. This a longer-term approach to economics then I usually take. The reason it is worth it for readers to know about the challenges is because you can alternate your investing strategy depending on whether the government makes the correct or incorrect judgments to solve these problems. I think we’ll have an idea within the first few months of the Trump administration what types of solutions will be offered. The challenges which lie ahead usually aren’t discussed on the campaign trail because voters want to know what will get done for them today. It isn’t bad to think short-term because some people have immediate needs. However, now that the election is over, the long-term will become reality.

The biggest problem facing America is the jobs situation. Millennials are having a tough time, after graduating college, getting the high paying jobs they were promised. This is because Generation X teachers/parents lived in a world where going to college was a ticket to a great job. They passed on their life experience to the younger generation. Experience is usually correct, but the problem in this case lies in the fact that everyone was told to go to college, so it made the degrees they got less valuable. Going to college became the equivalent of getting a high school diploma. This is a huge deal for millennials because it takes 4 years to graduate from college and they average owing around $35,000 upon finishing. The chart below illustrates this point well. In each category, younger workers are making less than the previous generation. Today’s workers who have a degree and debt make the same amount as the prior generation’s workers who had no degree.

millennialslowwages

Having debt after graduating college lowers discretionary income. However, a worse problem is it limits the jobs a graduate can take. If you’re 18 and have no debt, you can take an unpaid/low paid internship and gain skills to make it onto the next rung of the employment ladder. That’s not possible when you have debt payments to make. Students can get internships at college, but there’s a big difference between working part-time and working full-time. There is clearly a problem getting millennials into proper jobs because a graduate with a 4-year degree and tens of thousands in debt, while working at Starbucks, has become an unfortunate meme.

There are two issues with college. Too many people are going to college and it costs too much. These issues are caused by the same thing, namely government guaranteed loans. The government has good intentions because it wants to have a skilled workforce, but by making the guarantee that everyone is able to afford to go to college, it causes the prices to increase. Any product which the government provides loans for is going to see accelerated price increases. The government needs to drop this policy. Sure, it is a tough pill to swallow, but there’s no reason everyone needs to go to college when they’re 18. There’s nothing wrong with getting a job and saving money for a few years to pay for college. At that age, young adults may make wiser decisions about taking out massive loans. If the private market gave out student loans, it wouldn’t give loans to students who are majoring in an area of study they can’t a job in. Capitalism is a self-regulating system which prevents young-adults from ruining their lives at a young age.

The second issue is much more difficult to solve than a simple pricing one, which the government is causing in the first place. The common response to the problem that too many young-adults are going to college is to say they simply shouldn’t go. Instead they should learn a trade. It is true that some young adults are not able to do college-level work. The problem is in the next generation, these low skilled jobs will be replaced by automation. As you can see from the chart, 47% of American jobs are at risk of being lost to automation in the next 10-15 years. The creators of this study say the amount is likely lower because this metric includes jobs which have tasks which can be performed by a computer even if the job isn’t automated. On the bright side for Trump’s plan to bring work back to America, 70% of the institutional clients at Citigroup believe this will lead to re-shoring. The cheap labor overseas will be replaced by robots at home; the maintenance work on the robots will be done by domestic workers.

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The problem lies when those students who follow this new advice to skip college, they are more at risk to have their jobs become lost to automation. As you can see from the chart below, those with a high school diploma will have 19% of their jobs replaced by robots. Those making $20-$40 per hour will have 31% of their jobs replaced. Those who go to trade schools will even lose 8% of their jobs. If all those people who have lost their jobs due to automation who currently have a high school education or less start going to trade schools, the jobs requiring that education will become harder to get. The same situation with college graduates having a tough time getting jobs will happen to those who go to trade schools.

lowskilledlost

The chart below is for the Australian economy, but it applies to any country. The food service industry is the most at risk for job losses from automation; managers face the lowest risk of job losses. The question I have for this study is if the low-level employees are gone, then who are the managers going to be in charge of? I couldn’t find answer from this study which was called “Economy In Transition.” This shows all the jobs which will be lost, but the question remains what new jobs will replace the old ones.

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I don’t know where the jobs will come from and neither does the government. It will probably do studies like the Australian one above to try to come up with solutions for this problem. I am optimistic. I believe there will always be a need for human work. The economy survived becoming less agrarian and less manufacturing intensive. It can survive becoming less service oriented. The government needs to avoid trying to solve this problem by employing more workers because it is already too bloated. As you can see from the chart below, a high debt to GDP ratio hurts GDP growth. Investors need to watch how each country responds to this change in the labor market. The government which takes the least interventionist role will be the one who leads the global economy forward.

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