The AFR is about as prescient as the last phone call. Thankfully, Viktor Shvets looks forward:
Macquarie’s strategy guru, Viktor Shvets, argues that the higher-cost world that BlackRock sees – rising labour costs as the population ages, rising input costs from reconfigured supply chains, rising energy costs from the low-carbon transition – will be totally blown away by AI, which will unleash a wave of deflation.
“AI, as a general purpose technology, is now rapidly approaching the escape velocity, penetrating almost all industries, from robotics and automation to biotech, and from 3D printing to quantum computing,” Shvets says.
“We believe that in both the short and long-term, the information age will continue lowering marginal costs (and eventually average costs) of almost everything towards zero.”
On the surface, that sounds like a positive counterpoint to the prospect of higher-for-longer inflation and rates. But in an echo of Chalmers’ declaration of a defining decade, Shvets quotes tech expert and Stanford professor, Erik Brynjolfsson, who told the Financial Times in January: “This could be the best decade in history – or the worst.”
The deflation created by AI, Shvets says, “will mostly come in the form of lower demand for labour, with companies using AI to squeeze efficiencies and reduce costs, rather than augmenting labour, as some technology cheerleaders have been suggesting.”
A big chunk of white-collar jobs could be gone in as little as five years, he argues, and factories will start disappearing as the combination of AI and robotics rips through manufacturing and distribution.
If Shvets’ prediction is right, Chalmers (and most other Western leaders) will have a very different set of problems on his hands as unemployment soars. The scrutiny of companies’ profit margins would become even more intense.
Shvets is correct, but he does not discuss Australia, where the looming problems are MUCH worse.
I refer back to the work of two other excellent analysts to make the point.
First, Gerard Minack:
Australia’s economic performance in the decade before the pandemic was, on many measures, the worst in 60 years. Per capita GDP growth was low, productivity growth tepid, real wages were stagnant, and housing increasingly unaffordable. There were many reasons for the mess, but the most important was a giant capital-to-labour switch: Australia relied on increasing labour supply, rather than increasing investment, to drive growth. Remarkably, the country now seems to be doubling down on the same strategy.
Now add Carl Benedikt Frey, author of the book The Technology Trap: Capital, Labour and Power in the Age of Automation, which covers the history of the Industrial Revolution and how it affected labour:
Frey’s argument rests on the distinction between labour-enabling technologies and labour-replacing technologies. As the names suggest, labour-enabling technologies complement workers, boosting productivity and opening up avenues for new employment, while labour-replacing technologies boot workers out of the labour market entirely, forcing them to re-skill or search for other opportunities.
Artificial Intelligence (AI) is unequivocally a “labour-replacing” technology.
Now, combine the two analyses. A labour supply-led economy focussed primarily on low-level job creation runs smack into an AI revolution that renders low-level jobs obsolete.
This is a structural unemployment shock in the making.
If cyclical, this would be difficult but manageable. Fiscal transfers would support displaced workers, and much lower interest rates would boost household income to support economic activity. A much lower currency would help the external sector.
However, another colossal force is bearing upon Australia that complicates these solutions.
China is spiralling into depression economics, and Australia’s terms of trade have begun to crash. Much worse is ahead.
This is a brewing national income shock that will smash the federal budget.
Hence, we must ask the following question: How will the labour-supply-led economic growth model cope with a surge in unemployment concurrent with sudden large budget deficits, spending cuts, and tax hikes?
We have one recent example of a similar episode to consider.
From 2012 to 2015, an iron ore crash income shock hit Australia, triggering a mining capex cliff that delivered 300k job losses. Unemployment rose from 4.9% to 6.4%.
Australia overcame that episode by unleashing a dubious mortgage, house price, and construction boom, culminating in a Banking Royal Commission and macroprudential curbs.
MB labelled that period a “lost decade” because living standards stalled throughout as wage theft and oversupply overtook the labour market.
But, in the looming period, two things differ from the 2012/15 experience.
AI is projected to end an impossible three million jobs by 2030, and China will not stimulate the iron ore price again as it did in 2016.
The initial response of monetary policy easing through 2024-26 may be enough to stabilise growth. But as AI keeps sucking jobs away and the deficits keep rising, there is a significant danger of sovereign downgrades.
These could flow through to bank funding costs and inhibit monetary policy.
In response, Canberra will probably persist with or even ramp up immigration to protect property prices.
But, again, as AI keeps sucking away jobs, the cheap foreign labour flow will shift much more of the income lift from labour to capital.
Wages will be annihilated, and inequality will skyrocket as AI income gains accrue exclusively to capital.
And consider, if the AI rollout takes a decade, at the loss of 300k existing jobs per year (with some offset in new areas), the risk of the plutocratic ‘immigration consensus’ exploding in a popular (not populist) mushroom cloud is very high.
If immigration is cut to nothing, as it should be, and the economic model shifts back to capital investment growth-led from labour supply-led, then property prices would become vulnerable to a sustained correction.
Still, it would be fairer and ultimately more sustainable as interest rates collapse to zero (or below) and an obliterated currency repatriates supply chains.
This would be the structural unwind of twenty years of Chinese-inspired Dutch disease.
In truth, neither of these throwaway models is especially helpful.
If this convergence of horrors does occur, then, one way or another, Australia’s Brave New World of fake politics, bizarro ideologies and vested interests will blood a feeding frenzy at the economic carcass.
And the outcome may be better described as national chaos.
