Technology Is Not Just Disruptive, It’s Disastrously Deflationary

costsCharles Hugh Smith – While AI (artificial intelligence) garners the headlines, the next wave of disruptive technologies extend far beyond AI: as the chart of technologies rapidly being adopted shows, this wave includes new materials and processes as well as the “usual suspects” of machine learning, natural language processing, data mining and so on.

While many voices seek to assure us these technologies won’t displace human workers, the reality is cutting labor inputs is the core driver. What few pundits seem to understand (perhaps because they’ve never experienced a truly competitive market?) is that the rush to incorporate these technologies into existing enterprises is deflationary not just to prices but to profits.

Reducing labor inputs and improving productivity of capital and the remaining labor force is not going to generate profits if competitors can access the same tools and processes. The race isn’t to maximize profits, it’s to survive the inevitable deflationary spiral in prices as competitors are forced to pass along cost savings to customers to retain market share. Continue reading

A Fatal Accident Waiting to Happen: U.S. Healthcare

healthcareCharles Hugh Smith – Many of the systems we take for granted are historical accidents. Either based on legacy systems hundreds of years old (higher education) or assembled in a short-term, ad hoc fashion (post-1940 national defense/ national security), these systems have expanded into vast patronage systems that are completely out of touch with 21st century needs, costs or realities.

The U.S. healthcare system was not planned; it is largely accidental.

As Jeff Deist of the Mises Institute and I cover in our recent conversation on The US Healthcare Debacle (21:23) (YouTube version), the system of employers providing healthcare insurance began as a means of offering a bit of extra compensation in the 1940s era of wage/price controls.

This historical accident is at the heart of the current system’s dysfunction. Those without jobs are covered by the government at horrendous expense, and those with coverage are terrified of risking it by moving to less secure employment or self-employment: The New Shackle of Serfdom: Clinging to Healthcare Insurance (September 22, 2015).

By removing the consumer from the equation, pricing is now purposefully opaque. The cost for a test or procedure is all over the map, and insurers have few incentives to demand truly transparent pricing.

Meanwhile, the federal/state healthcare programs of Medicare and Medicaid are riddled with the same lack of transparency and are vulnerable to fraud, over-billing and paying for needless tests, medications and procedures.

Few seem to know that the cost of these two behemoth programs exceeds the Pentagon’s budget.

This contraption of private insurance paid by employers, co-pays paid by employees and state programs guarantees paperwork consumes an estimated 40% of all healthcare expenditures. How is that for inefficiency and needless expense? Continue reading

Why Capital Is Fleeing China: The Crushing Costs of Systemic Corruption

costsCharles Hugh Smith – Corruption isn’t just bribes and influence-peddling: it’s protecting the privileges of the few at the expense of the many. Rampant pollution is corruption writ large: the profits of the polluters are being protected at the expense of the millions being poisoned.

This is why capital and talent are fleeing China: systemic corruption has poisoned the nation and raised the cost of doing business. External costs such as environmental damage must be paid eventually, one way or the other.

Either the cost is paid in rising chronic illnesses, shorter lifespans and declining productivity, or profits and tax revenues must be siphoned off to clean up the damage and the sources of environmental degradation.

In large-scale industrial economies such as China and the U.S., that cost is measured not in billions of dollars but in hundreds of billions of dollars over a long period of time.

I have often noted that one key reason why the U.S. economy stagnated in the 1970s was the enormous external costs of runaway industrialization were finally paid in reduced profits and higher taxes.

China’s manufacturing base simply isn’t profitable enough to pay for the remedial clean-up and pollution controls needed to make China livable. That means labor and all the other sectors will have to pay the costs via higher taxes.

Pollution and environmental damage is driving away human capital, i.e. talent.This loss of talent is difficult to quantify, but it’s not just foreigners who have worked in China for years who are pulling up stakes to escape pollution and repression–talented young Chinese are finding jobs elsewhere for the same reasons.

The game-changer is automation, i.e. robots and software eating the world. To understand the impact on China, let’s start with unit labor costs, i.e. the cost of labor needed to produce each unit of output. Continue reading

Number Of Americans Renouncing US Citizenship Reaches All-Time High. Again.

citizenshipSimon Black – Under the republic of Ancient Rome, to be a citizen was an unparalleled status that people throughout the entire known world aspired to achieve.

Roman citizens were granted very special privileges and benefits. The right to vote. The right to stand for election. The right to engage in commerce.

They had the right to settle disputes in an impartial court.

Roman citizens were even exempt from the death penalty, except in cases of treason, where they were still afforded a fair trial.

But citizenship is ultimately a contract. And like all contracts, citizenship has both costs and benefits.

It also changes over time as the stronger party sets aside or ‘reinterprets’ parts of the contract.

As the Roman republic descended into imperial chaos, the costs of citizenship began to outweigh the benefits… many of which disappeared altogether.

Elections became obviously rigged, and bribery was rampant. So the right to vote wasn’t exactly much of a benefit.

Cicero tells us in 54 BC that so much money had been borrowed to rig Roman elections that interest rates had temporarily doubled.

By the 4th century, Romans were being executed simply for violating Emperor Diocletian’s infamous wage and price controls.

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Disrupt Or Be Disrupted

Charles Hugh SmithDisruptive technology is a tiresome cliche, as every Twitter/ AirBnB/ Uber/ Skype/etc. wannabe start-up declares itself disruptive. That the vast majority of costsself-congratulatory start-ups are over-hyped and derivative should not distract us from the larger reality that some technologies do in fact disrupt how things are done.

Fossil-fueled mechanization, for example, turned an overwhelmingly rural farming society into a highly urbanized services-dominated economy.

In the more recent past, CraigsList single-handedly turned the newspaper industry from an immensely profitable license to print money (via costly classified ads) to a struggling sector with an unclear future.

Digital file-sharing turned the $14 billion music industry into a $7 billion industry.

And now driverless vehicles are poised to disrupt the taxi and trucking sectors in ways few predicted.

The core idea of Disrupt or be Disrupted is that every sector and industry that avoids being disrupted just becomes a fatter target for disruption.

Continue reading