Archive for the ‘Economic’ Category

The Future of Employment – a Focus on Skills

January 7, 2018

Where will the jobs be – and how to prepare for them?

The answer depends in part on where you live and what age you are. Discussion of this question can be found in numerous places, authored by governments, think tanks and universities. Here I aim to address an audience of those in high school and university, but it may have some value for those already in the work force, since a main conclusion is that there will be fewer and fewer life-time jobs and many will have to retrain and requalify throughout their working life.

The chart found at the following site graphs how 16 labour force occupations by sector have changed between 1850 and 2015 in the US.

https://www.mckinsey.com/global-themes/future-of-organizations-and-work/what-the-future-of-work-will-mean-for-jobs-skills-and-wages

See Part 3, Exhibit 2.

The three categories above Agriculture (-55.9%) are:

Trade (wholesale and retail)

Construction

Transportation

The twelve categories below Agriculture are:

Manufacturing

Mining

Professional Services

Utilities

Business and Repair Services

Telecommunications

Healthcare

Entertainment

Education

Government

Financial Services

Source: McKinsey and Co. 2017

 

Two obvious changes are the vast reduction of those employed in the agriculture, shown by the shrinkage of the light blue area, and more recently the reduction of manufacturing jobs (dark blue). Each OECD economy would show similar changes modified by the physical location and a number of other factors affecting the geographic boundaries and natural and human resource endowment of the economy. Canada would be much like the US, but with a greater relative importance associated with natural resources such as forestry and mining.

The shrinking share of agriculture is associated with a vast increase in farming output, and the substitution of machinery such as tractors and combine harvesters. The manufacturing and other sectors have expanded their share of employment at the same time that it has shrunk in agriculture. Similar forces are at work today with manufacturing, which with automation has increased the demand for service sector employment associated with computer and communications related service activities. A main conclusion will be that it is more helpful to examine the skills that are likely to be needed in the economy than the changing share of the employment by sector.

 

Some facts about underlying changes

Employment takes place in different sectors of the economy; the share of employment by sector changes over time, sometimes slowly and today quite rapidly.

Existing sectors, as shown in the chart, can change the type of skills required and the arrival of new technology creates the need for new skills. (When you see the word skills think of education and training now and in the future).

For example, the agricultural sector employs fewer people today but the output of the sector has increased. Manual work was taken over by machinery such as tractors, and combines. At the same time the sector created new industries and jobs with employment rising in manufacturing, improvements in seed and cattle production and now the use of information technology. Output has grown in all sorts of ways.

A remarkable statistic shows that in 2012 the average American cow produced 22,000 lbs of milk each year compared with 5,300 lbs in 1950, an increase of 16,700 lbs per year or about four times as much a year. (I imagine a Canadian cow would be equally productive, although supply management may require it to work shorter days and take longer vacations.) With 1950 model cows, today’s 33 million Canadians could be supplied with a pound of milk per day by about just over two million cows. With today’s more productive cows, it would take about half a million cows, such has been the increase in productivity.

 Other sectors have seen a real shrinkage of employment. Horses no longer do the work of machinery so the work horse industry has declined to almost nothing, as have the people who bred horses. There is a horse industry but it is associated with equestrian events such as racing, show jumping, dressage, and circus performances.

In contemplating job opportunities look for situations of job creation and job destruction, as well as for education and training now and in the future.

 

Will technology eliminate jobs?

The lump of labour argument states that there is only so much work in an economy and that technology will reduce the need for work in the future. The facts show otherwise as argued by the “lump of labour fallacy,” namely that employment to-date shows the total amount of employment has increased over time, but the type of jobs has changed requiring different combinations of skills and development of new skills.

One difference today is that the rate of change has increased relative to most times in the past, and this has led to the need for retraining and re-education. Doctors and dentists undergo annual retraining seminars, academics do research and take sabbatical, teachers have PD days. People can train to be a nurse today, but will have to retrain to keep up to date with nursing skills. If in the future there is a declining need for nurses but an increased demand for MRI technicians then major retraining is required to operate this equipment.

My experience of training in economics and being an academic all my working life is not typical for many of those entering today’s work force. I was employed by several different universities but to teach economics in all instances. Part of my retraining came from doing research as well as teaching, including the use of online learning techniques. It was an evolving skill set that I had to learn.

 

What skills will be needed?

There is extensive research and reporting by economists and others on Future Work Skills and the education and training needed for a person to meet the likely needs. While economists and others don’t have a particularly good record of forecasting future jobs, they are better at suggesting what skills will be needed in the future, given the changes, technological and other, taking place. A focus on skills allows predictions to be made on the type of education and training likely to be needed.

 

Drivers of change – some examples

  1. People are living longer. With an older population, people may work to an older age, either full or part-time. They will have increased medical and care costs some of which can be provided by healthcare workers.
  2. Smart machines: these will be used to monitor healthcare needs for young and old persons. Security and defense are examples of other areas using monitoring techniques, such as the use of unmanned drones and security cameras.
  3. Technology now allows for massive amounts of information to be collected and manipulated in real time in areas such as medicine, security and education. This has allowed a computer to beat human chess players and win quiz games such as Jeopardy.
  4. New techniques of manipulation and communication of information has led to multimedia forms of communication. Oral, visual and written information can be created and stored for use anywhere on the planet, meaning that the footprint of an industry or occupation can be global
  5. Social media is a particular form of global footprint (Facebook, Twitter and email) where experimentation is taking place. I first used a computer in 1962. It was housed in a large air-conditioned room and processed input entered on punch cards in batches. Early portable computers weighed 25 lbs and had 64K memory. I first used email in 1989. Messages were sent and received with letters being written out slowly across a computer screen. Today we expect instantaneous receipt of the whole message together with pictures and sound.
  6. The world is connected globally so that information can be transmitted anywhere in the world that has the technical facilities. This expands the opportunities for all kinds of activity, medical, educational and other. It also allows for bad things to happen.
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Hit by ideological traffic going in opposite directions – Year end 2017

December 30, 2017

I fully expect this to happen and it will affirm that many people can easily be annoyed. Start with my favourite Christmas card featuring three women on a motorbike with a sidecar. The caption reads:

“Three Wise Women would have asked directions, arrived on time, delivered the baby, cleaned the stable, made a casserole… and there would have been peace on earth.”

Alternative wording (mine) reads:

Three politically correct women would have ignored gender equality when forming their committee, returned the diapers because they were the wrong colour, sent Joseph out to get coffee after he had cleaned the stable….and there would be slim prospects for peace in the home.”

One of the joys of growing old is to say things that will irritate people; another is to ignore warnings about what to drink or eat. So here goes:

  1. As a result of a recent hospital stay, it is clear that positions requiring a range of skill levels (doctors to cleaning staff) could not be staffed without encouraging some level of immigration. The same is true for employees in shopping malls and fast food outlets. One public policy issue is how to integrate newcomers into Canadian society and what is reasonable to expect from them.
  2. A prime issue is making sure that non-French or English speakers get language training. Without it employment opportunities are minimal except to live and work in a ghetto where their native language is spoken. Young arrivals who enter the school system will quickly adapt linguistically and act as interpreters for their elders.
  3. Newcomers need to be made aware of Canadian values…. this is where it gets interesting. At this time of year there are many summaries of what Canadian society looks like after 250 years as a nation. One I found interesting was penned by Jonathan Kay (read especially the last two columns on page NP2 of the National Post for Dec. 20, 2017)

“Will Canada come to regard itself as a sunny forward looking, pluralistic democracy that champions a generous social contract on a colour-blind basis…or a guilty grievance-infested patchwork of racial communities perpetually publishing angry manifestos and living in the shadow of bygone horrors?”

The latter gets the most public attention because angry people with grievances make the news, sell papers and attract eyeballs. Examples of social harmony don’t make headlines or tweetable epithets. One example, I suggest, of a well-functioning multicultural society is New York City, population 8.5 million. The country, state and city have no overt multicultural policy. The citizens from all over the world just get on with doing their jobs and living their lives. At least up to 2017, this has worked well. In contrast, Canada has a closely defined multicultural policy at least at the federal level, unfortunately ill-formed and implemented.

  1. Those seeking to evaluate existing Canadian multicultural objectives carefully avoid asking the difficult questions. Gilles Paquet is an exception in his Deep Cultural Diversity (University of Ottawa Press, 2008)
  2. An associated puzzle is why there is no discussion of the overall desired size of Canada’s population. Immigration acts as a tap for the flow of people into the population bath tub. Does Canada need to open the tap? If so I would like to see the rationale. Countries like Norway and Switzerland with smaller populations and land area have remained prosperous with small populations – for Norway 1990 and 2017 – 4.2mil and 5.3mil; for Switzerland 1990 and 2017 – 6.1mil and 8.5mil. In a sense Canada is similar size-wise in that almost all immigrants want to live in urban centres such as Montreal, Toronto and Vancouver. These cover a far smaller area than either Norway or Switzerland.

What happened in 2017 and what might happen now?

December 24, 2017

My favourite Xmas card for 2017 reads,

“Three Wise Women would have asked for directions, arrived on time, delivered the baby, cleaned the stable, made a casserole….and there would have been Peace on Earth.”

 

Overwhelmed by news coverage of the Trump presidency, I think we have lost sight of what actually happened which is a precursor for trying to figure out the future.  I suggest that Trump is like the head of a nasty boil beneath which resides a lot of infectious puss resulting from some unpleasant causes. It could kill you but can hopefully be treated.

What follows may be an oversimplified explanation, but here goes. Since becoming selected as Republican candidate, being elected and governing for a year, Trump has managed to grab the headlines with outrageous comments and behavior. If anyone else had done this they would have been crucified politically and in the press. Trump manages to change the channel when public indignation is stoked. He is an artiste at managing the press. He is more clever than mad.

So far the president’s support is rock solid with 30-35% of the US electorate. Some are traditional Republican voters, while others probably supported Bernie Saunders and may not have voted for Clinton. The Saunders followers felt and still feel that Washington is a swamp and Trump’s boast to drain it remains attractive to them.

The 30-35%, or a portion of them, feel that they have not shared in the economic growth of the past decades. Growth has seen significant structural changes in the economy, such as the loss of manufacturing jobs and their replacement by a combination of outsourcing and growth of service sector jobs associated with rapidly evolving communications technology. At the same time, some groups have managed to shape the rules of the business game, through such things as tax breaks, subsidies and protectionism favouring certain investors and sectors. In turn, these favoured ones finance political campaigns and keep the swamp well infested.

Responsible for all this are the acts of previous Democrat and Republican administrations, which have shaped the policy infrastructure to the benefit of their traditional supporters. What we observe and experience today is the result of an evolving social, political and economic backdrop. Trump is the focus of this scene. But without him the same underlying forces would be at work leading to some probably unwelcome outcome.

Can there be a positive future given these events? Probably, but this depends on the sturdiness of the of the American political system over the next three years. Trump will have left some unexploded mines on the political battlefield. He will have governed by signing executive orders (Obama did the same thing in his second term with a Congress controlled by Republicans), and by making judicial appointments of people favouring his political views. In this sense Trump is here to stay by leaving a lasting mark on American society. It will take time and leadership to redirect the ship of state.

Seasons greetings to all.

 

What might a post NAFTA world look like?

December 13, 2017

It is time to think about life after NAFTA. Since we don’t know what the details will be, all that can be done is to try to map out the factors, other than the revised terms, which could be no NAFTA, needing consideration. For this I refer to the methodology pioneered by Ronald Coase (Nobel Prize Winner in Economics 1991) focusing on how firms organize factors of production.

 

The term supply chain seems to have displaced vertical integration to outline how firms organize the production of goods and services. In general, firms weigh a make versus buy decision for the various goods and services needed, where make versus buy may involve a cross border transaction. An aluminum smelter may source bauxite and alumina from its own operation abroad or from an independent supplier abroad (or domestically). Both involve a transaction between the two stages of production. One is an intrafirm and one an interfirm transaction. Multiply these alternative opportunities for one stage of the supply chain by all the inputs required at different stages of production, and you get a large number of decisions to be made. A firm’s management has to get input from engineers, tax accountants, shipping specialists and others in order to reach the least cost way to organize the supply chain.

 

A similar situation exists when organizing the production and use of services, as opposed to goods. Input from lawyers and accountants, for example are needed to aim for the least cost way of production and distribution for a firm’s supply chain. For both goods and services, tariffs and non-tariff barriers are ingredients to take into account, hence the importance of the terms written into trade and investment agreements like NAFTA.

 

With ongoing technological change, it has become easier and cheaper to undertake crossborder transactions for goods and services, but especially for services such as finance, technology, accounting and advertising. The service alternatives available to many firms provide a similar challenge for those monitoring the operations of firms such as tax collectors.

 

What has this all got to do with the outcome of current NAFTA negotiations? Technological change has given firms more ways to organize domestic as well as international operations. The extent to which a NAFTA with new terms will raise costs for individual firms depends on the numerous alternative ways in which the supply chains can be organized.

 

The items to focus on include the ease with which capital, labour and technology can be moved across borders before and after a new international agreement is reached. At one time, Canadian manufacturing industry was protected by tariffs from imports. This lead to US firms hopping the tariff wall by investing in Canada, and more often than not setting up plants on a smaller less efficient scale in Canada, thereby creating what was called the miniature replica effect (plants that were too small to achieve scale economies in production and distribution). With lower tariffs due to NAFTA, imports could flow across the border in both directions. Similar opportunities opened up to Canadian firms selling into the US market as a result of NAFTA. If lower tariffs are removed, firms could be forced back into less efficient (higher cost) means of production.

 

It is highly likely that the abolition of NAFTA would lead to higher production costs and prices in Canada and the US, but the harm may not be as great as would have taken place a decade ago as firms have developed more ways to reduce costs. Where do these new opportunities exist? A combination of inward and outward investment, inflow of cheap labour (temporary foreign workers), and outsourcing abroad of work are areas to monitor and study.

 

When Ronald Coase researched similar issues, he did it by visiting plants and interviewing plant managers and workers on the shop floor who made the decisions about how to produce and ship goods and buy services. Others tend to do this by examining published statistics which is a step removed from the people actually handling the goods and making the decisions. Alfred Marshall, another economist used a similar methodology in research for his major work Economics of Industry (1879).

 

Of course, the cancellation of NAFTA will raise the costs of production for certain firms and industries, but the consequences may not be as dire as some predict.

Trumpmania

December 8, 2017

I confess I am addicted to following the antics of Comrade Trump, partly because it is such good theatre with the curtain rising on a new scene almost daily. But partly because events south of the border are already impacting our lives. Regardless of the outcome of the NAFTA re-negotiations, business will delay or cancel investment opportunities for the time being thereby slowing the economy. I am still amazed about why the US stock market is doing so well.

My addiction is fed by watching excerpts from Morning Joe on MSNBC for the anti-Trump view, and Fox News for opposing commentary by pro-Trump supporters. Add a puff of Steve Bannon and Breitbart News and the day can be shot without doing anything else, except to wonder whether Little Rocket Man or Humpty Dumpty (HD) will light the fuse for a nuclear holocaust. The Daily Show is another channel I watch. Hardly a day goes by that host Trevor Noah does not have a clip about the President and his supporters.

Each day Humpty Dumpty on Twitter offends someone personally, and as soon as the reaction gets out of hand he changes the channel –  from the charges laid against former campaign manager Paul Manafort, to Michael Flynn’s guilty plea, to testimony to Robert Mueller’s investigation, to the meeting of son Donald Jr with the Senate Committee on Russian election interference, to the decision to move the embassy in Israel from Tel Aviv to Jerusalem, to name a few. What will it be tomorrow?

The news media grab any story involving the President and his cabinet, and we the audience dutifully follow assuring that network audiences remain high. After a year in office, I conclude that one needs to watch both sides, in my case that is MSNBC versus Fox News with a touch of Breitbart. If one only listens to the MSNBC viewpoint then one misses the reason why HD won the election (OK with fewer votes), and why it is that over 30% of the electorate continue to support him, and apparently quite strongly. The majority of the electorate is fed up with the way Washington is run and support him as someone who could shake things up. Unfortunately, he is doing it for the benefit of his wealthy friends, not for the masses.

Michael Moore was one of the few people outside the President’s close supporters who called the election correctly. Moore spent time attending rallies for both candidates, noting that Clinton often had small and unenthusiastic audiences. And when Sanders’ supporters were asked if they would vote for Clinton, if Sanders was not the candidate, they often said no. Twenty-five years of Bill and Hillary in Washington was viewed as enough by many. And when Obama later accepted $400,000 for a speaking engagement five months after his term ended, this seemed to reinforce the need to drain the swamp.

HD is now behaving like a dictator. He asks the head of the FBI to drop the inquiry on Russian interference in the election; his legal advisor says he is above the law; his son claims client-counsel privilege when neither of them are lawyers; and he tweets his feelings daily. One hopes that the adults around the White House can keep him in check. They are mainly military men who must be wondering why they took their jobs. Tillerson from head of Exxon has become little more than an errand boy. Males groping females has now become headline news with the resignation of Al Franken, and the forgotten news that a president boasted about his groping.

These stories fill the headlines, and there will be more. Meanwhile important events are taking place in Europe and Asia which could ignite economic and political tumult around the world. Today our attention is drawn to the resignation of Senator Al Franken for behavior that HD boasted about. What will it be tomorrow?

The Swamp in Canada

October 28, 2017

So, Trump’s support has fallen to 38% from the mid-forties. That seems to me like a considerable chunk of voters including I suspect some, who in the run up to the election liked Sanders. Both appealed to voters who felt they had been dealt a raw deal and had few future prospects. That group still exists. Do similar circumstances exist in Canada?

To many voters Trump’s appeal was his promise to drain the swamp of lobbyists and hangers-on who benefit from the operations of government. In the process he has managed to fill the swamp with his own noxious creatures rather than to expel those already there. A Bannon is there to destroy the legislative process, at least the way it has operated to-date. Past dictators have used similar means to gain power for themselves and for those supporting their views.

Some blame the checks and balances built into the US constitutional structure. They forget that it was set up to offset what was seen at the time to be the failure of British rule by an hereditary monarch and elected parliament. It is more likely that all representative political systems develop flaws and weaknesses over time, as politicians learn how to work the system to the benefit of certain groups and the expense of others. This seems to be the case in the US where income has become redistributed to the top 5% of the population.

Figures for income inequality by country show 46.1 for the US and 33.7 for Canada, where a higher figure shows greater inequality. (Figures of inequality by country can be found in Wikipedia under “List of countries by income inequality”). This does not mean that Canada is swamp-free, but more likely that it may be less infested than south of the border, and may have different inhabitants.

Canadian interest groups are adept at lobbying not just for basic needs such as education and health care, but for low-cost (subsidized) transit fares, free on Wednesdays in Ottawa for seniors like myself, doubtlessly a deserving group, and attractive to politicians appealing to an increasing older population. Students lobby provincial governments to abolish fees for higher education without taking into account how it might be financed and what it might do to the quality of the service provided. Canada has its own swamp but with different residing creatures than south of the border. A weakness of any democracy is that voters learn how to play the system.

University Funding

October 7, 2017

A generous donation to Carleton University by the Nicol family is to fund a new commerce building to house the Sprott School of Business. One has to wonder whether this is the best use of the $10 million input to a $48 million building. Throughout universities many faculty offices are occupied only a few hours a week, as faculty work at home connected worldwide with their own computers. This has been the case since the early 1970s. University office sharing is an option as takes place in many businesses.

Another practice is online teaching which, while it will never altogether replace in class attendance, is increasingly being used in many disciplines. Check the Khan Academy website for one online example. Over time schools and universities will learn how to grant diplomas and credits which employers will recognize. This trend also works against creating more university space.

There will be no lack of suggestions as to how the Nicol donation could be used. An obvious one, at least to me, is financial support for students. Rising fees and reduced government funding increases the burden on students and their families. Nicol Fellowships could be created thereby spreading and perpetuating the Nicol name over numerous recipients rather than one building. Fulbright Fellowships, established in 1946, were named after Senator Fulbright. Although he provided none of the funding, his name lives on with fifty-four Fulbright alumni going on to win Nobel prizes.

Turbulent Times – A Path to Dictatorship?

August 27, 2017

A rough path to dictatorship is to be elected by a recognized democratic process and then to use the powers to create a dictatorship. Hitler did this in the 1930’s in Germany, while Mussolini and Franco performed a version of this in Italy and Spain. Conditions prevailing in each country determined the particular means to the takeover. Could this happen again?

 

After less than a year in office, 35 percent of the US electorate continue to support the president. Many are people with lower incomes who have not enjoyed the benefits of economic growth enjoyed by the rest of the population. To-date, President Trump has the support of those disadvantaged who are willing to ignore or to forgive him for the erratic way in which he has chosen to govern – the failure to make appointments to key positions, scripted speeches outlining policies (increasing troop deployment to Afghanistan) together with incendiary remarks about the failure of Congress to enact his platform, and possibly a willingness to create turmoil by refusing to fund the government. Another sign of unrest is the number of appointees who have either been fired or resigned their positions in the first eight months of the administration.

 

Presidential power has so far been held in check to-date by a combination of media reporting, the courts and acts of Congress. Should these fail to receive public attention and support then the democratic process flowing from the US Constitution will be in jeopardy. Currently two areas of particular concern are what happens if North Korea (or any other nuclear state) initiates an attack, and what happens if funding to the federal government is terminated.

 

The circumstances today in the US are in many ways unlike those experienced by Germany, Italy and Spain in the 1930’s, but the seeds of dictatorship exist and could still take root. The growth of political and economic uncertainty, both domestically in the US and internationally, is bound to create instability – in what precise ways is difficult to predict.

Personal versus Government Debt

April 12, 2017

Personal debt is relatively easy to understand. A person borrows, often for a specific purpose – house, car, education, vacation etc. –  knowing what the interest cost and terms of repayment will be. Once in receipt of the funds the money becomes fungible and can be used for any purpose including a specified item. The loan may make it possible to purchase the item, but the actual dollars used may come from any source available to the buyer.

 

Repayment is a condition of the loan and can only be avoided by renegotiating the terms, or defaulting on the loan with various consequences. For personal loans, the interest rate will be known at the outset, although there may be conditions for revising it if say the government alters interest rates through changes in monetary policy.

 

Consumers are generally aware of their personal debt situation, and can anticipate what will happen when various circumstances change which affect their ability to repay or service the loan. Use of a loan enhances their ability to acquire goods and services which can differ in terms of what is purchased. A loan spent on a vacation, a meal or attending a concert will have different consequences than if the expenditure is made on a house, car, medical procedure or attending an educational establishment. The latter represent a capital investment that can lead to an enhanced flow of income in the future; the former may give immediate satisfaction but have less lasting benefits.

 

The nature and consequences of personal debt are fairly easy to describe and appreciate. Public or government debt is a different kettle of fish in terms of measuring its size and understanding its ramifications which include these and other factors:

 

  1. Government expenditures are financed by a combination of tax revenues and, if needed, borrowing, the latter becoming part of the national as opposed to personal debt. But that debt becomes personal as it is shared by all Canadians and includes the debt of all three levels of government. If governments make poor economic decisions causing increased deficits, then their, and our, levels of liability increase, and Canadians would be likely to face higher levels of taxation.

 

  1. Public debt does not have to be paid off. A ten-year government bond does have to be redeemed at the end of the decade but usually it can be replaced with another bond. A government’s borrowing capacity is thus greater than that of most individuals. It has a much longer lifespan and a continuous and often growing source of revenue to service its debt and repay past loans.

 

  1. Trying to figure out the size of a country’s national debt and its consequences is extremely difficult, at least for me. An internet search results in different concepts of debt being used. Gross versus net debt is fairly obvious, but different sources will quote different figures for net debt for a country in a given year. News reporting is not helpful with reports merely printing what some source, that is thought to be official and thus reliable, publishes.

 

  1. It is often stated correctly that government debt incurred today will have to be repaid by future generations. Whether this is a bad thing or not depends on what the increased debt is used to finance. If it builds and/or repairs highways, hospitals, airports, ports and educational facilities, this represents an investment for future generations. Failure to make such public expenditures would be a detriment to future generations. Of course, there are limits as to how much borrowing can be done at any time, but these type of investments are different from other items of expenditure.

 

  1. National debts are sometimes reported gross and sometimes net with the net figure deducting assets which the government owns such as land, buildings, equipment including military equipment. Some physical assets may be easy to value but how do you value land in Canada’s national parks. These have significant value but since the government would not consider selling them then their only value comes from the revenue generated by visitors less the cost of administering the parks. (A similar private sector situation arises with churches which often find it difficult to borrow money using the building as collateral).

 

I don’t think economists or journalists do a good job of explaining the nature and consequences of deficits and debt except to repeat what each other say. It is not an easy topic to untangle, but if the absurdly low current interest rates on short, medium and long-term government debt persist there are likely to be severe repercussions. Bondholders holding bonds with negative real returns on their investments may turn away from government lending, causing interest rates to rise with consequences throughout the economy.

 

John Cochrane has an interesting article on debt and inflation at

http://www.nationalaffairs.com/publications/detail/inflation-and-debt

What’s special about infrastructure spending?

April 9, 2017

Two economic topics in North America are the return of manufacturing jobs and investment in infrastructure. The first is not going to happen because the nature of manufacturing has changed as automation takes hold. It is similar to what happened to agriculture when tractors and combine harvesters replaced manual labour and horse drawn equipment. Output grew but using a different combination of labour and capital. More farming output is now produced with far less labour, while more labour goes into producing the tractors and harvesters for the way farming is now undertaken. The same is happening today to manufacturing with more labour going into activities like writing software to run the machines which produce goods in place of manual labour.
Infrastructure covers a wide range of items like roads, bridges, railways, airports, harbours and communications facilities. These all require continual maintenance. Failure to do this on a regular basis escalates the the cost of restoring the infrastructure, while the quality of the services provided such as road and rail safety diminishes. The alternatives are spending today to maintain infrastructure or spending more tomorrow. If the latter is chosen not only will the cost be higher, but the service provided by the infrastructure will be of lower quality and impose cost on others. For example, unfilled highway potholes cause the deterioration of motor vehicles.

Much government activity is associated with expenditure on infrastructure such as schools, universities, hospitals, defense facilities and equipment. Failure to replace and renew equipment for the Canadian navy and airforce creates a saving today while placing a burden on future generations. The same is generally the case for other areas of infrastructure spending.

When a government announces that it will increase infrastructure spending, it is frequently the case that it is going to remedy the failure of previous governments to maintain facilities in good working order. Home owners know only too well what happens to buildings if items like roofs and windows are not repaired and woodwork is allowed to deteriorate for lack of painting. It represents a failure to maintain the value of family infrastructure. Governments forced to increase this type of spending are doing what all governments should be doing, but often fail to do on a regular basis. Far too much attention is often given to the cost of new capital expenditures as opposed to the future ongoing costs of maintaining the capital in good working order.