Technology’s Influence on the Economy

 

“It is usually a poor proposition to bet against human ingenuity”

 

The High-Tech Lever: Examining Technology’s Influence on the Economy

https://www.principalglobal.com/documentdownload/41193

 

Technological change and the problem of measurement:

Direct effects: GDP captures the value of goods and services produced in the economy like iPhone and the app charges

indirect effects: solves challenges, boost efficiency

e.g. incandescent light bulb 1) drove the creation of electrical infrastructure and other electrical appliances, 2) pushed factories to be safer and more productive, 3) even improved public health from reduced effects of carbon monoxide poisoning that had occurred with gas lightening

Cost though: some products and entire industries became obsolete or redundant
albeit also means the time, effort, and capital saved and new job created

 

Indirect effects:“cost of doing business”

technology can transform the “cost of doing business”

Technology boosts economic progress and productivity by turning economically unproductive belongings into revenue-generating assets (Uber or Airbnb)

and capital will be reallocated to more productive uses

now technologies in their nascent stages that could have a profound impact on capital allocation and economic forces in the future

スクリーンショット 2016-08-04 20.13.26

The future economics of cars:

1. A fleet of just 9,000 driverless vehicles could replace all of the taxi cabs (around 13,500) and other for-hire vehicles (about 44,500) in New York City
2. Passengers operating a shared driverless vehicles would wait an average of 36 seconds for a ride that cost $0.50 per mile while the current average price per mile for a private car is $3.57

The future economics of 3D printing:

1. produce a decentralized, on-demand manufacturing sector, meaning more efficient manufacturing processes, decreased production times and shipping costs, and even reduced greenhouse gas emissions
2. Economically, this would drive the prices of manufactured goods down further, allowing a great deal of capital to be redeployed

 

Indirect effects: non-tech industries

Agriculture has seen huge increases in production, decreases in water and fertilizer use, and more efficient land use, supported by technological change, including improved plant varieties, better irrigation methods, and mobile technology

population and supply in Malthus debate may be no longer a question

Social technologies could raise the productivity of high-skill knowledge workers by 20% to 25%, according to McKinsey & Company

attributes this to enhanced “collaboration and communication within and across enterprises.”

 

Indirect effects: emerging markets

Emerging markets may have to track a higher progress up the economic learning curve

access to technology that is growing more affordable by the day

Technology-enhanced productivity and education could become an imperative to remain competitive in the global economy (mobile phones in India and Africa)

 

Indirect Economic implications: Deflationary pressures

High-quality manufactured goods inundate the world and unlike the 2nd half of the 20th century, the world is entering a period where there is a structural excess supply of both manufactured goods and commodities

Technologically driven advances in utility and convenience, and reduced input and production costs

But deflation =/= recession [1],

1. improvements in features and product performance encourage people to upgrade in spite of price expectations.

2. growing middle class, with ever-larger pools of consumers able to purchase these goods that overwhelm the effects of wait-and-see deflation.

3. disappointing 2% growth in a time of improving quality in goods and services may be a good situation for consumers in the long run.

4. Instead of the continued, intense focus on real GDP, perhaps it is time for more analysis of nominal GDP

 

Implications for investors

Interest rates and bond yields will stay lower for longer than most commentators think.

(Besides technology, other factors like demographics also push rates dow)

Equities: more of a stock picker’s market

  1. Growth becomes far more valuable to investors in the absence of high interest rates, and hence, a high discount rate
  2. deflationary pressures will tend to choke off weak business models quite rapidly
  3. this environment would favor active management, (identify companies and business models that are susceptible to industry disruption and deflationary obsolescence
  4. at some stage, this trend could stem the proportion of assets invested on passive 

U.S.:

  1. remain a primary destination for capital in the near future, as economy is the once and future paradigm of technology (but effect of productivity can be global)
  2. U.S. companies with strong domestic earnings

More focuse on income, more prevalent in niche markets

  1. real estate, commercial mortgage-backed securities, municipal bonds, preferred securities, or emerging market debt are structurally and informationally less efficient

 

[1]

At its worst, deflation leads to economic stagnation and high unemployment because the expectation for lower prices in the future causes consumers to postpone present purchases, thereby slowing economic activity.