Book Excerpt: Yardeni on Technology, Inflation and Productivity - Barron's

The good news is that robots may not eliminate lots of jobs done by humans, as is widely feared. Instead, they may be filling the gap as shortages of working human stiffs become more prevalent. Japan is the most automated economy in the world, with a proliferation of robots doing all sorts of jobs, yet the jobless rate in Japan is below 3.0%. The country is suffering from a chronic labor shortage.

The demand for technological innovations is largely driven by demographic imperatives, i.e., the needs of human societies as they evolve. Hunter-gatherer tribes lived in mobile homes such as teepees and yurts because they had to follow the food. They settled down in one location once they mastered agricultural techniques such as soil tilling and basicirrigation. Their small villages grew into towns with markets where produce could be exchanged for goods manufactured by cottage industries. A few tradesmen became industrial capitalists when they built factories. Merchants became bankers and financiers. Soldiers were hired to protect the farms, villages, and cities. Roads were built between the cities, later becoming exits on superhighways and connected by airports. Indoor plumbing, electric lights and appliances, air conditioning, vaccines and antibiotics, radio and television, mainframe computers and PCs, the Internet and email, GPS navigation, and smartphones all have improved the quality and length of life.

This outline of human progress in one paragraph was enabled by technological innovations that met the individual and collective needs of people. The supply side of technological innovations is mostly driven by entrepreneurs, who see a need for a product or service that is either brand new or significantly improved over what is currently available. If they are right, and the market is big enough without much, if any, competition initially, then they stand to get very rich very fast. This is what drives entrepreneurial capitalism. As long as governments don’t meddle too much in this beneficial relationship between entrepreneurs and their customers, more innovations benefit more people.

The High-Tech Revolution that I started to analyze during the early 1990s continues apace. In my opinion, it has a long way to go. Given that so many of the new technologies supplement or replace the brain, they lend themselves to many more applications than did the technologies of the Industrial Revolution, which were mostly about replacing brawn.

One of the main themes of my book is that economists, especially of the pessimistic persuasion, rarely pay much attention to technological developments. Yet these developments regularly transform the course of human history. Human nature may not change much over time, but technology often does so in ways that profoundly impact human societies and their economies and financial markets.

The demographic projections discussed above show that the world is heading down the same road as Japan, with labor shortages likely to be widespread. Even the United States, which stands out with a relatively upbeat demographic profile, is already showing signs of labor shortages. The reasons may be partly cyclical rather than structural. But whatever their cause, tightening labor markets will revive inflation, won’t they?

This may be the most important question for investors to accurately answer in coming months and years. My working hypothesis is that inflation is likely to remain extremely low for all the reasons I discuss repeatedly in this book. On a worldwide basis, I will continue to monitor the CPI inflation rates data compiled by the IMF for advanced economies as well as emerging ones.

The US economy is less prone to transmit inflationary shocks today and in the future than in the past. The oil price shocks of 1973 and 1979 were rapidly passed through to wages by cost-of-living adjustments in the labor contracts of unionized workers. Today and tomorrow, similar price shocks are much less likely to trigger a broad and sustained upturn in inflation. That’s as long as globalization persists and perhaps even proliferates despite populist resistance.

Despite the weak pace of productivity growth in the United States, inflation is very low. There’s a lot of anecdotal evidence that productivity-enhancing technological innovations are proliferating in many industries. The cloud allows for much more efficient use of high-tech hardware and software across the economy. Automation and robotics have been integrated over the Internet to communicate and to interact seamlessly. The Great Disruptors among companies—including Alphabet, Amazon, Tesla, and Uber—are forcing competitors to boost their efficiency or risk going out of business.

Excerpted from the forthcoming book Predicting the Markets: A Professional Autobiography by Edward Yardeni. Copyright © 2018 Edward Yardeni. Used by arrangement with Edward Yardeni. All rights reserved.

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