With the big money rushing into tech and digital ventures, investors seem to have forgotten about the high social risks. As Covid-19 accelerates automation, a big employment crisis could be in the making.
Reading the financial news announcing record after record for the Dow Jones, the S&P 500, Bitcoin or Tesla's stock, one could give in to the deceptive euphoria and forget about the economic fundamentals that tell us a different story. Getting fundamentals right is the way to anticipate what could shape economic value and markets in the future.
And the fundamentals are telling us that the Covid pandemic is accelerating unaddressed problems. The key Covid effect is the rise of automation and its consequences for employment. The corporate winners from the slump of 2020-21 will tend to be big firms that benefit from technological disruption. They receive record funding from investors. The others, the less disruptive ones, are out of favor. They will cut back their expenses and investments, and lay off workers.
In their book «The Great Reset», the founder of the World Economic Forum Klaus Schwab and Thierry Malleret strongly argue that the pandemic will accelerate systemic changes that were already in the making: «In all likelihood, the recession induced by the pandemic will trigger a sharp increase in labor substitution, meaning that physical labor will be replaced by robots and ‹intelligent› machines, which will in turn provoke lasting and structural changes in the labor market.»
The trend could be accelerated by the massive concentration of investment flows into «disruptive» technologies, the obvious winners of the pandemic. Looking at the number of asset managers and family offices, from Zurich to Geneva, that flock to invest in highly coveted innovative startups and ventures, through «club deals» and other exclusive private equity networks, one can imagine the boost provided to digitization and automation by this funding of historic proportions.
What about the losers? This is a crowded space of more traditional companies and small and medium enterprises, and their workers. The disruptions provoked by necessity (i.e. sanitary measures) have a social cost: «they will soon result in hundreds of thousands, and potentially millions, of job losses», writes Schwab. The process of automation is never linear, explains the book; it takes big leaps in harsh economic times, when the decline in company revenues makes labor costs appear expensive, if not expendable.
«This is when employers replace less-skilled workers with automation to increase labor productivity. Low-income workers in routine jobs (manufacturing and services like food and transportation) are those most likely to be affected. The labor market will become increasingly polarized between highly paid work and lots of jobs that have disappeared or aren’t well paid and are not very interesting».
As government aid will be gradually rolled back, the gap between innovative and less innovative sectors will widen. In 2020, capital spending at the smallest 1000 American firms has dropped by 82%, for instance, while it went up 3% at the biggest listed ones. Inequalities are set to rise, particularly in the US. Some sectors will expand manyfold.
«Drug-makers and hospitals will be more powerful and wealthier than ever, to the disadvantage of the poorest segments of the population. In addition, ultra-accommodative monetary policies pursued around the world will increase wealth inequalities by fueling asset prices, most notably in financial markets and property», writes Angus Deaton, the Nobel laureate who co-authored «Deaths of Despair and the Future of Capitalism», in a Financial Times article.
The main consequence is that we might underestimate the social cost of disruption. Schwab and his co-author explain that an interdependent world has a deep systemic connectivity, and that economic risks can turn into political ones, like a sharp rise in unemployment leading to pockets of social unrest: «One of the most profound dangers facing the post-pandemic era is social unrest. In some extreme cases, it could lead to societal disintegration and political collapse. Countless studies, articles and warnings have highlighted this particular risk, based on the obvious observation that when people have no jobs, no income and no prospects for a better life, they often resort to violence». If these upheavals lead to more repression, societies could begin to disintegrate, writes Branko Milanovic, in Foreign Affairs.
Believing that there will be «winners» and «losers» that have no relation to each other is an artificial construct. In an interdependent economy, crises have cascading effects. These risks should clearly be discounted from the gains expected by the winners of disruption and the automation paradigm shift. Social unrest, massive – even if transitory - unemployment, a major crisis and restructuring of the job market, difficult adjustments in education, are all going to have consequences on the general economic backdrop.
Taking this into account, investors in disruptive technologies shouldn’t give in to unabated innovation optimism. One way to hedge the social backlash is to focus on the Environmental, Social and Governance (ESG) investments that offer part of the solution as they try to mitigate or compensate for some of these collateral damages. A clear focus will need to be set on the «S» dimension of the ESG equation in order to rescue the foundations on which the economy is built: consumption, savings and a healthy middle class.
At the end of the day, nothing is more brutally disruptive than a virus. «History shows that epidemics have been the great resetter of countries’ economy and social fabric», say Klaus Schwab and Thierry Malleret. Sparking riots, causing population clashes and military defeats, but also triggering innovations, redrawing national boundaries and often paving the way for revolutions. Outbreaks forced empires to change course – like the Byzantine Empire when struck by the Plague of Justinian in 541 - 549 AD – and some even to disappear altogether – when Aztec and Inca emperors died with most of their subjects from European germs.