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What NAB's announcement really means

National Australia Bank's (NAB) recent profit announcement would have been another uneventful example of a large Australian corporate meeting the market’s expectations, but for one big announcement. Some 6,000 people or fully 17% of the company’s workforce will lose their jobs over the next three years due to automation, artificial intelligence and robots, with 2,000 people coming in to execute those goals.

Banks are ‘reshaping’

NAB's cash profit was up 2.5% to a record $6.6 billion. The Net Interest Margin was a little better than expected and the non-interest income worse. What surprised the market was the announcement that costs are expected to grow by 5-8% in 2018 and won’t fall again until 2020 due to investment in programmes designed to cut costs by $1 billion per annum by 2020. Those programmes include ‘significantly reshaping’ the workforce by freeing nearly a sixth of the workforce from their daily obligations.

According to John Maynard Keynes, technological unemployment is the product of:

“… our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour”.

Technological unemployment – the kind Keynes warned about in 1933 - just hit middle Australia in the guts again, but it is not the product of computers and Artificial Intelligence. Indeed, Queen Elizabeth I railed against it in 1589, when she denied William Lee a patent for his stocking frame knitting machine because it would:

“… assuredly bring [my subjects] to ruin by depriving them of employment, thus making them beggars”.

Sadly, Queen Elizabeth I is today unavailable to defend 6,000 NAB employees from the same fate.  The announcement raises some important questions.

The first is whether our politicians are actually qualified or incentivised to navigate our country through the tempest that has only just begun.

The second is whether the current crop of parents or other advisers have thought sufficiently about whether they’re providing sound career advice to their children.

And third, what, if anything, should we be doing about the societal and economic forces that render large swathes of people unemployable? We don’t have space to tackle the third question here, but we can consider the first two.

Let’s not concede on our world trade

As the chart below reveals, for an inconceivably long and relevant period, Australia’s Balance of Payments (BoP) current account has been in deficit, and a generally worsening trend is evident. The current account records a country’s monetary transactions (trade, net income and current transfers) with the rest of the world.

Australia current account ($A millions)

The extended period of deficits, which reflects the cost of our imports far exceeding the revenue from our exports, leads many politicians in Canberra to claim our current account deficit is ‘structural’. Indeed, former Federal Trade Minister Andrew Robb told me precisely this.

To label the BoP current account deficit ‘structural’ is to resign our country to serfdom.

That is not as extreme as it sounds. We cannot forever continue to spend more on our imports than we earn from our exports unless we fund it by borrowing or selling off the farm. Eventually, our foreign lenders - who partially fund our profligacy - won’t want our IOU’s and they’ll demand our property. Were this to occur on a broad scale, and before deciding to default on our debts, we would render ourselves serfs to foreign landlords.

Exporting eight to ten metric tons of iron ore to pay for one imported iPhone is not sustainable.  Our spending on iPhones may not change but we should earn more from exporting finished, branded and highly-prized goods and services to fund that spending.

Of course, with no present solution to the problem, the sale of our prime agricultural properties and businesses to foreign owners is painted by our politicians as a ‘necessity’. According to Canberra’s logic, we ‘need’ the investment foreign acquirers because they bring innovation and advanced technology that improves employment opportunities for Australians. By owning the innovation we’d broaden the opportunities for our labour force.

The wool is being pulled over our eyes. The truth is we ‘need’ to sell our property to fund our spending.

NAB's decision shows Australia at a crossroads

More worrying is NAB's announcement demonstrates that the next phase of investment by corporates will be in automation and will detract from jobs rather than create them. And NAB is a domestic business. How much more ruthless would the ‘investment’ be if we hand control to foreign owners?

All that’s required is to give market forces the opportunity to determine what we are good at and where we can add value. We need a tax environment that incentivises enterprising entrepreneurs to start up, and stay, in Australia. NAB’s announcement is a reminder that Canberra needs to speed up its development of policies that will ensure John Maynard Keynes is wrong, that technological unemployment is not left to a foreign boardroom.

Of course, Canberra’s policy track record - from car manufacturing and energy to the NBN - hardly inspires confidence. With so much to do, it’s disconcerting, if not embarrassing, to witness Canberra’s focus on same-sex marriage and outing dual citizens.

In the past technological unemployment replaced routine intensive occupations, hollowing out middle-income jobs in manufacturing and clerical services, such as in-bound call receptionists and toll collectors, and forcing labour into low-income service roles. In many former manufacturing states of the US, for example, middle-income manufacturing has been replaced by low-income labour. These people now work in servicing the 140 million square feet of additional mega warehouses built to facilitate the doubling of e-commerce sales in the US, from $142 billion to $291 billion since 2010. Where once computerisation was confined to routine manufacturing and service roles, rapid advances in technology, including data mining, machine vision and AI, will render a much wider range of roles redundant.

Consider for a moment that as recently as 2004, Levy and Murnane, in their book The New Division of Labour, noted the challenges associated with replicating human perception. They used the example of driving in traffic as being ‘insusceptible’ to automation and specifically noted that making a left hand turn in front of oncoming traffic would be difficult for an algorithm to replicate judiciously. Just six years after that book was penned, Google announced it had successfully modified a Toyota to be fully autonomous.

Falling computing prices will ensure that cognitive and problem-solving skills are relatively productive, and a polarisation in the labour market should follow. Some of the big changes to the employment landscape will include transportation and logistics as the cost of sensors makes augmentation of vehicles cost-effective.

Elsewhere, algorithms will enter sectors reliant on storing and accessing information. Office and administrative support roles will be threatened. Meanwhile, personal and household robotic technology is advancing rapidly and the comparative advantage of human mobility and dexterity is diminishing. This will threaten a proportion of low paid jobs sending wages down.

Finally, for our purposes, but by no means final, prefabrication will permit more of the construction process to be conducted in controlled environments reducing error rates and injury, while robots that can assemble on-site are already being demonstrated.

NAB's announcement of 6,000 job losses represents the tip of the iceberg while simultaneously bringing the reality of the shift in the employment landscape home. And for investors, navigating this change will be no less challenging.

 

Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is for general information only and does not consider the circumstances of any individual.

4 Comments
Bruce
November 17, 2017

Roger's article is only one part of the potential disruption that our economy faces. We have already seen the impact of digital platforms like Uber and AirBnb and prepare for the Amazon juggernaut.

However, what happens when crypto currencies replace currencies issued by Governments for online transactions? And when individuals, not governments, issue money. How do regulators, such as the Reserve Bank, manage monetary policy when they are not the only issuer of the currency? Will they be forced to raise interest rates to encourage people to save and use their currency rather than a crypto currency? What about traditional measures of economic activity such as GDP, Balance of Payments or government income and expenditure?

Whilst many investors are skeptical of something that does not follow the conventional rules of business and expect that it will end badly, others are setting up hedge funds to invest in digital currencies. And there is growing interest from not only high wealth individuals but also some sovereign wealth funds.

Robert Craig
November 14, 2017

I agree with Darryl Harvey's response but his solution seems imprisoned by the idea that a meaningful life can only be created by meaningful paid employment either manual or intellectual. Man's Search for Meaning (Viktor Frankel 1984 edition) suggested our survival depends on our hope for a future.

If we cannot find hope without paid employment it would seem we are doomed. It has to be faced that in a fast approaching future, jobs are not going to be available for many people from all levels of society so whilst a liveable wage may be funded from taxation a complete shift in values, education and societal structure must accompany this to give life meaning.

Darrel Harvey
November 11, 2017

In this article, Roger Montgomery, like many other commentators tackles the first two parts of what this means but conveniently avoids tackling the third huge problem that will arise from the robotic and IT changes - 'what, if anything we should be doing about the societal and economic forces that render large swaths of people unemployable!'

Since the 1970's we have been warned of the changes that technical advances will have on jobs and I remember reading that it 'will create more new jobs than it replaces.' That of course has proved to be rubbish!

I would very much like you to find some commentators who are brave enough to tackle this problem, because so far as I can see it will require quite revolutionary solutions. Particularly since the growth of world trade and with it the power of the multi national global companies followed by the GFC national governments tax takes have shrunk, whilst the elite and super rich have prospered. Tax havens have allowed these global companies to please themselves what if any tax they pay whilst rewarding their executives handsomely and managing to curb wage growth of their workers most effectively.

As it is obvious that in the not too far distant future there will be 'swathes of unemployable people' who do not deserve to be in this predicament, those who are responsible for this must be made to pay.

Here are a couple of drastic solutions for consideration:

1. Those 'unemployables' to be paid a livable wage, to be financed by governments out of taxes raised on employers from the increased profits derived from replacing people with robots and technology.

2. Governments of the world work together firstly to introduce the taxes mentioned in (1) above; secondly to wipe out tax havens and thirdly raise taxes on the funds tucked away in these havens to assist them provide this livable wage.

3. Governments of the world must wrestle back the control of money and power from these powerful global and national companies and retrieve some of the taxes that they have so effectively avoided for decades!

I look forward to your response

Darrel Harvey FCPA

Retired Public Accountant

Ashley
November 09, 2017

Current account deficits should not lead “our country to serfdom:”. Current a/c deficits mean we run capital account surpluses – which is great because it shows that foreign investors have confidence that their money is better invested here than in their own countries! Australia has always relied on foreign capital and foreign workers for growth. Our prosperity today is built by foreign capital via capital account surpluses (ie current account deficits). We are rich today precisely because of our persistent capital imports (current account deficits) since the First Fleet.

If Australia does ever start run persistent current account surpluses (ie capital account deficits) it means foreigners no longer have the confidence to invest here. And it means local investors favour sending the money away to other countries rather than investing here. That would be the something worth worrying about. Fortunately Australia has enough rocks and dirt to export for centuries to come, and rocks and dirt need capital (mostly foreign) to exploit. And also enough beach resorts for foreign tourists to visit, and farms to produce food for foreigners – all of which need foreign capital to develop. Bring on more foreign capital (ie more current account deficits)! The bigger the current account deficit the more capital comes in from foreigners to develop businesses and employ people

 

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