How COVID-19 Will Change America and the World
Social distancing, a social phenomenon unimaginable in human history since medieval times, has become and will remain for the near future a fixture of human socialization. Social distancing will greatly affect the workplace, and the government is urged to contemplate new economic packages to alleviate the pressures that will come alongside the measures intended to halt the virus.
The “just in time” manufacturing model — a system in which production time is greatly reduced alongside faster communication lines between suppliers and customers — will begin. Governments are utilizing this model to reverse current manufacturing processes in which companies outsource a great deal of their production. This effort intends to localize production and bolster domestic production despite the cost-effective model of outsourcing manufacturing. Though, this production model is intimately linked with the density of robotics in manufacturing.
The movement from human labor in manufacturing to the use of robotics and automation for production purposes will increase dramatically in order to avoid interruptions of a company’s business model and profits- interruptions resulting from human obstacles, like an outbreak of the virus in a production plant, likely shutting down or halting production. With the increased use of robotics and automation in the manufacturing process and its eventual bleed into the service industries, an organized and targeted basic guaranteed income (BGI) policy — an income-floor income program supporting a country’s citizens — will need to be implemented to provide the basic necessities for those workers who find their jobs replaced by machinery.
While some labor will be able to merge into the new automated economy, many workers will find themselves barred due to a lack of ability, education, or necessity. For at least a limited time, advanced economies that are capable of the Modern Monetary Theory (MMT) — a structure arguing that a government does not have spending limitations as they are equipped to generate more money to pay off debts as required — will have to switch to this philosophy of economics to pay for the implementation of the dramatic expansion of liquidity in the marketplace. Additionally, since it seems to be impossible, at least in the United States, to tax the uber-rich who have been blessed with obscene tax breaks, a value added tax (VAT) may be necessary to somewhat offset the tremendous expenditure of funds that are being used to combat the worst effects the COVID-19 virus is having on the United States economy.
The COVID-19 virus is the third coronavirus to strike the human race. Based upon the current medical evidence of COVID-19, the emerging policy of social distancing may be with the human race for the foreseeable future. This new social behavior will alter not only social gatherings, but also the work environment for humans worldwide. While the introduction of robots and other machinery in manufacturing plants will cost many their jobs, it appears as a viable option to reduce the spread of the virus. Replacing human labor with machinery would uphold social distancing measures while sustaining the production of goods.
The Re-location of World Supply Chains
Due to the trade tensions between the United States and China prior to the outbreak of COVID-19, movement away from manufacturing in China had already begun. In 2018, exports from China to the United States was $816 billion. Exports from China to the United States dropped to $757 billion in 2019. The trend continues to accelerate amidst COVID-19 as more businesses are making arrangements to move the manufacturing of their products out of China and placing their manufacturing facilities in locations that are closer to the population centers that buy their products. With China becoming more of a liability in production costs, Mexico, with its vibrant population and low costs, is garnering attraction as a location for the outsourcing of manufacturing production. Mexico will likely be home to many of the manufacturing and supply chains that are returning to the American hemisphere.
Though, despite low production costs in Mexico, the country’s labor costs remain higher than that of robotics and automation.
Robotics and Automation in Manufacturing will Accelerate Especially in the United States
As noted, even prior to the trade dispute between the United States and China, U.S. manufacturers were already shifting some manufacturing processes from China. They made these changes cost-effective by replacing human labor with robots and automated machinery.
With the interruption of trade between China and the United States beginning with the trade war that President Trump initiated in 2018, and now with the disruption of global trade due to the COVID-19 virus, the process of replacing human labor with robotics and automated machinery will only accelerate. Robotics and automated machinery appear to be the most viable option that localizes production and minimizes costs. In 1995 there were 0.49 robots per 1 thousand workers in the U.S. In 2017 this number had risen to 1.79 robots per 1 thousand workers.
A panel underwritten by Forbes magazine published a list of professions, both professional and manual, that will be susceptible to automation. The list includes insurance underwriting, warehouse and manufacturing jobs, customer service, research, and data entry, production line evolution, local TV advertising, pharmaceutical discovery, banking services, retail checkout, outbound sales, fast food service, long haul trucking, delivery services and more. Essentially, any task that can be learned by a machine has a high likelihood of doing so. As technology improves, so will the ability of machines to replace human beings. While some of the people replaced by machines will be able to accommodate into a new technological-based society, many will not. With the displacement of so many people leading to ever-rising unemployment rates, the beginning of a BGI in the United States will become necessary to prevent potential civil unrest and sustain people’s livelihoods.
A Basic Guaranteed Income
The movement for a universal basic income (UBI) dates back to the early 16th century with the publication of Sir Thomas More’s work Utopia. In the late 18th century, the English radical Thomas Spence and American revolutionary Thomas Paine both advocated the concept of a UBI, though both used different terminology. Surprisingly, former President Richard Nixon once proposed a program similar to a UBI known as a “negative income tax.”
Put simply, each citizen of a particular country will receive a living stipend. This stipend will provide for their basic necessities. It would be up to each individual whether to reach for a higher standard of living or accept a basic existence of living as determined by the government. The issue of funding a UBI or a basic guaranteed income (BGI) has been a point of contention in pursuing the implementation of such a policy. With the advent of the COVID-19 virus, many industrialized countries, chief among them being the United States, have flooded their economies with liquidity despite no corresponding rise in tax revenue. This process has been executed with massive deficit spending, accompanied by the Federal Reserve pumping liquidity into the marketplace with the purchase of federal and non-federal bonds and other financial instruments. This process is remarkably similar to the economic policy of Modern Monetary Theory.
Modern Monetary Theory
In a previous article, I had discussed the apparent use of Modern Monetary Theory (MMT) by the U.S. government with its large deficits, and the dramatic expansion of the Fed’s intervention in private capital markets; they had repurchase agreements to provide financial liquidity for overnight lending between financial institutions.
Advanced economies around the world are using MMT to help their citizens cope with the massive unemployment caused by the virtual shutdown of the world economy. With world economies stunned by the loss of production and loss of capital, the use of massive deficit spending is the only thing preventing a total collapse of the world economy.
A Value Added Tax (VAT)
A value added tax (VAT) is a tax that is added incrementally to each stage of production of a good or service. Typically, it is a tax in a specific locality where the good or service is produced. It is often compared to a sales tax despite having some differences.
Those in favor of a VAT argue that a VAT encourages payment of taxes and discourages attempts to avoid them. Because it is typically levied as the same percentage on different goods and services, a VAT tends to have less of an impact on economic decisions than an income tax.
Those opposed to a VAT argue that a VAT imposes an unfair burden on those who are on the lower side of an income ladder as opposed to those on the higher end of the income ladder. For example, suppose there is a VAT of 15% of certain goods and services and a person has an income of $10,000. This would theoretically impose a 2% tax on the individual’s income. For someone who has an income of $500,000 a 15% VAT would represent a 0.02% tax on income. This is called a regressive tax.
The United States is the only member of the Organization for Economic Co-operation and Development (OECD) without a VAT.
With the refusal of both major political parties in the United States to bring its spending in line with its taxation rate, and with the United States embarking on massive deficit spending to finance the programs to bring relief to business’ and individuals, even a temporary VAT would bring some semblance of sanity to the current fiscal expenditures of the United States and to pay for some of the programs advocated in this article.
In short, COVID-19 has changed the world’s economy and its culture. The world is being forced to evolve, both culturally and economically. With the introduction of social distancing measures accompanied by a relocation of manufacturing facilities, robots and automated machinery appear to be a viable option in upholding social distancing while maintaining localized production. Though there are costs to all decisions, and this one would cost many their jobs. The American government is thus faced with numerous challenges regarding stimulus and taxation on a population that may be soon stripped of their income.