Let’s Not Waste a Crisis!

The ongoing COVID-19 related suppression of economic activity will impact incomes across the board. Irrespective of how the income is generated (e.g. business, employment, self-employment) the impact can be either positive, negative or uncertain.

  • Positive for those whose incomes are not disrupted or are increased due to demand (e.g. PPE manufacturers, health-care staff, delivery drivers).
  • Negative for those whose incomes have been disrupted without any relief in sight (e.g. restaurants, people who have been laid off with bad prospects for getting another job).
  • Uncertain for those who have been furloughed or laid off but with good prospects for getting a job.

With anything between 6-11% contraction predicted, the majority of the cases should fall in the ‘Uncertain’ category (I predict 4-7%) who will move to either Positive or Negative category over the next year or so.

Why do I say that?

I say it because there will be different responses to the challenges, from restructuring, process improvements to failing fast and even retraining/reskilling (both at individual level and at an organisational level). Depending on how effective a business is at transforming itself to survive, a lot of the people in the ‘Uncertain’ category will quickly transition to the ‘Negative’ category.

One of the main transformation patterns is to carry out process improvements/restructuring with increased automation so that costs decrease and production/service elasticity increases as incomes fall initially but then recover over the medium and long term.

This group of people who jump from Uncertain to Negative is the BIG problem as this can trigger a long term contraction in consumption. How can we help these people reskill and retrain so that they can re-enter the job market? What can we do to support people as the pressure to automate increases as business income contracts?

Universal Basic Income

One possible answer to many of these questions is Universal Basic Income. If we provide people guaranteed support with basics (e.g. food, rent) then we are not only cutting them some slack but also decoupling ‘survival’ with ‘growth’.

Universal Basic Income (UBI) is a simple concept to understand: all citizens get a basic income every month irrespective of how much they earn. This is guaranteed from the day they turn 18 till the day they die. They may also get a smaller percentage from the day they are born to help their parents with their upkeep.

See this TED Talk by Rutger Bregman for more on this: https://www.youtube.com/watch?v=aIL_Y9g7Tg0

With UBI a recession will not impact the basics of any household. It will provide a safety net for families and individuals. It will also allow people to develop their skills and innovate.

There are a few wrinkles in this. Firstly, how should we prevent inflation as ‘free money’ is handed out to people? One proposed mechanism is to use a different class of money from the currency of the country. This UBI money cannot be used as a store of value (i.e. can’t be lent for interest), just for limited exchange (e.g. food, rent). This is similar to the US Supplemental Nutrition Assistance Program (SNAP) – also known as ‘food stamps’ (https://en.wikipedia.org/wiki/Supplemental_Nutrition_Assistance_Program)which can be exchanged for certain types of food. Many other countries have tried this experiment (such as Finland, USA, Canada etc.). This form of money should also ‘expire’ periodically so that people don’t start using them in a ‘money-like’ way.

Another challenge is how do you convert the ‘temporary’ UBI money into ‘permanent’ currency. This is required for the businesses accepting UBI money to be able to pass it down the supply chain (both locally and internationally). For example if you buy all your groceries with UBI money and it is not convertible to currency then how will the grocery shop pay it’s staff and suppliers. What if the suppliers were importing groceries from other countries – how would they convert UBI money to any international currency. In SNAP, the stamps are equivalent to money. It doesn’t have the same impact as UBI as its cost is a fraction of the total US GDP (0.5%).

Still, one should never let a good crisis go to waste! Time to think differently.

What Happens Next?

In this post let us think about what happens next as we start to come out of the Covid-19 related lockdown.

No country can claim to be immune from the economic effects of the Covid-related lockdown. However, as countries start to emerge from the lockdown some will rebound faster than others.

What is happening now?

Let us next look at where we are today. Today, large number of people and businesses have seen the flow of money reduce to zero. The expectation of a return on investment is low for a large section of the economy. That said, certain sectors are doing quite well or as normal (e.g. groceries, online retail) as they are getting overflow business.

In this situation with little or no money going to people / businesses someone has to step in and be that ‘credible borrower’ and borrow on behalf of those who are struggling. This is the Government as the ‘credible borrower’ which then passes the borrowed money on to its citizens in a low-waste manner one hopes. One point here is that it is easy for a Government to print money rather than borrow, but that can lead to inflation without actual growth – so called ‘jobless growth’.

We can take the current situation as artificial suppression of demand and supply (as people loose incomes and stores are forced to close/reduce visitors).

This can also be understood as a scenario where blood supply to an organ in the body has been blocked. The body reacts in the very short term by reducing the function of that organ and rushing out chemical support to suppress pain but in the long term the body is severely impacted unless the block can be removed and/or another path can be found to deliver the required quantity of blood.

What happens Next and How to Deal with it?

It all comes down to effective planning and effective use of people, processes and tools.

Businesses that have or are able to quickly get the required plans in place for short and long term changes to how they work will benefit from overflow business.

People who are able to re-skill or move from impacted areas to areas of new opportunity will be able to benefit from continued employment during the rebuilding period.

Both the above things should allow some blood to flow to the organ but it does not restore normal supply nor fixed the original damage that resulted in a block.

Repairing the Damage

The repair will start once the lockdown ends. Those countries that release the lockdown earliest (and are able to ride the second wave of infections) will have ‘first movers’ advantage towards normalisation. This should also promote local business that step in to fill the gap from imports where possible.

The key point to keep in mind here is that we will not go back to status quo. Just as scar tissue is never as smooth as the torn skin it replaces. We will loose some businesses. Some people will fall into debt and be unable to recover without help.

Due to loss of incomes, social distancing and widespread work-from-home we will find demand continues to be suppressed for some time to come. This will be especially true for ‘non-essential’ goods. This means the suppressed demand must be unlocked using some of the options we will discuss below.

Who sinks/swims is down to how they prepared during the crisis for the post-crisis period (i.e. if they did not look to change business-as-usual and let a good crisis go to waste then they will sink) and how effectively they can implement those strategic plans in the coming months. This is a good example of Darwin’s Survival of the Fittest.

Who will survive:

  1. Those who are quick to plan and implement new processes that allows them to generate revenue.
  2. Those who have deep pockets to fall back on, for the next 12 months (at least)
  3. Those who are able to focus on their strengths and optimise resources – when we look at (2) we must remember “Markets can remain irrational for longer than you can remain solvent” (by John Maynard Keynes)
  4. Those who are directly benefiting from the crisis (short term survival)
  5. Those who enjoy a good name in the market or are ‘expected’ by the market to bounce back quickly

But what is the Recipe for Success? What should we do more of as a business?

  1. Advertise: Replace front-office with a slick website, smartphone app and/or virtual agent (even a chat-bot helps handle the first level of queries)
  2. Process transformation: Reduce the need for manual processes in business operations – this is not something only multi-million pound business need to do! In fact this is something everyone needs to do!
  3. Digitise and Automate as much as possible – from fundamental building block apps (e.g. billing) to more advanced planning, optimisation and prediction apps (Here is a golden chance for AI at the lower price-point. Or even local AI consultancy)
  4. Concentrate on strengths and focus your resources on the service/product that provides the greatest rewards – enable home delivery where possible – smart phones + hybrid/electric vehicles should reduce cost of operations and bring home delivery to the same price point as in-store
  5. Don’t stop innovating.. innovation is the hidden strength of any business (large or small!)

As an individual, facing an uncertain future in terms of employment, lot of the above points are just as relevant (once the context is changed):

  1. Advertise your existing skills and experience (make a website, LinkedIn profile), talk about your interests and hobbies! Blog!
  2. Look inward: Look at all the good stuff you have done, all the mistakes you have made and the lessons you have learnt. Try changing something small about yourself that you feel will improve the way you feel about yourself. For me this was ensuring I take in a lot of outdoor play time with my kids!
  3. Prepare your tools: make a CV, take stock of where you have been and where you want to get too! You won’t get another chance like this to plan your career!
  4. Concentrate on your strengths: reduce expenditure, improve efficiency by doing the important things and ignoring things that lead to waste of time, money or both. One personal example: we started cooking more at home which resulted in not only money saving but also us discovering new things that we could make at home!
  5. Don’t stop learning! Now is the time to take a risk. Make sure you use all the tools available to engage with people who are leaders in your field of learning as well as fellow students – this can be anything – from cooking to a language
  6. Don’t stop thinking and creating. Write a short story, create a new dish, draw a picture, change the layout of your living room! These act as massive confidence boosters

Additional Thoughts: Automation

Automation was on the rise before Covid. The bigger players have already moved online and use automation enabled IT therefore continue to sell effectively (albeit within constraints). But the contact-less nature of the solution to this problem will push app/online interaction even more. As this happens, it makes it easier to automate the interaction. Two small examples:

  1. Pizza shops now only support cashless delivery, no collection. Therefore, all my interaction with the pizza shop is through their website or an app (e.g. JustEat). The pizza is placed on my doorstep and I hardly even see the delivery person as they back away more than 2 meters and leave as soon as they see me pick-up the pizza.
  2. Food stalls in various food markets have started home deliveries (again cashless and contact-less). Earlier they would hire staff to manage long queues, today they operate behind a slick website (that you can throw up in a few hours), a scheduling tool, and WhatsApp messaging to personalise the interaction.

This effect when combined with the long term trend of more people working from home (which is bound to accelerate now) is an opportunity for small business to deliver local services through different app-based platforms involving lots of automation (to make it cheaper). The smaller players have to make use of the same force-multiplier tools, platforms and channels as the bigger players right now! The most basic one is the ability to accept online orders and payments.

Now that people don’t travel for work then they no longer form a captive market for food vendors, coffee shops and bars. But these things can come to their doorstep! With automation enabled IT the cost of home delivery can be managed especially with the added benefits of scale.

Finally: I am still waiting for the day I can order Starbucks coffee to my home for the same price (if not cheaper) as what I get in the stores. Starbucks could open coffee-making kitchens in different areas and serve the area from there. Automation will help by providing seamless links between different stages, AI-based planning and prediction of demand.

Digitisation of Services and Automation of Labour

Digitisation of services is all around us. Where we used to call for food, taxi, hotels and flights we now have apps. This ‘app’ based economy has resulted in a large number of highly specialised jobs (e.g. app developers, web designers). It also impacts unskilled or lower skilled jobs as gaps in the digitisation are filled in with human labour (e.g. physical delivery of food, someone to drive the taxi).

The other side of digitisation is automation. Where manual steps are digitised, the data processing steps can involve human labour (e.g. you fill a form online, a human processes it, a response letter is generated and a human puts it in an envelope for posting it). 

In case of a fully automated and digitised service, processing your data would involve ’machine labour’ (with different levels of automation [see http://fisheyefocus.com/fisheyeview/?p=863]) and any communication would also be electronic (e.g. email, SMS). One very good example of this is motor insurance, where you enter your details via a website or app, risk models calculate the premium on the fly and once payment is made all insurance documents are emailed to you. Only involvement of human labour is in the processing of claims and physical validation of documents. This is called an ‘e-insurer’.

Machine Labour

Automation involves replacing or augmenting human labour with machine labour. Machines can work 24×7 and are not paid salaries – thus the cost savings. However, machines need electricity and infrastructure to work and they cannot self-assemble, self-program or self-maintain (so called Judgement Day scenario from the Terminator series). Human labour is still required to develop and maintain an increasingly large number of (complex) automated systems. Human labour is also required to develop and maintain the infrastructure (e.g. power grids, telecom networks, logistic supply chains) that works alongside the automated systems.

So humans earn indirectly from machine labour but in the end automation and digitisation help save large amounts of money for companies by reducing operational costs (in terms of salaries, office space rentals etc.). Another side-effect is that certain types of  jobs are no longer required as automation and digitisation pick up pace.

Impact on Consumption

Now we know from basic economics that all consumption results in someone earning an income. 

For a company, the income is the difference between the value of what they sell and their total costs (fixed + variable) in making and selling it.

A company will increase digitisation and automation with a view to increase their total income. This can happen by targeting automating processes that increase sales or decrease costs. A company will also automate to keep levels of service so as not to lose customers to competition but there will always be some element of income increase involved here as well.

If costs are reduced by digitisation (e.g. less requirement for a physical ‘front office’) and/or automation (e.g. less number of people for the same level of service), it can lead to loss or reduction of income as people are downsized or move to suboptimal roles (e.g. a bank teller working in a supermarket). This also contributes to the ‘gig’ economy where apps provide more ‘on-demand’ access to labour (e.g. Uber).

People consume either from what they earn (income) or from borrowing (e.g. credit cards and loans). If the incomes go down then it can either impact consumption or in the short term lead to increased borrowing. This decrease in consumption can impact the same companies that sought an increase in income by automation and digitisation.

To Summarise:

  1. Automation and Digitisation leads to cost savings by introducing electronic systems in place of a manual process. 
  2. If less people are required to do the same job/maintain a given level of output then employers are likely to hire fewer new workers and/or reduce the size of the workforce over time. 
  3. This will reduce the income of people who are impacted by redundancies and change of job roles. 
  4. This in turn will reduce the consumption of those people which may hit the very same companies that are introducing automation and digitisation
  5. This in turn will further push the margins and thereby force further reduction in costs or increase in consumption from some quarter…. 
  6. And we seem to be trapped in a vicious circle!

This Sounds Like Bad News!

So looking at the circular nature of flows in an economy, as described in the previous section, we can predict some sort of impact on consumption when large scale digitisation and automation takes place. 

As an aside, this is a major reason why ‘basic income’ or universal income is a very popular topic around the world (read more: https://en.wikipedia.org/wiki/Basic_income). With basic income we can guarantee everyone a minimum lifestyle and thereby promise a minimum level of consumption.

The actual manifestation of this issue is not as straightforward as our circular reasoning, from the previous section, would indicate. This is because the income of a company depends upon several factors:

  1. External Consumption (exports)
  2. Amount consumed by those whose income increases due to automation and digitisation
  3. Amount consumed by those whose income decreases due to automation and digitisation
  4. Labour costs attributed to those who implement and support automation and digitisation
  5. Labour costs attributed to those who are at risk of being made redundant due to automation and digitisation (a reducing value)
  6. Variable costs (e.g. resource costs)
  7. Fixed costs

Exports can help provide a net boost to income – this external consumption may not be directly impacted by automation and digitisation (A&D). It may be indirectly boosted if the A&D activities lead to imports from the same countries.

The two critical factors are (2) and (3): namely how much of the output (or service) is sold to people who benefit from A&D and how much is sold to those who do not benefit from A&D. 

If a company employs a large number of people who can be made redundant via A&D activities and a large portion of their consumers are those whose incomes will be impacted by A&D then we have a very tight feedback loop – which can lead to serious loss of income for the employer, especially if it ties in with an external shock (e.g. increase of a variable cost like petroleum).

On the other hand if a company caters to people whose incomes increase with A&D (e.g. software developers) then the impact to its income will be a lot less pronounced and it may even increase significantly.

What works best is when a company can sell to both and has enough space for both A&D activities and manual labour. This means they can make money from both sides of the market. A good example of this are companies like Amazon, McDonalds and Uber who have human components integrated with A&D which then acts as a force multiplier. 

Using this framework we can analyse any given company and figure out how automation will impact them. We can also understand that in the short term A&D can have a positive effect as it acts as a force multiplier, opening new avenues of work and creating demand for different skills.

Breaking Point

Real issues can arise if automation is stretched further to complex tasks such as driving, parcel delivery and cooking food. Or digitisation is taken to an extreme (e.g. e-banks where you have no physical branches). This will have a large scale impact on incomes leading to a direct reduction in demand.

One way to force a minimum level of consumption is for the government to levy special taxes and transfer that income as it is to those who need it. This will make sure those who are unskilled or have basic skills are not left behind. This is a ‘means tested’ version of basic income similar to a benefits system.

The next step will be to re-skill people to allow them to re-enter the job market or start their own business.