Housing as an ATM: On the Way Up, and On the Way Down, plus Automation at HP

Previously, I suggested that stagnant wages arising from job automation and globalization may have been an important contributor to the fundamental cause of the financial crisis. I argued that lack of income growth for the majority of workers may have pushed people to rush into the housing market because it represented perhaps the only hope for the average family to get ahead. People were then able to extract and spend their gains from the bubble, and that, of course, helped support consumer spending.

Everyone is familiar with the idea that home equity loans were used like ATMs, and that has pretty clearly come to an end.  However, there is increasing evidence that a sort of reverse effect is now occurring. A number of analysts have pointed out that people intentionally halting their mortgage payments—so-called “strategic defaults”—might have a significant stimulus effect. Here’s a quote from Mark Zandy of Moody’s via Diana Olick at CNBC and Naked Capitalism:

With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status) , this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending.

Now we have an article in the New York Times on people who are cheerfully ignoring their mortgage payments while remaining in their homes. In some areas, people are able to stay in their homes, rent- and mortgage-free, for years before getting evicted. Think about the implications of that: for many people that’s probably the biggest jump in monthly discretionary income they have ever seen (or ever will).

So I think we can be pretty confident that, once again, where wages are failing to support consumer spending, housing is—in a pretty perverse way—stepping in to prop things up. Now is that really healthy? Or is that Mr. Economy injecting himself in the ass with veterinary steroids that are really meant for cattle?

As far as the more healthy and organic stuff goes, things are not looking so great. Yesterday Hewlett-Packard announced the elimination of 9000 information technology jobs, primarily as the result of automation.  BusinessWeek reports that:

The Palo Alto, California-based company plans to replace about 6,000 of the eliminated positions with workers in different countries.

What that really means is “we’ll automate what we can, and where we can’t automate, we’ll offshore.”  Of course, that will only be true until automation technology improves sufficiently to get rid of those offshore workers as well.

It’s important to realize what is driving this push toward automation and offshoring: it’s competition and it will continue to be relentless—especially if consumer spending remains tepid (those housing-based steroids won’t last forever). Marketwatch, referring to HP’s acquisition of EDS, says:

In a report, analyst Louis Miscioscia of equity-research firm Collin Stewart said H-P was taking a sound approach. EDS failed to invest sufficiently in automation and its data centers were more expensive to operate, he added, giving rivals such as International Business Machines Corp.  a competitive advantage. 

Information technology workers, and in particular the people who administer systems, are among the first highly skilled and highly paid workers to get hit  en mass by automation. They are first because they are the closest to the system—the first to see their jobs get “sucked into the cloud” (as in cloud computing).  It’s fairly obvious (to me at least) that this trend will expand to include knowledge workers of all types.

As the cost and capability of automation falls, it will eventually be profitable to eliminate many low wage jobs as well–and as soon as it happens somewhere, competition will make sure it happens everywhere. Here’s what I wrote in The Lights in the Tunnel (get the free PDF) in reference to the “jobs of last resort” at Wal-Mart and similar retailers: 

 At some point, if one of Wal-Mart’s competitors tries to gain an advantage by employing robots, then Wal-Mart and every other competing business will really have no choice but to follow suit. The point of this is not to vilify Wal-Mart or any other business that might someday choose to employ automation. We have to acknowledge that, in a free market economy, every business has to respond to its competitive environment and employ the best available technologies and processes. If it does not do so, it will not survive. 

So we have to consider the possibility that at some point in the future (five, ten, fifteen years?) this may unfold systemically, impacting nearly every industry and employment sector, from Wal-Mart workers to six-figure professionals at HP, and just about everything in between. The conventional wisdom, of course, is that if that happens, there will be jobs for all those workers created in other areas. I really wonder: Where, exactly?

Update

Another good post on HP and Cloud Computing.