PHOENIX – Citigroup's George Friedlander is sounding the alarm for the municipal market, warning that significant changes in technology will affect the economy in profound ways that many issuers may not be prepared for.
Friedlander, a managing director and chief municipal strategist, is among several Citi analysts and strategists to contribute to recent research in conjunction with the Oxford Martin School on how rapid advancements in technology will shape the economy. Friedlander presented the research relevant to the muni market at The Bond Buyer's National Municipal Bond Summit in New Orleans late last month, and says his findings should serve as a warning that accelerating change could have enormous implications for market participants.
"In our view, implications in the U.S. at the Federal, State and local level have been underplayed, in terms of politics and policy, and in terms of market and credit implications," Friedlander said in his presentation.
A major feature of the work is how automated technologies, robotics and artificial intelligence advancements will compete with traditional labor. The accelerating technological change, or ATC, is a major challenge for issuers in the intermediate future, Friedlander told The Bond Buyer in an interview.
"There are a lot of potential concerns here for state and local governments," Friedlander said. "There are serious job implications in all of this. It all accelerates just beyond four or five years. It's not long, long term by any means, but it's not next week, either."
Macroeconomic impacts could include permanently low inflation, Friedlander said, as well as pressure on the demand side as competition between humans and automated solutions becomes greater. There has yet to be any indication of a shift in Federal Reserve policy to respond to these emerging findings, Friedlander said.
The ATC is not occurring evenly, but is disproportionately affecting a smaller population and will contribute to widening income inequality, Friedlander said. He noted that populist political movements could be rooted in part in this fear of a rapidly evolving technological world and what it will mean for the economy. Oxford Martin said 47% of U.S. jobs could eventually be replaced by automated technologies, though the development will differ from locality to locality. The sectors most vulnerable, Friedlander said, include transportation, call centers, and distribution chains including ports and warehouses as well as anything replaceable by the emerging driverless cars.
"There is a lot that can be done in terms of automating ports," Friedlander said, "But it also reduces employment."
Joe Miller, senior director of engineering and construction at the Jacksonville Port Authority in Jacksonville, Fla., said there are already automated port terminals in Los Angeles and in Norfolk, Va., and that it is already more widespread in some foreign ports. Jacksonville is a landlord port that rents space to terminal operators, but Miller said the port authority is now developing infrastructure to support automated terminal operation within the next few years.
"I would expect to see major improvements over the next five to 10 years," Miller said.
Though he did not deny the job impact of automation, Miller said the efficiency of automated terminals would be necessary to keep ports economically competitive going forward.
Manufacturing cities are most at risk, Friedlander said.
"State and local governments have to keep up with the pace of change, or some of them will be very badly left behind," said Friedlander.
Beyond robotics, Friedlander said, big data and new analytical tools will also compete with traditional human endeavors.
There is not yet much indication that other sectors of the market are accepting of the Citi/Oxford Martin research and other likeminded economists and strategists, or have begun to take it seriously in the near term. Spokesmen for both Moody's Investors Service and Fitch Ratings said their analysts were aware of the research and considered it interesting. But neither agency could comment on how technological change as described by Friedlander impacts the way they think about issuers. Friedlander said he and his colleagues are still in the early stages of reaching out about their findings.
But while ATC could be another huge challenge for city and state governments to face on top of pension liabilities, infrastructure funding gaps, and more, Friedlander said that most futurists are optimists and that much good could come of what some have dubbed the "Fourth Industrial Revolution." Policymakers need to think seriously about creditworthiness, education and re-education, he said, but have the chance to use ATC to build bright futures. Part of the solution could be the use of public-private partnerships to deliver solutions more quickly and cheaply, he said, as well as using data mining and monitoring to improve efficiency.
New and enlightened leadership will be key to navigating the waters of the near future, Friedlander said. The question is how the muni industry will respond to the challenge.
