The Great Jobs Collision

by John Mauldin - Mauldin Economics
 

Karen Harris from the Macro Trends Group at Bain & Company has done some ground-breaking research on job automation and the future of work. Much like geopolitics, these factors define the parameters in which other trends develop.

Labor 2030


Karen’s group has issued a magnum opus report called “Labor 2030: The Collision of Demographics, Automation and Inequality.” I’ve written on all three of those subjects, but Karen teases out the connections among them in ways I’ve not seen elsewhere.

First, the bad news: Bain thinks automation will eliminate up to 25% of US jobs by 2030, with the lower-wage tiers getting hit the hardest and soonest. That will be devastating, and it’s not that far away. Remember 2006? Right now, you are halfway between then and 2030. Time flies, and this time it won’t be fun. Interestingly, though, Bain predicts that the manpower needed to build out the technology that will ultimately eliminate all those jobs will be enough to keep us all working until 2030. The Bain team is a tad more optimistic than I am. But they have their reasons.

Why is this happening? Demographics and automation are mutually reinforcing trends. One we already see: Employers turn to automation increasingly because they can’t find workers with the skills they need in sufficient numbers. The Baby Boom generation is leaving the workforce (though many Boomers are delaying retirement as long as they can). The additional labor that came from one-time factors like China’s opening has mostly run its course. If sufficient numbers of qualified people aren’t available, employer turn to machines.

At the same time, technology is making the machines better and less expensive. Much of the job automation so far has been fairly benign, jobs-wise. It has replaced dangerous factory work or other repetitive, unpleasant manual labor. Often the automation makes human workers more productive instead of replacing them. That’s about to change as artificial intelligence technology improves. Machines will be able to perform cognitive tasks that once required highly trained, experienced humans.

Now, at any given company this trend can look like a good thing to the owners. Invest in machines, lay off people, mint more profits. But that’s short-sighted in the aggregate because someone has to buy your products. The workers your company and others just laid off won’t be able to spend as much unless new jobs replace the ones you just eliminated.

In theory, automation will enable lower prices, which will raise demand and create more jobs. Bain does not think it will happen that way. They foresee up to 40 million permanent job losses in the US, even accounting for higher demand.

 

Surplus Workers


In other words, in the next 10–12 years the US economy will swing from a labor shortage to a huge labor surplus. With the labor force presently around 160 million, this implies an unemployment rate around 25%. I find it hard to see how we could call that an economic boom.

But let’s be optimistic and assume other jobs do appear for many displaced workers. The situation still won’t be ideal for either them or the economy at large, because they will likely make less money and have less spending power. Karen’s report points out that wages will face downward pressure long before workers get replaced by machines. The mere existence of the new technologies will cap wages as the price of automating vs. employing humans falls.

The result will be even more inequality between lower-wage workers, highly skilled professionals, and business owners. That will create a variety of problems, one of which is consumption growth. The small number of wealthy people at the top can only spend so much. They save most of their income. Lower-income people spend more of their income. This pattern will only intensify.

 

As you might imagine, this doesn’t end well. The best case is that reduced consumer demand caps growth and we’ll see more decades of flat or mild growth. The worst? Economic dislocation and inequality lead to social breakdown and more calls for government intervention, higher taxes on the wealthy, and more generous welfare programs.

None of those outcomes would be good, but it’s not clear to me how we’ll avoid them. Note also that these projections aren’t coming from some liberal think tank. Bain is as business-friendly as it gets. It employs talented people like Karen Harris to examine factual evidence and make accurate projections, so its clients can plan for the future. I invited her to SIC because these are facts we can’t ignore. We have to face them.

 

Wealth Tax Coming


Whatever degree of life extension we achieve, results won’t reach every population group at the same time. This inequity will result in distortions that could get uncomfortable, or worse.

For instance, enabling older people to work longer could accelerate automation-driven job losses. Younger generations will feel the impact of this trend disproportionately, and many won’t like it – which brings us to possibly the darkest part of Karen’s forecast.

As we see large parts of jobs destroyed, displaced workers won’t meekly surrender, nor will they be happy that small numbers of highly talented, mostly older workers receive most of the rewards. They will want help, and in a democracy they will have the power to demand it.

This response means that the populist movements springing up all over the world will probably keep gaining momentum and, increasingly, taking control of governments. Resulting policy changes could be significant. Karen pointed out that mild measures like job retraining probably won’t suffice this time. We could see major expansion and redesign of the “safety net” programs.

The potential for a left-wing populist movement to arise is at least 50-50. And those odds mean higher taxes. And larger government and more government controls. As Neil Howe pointed out, populist movements look for a strong leader to be able to direct the country and the correct path. Candidly, this panel was just one of the many panels and sessions at which I found myself being surprised. More on that later…

How to pay for all this? Karen expects pressure for a wealth tax. Not an income tax, mind you, but a tax on all your wealth. That will be aggravating to many who have already paid tax once when they earned that wealth. Now imagine having to “donate” 1% or 2% of your net worth to the IRS every year. It could happen, and if it does, it will make it that much harder to keep your assets growing against other headwinds. I agree that we want see a wealth tax under a Republican-controlled Congress and White House, but these things do not last forever. A populist backlash could take us to a different state of mind, especially now that Alexandria Ocasio-Cortez, a much younger and more charismatic version of Bernie Sanders/Elizabeth Warren has emerged.  Her siren song of how the rich should be made to pay to make society more “just” and equal, because they benefited the most and the majority of the population did not, will resonate.

I know what our premarket/libertarian rhetoric would say. Many of us would suggest that this outcome would be a terrible thing for the country. But it is quite possible that many more voters in this country will disagree with us, and things will change. Remember that significant majority of millennials, who will be voting in greater numbers, think that socialism is superior to free-market capitalism.

(Not that we have ever actually tried free-market capitalism… Seriously, we do a parody of it. When oligarchs and the powers that be, in cahoots with various levels of government, structure things in such a way that their particular backs are scratched, that is hardly free-market capitalism. Of course, all of this is done in the name of making sure that things are more “equal and fair.” And it is not just large corporations at the top of the food chain that do this. When you need to complete 500–600 hours of very expensive school and apprenticeship in order to be able to qualify to apply nail polish, a talent that every young teenager learns on her own, there is regulatory overkill at all levels. And the cosmetologist unions make it ever more difficult for a young person to break into their niche. And I’m not putting down cosmetologists. Some of them, including my own hairdresser, are extraordinarily talented. They are artists. But the unions that set up government-enforced barriers to entry are not free-market… Much like lawyers and doctors… But now I have gone from preaching to meddling…)

Okay, back from my rant… For investors, a wealth tax would mean that merely keeping your wealth, much less growing it, may get a lot harder in the next decade.

There is a lot to think about.

John Mauldon