Bain: Collision Of Demographics, Automation, And Inequality Signals Societal Catastrophe

Earlier this month, John Mauldin hosted the Strategic Investment Conference 2018, a three-day investor conference with 20 financial experts discussing everything from the global economic outlook for the next 12-months, along with trading strategies to overcome significant geopolitical, economic, and technological risks.

One panel was hosted by Karen Harris, Managing Director of Bain & Company’s Macro Trends Group, who presented a fascinating  keynote tilted: “Labor 2030: The Collision of Demographics, Automation, and Inequality.”

According to Mauldin Economics, Harris addressed roughly 700 investors who eagerly waited for her speech. Harris started off by saying, “the combination of a demographically shrinking workforce plus increasingly cost-effective automation will aggravate inequality, constrain demand, and put a cap on economic growth.”

She also warned, “this will have all sorts of unpleasant effects in the next decade.”

Similar to  Chris Hamilton via the Econimica blog, Harris indicates there is a significant and ominous shift currently underway in the American economy — originating from the 1980s/1990s and forced upon by a  “supply-constrained world to a demand-constrained one.” The primary drivers of the shift are debt, demographics, and disruption (or automation).

“Automation’s impact will be highly unequal. At least initially, high-wage workers will reap most of the gains and low-wage workers pay most of the cost. This is not beneficial to social order, obviously, but in the end, it’s not helpful even to the businesses that automate. Someone has to buy the goods the robots build and wealthy people have a lower propensity to spend. The results will be “demand-constrained growth.” This isn’t necessarily a contraction, but it will likely cap future GDP growth potential”

About 13-minutes into the keynote, Harris elaborated on “technology’s impact on demographics, i.e. helping people live longer." She does not foresee lifespans dramatically increasing to reverse or cushion the deceleration in America’s lifespan growth.

Bain believes the collision of demographics, automation, and inequality has only just begun — and it will get much worse for the American worker. She dubbed the inflection point the “Wile E. Coyote” moment…

Harris says rising inequality has only just begun. It will get much worse and not just in the US. Many won’t notice initially because rising productivity will mask some of the job losses, but eventually, job losses will overwhelm productivity. She called this the “Wile E. Coyote” moment. Hard to pinpoint, but probably coming in the next decade.

Now is no time to follow market momentum, Harris says. It is a massive boom akin to tech and housing combined and the reversal will be tough.

Another implication is consumer spending. Baby Boomer spending growth will begin declining in the 2020s anyway. Add in the growing inequality with up to 25% of the workforce displaced by automation, and middle-class markets seem likely to erode. Investors and businesses should be asking, “Who will be my customers a decade from now?”

Here is the actual report from Harris and her team with excerpted highlights below: 

Figure 3: US companies could invest nearly $8 trillion in automation technologies by 2030.

Figure 4: US service sector automation could displace labor two to three times more rapidly than previous transformations.

The report paints a bearish long-term outlook for the United States: 

  • Be wary of following market momentum—volatility will increase. The crosscurrents of multiple macroeconomic forces will ebb and flow at different times, making it dangerous to assume that signals indicate stable opportunities. Trends that had longer trajectories up until now, such as falling interest rates or even growth itself, may reverse course far more rapidly than in past decades. Companies can prepare for such shifts by making resiliency a high strategic priority and actively managing and monitoring macro risks.
  • Middle-class markets are likely to erode. Many consumer-facing businesses design and market goods based on a three-tier household model, including a small upper-income tier, a small lower-income tier and a broad middle-income tier. Pressure on the middle class may favor a primarily two-tier structure, with upper-income households representing roughly 20% and lower-income households making up the remaining 80%. This change would trigger a dramatic shift in the way that companies segment goods and services markets within and across these tiers.
  • Expect an interest rate speed bump. Interest rates are likely to rebound upward (potentially rapidly) in the next decade before dropping back toward historical lows, making capital management for businesses and capital preservation for investors more challenging. Since the 1950s, interest rates have tended to rise or fall gradually with patterns in one direction or the other, lasting decades. An environment of volatile interest rates would expose companies and investors to a greater risk of being caught with exposures pointing in the wrong direction.
  • Automation could fuel a 10- to 15-year boom followed by a bust. The next wave of automation investment will create many opportunities but will grow increasingly perilous as it builds momentum. Companies may feel competitive pressure to invest in automation technologies, similar to the way they felt compelled to create global supply chains in the 1990s and 2000s. But to avoid being caught on the wrong side of the investment cycle, businesses and investors will need to pay greater attention to monitoring their risk exposure as the investment cycle progresses.
  • Highly skilled, high-income labor will grow increasingly scarce. The pace at which displaced workers retrain and migrate toward higher-skilled jobs will likely be too slow to alleviate shortages. The challenge for companies will be attracting, growing and retaining highly skilled talent and maximizing worker’s productivity by rethinking how their businesses are structured.
  • Baby boomer spending growth will peak in the 2020s before tapering.Compared with previous generations, baby boomers will extend the period of high-income earning and spending by about 10 years. The sheer size of this generation means there are considerable market opportunities for most goods and services, including big-ticket items such as housing and transportation. But growth based on this demographic shift will become more concentrated among the top 20% of households.
  • More government in more places is likely. Faced with rising inequality, governments are likely to become more interventionist, using higher taxes and regulation to manage market imbalances. Governments may expand their role in the marketplace, similar to what was seen in the West between the end of World War II and the early 1980s, by shifting resources as well as becoming a direct buyer of goods and services.
  • Intergenerational conflicts will potentially rise, drawing in businesses. As retirees and the working-age population battle for resources, businesses may become indirectly involved. Businesses, management teams and even shareholders may add their voices to the conversation about government transfers as they grapple with existing pension obligations, the scarcity of highly skilled workers, social pressure to address job losses and declining incomes among mid- to low-skilled workers.

Figure 8: Baby boomers powered worldwide labor force growth in the 1970s and 1980s, but this is slowing…

Figure 9: Despite longer work spans, the relative size of the workforce will shrink to less than one worker per dependent by 2030.

Figure 10: US labor force growth will remain low for the foreseeable future. 

Figure 12: Workers delaying retirement will not fill labor force gap to maintain historical GDP growth.

Peak America: The report indicates the collision of demographics, automation, and inequality poses a serious threat to the financial system: 

For capital markets, the increased spending by an aging population could spell trouble. As people retire, they will be liquidating savings en masse. Financial savings are only backed by the real output potential of the economy, so the practical consequence for capital markets is likely to be too much capital drawdown chasing too little real capacity. Until now, the dramatic inflation of financial assets vs. the size of the real economy has masked the coming challenge posed by insufficient real growth to meet future obligations (see the Bain report A World Awash in Money).

But as baby boomers begin using assets and pensions, the large-scale liquidation of financial assets could lead to a drop in their value. One risk here is that guaranteed private or government pensions that similarly relied on financial asset inflation to meet future obligations will become highly strained or could break, especially at subnational levels of government.

Countries will have limited policy options to alter demographics at a national level and increase output: These may include increasing the supply of labor through increased immigration, incentives for more female workforce participation and improving workers’ skills to raise their productivity. But given the breadth and scale of the demographic imbalances, these levers are unlikely to meaningfully offset declining labor force growth at the global level.

Figure 18: Productivity gains from automation will vary broadly across industries by about 10% to 55%.

Figure 20: Advanced economies using automation to close the cost gap with developing economies.

Figure 21: Next-generation robots are becoming cost competitive against developing-economy workers.

Figure 22: Automation could eliminate 40 million jobs in the US and depress wage growth.

Figure 23: Many industries could use automation technology to reduce operating costs by 10% to 15%.

Figure 24: In retail distribution, automation will crease new job functions but fewer full-time jobs.

Figure 25: In healthcare, automation will eliminate full-time jobs and change job functions.

Figure 26: Automation will affect 80% of workers through wage suppression and job loss.

Figure 27: US service sector automation could displace labor two to three times more rapidly than previous transformations. 

Figure 35: Automation may create worse outcomes for lower-income workers.

Figure 36: Labor’s share of GDP is already declining; increased automation may accelerate this trend.

According to Bain Capital and Karen Harris’s eye-opening report, a historic shift for America has begun. The trend is driven by debt, demographics, and automation, which will only accelerate into the 2020s. The magnitude of the workforce shift is expected to match that of the automation of agriculture from 1900 to 1940. The automation of farming transformed America’s economy and severely disrupted labor markets, ultimately climaxing into the Great Depression and subsequent world war.

From the gloomy future laid out by Bain Capital and Harris, one can expect a similar outcome this time as well.