by Patrick Cox
September 7, 2018

Many futurists believe that humanity is approaching a period of profound transformation as new technologies deliver new and inexpensive goods and services. Some call this dawning era “the Age of Abundance” because prices—even for goods and services considered luxuries today—will fall dramatically.

But at the same time, fear about the short-term consequences of AI and automation on employment is growing. Specifically, some futurists predict that new types of jobs won’t come into being fast enough to replace those that have been made obsolete.

The interesting thing about this gloomy prediction is that it has been repeated in every past period of innovation since the beginning of the Industrial Era. Nevertheless, mass unemployment has never come to pass as the result of technological progress.

Still, a lot of people think it’s going to be different this time. Innovation, they believe, is happening too rapidly for markets to adjust. Just about everybody agrees that in the long run, the future looks great. It’s the transition period that worries people.

Why I’m Not Worried About Mass Unemployment Due to Automation

My perspective is different. I don’t think we’re going to see mass unemployment caused by technological advances.

There are several reasons. One has to do with the historical ability of markets to adjust more rapidly than expected. Another is the failure of contemporary economics to deal with accelerating innovation.

Here’s one sign that they are missing something big: We frequently hear that real wages haven’t gone up in decades. This is true on the surface, as this Pew Research chart from 2014 shows, but it’s not the catastrophe many believe it is.

Wages don’t tell the whole story, because accelerating innovation has changed the way living standards improve. Though inflation-adjusted wages haven’t changed much, the quality of life has been transformed.

Since 1960, life expectancies have increased by more than a decade in the West. In other parts of the world, progress has been even speedier. Automobiles are safer, travel is cheaper, healthcare is far better, and most basic necessities have dropped in price compared to total income.

Food, for example, costs far less than it did a generation ago. Our grandparents spent more than twice on food (in terms of income percentage) than we do, and at the same time, our choices have broadened from a few bland ingredients to an international smorgasbord. Eating outside of the home, once a rare treat for all but the rich, accounts for about one-third of our food budgets today.

The Internet has revolutionized shopping and entertainment options even in rural areas. I occasionally remind my kids that most homes used to have only one phone… and it didn’t provide free navigation, games, music, or millions of videos. People can maintain real-time relationships with family and friends no matter where they’re located—an unimaginable luxury only a generation ago.

In short, neither wages nor the CPI reflect the immeasurable improvements in daily life we enjoy in the 21st century. More importantly, technologies in development now will further accelerate the reduction in price of new goods and services.

One consequence of cheaper goods and services is that people will have to work less in order to live a comfortable life as wages buy more of what they need and want.

The following chart from Business Insider uses Federal Reserve Economic Data (FRED) statistics of hours worked per year. The blue line, tracking hours worked from 1950 to 2013, shows that Americans worked about 36.7 hours per week in 1950, but only 32.6 hours in 2013.

Source: Business Insider

The French and German reductions are even more dramatic. The French worked 41.5 hours per week in 1950 and about 28.5 in 2013. The first German data, from 1970, shows an average work week of almost 38 hours. In 2013, it had fallen to about 27 hours.

In the early 20th century, a few optimistic economists proposed the emergence of a “backward-bending demand curve for employment.” They suggested that people would work fewer hours as their needs were satisfied with less money and effort. Traditional economists generally mocked the notion.

They were wrong, of course. As dollars (or any other unit of currency) buy more necessities, some workers choose to spend more time on other activities—which may, in fact, increase rates of health and happiness.

We should remember that innovation only takes place because it increases productivity and generates profits. The people who earn that wealth will either invest or spend it, which provides funds for startups and job creation.

Moreover, prices in market economies act as sophisticated signaling mechanisms, dissuading investments in technologies that would reduce consumer demand for products. A technology that destroys too many jobs will encounter powerful market and social resistance.

For all those reasons, I think those worried about machines destroying jobs are missing the big picture. But let’s imagine for a moment that they’re right—that automation will happen so fast that it outpaces entrepreneurial job creation.

Even if that happens, automation will produce cheaper goods and services, and that, in turn, will reduce the amount of time people need to work to afford them.

As a result, people will opt to work fewer hours and continue the trend that has been in motion since the middle of the last century. Businesses will adjust, as they always have, by hiring more people who work fewer hours. That is a legitimate form of job creation. Or, in the alternative, they will work the same number of hours and buy far more of what those businesses produce.

For the last two centuries, they’ve done both. And the whole world is vastly wealthier as a result.

Falling Birthrates and the Job Market

Another often-ignored factor in the labor market is sub-replacement fertility rates. For the first time in history, the labor force is getting smaller.

A few countries, notably India, will continue to grow due to higher birth rates for a few more decades. However, the global labor force is already shrinking. Look at Japan, the most technically advanced and automated country in the world. There, automation is not keeping up with the growing labor shortage.

That doesn’t mean I’m not worried about the transition period. In fact, I occasionally lose sleep thinking about it. The reason is related to the falling birth rates I just mentioned.

If you’re familiar with my work, you know that the world is aging because of falling birth rates and longer life spans. As the non-partisan Congressional Budget Office (CBO) has pointed out, the rising healthcare costs associated with an aging population are the cause of growing US government spending. Moreover, the debt is becoming untenable, risking a catastrophic fiscal crisis.

You rarely hear this from the news media, but the people who study the economy understand our peril. Former Fed Chair Alan Greenspan has warned that the cost of age-related diseases will continue to throw the budget off balance.

Our last Fed Chair Janet Yellen, an Obama nominee, said shortly before leaving the post that the national debt “should keep people awake at night.” She also pointed to the cause of the soaring burden, saying that Medicare, Medicaid, and Social Security will grow more rapidly than tax revenues as the US population ages.

On the other side of the aisle, House Speaker Paul Ryan told FOX Business Network’s Maria Bartiromo, “That is the key driver of our debt in the future, which is demographically driven. It’s a combination of demographics and healthcare inflation. You fix healthcare, you fix the debt crisis.”

Unless US healthcare is fixed, the debt could lead to a depression-style contraction. Such an event would derail, or at least postpone, the coming of the Age of Abundance.

Yet we shouldn’t focus only on America. The US has enormous advantages—including growing energy production and a birthrate that, while low, is still higher than those of most of the developed world.

Whether we like it or not, though, we’re all part of the global economy. Japan, teetering under the weight of its aged population, accounts for about 6% of the global economy. Germany makes up 4.5%, and the UK is about 3.9%. All of them have greater entitlement problems than the United States, but in our interdependent world, economic crisis in one or more major countries can spread quickly, setting back technological progress for decades.

The solution to this threat is not tweaking the knobs on national healthcare programs. It is the introduction of regenerative medicine that extends healthspans and repairs crumbling old-age dependency ratios.

Adding just three years to the average worker’s productive life would completely solve the fiscal problems facing Social Security and Medicare. A lot more than those three added years is becoming not just possible, but likely. As I’ve written extensively on this site, many of the biotechnologies that can accomplish this are already working their way through labs and clinical trials.

So what keeps me awake at night? None of the current popular doomsday scenarios, but rather the possibility that institutional resistance will stall the deployment of these new biotech breakthroughs, thus destroying our chance at a smooth transition into the Age of Abundance.

And that truly would be an historic tragedy.

— The Age of Abundance vs. the Abundance of Age originally appeared at Mauldin Economics.