Income, jobs, automation, and our future

I've written several times in the past about jobs, the impact of automation, the economy, and our future.  It's not a very comfortable subject, but it's becoming more and more critical for everyone in this country to be aware of what's going on and plan accordingly.

Two recent articles drive home this point.  They're long, and therefore likely to be overlooked by many who want a quick fix of information without having to work at it, but they repay our attention.  I'll quote from both at some length.  Even if you don't read both articles in full (which I hope you will), please read and think about these excerpts.  They're important to your future, and mine.  I've highlighted some points in bold print.

The first article is titled "The Long Death of America’s Middle Class".

The American middle class is dying.

In 2015, it dipped below 50% of the population for the first time since data collection started on the issue. It’s now an official minority group.

Meanwhile, nearly half of Americans don’t have enough money to cover a surprise $400 expense. Many are living paycheck to paycheck, with little to no cushion. And US homes are less affordable than they’ve been in decades—possibly ever.

. . .

The late 1950s was the golden age of America’s middle class ... Around then, a husband could support his family on an average income. He and his wife likely owned their own home, as well as their car. They had multiple children—and didn’t think much of the cost of having more. Plus, they had money to save.

Compare that to the average family today. Both spouses likely have to work—whether they want to or not—just to afford the same basic lifestyle.

Plus, it now costs well over $200,000 to raise a child, on average. And that doesn’t even include college costs. Back in 1960, it cost roughly $25,000.

This hefty price tag is one of the main reasons middle-class families are having fewer children… or none at all.

In short, the average American’s standard of living has taken a huge hit over the past generation or so.

For example, consider a typical high school teacher’s financial situation.

In 1959, the median annual salary for a US high school teacher was $5,276, according to the Department of Labor. Meanwhile, the median US home value was $9,627, according to the US Census Bureau.

That means a teacher made enough money each year to cover over half of the price of a middle-class home. Or 55%, to be exact.

Take a minute and think… How does your annual income compare to the price of your home? I’d bet many people make far less than 55%.

Today, the median purchase price of a US home is $241,700. To maintain the 1959 income-to-home price ratio, a high school teacher would need to make $132,935 annually.

Of course, the average high school teacher doesn’t make nearly that much. Not even close. He or she makes around $48,290—just enough to cover 36% of the median home price.

. . .

Cars are another large expense for Americans. Debt has helped camouflage a big price increase there, too.

Americans are now over $1.1 trillion in auto debt. This figure has skyrocketed 2,954% since 1971.
Americans have also racked up more than $1 trillion in credit card debt. This debt explosion also started in the early 1970s. Credit card debt is up 14,281% since 1971.

So why are Americans going deeper and deeper into debt?

It’s simple: The cost of living for the average middle-class family has risen dramatically faster than its income.

Since 1971, there’s been a dramatic—and growing—split between work and wages. As the next chart shows, the average person’s real wages have more or less stagnated since the early 1970s.

With higher expenses and stagnating wages, people have made up the difference with debt.

There's more at the link.

When you combine that with the employment situation, the red warning lights are flashing ever brighter.  John Mauldin sets out the scale of the problem in an article titled "The Great Jobs Collision".

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, employers 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.

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.

. . .

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.

. . .

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 ... 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 ... populist movements look for a strong leader to be able to direct the country and the correct path.

. . .

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 won't see a wealth tax under a Republican-controlled Congress and White House, but these things do not last forever. When a populist backlash takes us to a different state of mind, when a Bernie Sanders/Elizabeth Warren type figure emerges, likely much younger and more charismatic than his or her predecessors, with the 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, that message will resonate.

Again, more at the link.

We need to be thinking about these things now, and planning our futures accordingly.  If our jobs are likely to be affected by automation, we should be planning right now to get whatever education and/or training we need to move into a field where that's less likely to happen.  I suspect many so-called "service" jobs (e.g. plumber, electrician, auto service and repair, etc.) will remain in high demand, simply because people can't afford to do without them.  Increasingly, such jobs will be a lot more "automation-proof" than working at a call center, or customer service center, or shop assistant.

It's already reached a point where many of the "voices" you hear when you call a bank, or insurance company, or other major corporation aren't human at all.  They're artificial intelligence systems, designed to screen all incoming calls and direct them to the most appropriate department or person - or deal with them through a series of automated menus, so that no human contact is needed.  That's faster and cheaper for the company, so expect getting through to a human being to become more and more difficult - by design.  Expect the same automation-centered approach to dominate more and more businesses.

It's an "interesting time" to be alive, in the sense of the apocryphal Chinese curse.

Peter