Megatrends – where will we be in 2030?

Mark Pack recently wrote an article in Liberal Democrat Voice about how badly awry political predictions went in 1992.  Politics, an interaction between adaptive and opportunistic parties is inherently unpredictable.  What about the economy?  The big trends (“megatrends” I will call them, to contrast with “microtrends” in fashion a couple of years back) of the 1990s were technology (internet and mobile phones) and globalisation, especially the rise of China and India.  I may be mis-remembering, but these unfolded more or less as predicted if you discard the excitable froth.  But these trends have played out.  What does the future hold for the British economy.  What will 2030 look like?

First megatrend.  The era of cheap imports is over.  Chinese and Indian costs were so low in some industries that ours could not compete; many jobs were lost in manufacturing, especially.  These jobs were replaced by well paid jobs in more up-market and high tech businesses (including finance) and by a lot of poor quality service jobs too.  On average, Britain prospered, but inequality grew as well.  The economics of this (the law of comparative advantage, to talk technical) is notoriously difficult to pick up intuitively.  But, as the developing economies prosper, their cost advantage erodes.  We saw this with South Korea and Taiwan; it’s now happening to China and India, whose costs are rising rapidly.  There doesn’t seem to be a huge pool of undeveloped countries to replace them at the bottom of the market.  Bangladesh, Pakistan and various African nations might rise to it, but they don’t seem to have the political stability or governance required.  The good news is that the steady stream of job losses will diminish, especially at the lower value end, and jobs will even be repatriated.  The bad news is that our overall living standards will stagnate, since we no longer get the boost from consuming cheap imports.

Second megatrend.  Energy costs are going up.  The range of predictions ranges from the serious to the apocalyptic.  Demand for energy of all sorts, but especially oil, grows as developing countries develop.  There are plenty of energy sources, but to increase overall supply means tapping into energy that’s much more expensive to get.  The consequences of this are quite profound (this is a favourite topic of the Economist Buttonwood blog, like here and here).  This will prove a major drag on living standards and we will have to invest huge sums in both new energy sources (especially alternative energy) and energy conservation (especially our homes).  Something analogous may be happening in food and agriculture.

Third megatrend.  The work force will stagnate.  The baby boomers are retiring, or at least want to wind down; most mothers that want to are already working for as many hours as they want, rather than staying at home with the children. Immigration is coming down, as we fret about the social consequences, and anyway we don’t provide such an attractive proposition to immigrants, as the economies of east Europe steadily catch up.  And productivity has reached such levels that many question the need to work so many hours, and crave a better work-life balance.  This puts a strong damper on the economy, although it’s not all bad.  More leisure, if people want it, is a sign of economic success, not failure.  The problem is if publicly funded benefits are supporting leisure that is not earned (by artificially low pension ages, for example)…though my feeling is that this is less of a problem in Britain than elsewhere.

This is pretty negative stuff.  So what about the fourth megatrend: the continued advance of technology?  This is very difficult to read.  One article I read recently suggested that current technology trends are rather ephemeral: smartphones and social networking don’t have the power to change things like the internet and mobile phones did.  But we can’t know; the Economist carried an interesting article last week on how print technologies are transforming manufacturing industry.  We have to invest a lot of hope in technological change to help meet the other challenges.  Which means we must understand how technological advance works.  It’s disruptive; the law of diminishing returns slowly kills off the current industry leaders (look at Pfizer closing down its R&D outfit because it doesn’t pay any more).  The process is disruptive and favours the nimble, be it glitzy Silicon Valley start-ups, or earnest German family businesses.

So where am I going with all of this?  The trends that shaped our economy in the last 20 years are coming to a halt or reversing.  We face major challenges which mean improvements to standards of living are most likely to come from technological innovation and a more equal distribution of wealth.  Some of the trends of the last 20 years, growing inequality and companies retaining a bigger share of profits, may well go into reverse.  Bad news for share prices.

What should governments do?  First promote innovation – and the key point is to make it easier for smaller and medium sized companies to get cheap finance; which means big changes to our banking system.  Second, energy policy will be critical; even if you are a climate change sceptic, there remains a lot of value in low carbon policy as cover for dealing with rising energy costs.  Third, the public demand for “fairness”, however impossible to define, is here to stay.

Economists may fret about stagnant income, but this doesn’t have to end badly.