The Fragmentation of Society
The Fragmentation of Society
By John Mauldin | Oct 29, 2017
Lately,
my life has been completely packed with speeches, meetings, and in-depth, often
lengthy, conversations. Plus ongoing research and writing, of course. It all
culminated Thursday afternoon at the beginning of a business meeting with the
leadership team from a firm that will become a significant new business
partner. At the very beginning of the meeting, the head of the firm leaned over
to me and asked, “What’s on the top of your mind? What are you thinking about?”
The previous night we had a small group of about 15 people in my living room
after dinner, and the question was similar, “What keeps you up at night?”
It
has become an emotional question for me, because the answer does not come
easily, is complex, and can be more than a little unsettling. It is, however,
evolving out of the research and writing I’m doing on my new book, The Age
of Transformation. Whether audiences and readers agree with my
answer or not, it is not a feel-good message, which is somewhat frustrating
because I’m the biggest long-term optimist in the room. But I acknowledge that
what I am talking about suggests that the ride between today and the long-term
happy ending is going to be more than a bit bumpy.
This
week’s letter is going to be a passionate summary of my answer. In form, it
will be something like a conversation between you and me, sitting in your
living room or mine, or in a restaurant, maybe sipping an adult beverage,
thinking through the future together, and wondering at how the world is
transforming in front of our eyes.
In
part, the impetus for this letter was a video I did with Patrick Cox last week,
one in a four-part series that Patrick is doing called “Riding the Gray
Tsunami.” We had a candid conversation about the future that lasted an hour,
though our outstanding moderator and editor Jonathan Roth, one of our team
members, will likely edit it to about 30 minutes. Patrick’s other guests will
be Dr. Mike Roizen, the chief wellness officer at the Cleveland Clinic; Aubrey
de Grey, the chief science officer of SENS Research Foundation and one of the
true experts on longevity science; and finally, our friend Jim Mellon,
self-made British billionaire and avid biotech investor. You
can sign up to participate here. You really don’t want to
miss this. Now let’s jump to the letter.
In
the interest of brevity, let’s take it is a given that we’re going to see
massive technological change in the next 20 years. In fact, we will see more
change – and improvement – in the next 20 years than we’ve seen in the last
hundred. Think where we were 100 years ago and how much has changed since then.
That much and more is going to happen in the next two decades. Global society
really is going to transform that fast.
Let’s
start with some good news. In 1820 some 94% of the world’s population lived in
extreme poverty. By 1990 the figure was 35%, and in 2015 it was just 9.6%.
Forty percent of those who remain impoverished live in just two countries,
Nigeria and India, both of which are growing rapidly and will see their extreme
poverty significantly decrease in the next 20 years.
There
is research
to show that, on a global basis, the poor are getting richer faster than any
other group. However, if you look around the US or Europe, that is not the
conclusion you come to. But Africa or Asia? Absolutely. Let’s be clear: The
Industrial Age and free-market capitalism, for all of its bumps and warts, has
lifted more people out of poverty and extended more lives than has any other
single development. The collapse of communism has been a great boon to humanity
(even if it is still talked about favorably in Western universities).
Because
of where the emerging-market economies are in the development cycle, they have
the potential for vast, rapid improvement in the lives of their people. But
most of my readers do not live in the emerging markets. We live in the
developed markets; and here, some of the outcomes of the Age of Transformation
will not be so comfortable. Let’s start with this chart
(hat tip, Downtown Josh Brown).
Obviously,
the rig count in US oilfields is rising rapidly – no surprise there. But
distressingly, the number of oilfield workers is continuing to fall. How can
this be?
There
is an answer to that conundrum in the long article
that is the source of this chart and others I’ll use later. There is a new
robotic machine called an Iron Roughneck that reduces the human labor required
to connect pipe from a crew of 20 down to a crew of five. And those jobs were
quite high-paying. Here’s a picture of this new robotic roughneck. Fifteen
workers per site at well over $100,000 a year each? Does that machine look like
it cost more than a few million? I bet it amortizes pretty quickly, and that’s
why it is being rapidly adopted.
Now
look back at the chart. The amazing thing is that this transformation happened
in two years; it didn’t take a generation or even half a generation. You were
an oilfield worker with what you thought was potentially a lifetime of steady,
well-paying – if dangerous, nasty, and dirty – work. And then BOOM! The jobs
just simply disappeared. Your on-the-job experience doesn’t translate to any
other industries very easily, and now you and your family are on the skids.
I
could actually spend this entire letter talking about the amazing
transformation of the oilfield. Oil production is now a technology business.
Computers and artificial intelligence are used in abundance in the oilfield.
Future wells are going to be a magnitude more productive and less expensive.
There are oilfield operators here in Dallas running around with pro formas,
raising money, talking about how they can do very well at $40 and even $30 per
barrel. And with oil at $54 and looking as though it could well go to $60, they
are raising money and punching holes. Just with fewer workers.
From
the report on the Iron Roughneck we get the following alarming quote. (Note
that the report is full of links to academic research. While I don’t like the
author’s conclusions, his work is at least well researched).
A landmark 2017 study
[dismal reading – John] even looked at the impact of just industrial
robots on jobs from 1993 to 2007 and found that every new
robot replaced around 5.6 workers, and every
additional robot per 1,000 workers reduced the percentage of the total
population employed by 0.34% and also reduced wages by 0.5%.
During that 14-year period of time, the number of industrial robots quadrupled
and between 360,000 and 670,000 jobs were erased. And as the authors [Daron
Acemoglu and Pascual Restrepo] noted, “Interestingly, and perhaps surprisingly, we do not
find positive and offsetting employment gains in any occupation or education
groups.” In other words, the jobs were not replaced
with new jobs.
It’s
expected that our industrial robot workforce will quadruple again by 2025
[more troubling MIT research – John] to 7 robots per 1,000 workers. (In
Toledo and Detroit it’s already 9 robots per 1,000 workers.) Using
Acemoglu’s and Restropo’s findings, that translates to a loss of
up to 3.4 million jobs by 2025, alongside depressed wage growth
of up to 2.6%, and a drop in the employment-to-population ratio of up to 1.76
percentage points. Remember, we’re talking about industrial robots
only, not all robots, and not any software,
especially not AI. So what we can expect from all technology combined is
undoubtedly larger than the above estimates.
Automation has been happening right under everyone’s noses, but
people are only beginning to really talk about the potential future dangers
of automation reducing the incomes of large percentages of the population. In
the US, the
most-cited estimate is the loss of half of all existing jobs by the early
2030s.
You
can find people who estimate that technology will eliminate as many as two
billion jobs, while also creating a large number of jobs – but nowhere near as
fast. I don’t buy those extreme estimates, as I think they amount to
sensationalism, but if you want to predict 30 to 40 million jobs lost in the US
by the middle of the 2030s (that’s 17 years from now), I’m not going to argue
with you. How many jobs will be created? We’ll get to that in a minute.
People
frequently talk about the loss of trucking and taxi jobs that will result from
the automation of driving. RethinkX, in a 77-page report,
concludes that 90% of all driving in the US will be TaaS (transportation as a
service) by 2030, although that will utilize only 60% of the cars. The good
news is that the average family will save $5,600 per year in transportation
costs, keeping an extra $1 trillion per year in Americans’ pockets. Think of
all the time that will be freed for activities other than driving, not to
mention the traffic jams that will be reduced. The authors believe that freeing
time now spent commuting to work, plus faster transport times, will lead to an
increase in GDP of between $500 million to as much as $2.5 trillion. Public
sector budgets will benefit because highway infrastructure costs will fall, and
vast amounts of land will be freed from parking lots and publicly owned
right-of-way properties next to highways. Of course, governments will lose as
much as $50 billion in gasoline taxes as we shift from internal combustion
engines to electric and other alternative forms of power systems.
The
really bad news is that a lot of people will lose their incomes.
The
report projects that the adoption of TaaS will come about in typical
technological adoption fashion: slowly and then seemingly all at once. The
authors talk about the end of individual car ownership. Why would you own a car
if it was far cheaper and more convenient just to pick one up via an app on
your phone? Not owning a vehicle frees a lot of garage and parking space and
might even eliminate the hassle of picking up your kids and getting them to and
from their various activities. Of course, the system will work much more
effectively in urban and suburban areas than in the rural world.
And
it is not just the six million taxi and truck driver jobs that are threatened.
Automated driving will save some 30,000 lives per year just in the US, which is
something to be applauded. But it will also dramatically decrease the number of
people going to emergency rooms from automobile wrecks, reducing the need for
healthcare workers. Since cars won’t be in wrecks, the number of people
required to repair them will be radically reduced. There are 228,000 auto
repair shops in the country, employing some 647,000 workers (at a minimum –
data from BLS). When a new car will last for one million miles and have fewer
than 30 moving parts, those auto repair people are going to be like the Maytag
repairman in the commercials of my youth: very lonely and increasingly
unemployed.
If
driving is TaaS, then automobile dealerships are in trouble, as are most car
salesmen and the 66,000 people who work in automotive parts and accessories
stores. What about auto insurance salesmen? And all the gas stations that will
not be needed? (When an automated car gets low on electricity, it will simply
pull into a spot and replug – automatically, of course, aided by robotics.)
The
US auto industry employs 1.25 million people directly and another 7.25 million
indirectly. Not all driving jobs will be lost, but the authors estimate that
around 5 million will be, with a reduction in national income of $200 billion.
And
if we need fewer cars? That shift would put a lot of automotive manufacturing
companies and their workers under severe strain. I’m not certain how the
authors arrived at the number, but they estimate new-vehicle annual unit sales
will drop by 70% by 2030, to around 5.6 million vehicles versus the 18 million
that will be sold in 2020. Ugh. If we actually do see wholesale
conversion to electric vehicles, US oil demand for passenger road transport
could drop by 90% or more. Oil production companies may need to figure out how
to make life work at $25 per barrel, if that’s the case.
Personally, I think the report is a
little over the top. (Well, maybe more than a little.) But if they stretch
those projection figures to 2035 or 2040? Totally in the ballpark. And frankly,
as I will note in a few paragraphs, whether it’s 2030, 2035, or 2040, the
change will seem like it came overnight and totally out of left field –
especially for the workers who no longer have work.
The End of Cancer
I was talking with my friend Dr. Ray
Takigiku, chief executive and chief scientist of Bexion
Pharmaceuticals. The company is
now 15 months into a phase I trial to determine the safety of a drug called
BXQ-350, which is basically a full-on silver bullet for mass-tumor cancers. It
has so far been a small trial in four medical research universities, with a
limited but growing number of patients who have pancreatic cancer and brain
tumors. The results have been very promising. Ray told me about one patient at
the University of New Mexico who has a very rare form of cancer and who was
given the drug. This is a cancer for which there is no treatment – it’s basically
a death sentence. It occurs in adults but more frequently in children. Ray was
initially concerned about treating this patient, as the study is about safety
and you really don’t want to have any issues associated with a safety trial.
But the patient’s doctor talked him into proceeding, and they began to
administer the drug. It hasn’t been very long, but the patient is improving,
and the cancer is regressing. He had lost partial use of his right side but is
now walking and using that side again.
Because it’s a phase I trial, we don’t
really have much information about how effective the drug is, apart from
anecdotes; and distressingly, the researchers must sometimes stop administering
the drug because that’s part of the required protocol. The rules simply want to
make me pull my hair out.
In the US, one million people per year
get cancer, and half a million die. Those are ugly statistics, but they could
change drastically within less than 10 years. Cancer could become a nuisance
rather than a threat to life. I lose more and more friends every year to
cancer. We all do. I will be so glad if that stops. So will you.
Full disclosure: I was a first-round
investor in Bexion, and so I have a strong home-field bias in wanting BXQ-350
to succeed, but the reality is that its success will be extraordinarily good
for humanity. And frankly, one of the main risks to my investment is not that
the drug won’t actually work, but that any of several other companies that
Patrick Cox and I are looking at will actually come up with a drug that is
cheaper, better, and faster. Or maybe, as in treating AIDS, you end up with a
cocktail of drugs to fight cancer.
One way or another, cancer is going to
go the way of measles and polio. You’ll be diagnosed by means of a simple blood
test that will be part of your annual medical checkup, and you’ll be informed
if you have cancer. Next you will undergo further tests to determine what type.
And then, whatever the therapy is, it is likely that you will simply go to your
doctor’s office for regular treatments. In the case of Bexion’s drug, treatment
will (hopefully) amount to a few months or less of three visits per week, no
side effects, and your cancer goes away. That is the extrapolation from mouse
studies. We’ll know more after phase II studies are underway sometime next
year. Since it is now public information, I can mention that John McCain will
be given access to this drug at the University
of New Mexico Comprehensive Cancer Center. Randomly, McCain has one of the types of cancer that the
phase 1 trial has focused on. And he also actually qualifies for the trial
(which is not easy to do). With all Americans, I wish him the best.
But let’s think for a minute about the
impact of the success of a drug of this type beyond the many lives that will be
saved and the significant reduction of pain and suffering. I couldn’t determine
the number of healthcare workers specifically associated with the treatment of
cancer, but it has to be in the hundreds of thousands, and they have relatively
high-paying jobs. Then there are all the hospital beds filled by cancer
patients – easily many tens of thousands. Plus all the ancillary workers that
are associated with the care and welfare of cancer patients. The good news is
that with the rising need for healthcare workers, those workers will be able to
relatively quickly moved to an associated field. And let’s not forget the
estimate Kyle Bass gave me, that at least $500 billion of market cap in big
Pharma will be destroyed by a cure for cancer.
So there are just two examples of major
disruptions to employment that will be caused by near-future technological
change. We haven’t even gotten into the brick-and-mortar retail jobs that online
sales firms like Amazon are taking away. And warehouse workers? The list could
go on and on of whole job classifications that are endangered species. These
changes are going to disrupt our lives and the social cohesion of our country.
And of course these shifts are coming not just in the US, but in the entire
developed world. And even technology centers in the developing world are going
to find themselves at risk of employment dislocations.
Just so that I don’t appear to be a
total Gloomy Gus, let me quickly note that the very technologies that are
destroying job are also going to result in tens of millions of new and in many
cases better jobs. Many of them will be high-paying, more life-fulfilling, and
far less dangerous than the occupations they replace. I’ll write a letter in
the near future in which I’ll talk about where those tens of millions of new
jobs will hopefully come from.
The glib answer to the question, “Where
will the jobs come from?” has always been “I don’t know, but they will.” That
is what has always happened in the past. We went from 80% of laborers working
on the farm in the 1800s at barely subsistence-level incomes to 2% producing
far more food today. As these farm workers became redundant, they moved to
where the jobs were. And with a lot of ups and downs, we managed over time to
find jobs for nearly everyone. But that transition took place over 200+ years –
10 generations. There was time for people to adjust and for markets to adapt.
Even when whole industries appeared and then disappeared again, it happened
over generations. Everybody bemoans the loss of US manufacturing jobs, but few
realize that we are producing almost as much as we ever have – just with fewer
people. And this trend will continue. More production, with fewer workers. Just
like we see in the oilfields.
The transformations I am talking about
are going to happen in one half a generation, or at the most a full generation.
That is not much time for adjustment, especially for a country like the United
States where 69% of families have less than $1,000 in savings. (I have seen the
figure quoted that 47% have less than $400.) That is not enough to deal with
the loss of your job.
The classic Republican answer to this
problem is that we need to unleash the entrepreneurial tide in the United
States that has been dammed up by bureaucracy and excessive taxation. And there
is a point to that. But for whatever reason – and this is a topic for another
letter (and it’s one I have addressed in the past) – for the past five or six
years the country has had more firms close than be created, and for the first
time in our history.
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