Inflation hits a 38 year high in the US; labour shortages mount; never has there been a greater need for technology, but governments seem more concerned about house prices.
They say there is no magic money tree. The argument is wrong, of course; a metaphorical magic money tree has existed for as long as money has been backed by gold. Every time a new gold mine was discovered, there was new money — regardless of whether the technology existed to create more goods and services from the extra money. That is why Spain and Portugal suffered high inflation after gold discoveries in the New World. It might even have hastened the end of the two country’s dominance of Europe half a millennium ago.
What people mean when they say there is no magic money tree is really that the goods and services you buy with money can’t appear by magic. Then again, growth in our ability to create goods and services has been a characteristic of the economy since the industrial revolutions of the 17th and 18th centuries. When such ability is growing, we need more money. The economy needs a money tree, or we end up operating below capacity.
The housing-market magic money tree
In any case, the last twenty years or so ago has indeed witnessed the emergence of a money tree; it is called rising house prices. As the acclaimed economist Raghuram Rajan pointed out in his equally acclaimed book Fault Lines:
“Politicians have recognised the problem posed by rising inequality…Politicians have therefore looked for other ways to improve the lives of their voters. Since the early 1980s, the most seductive answer has been easier credit. In some ways, it is the path of least resistance…. Politicians love to have banks expand housing credit, for credit achieves many goals at the same time. It pushes up house prices, making households feel wealthier, and allows them to finance more consumption. It creates more profits and jobs in the financial sector as well as in real estate brokerage and housing construction. And everything is safe—as safe as houses—at least for a while.”
It works like this; since the 1980s, economic growth has not fully translated into higher wages; this partly created the danger of popular discontent, but more seriously (from an economics point of view) risked sucking demand out of the economy. The solution was lower interest rates, pushing up house prices, allowing homeowners to borrow against higher house prices to fund consumption.
In this way, bankers created money to support the economy. The magic money tree has been an ever-present crutch for the economy these past forty years.
The post-pandemic economy
Labour shortages are everywhere — in just about every sector in just about every major economy. The problems are especially pronounced in the UK because of Brexit but are by no means limited to the UK.
The combination of labour shortages, supply chain disruption and ultra-low interest rates creating money seems like a recipe for inflation. And so it is, with inflation surging on both sides of the Atlantic.
Technology
But technology provides a potential answer to both labour shortages and higher prices.
The high oil price will accelerate the adoption of electric vehicles. High oil prices will emphasise the importance of shifting to renewables. The shift will lead to lower costs in running a car, and thanks to falling costs of renewables, falling energy prices. These shifts won’t occur overnight but will occur throughout this decade.
A shortage of HGV drivers is leading to higher wages for those drivers. As a result, bus drivers are quitting to take advantage of these new opportunities.
The solution lies with autonomous vehicles. Only technology can answer the problem of labour shortages in the transport sector. The ultimate result will be lower transport costs.
In the office environment, software automation tools like RPA and AI will have to be adopted. The result will be higher productivity.
The move to remote working, which will be given added impetus by the Metaverse, will reduce company overheads (cheaper office costs) and give more disposable income to commuters. But it will hit the supportive office economy.
All the above factors will combine. The result will be higher productivity, higher wages, less wasteful use of resources.
Further out, cultured meat will lead to cheaper meat; gene editing technologies will lead to cheap vegetables.
House prices
I think that the old way, the house price route to higher growth, will stagnate.
For one thing, remote working and the Metaverse will free up real estate currently used as office space.
For another thing, the further rise of e-commerce, supported by the Metaverse, will free up real estate currently used in retail.
Thirdly, 3D printing and off-site construction technologies will combine to reduce the cost and increase the speed of construction.
For a fourth thing, and probably late 2020s/2030s, cultured meat will free up land currently used for livestock. If urban planners follow the Singapore lead, there will be no aesthetic price to pay for using land currently used for livestock as residential — indeed, the result could be more trees. As it were, by taking a leaf out of the Singapore book, increased urbanisation may lead to more leaves.
Caring
However the biggest challenge of the 2020s and 2030s will relate to caring for ageing baby boomers.
Right now, there is a chronic shortage of carers and 'caring' remains low paid. There just isn’t the money to pay carers decent wages. HGV drivers and hospitality workers may enjoy higher pay, but carers will remain on the bottom rung of the pay scale unless more money is found to pay for care.
Unless the money is found to pay carers higher wages, ageing baby boomers, especially those with debilitating conditions, can look forward to a very difficult last few years.
The solution is obvious, but governments are terrified to embrace it. The solution lies in the wealth tied up in property, much of the property significantly bigger than its occupiers need. The solution lies in a re-adjustment in the tax treatment of workers compared to the tax treatment of property owners. The solution lies in lower income taxes and higher personal allowances (or universal basic income) and higher taxes on property in the form of capital gains tax on property and higher inheritance tax.
The above solutions are massively unpopular with baby boomers, but as they age and worry about who will care for them, simple necessity will change the dynamics.
That is why we are seeing a re-set and why neoliberalism is dying. The economic system of the last forty years no longer works. Technology and necessity will converge to create this new economy.
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