Monday, April 1, the day when people traditionally make fools of themselves, I took a crack at looking at the macroeconomic shape of the world in 2025. Tuesday, perhaps even more rashly, I look at the microeconomic makeup of that world.
The world, first, will not be much warmer, although it may be a little warmer. The debate on global warming, at least at its sober center, revolves around whether the world will warm by 1 degree Celsius or 6 degrees by 2100; nobody expects much warming before 2025. However, with 23 years more research into climate change, we will by 2025 know with a reasonable degree of certainty what the reality is, and will have adopted measures to combat it.
It seems very likely that those measures will include a phasing out of hydrocarbon consumption, particularly in transportation. The effect of this by 2025 will depend on how it is done. If the model chosen is “Nanny knows best,” as preferred by the European Union, then the result will be similar to that of the CAFÉ fuel economy standards adopted in the 1980s — the cost will be huge, the market will simply move to other forms of consumption — in CAFÉ’s case, SUVs — that are not covered by the regulations, and the benefit from the regulations will be much less than projected. If on the other hand, a pricing and tax model for compelling change is chosen, then providing the taxes are ratcheted up gradually, and provided the revenue from them is matched by other tax cuts and not simply absorbed into the public sector, the changes should be effective and the market is likely to adapt well to them.
Whether the technological answer to global warming is fuel cells, 200 miles-per-gallon cars, public transportation or allowing a measure of global warming to preserve existing lifestyles is unclear, but as far as possible that choice should be made pluralistically, by the market. My guess, for what it’s worth, is that in the long run the solution as far as autos are concerned will involve the use of Global Positioning Systems and intensive use of information technology to automate much of the car’s driving process, which will greatly improve safety, increase highway carrying capacity and cut fuel consumption.
Public financing is likely to be a very difficult issue in Western countries around 2025, and for a decade or so before and after. All major social security systems in the West are set up on bases that, with increased lifespan, have become actuarially unsound. This problem has been disguised so far by the “baby boom” and increase in women’s workforce participation, both of which have tended to improve the current financing of social security schemes. By 2025, the baby boom will be worsening public finances, not improving them, as the majority of that large generation will have retired, and will be making increasing demands on national medical systems.
Theoretically, mass immigration of young skilled workers from the Third World might alleviate this problem, although in the most extreme cases of actuarial deficit, such as Germany and Italy, it is impossible to imagine immigration on a scale that might solve it. Even in the United States, which partially reformed social security in the 1980s and which benefits from a relatively young workforce, the high immigration of the 1990s has caused considerable social strain, strain that will be worsened by any prolonged economic downturn.
In Britain, the problem has been disguised by having a remarkably ungenerous social security system, which in the bull stock market years has been supplemented by private pensions. If the years 2000-2025 are ones of slow growth, the actuarial strain on the system by 2025 in the United States and Britain will be acute. In Germany, France and Italy it will be acute whatever the future growth rate; in Japan, whose baby boom was somewhat earlier and whose demographic transition was more extreme, it is looming already in the present.
Consequently, it is likely that in all major advanced economies tax rates will be considerably higher in 2025 than at present, simply to support a large generation of unproductive oldsters. Inevitably, economic growth will be slowed; inevitably, social strains, particularly between the generations, will be exacerbated.
A couple of the current growth and technology sectors are unlikely to have exploded in size by 2025, for more or less opposite reasons: information technology and space exploration. In the case of IT, the pace of change in the 1990s was dazzling, but many of the easy applications are already in place — the current position is perhaps similar to that of the automotive industry in the late 1920s. There will be improvements — the IT equivalent of automatic transmission — but IT and mechanical applications such as car automation will be quite slow to arrive, because of the difficulty and expense of the technology involved. By 2025, we may all be watching banal propagandist Hollywood movies on our cell phones, but so what?
In space, progress has been glacial since 1975 or so, but can be expected to pick up if two breakthroughs are achieved. One is technological, the invention of a safe rocket engine that is less stunningly inefficient than the current messy and dangerous oxygen/hydrogen burner, devised for the German V2 missile by Werner von Braun in 1943 and still in use. The second is economic, the privatization of space exploration and the removal from it of the dead hand of NASA and the European and Russian space bureaucracies. Both may well have been achieved by 2025, so the period 2025-2050 may be one of resumed rapid advance. Even so, progress will be slower than in other technological fields, for the obvious economic reason that the profits from space exploration may be huge but are certainly slow to arrive. Expect in space exploration therefore not the rapid Conquistador gold rush flowing Columbus’ first voyage, but a halting, much slower but in the end more lasting process like that of colonization of British North America.
Genetics, on the other hand, are likely to provide the most exciting stories between now and 2025. Human cloning is likely to be possible by 2010, and human genetic manipulation to produce favored characteristics not much later, so in principle this could be a huge industry. Unfortunately, most of the really interesting applications are likely initially to be illegal in Europe and the United States.
This will not slow the industry down much. Non-Islamic Asian societies do not appear to have the religious hang-ups of the Christian world about cloning and genetic manipulation, and the chance to lead in a huge new industry will surely prove irresistible to such countries. Expect human cloning and human genetic manipulation to migrate to the “Asian tiger” countries initially, because of their highly educated workforces, and probably thereafter to China and India. Thailand, for example, may well find it can boost its tourism industry still further by providing cloning services as well as sex to jaded western middle-aged males. Eugenic techniques, too, the possibilities for which are enormously expanded once genetic manipulation is feasible, are likely to come back into fashion in these countries — indeed in China they never really went out of fashion.
Genetic engineering is likely to produce the largest new industry of 2025, but on present trends it will be concentrated in Asia, not the West. Naturally there will be a certain amount of international political tension about this, but countries that bow to U.S. and EU pressure on this matter will simply find themselves cut out of the new technology.
As well as the above, forecastable trends, there is likely to be a significant segment of the 2025 economy, maybe 5 percent to 10 percent, that represents products or industries that have not yet been thought of. After all, in 1975 the Internet was a laboratory curiosity and the PC was a plaything. Equally, there is also a substantial chance of unforecastable disaster — probably war or disease — that costs lives and reduces human welfare below the modest growth trend of the “base case.” Economic life is chaotic and fuzzy, in the mathematical sense of those terms, not random or determinist; hence there are always “butterfly effects” — new trends that are currently non-existent or unnoticeable but become hugely important twenty years hence.
And the U.S. stock market? Well, after deflation of the 2000 bubble, years of substantial share sales by retiring baby-boomers, and 25 years of rather slower economic growth, it will probably be close to or slightly below its historical trend line in terms of valuation, around a 12 to 14 times price-earnings ratio, with earnings no longer inflated by 90s funny accounting. If inflation has been modest during the period therefore — something on which my crystal ball is unclear — I can make a firm prediction for the closing Dow Jones Index on Wednesday, December 31, 2025. It’s 10,362.70 — curiously, precisely the same level as last night’s close, April 1, 2002. You might just as well put your money in a sock.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.