An Age of Economic Plenty or Scarcity?

History is littered with widely believed long-term economic forecasts that prove to be highly mistaken.

Remember when it was generally believed that first Russia and then Japan would eat our economic lunch only to find out that those two economies had clay feet? Or more recently, we might recall how widely held was the view that the Great Economic Moderation of low inflation and respectable economic growth would continue indefinitely, only to find out that global inflation was soon to reach a multi-decade high and the world economy was flirting with recession.

Not to mention the conventional Modern Monetary Theory wisdom that interest rates would stay low forever and that we need not be overly concerned about large budget deficits and rising public debt levels. Come to find out that governments are now having to finance themselves at considerably higher interest rates than they had become accustomed to, while the rating agencies are reminding us about the issue of debt sustainability.

All of this is not stopping a number of highly respected economists, including Charles Goodhart and William White, to make bold new long-term economic forecasts. They are now confidently touting the view that the past age of plenty will soon give way to a prolonged age of scarcity. They base this view on the idea that a number of important economic trends that once supported the world’s post-war economic prosperity might now be going into reverse.

Among those trends are the rapid expansion of the global workforce and China’s entry into the world economy following its accession to the World Trade Organization. They also include the increased globalization of the world economy and the expansion of global supply chains. In addition, there is the idea that heightened geopolitical tensions are bringing the age of less guns and more butter is coming to an end. With the reversal of these trends, some believe that we will have a labor shortage that will spawn higher wage and price inflation and a scarcity of goods.

There is certainly considerable merit in their argument. After all, the world’s population is aging rapidly and China’s economic miracle seems to have run its course. At the same time, world trade restrictions are on the rise, and companies in industrial countries are trying to reduce their reliance on the global supply chain in the wake of their unpleasant COVID experience of broken supply chains. Meanwhile, the ongoing Russia-Ukraine war and the threat of a Chinese military adventure in Taiwan are requiring increased defense expenditure.

However, it is also more than plausible that we are on the cusp of an age of rapid labor-saving technological progress that can more than offset the reversal of trends that would otherwise usher in an age of scarcity. It is not only that artificial intelligence is making technological breakthroughs that soon might put many white-collar jobs in jeopardy and could allow a quantum leap in economic productivity. It is rather that the artificial intelligence revolution is being accompanied by other disruptive labor-saving technologies like robotics, 3-D printing, and driverless cars.

All of this suggests that more than a dose of humility is required before making long-term economic predictions. It also suggests that economic policymakers should not take those predictions too seriously. Perhaps the reversal of a number of favorable post-war trends will usher in a period of labor shortage and economic scarcity. However, it is equally plausible that today’s burst in economically disruptive technology will do precisely the reverse and give rise to a situation of excess labor supply, falling wages, and economic plenty.

The honest answer is that only time will tell which of these two countervailing trends will dominate.