The Next 40 Years in Twelve Hundred Words

Info-graphic taken from Peter Turchin, “The Double-Helix of Inequality and Well-Being,” Social Evolution Forum (8 February 2013)

Recently in a discussion at a different venue I wrote the following:

I am extremely pessimistic about the near term (2015-2035) future of both of the countries I care most about and follow most closely, but very optimistic about the long term (2040+) of both.

I was asked to give a condensed explanation of why I felt this way. The twelve thousand words or so I wrote in response proved interesting enough that participants in the discussion urged me to re-post my speculations here so that they might receive wider circulation and discussion.

Below is a slightly edited version of my response:

The demons that afflict the United States of America and the People’s Republic of China are legion, and every pundit that turns their eye to either country seems to have their own favorite. Some of these difficulties are more alarming than others.

The United States faces two problems that cannot be resolved without great turmoil. The first is one many in my demographic already feel acutely – the rising generation is one with no future. This generation has gone into obscene amounts of debt to finance educations that have provided them with few real skills to compete for a shrinking number of decent upper-middle class occupations. Part of the problem stems from the way economic inequality has hollowed out the middle class, part of it comes from the way sinking living standards for America’s working class have made that fate less and less desirable (accentuated by a growing cultural divide and spatial separation between the two groups), but the biggest problem is simpler: the number of people in the applicant pool has expanded far past the number of respectable positions our society has been able to offer them. More people go to college now than ever in the past, and more go to graduate school and earn PhDs as well. Millions more. And there is nowhere to put them. PhD placements have never been more competitive, half the people who leave law school cannot get jobs in law-related careers (much less jobs as real lawyers!), the medical profession is a place of misery, and so forth.

Thus we have a generation that put themselves into a debt slavery on the hope that they would be able to improve their life by doing so, snag great jobs and pay it all back. Except they won’t. In about ten years enough time will have gone by for all these graduates to realize that the future they’ve always imagined will never come to pass and that they spent more money on their education then they will earn in the next 25 years.

And that is when things get nasty. When you have a surplus of angry, educated, and bright people with no hope then things start to get dangerous.

The second problem will compound the situation because it will manifest itself at about the same time. This is one more people talk about (so I will not describe it with as much depth here), and the people who suffer will be on the other side of the demographic charts. Basically, the United States does not have the money to pay for its social programs now, and it really, really, really will not have the money or the capacity to administer its basic obligations in fifteen years’ time. All of the people who have promised that they will get social security benefits and health care and all other sorts of wonderful things, especially in retirement, will find out that the money just isn’t there for it. Some money may be seized from the richest, but they really don’t have it either. In the end the whole system will collapse because there just is nothing else it can do.

In the urban areas China faces a very similar “over elite production” dynamic as the USA. The debt problem is not nearly as bad for them, but the job situation is just as tight, and because of China’s “family planning” policies of the last few decades many balinghou and jiulinghou households will face the additional financial (and psychological!) pressure of being the only grandchild of four grandparents in a country with underdeveloped social services.

That is in the rich areas. Combined with this challenge is the simple fact that there are still 300 million Chinese men and women living on $2 a day. China’s great challenge is to lift those 300 million out of poverty and raise their living standards to something close to the developed world’s. To make its model work China needs at least a 6-7% growth rate every single year. No one is really sure what will happen when the numbers hit lower than that, but eventually they will. There is some fancy stuff I could say about China needing to move from an investment-driven economy and account balances and stuff, but there is nothing I could say here that Michael Pettis has not already said better. The gist is that for China to pull off the transition to developed, slow-growth economy there needs to be significant restructuring in the economy. And its not going to happen. I don’t think it can happen – the Chinese economy and especially its finance markets have been too warped by state intervention and government goals for the changes to happen naturally and the whole shebang has been paid for by “an unsustainable debt burden caused by wasted debt-financed investment.” When the fall happens the best case scenario is a decade of nil growth; the worst case scenario is a Great-Depression style crash that pulls the rest of the world in with it.

China’s regime is much more fragile than America’s. I don’t buy the common talking point that the Chinese people only support or acquiesce to the Party’s rule because of the wealth they have gained by doing so, but I do think this is a very important reason the average Party insider plays the game. I do not know how much stress – especially economic stress – the Chinese Communist Party can take before it ranks begin to crack.  

Now for the good news.

Neither country has much to worry about in terms of external threats. The United States really has nothing to fear from anybody – we can temporarily lose standing or even permanently lose prominence without the everyday lives of Americans being changed in any real or horrible way. China’s neighborhood is a bit rougher, but their big worries are things like losing a few stupid islands or having to recognize Taiwanese independence. The worst case scenario is a protracted war between the two powers because of that last issue, but the people who will suffer the most in that scenario are the Taiwanese themselves. It is difficult to imagine a credible scenario where millions of mainland Chinese die or China faces territorial dismemberment because of any foreign power.

In both cases I am much more worried about the consequences of internal conflict than I am in any external war.

Other good news: the way technology is developing the political economy of both countries – indeed, the entire world – is going to change incredibly. People don’t ask the right questions when they ponder over the near term future of humankind. Think of it this way: what does the world look like when you can 3D print in your house anything you buy at Walmart today? Production is going to return to houses (just like in the old frontier days!) and away from multi-national corporations. A decentralized economy will provide what the current economy cannot – a place for the newbies trying to succeed and resilience/security for those who are past their prime.

It will be hard to see that time in the midst of the troubles, however. An analogy could be made with the early 20th century, and it is particularly apt for China. When the SHTF a lot of folks will be saying things like, “China isn’t going anywhere, all that angst about China rising was foolishness!” Such statements are short-sided. During the 1930s you could have said much the same about America. But when we talk about the first half of the 20th century as a whole, the story is one of America’s titanic economic rise, not its great depression. When the troubles are over China will come roaring back – its just a question of what kind of country China will be.

Note: In the event of serious civil war or insurgency who knows what happens. Those things are easy to start but hard to end. If they occur then the future is too cloudy for me to even try and speculate like I do here.

Beause of the unusual circumstances of this post’s creation I have not bothered to insert meticulous foot-notes and citations standard at the Stage. Here are a few general references for those who want to investigate specific themes raise above in more detail.

Further Reading
  
Peter Turchin, “Return of the Oppressed,” Aeon Magazine (7 February 2013). 

(Peter Turchin invented the term “elite over-production” while working on mathematical models of cliodynamics. These articles are an accessible explanation for those not mathematically inclined. If you would like to jump into the data behind the concept, start here and here).

T. Greer, “Economies of Scale Killed the American Dream,” The Scholar’s Stage (1 July 2013)

Scott Alexander, “SSC Gives a Graduation Speech,” Slate Star Codex (23 May 2014)

Yukon Huang, Canyon Bosler, “China’s Burgeoning Graduates — Too Much of a Good Thing?,” The National Interest (7 January 2014). 

Jim Kessler, David Kendall, and Gabe Horwitz, “Now or Never: Now is the Moment for Democrats to Get a Grand Bargain,” Third Way Policy Memo (June 2012).

(It is easy to find conservative diatribes on this topic; it is more notable when American liberals raise the same alarm. Note also that the ‘moment’ in question is now two years past.)

I explicitly acknowledge the work of Michael Pettis in the body of the post. This is his blog. These are his books.  

John Maudlin and Wroth Wray, “China Will Need a Series of Economic Miracles to Sustain Growth”, Business Insider (9 June 2014). 

(The quotation in blue is comes from Wroth Wray’s section of this article.)

Carle Walter and Frasier Howie, Red Capitalism: The Financial Foundations of China’s Extraordinary Rise  (New York: Wiley, 2011).

(I am reading this book at the moment and strongly recommend it — it provides a clear eyed picture of just how much government intervention has distorted the Chinese financial sector).

James Bennett and Michael Lotus, America 3.0: Rebooting American Prosperity in the 21st Century-Why America’s Greatest Days Are Yet to Come (New York: Encounter Books, 2013). 

(By far the best treatment of  the happy, decentralized future I describe here is found in the second chapter of this book.  I reviewed the book with strong praise here at the Stage last year, though looking back at the review I see that I barely touched on the technological side of their vision).

“3-D Printing and the Future of Manufacturing,” CSC Leadership Edge Forum Report (Fall 2012).