ESSAY 3 Featuring Karen Harris
By John Mauldin
“It’s hard to be a pioneer. But you can’t expect universal approval when you’re doing something completely different.” – Karen Harris
“By 2025, we see the US and other technologically advanced countries at the forefront of defining a new post-urban economy. Spatial economics will give rise to new markets, more innovative businesses, new lifestyles and different career opportunities.”
– Karen Harris
In the past few years, automation and the effect that it’s having on the workforce has become a hot topic of conversation.
Almost daily, in the WSJ or on Bloomberg, you’ll see an article about automation and how it’s negatively impacting employment. At the same time, major research institutions like McKinsey, Brookings, and Pew are releasing studies on the topic.
Findings from these studies all draw the same conclusion: 30–40% of US jobs will be lost to automation over the next 20 years. When I see multiple forecasts, which arrive at the same conclusion, I get a little nervous.
When the consensus expects one thing to happen, quite often the exact opposite ends up occurring. Here are two reminders of just how wrong the consensus can be.
- March 1999: Oil was at $12, and the consensus said it was headed lower. As we know now, that was pretty much the bottom for oil prices.
- November 2007: Nokia had a 37% market share, and its stock price was $39. Today, it has less than 2% of the market, and its stock price is below $5.
Needless to say, investors who allocated capital according to these prevailing thoughts would have been on the wrong side of two seismic shifts.
While automation and technology are having a massive effect on employment, when I see everyone falling into line with the consensus, my “inner-contrarian” alarm bells go off. When this happens, it tells me that I should seek out independent and unique perspectives.
Someone who offers exactly that is Karen Harris. I would wager you have never heard of Karen. If not, it’s my delight to introduce you to her and her ideas.
Karen Harris is the Managing Director of Bain & Company’s Macro Trends Group. Karen and her team at Macro Trends focus on developing insights about global macroeconomic and social trends. They also work with institutional clients to embed macro strategy into their investment and business decisions.
I am featuring Karen in this five-part series because of her pioneering work on the declining cost of distance–a topic which fits hand in glove with automation, and has profound implications for investors and entrepreneurs.
Before we proceed, I want to let you in on a secret: Karen’s work on spatial economics and the declining cost of distance made me rethink my thoughts on the US economy, and how society will function in the future.
The declining cost of distance may be the one of the overarching trends that shapes the economy and financial markets in the coming decades. When I say this is one of the most critical concepts to grasp going forward, I mean it.
Today, I’m going to take you through this concept, and show you what it means for us. Let’s dive straight in.
The key driver of where you live and work is changing rapidly
Macro Trend’s report, titled: Spatial Economics: The Declining Cost of Distance, opens with this thought:
“For centuries, the cost of distance has determined where businesses produce and sell, where employers locate jobs and where families choose to live, work, shop and play.”
While not widely recognized, the cost of distance—that is, the cost of moving information, people, and goods—is a key driver of business and individual decision-making.
For example, the cost of moving goods is the reason why companies like Amazon strategically place their warehouses near major transportation routes. On an individual level, the cost of moving oneself is the reason you would ideally live near your workplace.
The need to minimize the cost of distance has caused businesses and individuals to cluster around urban areas. This trend began during the Industrial Revolution 250 years ago, when millions of people moved to cities to work in factories. As Karen notes “Cities are dense urban hubs that minimize the cost of moving raw materials, labor and finished goods.”
To date, the cost of distance has remained a critical calculation for businesses and individuals regarding where to operate and live.
Which leads to the question: How would the world change if the cost of distance fell dramatically and greatly reduced the importance of location? Well, thanks to technology and automation, we’re starting to find out.
Technology is enabling a post-urban world
From the Macro Trends report:
“The catalyst for this historic shift [are] new technologies that have pushed the cost of distance to the tipping point. Robotics, 3-D printing, delivery drones, logistics technology and autonomous vehicles are giving rise to new products and services that sharply erode the cost of moving people, goods and information.”
Let’s look at how technology is reducing the cost of moving information, goods, and people:
- Information: Compare the cost of sending information via an email to sending it by postal letter. Or the cost of making a long-distance phone call today versus two decades ago.
- Goods: Data from The World Bank show that the cost of transporting goods by air and ocean freight has dropped substantially over the past 40 years. Going forward, autonomous vehicles and delivery drones are expected to reduce the cost of transporting goods by a further 75%, according to Macro Trends.
- People: The rise of online communication channels and computer systems has enabled many individuals to work from remote areas, so they no longer have to travel to an office.
Technology is creating a post-urban world in which physical location will not be the primary driver of where people live. This is the biggest shift in how economies function since the Industrial Revolution, when the population of London and other English cities doubled in just 50 years.
The declining cost of distance will allow millions of individuals to reassess where they live. At the same time, constraints on businesses such as scale and density will be reduced, creating new opportunities for businesses, investors, and entrepreneurs.
Think about where you would live if you could work from anywhere. Or, what would happen to urban economies and real estate prices if millions of people decided to leave? These are just two factors to consider on how the declining cost of distance is a complete game changer.
Let’s run through some of the implications.
How businesses will change when distance doesn’t matter
From the Macro Trends report:
“As the cost of distance declines, companies will be able to deliver economic output at smaller scale. Advances in technology already are beginning to lower costs in manufacturing and service, allowing both to be profitable at reduced scale.”
The declining cost of distance will allow businesses to operate at a smaller scale, which will disrupt the tight constraints that most operate under, today. Let’s use the average Apple store as an example of how this is going to completely change the economic landscape.
Today, a 6,000–8,000 square-foot Apple store requires a population of roughly two million people within its target radius to be profitable. This required population density is a huge barrier to entry, making small operations completely unviable. But I have good news, automation is changing that.
According to research from Macro Trends “with service robotics, an Apple store will potentially be able to thrive in a population center with 200,000 inhabitants instead of 2 million.”
Automation is also changing the business model of casual dining outlets like McDonalds and Burger King. As the following chart from Macro Trends shows, with the help of automation, these outlets will be able to reduce their break-even costs by 30%, annually.
Now, here’s why the declining cost of distance fascinates me—and why it offers a unique perspective on the link between automation and employment.
On the surface, automation is bad for jobs. For example, Macro Trends estimate that by employing service robots, casual dining outlets could reduce staff from 25 to 8 people. However, as automation will enable businesses to operate at a smaller scale and scope, it may create jobs net-net. Hear me out.
While automation will reduce the number of people working at each location, by lowering operating costs, automation will make smaller scale and scope locations economically viable. In effect, the volume of stores would increase, while the number of people working at each location would fall.
For the first time ever, large retailers and dining chains will be able to operate in smaller, less dense markets. The large retail stores and restaurant chains that I have the pick of here in Dallas, may open locations in the much smaller neighboring cities of Allen and Katy.
As I mentioned above, when there is a strong consensus on a topic, it almost always pays to seek out an independent view. While automation will render some jobs obsolete in the coming decades, I believe it will also create a lot of opportunities. Karen and Macro Trends’s groundbreaking research into the declining cost of distance has convinced me of that.
Along with changing how businesses operate, the declining cost of distance will also alter where individuals choose to live and how they work.
How does low-cost, rural living with a city wage sound?
From the Macro Trends report:
“Individuals may opt to live further from city centers, as advances in transportation and connectivity allow them the abundant space of a rural town combined with many of the employment options, goods and services once available only in cities.”
According to the US Census Bureau, the percentage of the US population that lived within 10 miles of a city center declined by 2.2% between 2000 and 2010. That might not seem much, but it represents almost 6 million people—more than double the population of Chicago.
While the declining cost of distance is only beginning to gather pace, it is likely one of the reasons for this move away from cities.
As more businesses open locations in less dense, rural areas, these areas will become more attractive places to live. A 2016 Macro Trends poll shows that an increasing number of people want to live in rural areas.
However, a greater variety of amenities is only the start of how the declining cost of distance is going to transform rural areas… and possibly cities, too.
Virtual communication tools and computer systems are giving people who live in rural areas access to many of the same employment opportunities that city dwellers have.
As opportunities to telecommute (work remotely) increase, fewer people will need to travel to work. Already, 37% of US workers say they work remotely or have done so in the past. That’s a four-fold increase since 1995.
This trend toward working remotely is actually very close to my heart, it’s how Mauldin Economics operates. Since my partners and I founded the company back in 2012, we have been a “virtual business.” Although we have over 40 members of staff, no more than three of us are in the same location. Right now, my team lives in a wide range of locations: from Dallas to Dublin, Ireland, and Vermont to Vilnius, Lithuania.
While we operate across several time zones and live in vastly different locations, thanks to online communications tools and shared computer networks, we operate as if we were all under the one roof. At the same time, the absence of an office greatly reduces overhead costs. Best of all, each one of us gets to work from wherever we please.
Take my friend and colleague Jared Dillian, for example. When Jared was working at Lehman Brothers in New York, there was no escaping the ultra-high cost of living. Today, Jared is able to work from his beachfront home in South Carolina. Geographic arbitrage.
Karen and the Macro Trends team believe this trend of de-urbanization is accelerating:
“The declining cost of distance has the potential to trigger a major lifestyle shift away from city centers, similar in scope and impact to the US suburban exodus between 1950 and 1980. Based on that scenario, we would expect the move out of US urban centers between 2010 and 2025 to rise to about 6% of the population per decade, or up to 24 million people in total by 2025.”
As the following chart from Macro Trends shows, its base case is that a further 10 million people will move out of urban areas by 2025.
A move of this magnitude would have massive implications for the economy and the employment landscape.
For example, a mass exodus to rural areas could create a boom in the construction industry, akin to what took place in the 1950s. Conversely, urban real-estate prices, which are notoriously high across the globe, could plummet as demand falls.
Still, there are a lot of unknowns. Would millions of Americans switching from urban to rural living ignite a baby boom and cure our demographic problems? It’s certainly not out of the question. After all, birthrates are substantially higher in rural areas. Plus, families could dramatically reduce their cost of living by moving out of cities, allowing them to feed more mouths.
This is just the tip of the iceberg. I have many more questions I want answered about the declining cost of distance.
For example, what are the opportunities and risks for investors, and how will the reduction in the scale and scope of businesses in advanced economies affect emerging markets?
Karen will address these questions and provide other insights from her team’s work at Bain, when she delivers what promises to be an enthralling speech at my Strategic Investment Conference in San Diego, next March.
Yet, Karen is only one of the brilliant minds that you’ll get exposed to and have the chance to meet at the SIC. It’s going to be an intellectually thrilling event, and I hope you can be there with me to experience it firsthand. To learn more about attending the SIC 2018, and about the other speakers who will be there, I encourage you to click here.
I attended my first conference this year and loved it! I am a small investment manager just starting out, so I was looking to gain some perspective on how to protect my portfolio and profit from likely events that will be occurring in the future.
—Matthew (past SIC attendee)
That concludes the third part of this series. In the next installment, I share my thoughts on Lacy Hunt’s “big idea” that fiscal and monetary policy have become incapable of generating growth.
Before you go…
I want to get your thoughts and questions regarding Karen and her insights into the declining cost of distance.
You can post any questions or comments about Karen and her team’s work, or about the other essays in this five-part series, in the comment section below.
Your memorized at how technology is changing the entire world analyst,