You Can’t Take It With You
The American economy seems to be getting better at generating profits these days, but is still slow at generating jobs. The reasons for that may be structural: investments in automation (primarily information technology) and offshoring of jobs to low labor-cost markets are dramatically reducing the value of labor in many areas of the economy. Companies can do more with less, or do more somewhere else, and the merciless logic of global competition forces them to find efficiencies where they can or die.
Employers who cut operating costs at the expense of their workforce get to keep more of what they make in profits. Capitalism sees that as a good thing. The presumption is that profitable companies will eventually expand into new markets and demand more labor when they do so, creating jobs. However, companies that have effected improvements in productivity as a result of automation and outsourcing are almost certain to require less domestic labor than before even when they expand. Hard times have taught them the lessons of keeping costs low; good management will not likely return to bad habits when the corporate coffers are full unless the labor market is so tight that they have no choice.
The problem, as I have expressed before, is that after a certain point, the buying power of consumers begins to drop because an increasing percentage of the population is stuck in a spiral of unemployment and declining wages. Henry Ford was fond of saying that he paid his employees a living wage ($1 a day) so that they could afford to buy his cars. As a single actor, Ford was able to make good on his rather astute insight. Today’s capitalists are competing in a much more open market and are stuck in a prisoners’ dilemma where the virtuous action of one or two firms (e.g., paying higher wages) only puts those firms at a competitive disadvantage, but coordinated action for the public good is impossible (as well as illegal). Downward pressure on production costs creates downward pressure on wages which creates downward pressure on demand, which in turn depresses prices. That’s the deflationary spiral that leads to economic depression.
So far, that dynamic has been offset in the United States because middle-class consumers have leveraged the value of their real estate to fuel continued spending. Historically low interest rates and skyrocketing housing prices have made this particular wealth-effect possible, and it has so far blunted the worst effects of our changing economy. But there is every indication that the party is almost over. Economists are noting with increasing alarm that housing prices are reaching unsustainable levels, and that there is a bubble in the housing market as bad or worse than the stock bubble of the late 90s (and I’m sure that when the housing boom fizzles out, those folks who deny the legitimacy of the 90s prosperity will be just as quick to condemn what modest economic circumstances we’ve enjoyed since Bush took office as the similar result of “smoke and mirrors.”)
The worst news is, the party may soon be over. The Fed declined again to raise the short-term interest rate, but they have indicated that they will not keep the pedal to the metal indefinitely, especially since swelling deficits are putting upward pressure on long-term rates. If rates go up and housing values fall, a lot of banks and individuals will suddenly face a mountain of unpayable debt.
Is it all that bleak? Perhaps not. There is one huge untapped source of wealth remaining in the American economy and I have yet to see any economic forecasts that account for it. In the next 10-20 years, the accumulated savings of the most prosperous generation in the history of the world – Americans born between 1920 and 1940 – will begin to be liquidated. Funds tied up in low-yield investments such as savings accounts or bonds, along with huge heretofore unrealized capital gains in long-held stocks and properties – will either be spent on leisure and health care or redistributed to succeeding generations with a greater need or inclination toward immediate consumption.
This is the generation that came into the post-War economy, when America accounted for upwards of 60% of world trade and production. They held well-paid jobs, enjoyed generous government subsidies for housing and education, low prices on basic commodities (food, energy, transportation) and often retired with fixed-benefit pensions. Assets they acquired cheap in times of plenty, such as blue chip stocks or property – have appreciated tremendously in value. Raised in the Depression, many of these people took but uneasily to the habits of mass consumption, and some are sitting nervously on large nest eggs, fearful of outliving their money or hedging against the potentially ruinous medical costs of old age.
Potentially trillions of dollars of hidden value could hit the economy in a relatively short period of time, just as retiring baby boomers are restructuring their portfolios from growth to income in preparation for their own retirements. Some of this new money may go to repay old debt, but vast amounts will likely be spent in a flurry of economic activity that could put a spike in demand and force the kind of aggressive hiring that will re-stabilize the American work force and lay the basis for lasting growth. Once that happens, there is even the possibility that, with legislative discipline and fair taxation, public finances could be restored to balance and government could return to its role of providing the infrastructure, stability and disinterested regulation necessary for the optimal function of a market economy.
Strange that few people of any political persuasion are thinking much about this scenario. No one wants to dwell unduly on the aging and death of a large segment of our population, but demographic trends are not sentimental in that regard. The generational redistribution of wealth will have a profound and positive impact on the American economy. While we should be careful not to squander this final inheritance from our most productive generation with the kind of pointless stupidity we’ve seen from government and the private sector over the past decade, we can perhaps allow ourselves to view the future with a speck of hope. All we have to do is get there in one piece.
10:01:51 AM 
|
