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Monday, September 18, 2017

Sleepwalking Through Life

I, as many of you, am a big fan of Warren Buffett. Recently, I was watching a You Tube video where the great Oracle of Omaha was speaking to an MBA class. When asked to give advice he gave his normal admonitions about business ethics and responsible investing. In this one, however, he added the advice of “Do not go sleepwalking through life.” I was pleased as it is a theme that I think is vitally important but neglected in pop psychology and often commencement addresses.

Buffett commented that you should find out what you love to do and then make that your career. He suggested doing what you would do if you were not getting a salary and did not need the money. Then, he said he actually did that by offering value investor guru Ben Graham his services for free if Warren could simply work for the master for a while. Graham hired Warren but did not take him up on the working for free offer.

When I was becoming an adult most people were keen to give me advice. Often, they would tell me to not worry about what you were going to do for a living. The line most often used was “you will fall in to something and then make it your career.” Even then, growing up in rural Rhode Island, I knew that had to be limiting. Given my free market proclivities a career in government was unlikely and unappealing. Heavy industry or production had little pull for me and, in finance, I could make a decent living but always be in the minor leagues. Only my father spoke to me sensibly and directly and told me to try a few things and find something that I really liked. It was profoundly good advice.

Hearing Buffett’s words recently, I was struck by how many people I had observed over the years who were truly sleepwalking through life. Things always seemed to be on auto-pilot with them. They had no plans beyond the next paycheck. I found it particularly annoying when I found it happening with the many people who are far more intelligent than I. They watched a great deal of TV, were addicted to sports, but seemed to have little awareness of what was going on around them. Others seemed to fritter away their time with hobbies or make work projects. Yes, many of these things are stress relievers or some persnickety people want to have things just so in their homes. Yet, it takes time and over the years, some of them become breathtakingly boring. Their world has become tiny.

In my advertising career, I was accused of being overly interested in talking with sales reps. My response was simple—“Sales reps see more people in a week than you, Mr. or Ms. Account Person in a year. They know where the marketplace is going if they pay attention at all and, if they pay close attention, they have a great view of trends forming. You do a nice job of servicing our clients marketing needs but sales reps can give us a nice idea of competitive threats”.  Most dismissed me as a neanderthal.

Over the years, I have been a very ambitious reader. I used to mail books to friends and colleagues a great deal but have cut back drastically. The response often was “that is way too long. I will never get through that.” Or, “This is great. I will be on a long flight in three months and, if I remember, I will take it along.” I was trying to help their careers. They did not get it.

Another form of sleepwalking is what used to be known as the “let George do it” syndrome. Some days I feel that I am one of the few people left in America who are concerned about our $21 trillion + national debt and our entitlement overhang of perhaps $200 trillion or more. Mention it and people dismiss me as a crank or more annoyingly say, “Someone will do something and take care of it.” I shoot back, “I am been waiting for over 40 years and regardless of the party in power, not much gets done.”

So, at the risk of sounding like an angry old scold, may I suggest that you get engaged. Do not live an un-examined life. There is a big world out there and you have something to contribute. You might even have more fun than you are having now.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a comment on the blog.

Thursday, September 7, 2017

The Future of Jobs--A Contrarian View

A few years ago, two people approached me and asked for my opinion of what the job market would look like in about 10 -12 years. I went at an answer tooth and nail pulling together data from a wide variety of sources. Then, as a trial balloon, I sent my forecast out to a few people whose opinions I value greatly. The response was mixed. We will come back to that but first here is my forecast:

By 2027, we will not have a two tiered employment market but actually three.

From what I see today it  will likely shake out as follows:

1) The top 10-12% will be made up of very smart individuals. These sharpies will have mastered the new technologies or will have so much money or power in a firm that they can manage those who have. They will push and likely succeed in making their products or services even more efficient and will garner increasing profits and market share.

2) The next group will not be that large; perhaps 5% of the workforce. These people will not be tech mavens but they will cater to the whims of the top 10%. Personal trainers, interior decorators, financial planners (although index funds will hurt them), SAT Tutors, and household managers will top the list. Suppose an investment banker (a woman) marries a successful surgeon (man). Their income will be huge but the one commodity they will not have much of is time. A manager will be hired who will get the kids to school, pick them up after squash practice, make dinner and do the laundry. They will be paid quite well.

A new servant class will emerge to address the needs of the emerging 2nd gilded age.

3) Things get rough for the group below these two which may be 80-83% of the population. Robots will take some of these jobs and continued growth in offshoring will do even more damage. Lawn services, roofers, building security, some food service and home health care are likely to be here. These jobs can often resist automation as you will need some hands on action. Importantly, you will need less. I saw a video of a coffee shop in the Bay Area that has machines that make a perfect cup of quality coffee (not the dreadful vending machines that "brewed" coffee years ago!) . It had one employee who collected the cash that some customers still used and was there in case of a machine malfunction. So food service jobs will still exist but there will be far fewer of them. A problem, of course, will be that these jobs will ALWAYS have low salaries as one can digest the necessary skills in a few days and you are very easily replaceable.

Now, will all 80-83% have dead end jobs? Of course not. But, and this is important, raises for middle managers will likely be smaller over time and upward mobility will get tougher except for the most resourceful. I have always bristled when people would say “this time it is different.” They say it with real estate or stock market booms or even overpriced media properties. Yet, here I am saying this time it IS different. When The Industrial Revolution came along many people were free to leave the farms and move to urban areas as improvements in farm equipment had made yields higher with less labor. As electricity came along and steel mills started to roar, millions of new non-farms jobs were created. Henry Ford used his assembly line to build cars, paid workers well, and cars came to the masses.  And so it went for decades.

Historically, increases in technology have increased the number of jobs, good paying jobs, too. Now, we face something a bit different. Like many of you, I am fascinated by the future of self drive cars and trucks. What, however, will happen to the hundreds of thousands of truck drivers in the U.S? No, they will not all go away, but major companies will find self drive vehicles safer and cheaper to operate. Efficiency will always win out.

Also, don’t forget Big Data. It will not simply be a turbo-charged marketing tool. As I write people are working on ways for Big Data to measure worker productivity. Workers will be under more pressure than ever and will face greater scrutiny. The coming together of data points will not be dissimilar to your credit score. It will be hard to fight this in performance or compensation reviews.

Right now, some plants are using robots along with people. I read of one where when a night shift is required they go 100% robots as they are more dependable. Schools do more online courses which cut the number of faculty required and do not use up much classroom space or heat or electricity. I would not want to be a 26 year old Latin or Greek professor these days!

The media world is affected, too. As mega-shops place more on line advertising on exchanges, fewer people can handle billions more in billing. The logarithms get more sensitive and effective every day. An acquaintance has told me he loves what they do but is glad he is 60 and can pull a platinum parachute as he leaves his media giant.

Should the top tier get far wealthier due to the efficiency, the flip side is that the bottom 80% but especially the bottom half could get poorer. We have seen how the wealthy have an aversion to tax increases and they have the contacts and deep pockets and influence to fight them. So, we are heading toward a world of the tech haves or financial heavies and the tech have nots regardless of how many of us own the latest smartphone.

When I looked at this almost inescapable trends to deeper inequality in the US, I went back to my first teacher in Economics—Adam Smith. At 20, I read the WEALTH OF NATIONS (1776) for the first time. The father of modern economics taught me the merits of the market system and the tremendous benefits of free trade. In WEALTH OF NATIONS, the great Dr. Smith wrote: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” Amazing. He wrote that way back in 1776 but it appears that we are headed that way in the next 10-15 years. What to do? Elect Bernie Sanders or a clone in 2020? No way. That could kill the economy. Smith often talked about the value of unfettered markets but admitted that sometimes they needed a little fettering. While he bristled at his own prescription as government entering in to markets was against what he called “natural liberty”, perhaps a progressive income tax and some careful financial regulation would prevent consolidation of economic power in to the hands of a few. My libertarian friends would argue that unfettered markets are great and that crony capitalism has caused much of the inequity in society. Let me be clear—there will ALWAYS be unequal distribution of income in a relatively free market. Some people are more intelligent, some work harder and some are just plain lucky. Yet, if the trends that I see continue, we will be seriously out of whack.

The response to my thesis has been interesting. A few said that I had read too much science fiction and others said that I was a gloom and doomer.  Some quietly agreed and admitted that they will be on top. I consider myself an optimist but, to me, the handwriting is already on the wall. Companies will use tech to squeeze out costs and as one person said to me several years ago, "Robots and logarithms do not require vacations, sick leave, health insurance, raises or a  401K."

I sincerely hope that I am totally wrong with this hard nosed forecast.  Yet, unless things change in a big way, I do not see how much of it is unavoidable.

If you would like to contact Don Cole directly you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Tuesday, August 29, 2017

What is a Fair Price?

When I was about 8 years old, I started to collect coins. The collection was nothing special as I look back on it, but it taught me a very valuable lesson. I went with my dad to a coin shop and paid $6 for a coin. Some two years later, I looked the coin up in the “Red Book” which placed a value on coins and saw that my original purchase was listed as $12.00 in uncirculated condition which mine was. I excitedly told my father that I had doubled my money. He smiled and said, “Not so fast, Don.” Then he proceeded to explain to me that the Red Book price was close to what a dealer would charge me if I wanted to BUY the coin now. If I were selling it to him, I would be lucky to get $8 and more likely $6 which is what I had paid for it. The lesson that I learned at my tender age was that a coin, a house, a used car, a collectible, or a stock was only worth what someone else was willing to pay for it.

In Consumer Behavior, theorists often refer to a phenomenon known as the endowment effect. If something is owned by you, you endow it with a value that is often distant from marketplace realities. People who think their home is worth a million dollars are shocked when their realtor places it at $650,000 and even then the bids that arrive are lower. The used car that you have pampered for 12 years does not fetch nearly as much as the price you envision for it. Learning that things are only worth what others are willing to pay for them was a great lesson to learn when very young.

Over the years, I have  been shocked by people who survived in the advertising and media business not realizing the simple truth of auction market pricing. I would suggest a bid on a property or a sponsorship and a colleague might say, “We can’t offer that. The station will not make any money on it.” I would often respond simply that such a low amount was what the property was worth to our client and add that, if the price was truly too low, they would not sell it to us. You did not have to be abrasive or obnoxious about it. Simply state that our offering price was all that the client could pay or what we were willing to pay.

Another sales tactic that always really amused me was when a rep would say, “We have worked so hard putting this together. You have to pay more than your offer.” Once, sitting across from a particularly odious salesperson, I smiled and said, “I didn’t know that you were a Marxist.” He looked wounded at first and then slowly became angry. I outlined Marx’s long discredited labor theory of value which briefly described that the value of a commodity can be objectively measured by the average number of hours required to produce that commodity. Think about that for a moment. Let’s say that I decided to knit a sweater. I assure you, my friends, that I could spent 1,000 hours working on it and, at $15 per hour as a wage, no one would want to buy the ugly sweater that I had produced at any price—but especially not at $15,000. Well, I use that absurd example to make the point that it mattered nothing to me that someone had spent a lot of time putting a proposal together. If it did not reach the people whom the client needed to reach at the right price in the right environment, we would go elsewhere.

In the years to come, prices for advertising or  program or event sponsorships will fluctuate depending on market conditions and competitive demand. There is no intrinsic value to media time or space across any platform. It is only what someone is willing to pay for it. Ideally, both sides get a win-win in an important negotiation. Pricing to me has always been something of an economic miracle. Sometimes dozens of people in many countries contribute to putting a product or service together. Each makes some money every step of the way. The finished product, however, is only worth what the consumer thinks is a fair price and one hopes the producer can make a profit at that level.

The little boy with the shiny uncirculated silver quarter is now almost 60 years older. He has not forgotten the lesson he learned so long ago.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, August 20, 2017

Netflix, Disney and Cable

I have been away for a few weeks with somewhat limited access to e-mail and some of my normal business news sources. Opening up the mail last night, I found a number of statements about the state of the media world. Those that I can repeat included:

“Netflix is toast. Disney’s moves will take a few years but Netflix will be crushed.”

“Say goodnight, Comcast and Time Warner. AT&T’s purchase of Time Warner will prove to be one of the biggest blunders in American business history.”

“A freestanding ESPN is going to drag cable down, down, down.”

“Disney does not get it. They clearly have no idea how hard it is to start a streaming service from scratch.”

What is all the hysteria about? On August 8th, Disney Company CEO Bob Iger announced several things. First, Disney will end its partnership with Netflix in 2019. After that, Disney content will not be found on Netflix. Also, Disney will launch it own streaming service in 2019 which will be the only place where one can watch new Disney material including action and animation. Content from the Disney Channel, Disney Jr. and Disney XD will be available on this entity as well.

Separately, ESPN, a Disney property, will begin a streaming service in 2018. It will feature 10,000 events a year including much live programming. Simultaneous to both announcements, Disney revealed that they will have a majority stake in BamTech, which is a significant streaming as well as marketing service.

So, the Disney changes are what precipitated the four quotes that I received from Media Realism readers and friends. Are the above comments correct? What is going to happen?

Here is my quick take on what appears to be going on:

1) Over the last couple of years, ESPN, until recently, a spectacular cash cow for Disney, has been struggling a bit. They were bidding up the rights fees for various sports properties which they were trying to pass on to advertisers. As more people cut the cable cord and young people used many online properties to get sports news, ratings began to sag a bit. ESPN, in a belt tightening move, laid off a number of on air personalities, some of whom were making seven figures in compensation.

2) For years, many pundits were saying that a large group of people ONLY were cable subscribers to obtain ESPN and its sister channels. If ESPN went freestanding, Disney could earn more money than now. Anecdotally, a number of young men in their 20’s told me that they would definitely dump cable if they could receive all ESPN platforms on line for $15-18 per month.

3) Cable has definitely lost some penetration in the recent past due to cord cutting and cord-nevers. As part of an experiment, I used Netflix, You Tube and Apple TV as a surrogate for a cable subscription about 18 months ago and had 95% of my video needs met admirably.

4) Netflix—the August 19th edition of BARRON’s, a Dow Jones publication, cautioned stock investors about Netflix. It is selling for over 200 times earnings, has high debt and, as they put it, are a “hit renter” rather than a “hit owner.” It would require them to spend massive amounts on content to keep growing. The author suggested that with such a high market cap they could easily float some new shares to either pay down debt or finance new programming. I agree but have a different take on Netflix than most. Several years back, I thought that Netflix had arguably the best business model that I have ever seen (Single exception! I grew up outside Providence, RI so the mob may have had a better one in the 1950-70’s given the high cash nature of their business interests). To me, as a consumer, Netflix is an outstanding product. I absolutely love it. As an old movie buff, I have over 100,000 films to choose from and also their made for Netflix properties, a few owned and others rented which are often of excellent quality. The pricing to me is a steal. Consumers these days are sensitive to price increases so they may have to move subscription rates up slowly. Outside of the US growth is still fairly strong and they now have an eye popping 100 million + subscriber base. My problem is that movie making and TV shows are generally a pretty crappy business. Over my active media career, I tracked that 72% of new televisions shows were cancelled in the first year (I would assume that today a similar statistic would be operative). And, most films lose money. So, Netflix had a wonderful model but now that they have become a programmer they have added a lot to their risk exposure. Also, people tend to forget a vital thing about Netflix growth. For years, they were competing against hapless Blockbuster. I am certain that in the future, the Harvard and Wharton MBA programs will be using Blockbuster as a preeminent case study on how NOT to run things. Netflix shrewdly hopped on the digital train as it left the station and Blockbuster continued to build brick and mortar stores as one new CEO replaced another. Blockbuster also refused to consider a bid to buy a substantial hunk of Netflix went Reed Hastings (founder of Netflix) went to them hat in hand.  Also, Netflix is now facing direct competition from Amazon Video and will soon have another deep pocketed competitor in Facebook. And, do not forget that Alphabet (Google) has a sleeping giant in YouTube if they choose to get in the mix in a much bigger way.

So, what is going to happen over the next 36-48 months? I do not know and anyone who tells you they do is as sensible as those talking heads that I see on CNBC or Bloomberg telling you precisely what is going to happen to the Dow Jones Industrial Average over the coming week. Clearly, while no one knows how the media merry-go-round is going to develop, there is certain to be some upheaval. Disney has content and Comcast and Time Warner (likely to soon become AT&T) have both scale and buying power. Netflix has consumer preference but not the deep pockets of a Facebook or Alphabet. So, on balance, I would have to say that Netflix which I love as a consumer may well be the most vulnerable when I look at it unemotionally as a media analyst.

Frederick the Great of Prussia once famously said that “God is on the side of the big battalions.” Directionally, that is where my bet would be as well for 21st century media.

If you would like to contact Don Cole directly, you may reach him at doncolemedia.blogspot.com or leave a message on the blog.

Saturday, August 5, 2017

Malcolm Gladwell's 10,000 Hours

Since its publication in 2008, many of us have read Malcolm Gladwell’s bestseller,  OUTLIERS: The Story of Success (Little Brown and Company). Gladwell gets a lot of criticism for being something of a pop psychologist who is selective with his research but I always find him to interesting and fun to read.

When OUTLIERS had been on the bestseller list for many weeks, an aggressive young salesperson visited me. He asked me if I had read the book and I said yes. We discussed it for a few minutes and he then said, “I will know as much about media as you do in another four years.” I smiled and said maybe you are right. Annoyed, he replied, “No, I will. I have been in the business a year working 40 hours per week so that makes 2,000 hours. When I have five years under my belt, I will have my 10,000 hours in and be an expert just as Gladwell said.” I tried very hard not to laugh and responded, “I think that you are taking Gladwell a bit too literally. You get stuck in meetings and sales calls daily where you do not learn anything new. Also, you drive to a few appointments a day in Atlanta traffic. Those 2,000 hours per year are not all solid gold in terms of learning the business.” He was clearly not happy with me.

In my life, there were two examples that illustrated my point that I tried to articulate to the young lad but he failed to accept. The first happened in college. I was interested in a young woman and she told me that she saw that famous pianist Van Cliburn was performing the following Sunday. The problem was that he was performing in Providence. I said no problem, I had a car, I was from Rhode Island, and I knew the venue well. Off we went and I must say I enjoyed being with her more than the recital. After the performance, she asked “Don, can we go backstage and meet him?” I said sure thing but was a bit nervous.

About a dozen people were there and I asked him to sign the program and he was most gracious and my young lady friend was thrilled. Then, a stage mother pushed a nervous 10-11 year girl up to the great man. She said, “Van, my daughter practices four hours per day."

Van Cliburn gave a pained smile and said “When I was young my mother was working so I would come home from school alone and work on my music. Sometimes, she was late coming back from work. She never asked me how long I played. Always, she asked what did you do? Learning to play well is all about focus. The only valuable time is when you are totally in to what you are doing. Very often, it does not take as long as you think some days.” That really impressed me.

Some 35 years later, I was playing in a golf junket at Pebble Beach with my brother.  Two time PGA champion Dave Stockton did a clinic for us before the tournament. He echoed Van Cliburn by asking us how often we practiced at the driving range and how many balls we hit when we did. He stressed that we should never stand in the practice area and hit one ball after another. Rather, we should watch the flight of each ball hit, especially the bad ones and try to access what went wrong. The number hit was not nearly as important as trying to discern what went right or wrong with your most recent swing.

Over the years, I have unknowingly practiced the 10,000 hour drill. There is a particular topic about which I have read 700 books. Literally. I do not consider myself an expert but I know more than most. In recent years, I have devoted with few exceptions an hour a day to another topic. Before I die, I hope to be near expert level in that discipline as well.

Interestingly, Gladwell gets some criticism from the originator of the 10,000 hour theory. He was Professor Anders Anderson of the University of Colorado. The concept was developed in a paper he wrote entitled, “THE ROLE OF DELIBERATE PRACTICE IN THE ACQUISITION OF EXPERT PERFORMANCE.” Unlike Gladwell, he stressed that the QUALITY of practice was important. So, both Van Cliburn and Dave Stockton were saying the same thing to me before OUTLIERS was published.

The morale? Be wary. Just because someone has been in a business for 10, 20 even 30 years does not guarantee that they are a true expert nor does it mean that they have kept current with what is going on. This is especially true in today’s world of media and marketing.

I have played golf since 1958. An invitation to play in next year’s Masters Golf Tournament is not in the cards despite my extensive practice!

If you would like to contact Don Cole, you may reach him directly at doncolemedia@gmail.com or leave a comment on the blog.

Sunday, July 30, 2017

"I Am Not Really Needed"

Like many of you, I do not get a hard copy of a daily newspaper anymore. On line subscriptions to both the Wall Street Journal and The New York Times cover my needs very well. One exception is the Sunday New York Times. It is delivered to my sidewalk each weekend and I devour it with my morning coffee. Given my age, I often linger for a few moments over the obituaries to see if anyone whom I knew or knew of in advertising, broadcasting, or publishing has passed on. Yes, in ten years time, it may become my sports page!

A few months ago, I saw a name that seemed to register a bit in the cobwebs of my memory.   I read the obit carefully and think that I may have remembered this fellow. We met very briefly for a few hours but what he said has stuck with me.

For many years, I traveled a great deal on business. A great deal. While not in real miles, more than one airline gave me over 200,000 air miles to my frequent flyer accounts in the same year. When one travels that much you have your fair share of cancellations and long delays. One such delay occurred in the dead of winter. I was coming back from a client meeting in the upper midwest. The first class cabin was not full and three of us were talking when the first delay was announced. The flight attendant served a round of drinks and we all took things in stride. The captain announced a half hour later that there would an equipment change and we all had to vacate the plane. We would likely not leave for 90 minutes. An unusually well dressed man about 10 years older than I offered to buy us a drink in the airport lounge. We all exchanged what we did for a living. He had a high powered job for a prominent company in the financial arena. The third member of our party exclaimed, “Wow, you must be rich!” Our new drinking buddy shook his head no. “I consider myself successful but I will never be rich.” He went on to describe his life with a brutal candor that almost made me feel a bit sorry for him. As a youngster, like his father before him, he had gone to the right prep school and then college and was now a member of the right clubs in New York. He then went on a tirade about the federal, state and city income taxes that he paid. His real estate taxes in Westchester county were astronomical and his commute was horrendous. Were he to make any real money the Feds would hit him with a gift tax if he wanted to help his children who were now at very expensive prep schools and perhaps a large inheritance tax as well when he died.

I was getting fed up with his pity party for himself and other members of the 1% when he dropped something of a bombshell to both of us. “I am different from my partners. I know that I am not needed. Someone else can help defer taxes or evaluate a security or a new business every bit as well as I can. I am a well paid corporate functionary who leads a boring, upper middle class, unimportant existence. Yes, I am a professional but I am not and never will be a tycoon.”

He then went on to say how if he had his life to live over again he would trash his Northeastern respectable point of view. “I should have taken some risks and been willing to put up with uncomfortable situations. Moved to Africa or Asia and really made a difference with something. Then, maybe I could have been rich, and more importantly, fulfilled.”

A lot of things hit me. First, he had no idea how lucky he was relative to almost everyone in the world. His problems were ones struggling people and most of us would love to have. At the same time, he had a self awareness of how unimportant he was in the scheme of things and had genuine admiration for gutsy entrepreneurs who had a dream and went across the world to make it reality.

Last week, I asked some of my panel members if they were needed. Surprisingly, the broadcasters in senior positions generally said no. The older ones said they had a good run in the golden era of broadcasting and advertising but all felt they could be replaced quickly and easily. Ad agency owners (small to mid-sized shops) were a mixed bag. A few said they were grooming someone to take their places but a small group said almost directly that they were the glue that holds the place together and if they went, the shop would not be far behind. Perhaps broadcasters see themselves as mangers while agency heads, even of small firms, perceive themselves to be builders.

We need functionaries everywhere--the state department, law firms, brokerage houses, the Vatican, and at media properties and ad agencies. Can their lives compare to the brave few who help make the desert bloom or pass through the eye of the needle in Silicon Valley and get funding and change our world? I suppose not but, in my life, I have been touched by and learned from any number of functionaries who were kind, helpful and did a good job. They were not “needed” but they were and are important.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Monday, July 24, 2017

The Four Headwinds

A long time ago I was at a client meeting in Florida. One fellow at the sessions was a fellow New Englander who had rarely ventured in to the South or Southwest in his life. At dinner, he mentioned how stunned he was at the amount of construction going on and asked how did Atlanta, Miami, Tampa, Houston, Dallas and Phoenix grew so fast. My clients gave answers such as no state income taxes in Florida or Texas, less regulation, and fewer union issues. My new New England friend asked me directly and I said, “Air conditioning.” The clients were not amused and let me know it after they dropped off the questioner. I stuck to my guns and do so now. In the last two weeks, I have read a book twice over that brought that moment back to me.

The book in question is THE RISE AND FALL OF AMERICAN GROWTH (Princeton University Press, 2016). Its author is Robert J. Gordon, a deeply experienced and prolific writer who is an economics professor at Northwestern University. Gordon’s book is a real tour de force. He essentially covers U.S. economic history from the end of the Civil War (1865) to 1970. It illustrates how the growth occurred and gives great credit to electricity which reduced the drudgery of many household and industrial tasks and was a great catalyst for growth.

Gordon is not an anti-tech luddite. He simply states that for us to have the dynamic growth experienced from 1870-1970 is going to be a steep challenge going forward due to four headwinds:

1) Inequality
2) Education
3) Demography
4) Repaying Debt

One by one, we find, in brief:

1) Inequality--the bottom 80% of the population has suffered wealth stagnation in the span measured from 1983-2013. The top 20% has experienced a doubling of wealth with the infamous top 1% going up several times. Interestingly, he cited studies that showed that the bottom 90% tend to have the world’s worst market timing. Those in stocks in 2008-2009 “bailed out” while the top 10% increased their holdings in 2009-2010 and saw their net worth multiply several fold in many cases. So what, you may say? Well, Gordon illustrates the growing difference between average income and median income (50th percentile). If current projections hold, every 1.0% gain in average income would only translate to 0.6% median growth. The 80-90% at the bottom will get more and more distant from the top 10%. This will effect overall buying power.

2) Education--from 1870-1970 there was a huge surge in people obtaining high school diplomas. Many high school graduates or less earned excellent money with great fringe benefits and were often union members. Today, a high school dropout will likely never earn more than minimum wage over his or her lifetime. And, college degrees are no longer a path to the upper middle class. Many recent graduates are doing work that does not require a college degree. Adding to this problem, is soaring college debt over $1.2 trillion. If a student takes on $100,000 in college debt they may be better off than a high school only graduate by age 34 IF they earn the same amount as the average college graduate. In some fields, that can be very difficult.

3) Demography--my old favorite comes to center court once more. As American baby boomers age (born 1946-1964), they are retiring at a rate over 6,500 per day. Fewer workers put a strain on funding the entitlements net (see post on “The Graying of the West” from 7/21/17).

4) Repaying debt--we have reported debt in the U.S. of over $20 trillion. Some analysts say that is absurdly low as our Social Security and Medicare/Medicaid liabilities push it up to $100-200 trillion. Right now, we have historically and, in my opinion, unnaturally low interest rates. The ratio of federal debt to Gross Domestic Product (GDP) may stabilize for a few years but has to soar if interest rates have a return to normalcy and/or if the Congressional Budget Office (CBO) estimates are too optimistic as Gordon projects.

Professor Gordon is not a “gloom and doomer.” He strikes me as a hard headed realist who sees real problems on the horizon. Electricity and the internal combustion engine changed the lives of most of the world and made the 20th century, The American Century. The four headwinds will get in the way of even the exciting technological changes to come.

The book is amazing. I have read it twice in the last two weeks and it is over 750 pages long. Admittedly, it does not read like a sexy novel but it is not the Statistical Abstract either. I am clearly an economic history and demographic wonk but I found it very absorbing reading.

Too much for you? Okay. Go to You Tube. Professor Gordon has a 12 minute version on a TED talk that sums up his opinions. It is well worth 12 minutes. Not enough? You Tube also boasts a 90 minute presentation that the good doctor gave at the London School of Economics. Finally, You Tube has a few videos of academics trying to refute Professor Gordon’s forecasts.

If you would to contact Don Cole directly, you may reach him at doncolemedia@gmail.com