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:
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.
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