by Elliott Morss, Morss Global Finance
The “talking heads” tell us that the global slowdown is largely the result of declining GDP growth in China and a resulting collapse in commodity prices. And the woes of Greece are not helping. But is this all there is to the story? I think not.
The US appears to be growing. But as Lawrence Fuller and others have pointed out, the net worth and income of the majority of US households have not. After reviewing how the global economy is doing, this question will be addressed.
Globally, GDP is projected to grow by 3.6% in 2016. One would think that is an acceptable rate. Information on regional growth is provided in Table 1. The world is being uplifted by the expanding middle classes of Asia. Russia and the Middle East have been hurt by declining oil prices. They can afford their large government deficits because of huge reserves built up from past oil exports. The large debts of advanced countries are as much a result of capital market access as the need for deficit finance to stimulate growth. The leading Eurozone countries have tried to limit deficit financing. The result has been very slow GDP growth. Like the Middle East and Russia, Latin America has been hurt by declining commodity prices.
Table 1. – Regional Growth, Deficits and Debt, 2016 Projections
Economic well-being does not depend exclusively on global economic happenings. Some countries are well-managed. Others are not. My judgments on management follow.
a. Best Managed Countries
Table 2 provides my selection of the best-managed countries. Their GDP growth numbers are not all that great, but at least their government finances are in order. Ireland’s unemployment is still high as it continues to recover from the 2008 global recession. And yes, Norway’s data are correct – it is running a government surplus. The 10-year bond rate shows what the financial community thinks of my choices. It appears that Asian countries have to pay more on their bonds than other, similarly situated nations. The Philippines is particularly notable. It is growing rapidly with a very modest government deficit but still has a 4.5% bond rate.
Table 2. – Best Managed Countries
Table 3 gives a “representative” list of Exchange Traded Funds for these countries. I see very little risk in any of these ETFs. And with dividend yields approaching 4%, they are worth considering as investments.
Table 3. – ETFs, Selected Countries
Source: Yahoo Finance
b. Badly Managed Countries
Table 4 provides my list of the least well managed countries. Venezuela is in a class by itself. Its proven oil reserves are greater than any other country, even Saudi Arabia. Despite this, their finances are in a complete mess. Like Venezuela, Brazil has great resources but currently has serious economic and political problems. Russia has never embraced free markets for anything and it shows. Greece remains in real trouble with no indication that the keys players (the Greek government, the Eurozone leaders (most notably Germany), and the IMF are near agreement on a sensible solution. And on top of this, Greece has to deal with a large migratory influx. Few talk about France’s economy. But it is worrisome with a high unemployment rate and debt. South Africa has been hurt by the slump in commodity prices. On top of this, its high unemployment rate results in political instability. The US – party gridlock with no real attention being given to how to reduce the deficit.
Table 4. – The Badly Managed Countries
Why Are US Incomes and Net Worth Declining? Labor Saving Technology
In an earlier piece, I argued that productivity gains and not the outsourcing of jobs to foreign lands was the primary reason for declining jobs in manufacturing. I was not alone in this assertion. The McKinsey Global Institute concluded“…overall in the United States, trade and outsourcing explain only about 20 percent of the 5.8 million manufacturing jobs lost during the 2000-10 period; more than two-thirds of job losses can be attributed to continued productivity growth, which has been outpacing demand growth for the past decade.”
Labor Saving and Productivity Gains – The Data
What sort of productivity gains are we talking about? They are huge. Data from the US Bureau of Labor Statistics indicate that output per labor hour in manufacturing has grown at a compounded rate of 4.79% since 1947. That means manufacturing workers are today 25 times more productive than they were in 1947. Reliable data on productivity gains in making autos does not go back that far, but assume the data for manufacturing is a good proxy for autos. It would mean that if 10 workers could assemble 10 cars per day in 1947, they could assemble 250 autos today! Since the demand is not there for such an increase in cars, workers have lost their jobs and the earnings of those still working have fallen. Table 5 tells us what has happened just since 1987.
Table 5. – Productivity Gains, Selected Sectors
Source: US Bureau of Labor Statistics
But figures do not tell the whole story on the labor saving effects of technology. Consider real estate and the auto businesses. The consumer is able to acquire almost all relevant information on line. Sales people are only needed to complete the transaction. Internet information is replacing the need for sales people for a wide range of products.
Department stores? As I noted in a recent piece, online sales continue to grow dramatically. This has spurred the growth in a number of transport companies from home delivery (FedEx’s) to container ships. And also in the transport sector, we see large labor saving innovations. The largest container ships can carry 19,000 20-foot containers, all loaded and unloaded by machine. In home delivery, work is afoot to deliver by drones.
Labor saving in education and health services has been restricted by hospitals, teacher unions and professional associations. There is really no need for teachers to develop their own lectures. Great lectures can be wired into every classroom, leaving the teachers to serve as discussion leaders.
In health, despite doctor resistance, delegation is growing that will in turn mean fewer doctors have to be in attendance. And even now, medical specialists are advising patients all over the world from MRIs and other images being sent to them over the Internet.
In short, it does not matter if it is autos, banks or legal services, Technology is reducing jobs. Today, most rote work is done by machines. The laborers are viewing computer monitors to insure machines are doing what they used to do by hand. And as consumers, we use the Internet for information formerly provided by “service” employees.
Growing Income Inequality is The Inevitable Result
In 2011, The Congressional Budget Office (CBO) found that, between 1979 and 2007, income grew by:
- 275 percent for the top 1 percent of households;
- 65 percent for the next 19 percent;
- Just under 40 percent for the next 60 percent; and
- 18 percent for the bottom 20 percent.
What is the reason for growing inequality? It is not greedy financiers. The reality is that the demand for many middle class workers is drying up. Labor-saving technology makes it possible for investors to use robots and other machines to do things humans used to do. And the robots/machines are cheaper and more reliable than humans. A growing surplus of “workers” relative to “owners” means wages go down and owners’ returns increase.
In a recently acclaimed book, Piketti and Goldhammer argued the share of income going to capitalists will increase. They said only a burst of rapid growth from technological progress or rising population can be counted on to turn this around. In asserting this, the authors were ignoring the labor saving effects of technology. The “burst” of technological progress is having just the opposite effect – less jobs and greater inequality.
Juliet Schor is an economist and author of The Overworked American: The Unexpected Decline in Leisure and Born to Buy: The Commercialized Child and the New Consumer Culture. She points out that historically, civilizations work fewer hours as they develop. I interviewed her a few years back and I quote her from that article:
“You’re right that we are going through a wave of mechanization, which has also extended to white collar labor. The only way to make this work now is to reduce hours of work. Trying to grow our way out of technical-change induced unemployment is ecological suicide. We’re already producing more pollution than the climate, and planet, can tolerate. Historically, we reduce hours per year and over the lifetime to respond to technical change. For example, in the US and most other global North countries, annual hours fell between from 3000 in 1870 to under 2000 by 1973. And that’s a big part of the point, isn’t it? Economic progress gives us more time to live, rather than slave.”
The “Education Solution”
Everyone cites the need for more education as the key to getting a well-paid job. The McKinsey study mentioned earlier concludes that the global supply of high-skill workers is not keeping up with demand. It predicts a potential shortage of 40 million high- skilled workers and 45 million medium-skill workers by 2020.” However, there is an upper limit on jobs needing more education. 85 million might sound like a large number but there are 3.4 billion works in the world.
While there will be temporary ups and downs, the global economy will continue to grow, at least in the near future. But labor saving technology casts a dark shadow over long term prospects. Increasingly, the economy will need fewer workers as investors find they can do things more reliably and cheaply by using robots and other machines.
There will be an increasing demand for better educated workers, but labor saving job losses will dwarf this new need. This lower demand puts labor in a tough position: they will either have to take lower wages (what is happening in the US now) or join the unemployment rolls.
And while all of this is going on, investors get richer and income inequality grows. The question then becomes, what happens to the unneeded workers? If they can’t earn income for work, then what? A partial fix would be to allow people to collect retirement benefits at earlier ages. I suggest this at a time when for budgetary reasons, politicians are talking about increasing the age at which Social Security benefits can be collected. More will be needed.
In a world where income is universally earned for working and there is no work, what then?