- The GFC has spawned a new norm of sub-trend growth. In the US, growth is lacklustre at best, unemployment is stable but participation is declining and the only winners seem to be on Wall Street. Such an economic malady must contend with the major secular trend of technological innovation which will continue to displace jobs over the coming century.
(Sub) Growth for the Future
- America has officially and technically risen out of recession however as the graph below shows, GDP growth remains well below its long run historical average. Just 3.5% per annum in the past seven years, which is almost half the 6.6% average since WW2.
- Although this meagre growth has secured a stabilisation of the unemployment rate, it has done little to stem the dual tides of declining participation rates and increasing underemployment. As Barry Bosworth from the Brookings Institute has said, this appears to be a new permanent norm. All this in the context of almost thirty years of effective wage stagnation in the US (wages having only increased by 3% from 1979 to 2014) so it is no wonder that American workers are not pleased.
The Extraordinary Had No Impact, Except...
- This tepid economic growth has been achieved through an extraordinary quantitative easing response from the US Federal Reserve. As shown below, the successive quantitative easing programs are wholly unprecedented in the history of the Fed. As a consequence of these measures, the Fed’s monetary base now totals over US$4 trillion.
- The clear winners from this quantitative easing regime have been asset and equity investors, with prices for both investments soaring. As the graphs below show, the equity market capitalisation has increased by a dramatic 122% since 2009 and asset prices are at their widest divergence from treasury bond yields since 1990.
- In an appearance before Congress in late February the Fed's Chair Janet Yellen recognised this unbalanced recovery, saying: 'We have seen a significant increase in the share of the pie, or GDP, that accrues to capital as opposed to labor... (while) too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our long-term objective.'
The Disruptive Solution
- Such divergent experiences pose big questions for policy makers in the US as they eye off new ways to get out of the new low growth norm. One sector that has always offered new solutions is technology, with the last decade seeing unprecedented levels of technological innovation. Indeed, information processing equipment and software has increased from 8% to more than 30% of private non-residential investment between 1950 to 2012. The results of this investment are born out in the technologies we use in our day to day lives: smartphone in hand, transferring money to the other side of the world, whilst directing Suri to use Google maps.
- However, one only need think of the Luddites of the Industrial Revolution to know that such innovation always faces resistance. As the graph below reveals the price of computer power has decreased rapidly since the 1970’s. This has posed, and continues to pose, a threat to routinised jobs as it creates a strong incentive for employers to substitute expensive labour for cheap technology. This is quite a quandary for policy makers in the US who must manage the malaise in the job market as well as the fall out from technological disruption.
- Researchers from the Brookings Institute argue that while jobs may be initially displaced, in the long term such technology actually creates employment. But, and this is important, the jobs generally created are more conducive to non-routine physical movement and abstract, imaginative and persuasive skills; which are generally used at the higher end of the skill and wage distribution. Leaving a whole host of displaced manual labour out of the benefits of innovation. This is a major problem for a country with 50 million people already living in poverty.
- The US remains in a state of paralysis despite having long surfaced from recession. Lacklustre economic growth has created a situation of underemployment of labour and the extraordinary response from the Fed has had little impact beyond boosting Wall Street. Add to this the prospect for major technological innovation, seen as a solution to sub-trend growth, and you arrive at one big quandary.
- To find a way around this, policy makers are rightly focused on education at the same pace as technological innovation to ensure that those displaced from the workforce can be folded back into the economy with new skills and better jobs. The progress is slow however and growing unrest on Main Street due to poor employment prospects and low real wage levels, is beginning to mount pressure on Capitol Hill to reverse the unprecedented monetary largesse. The impact for the global economy of less liquidity and higher interest rates in the US will be severe – but perhaps ironically it appears old fashioned voter sentiment around job security, being communicated on modern electronic devices and platforms, will be the driving force to unwind the current monetary bubble.
This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.