Stuck in the Middle With You
Reservoir Dogs … If it’s lost on you Google it
It’s safe to say that all eyes globally are on the United States right now with an election that feels more like a script of House of Cards than the sad reality we’re living.
There are reasons to be despondent on both sides of the aisle. We are in the midst of global economic changes and challenges and both extremes seem to have formulas more pointed at the past than the future.
It seems well understood and agreed that economic inequality has widened and that traditionally middle-class, white, male, non-college-educated workers have less relative money, stature and influence than they once had.
It should be said that African Americans and Latinos of lesser economic means are also suffering but lately that seems to capture less press attention — mostly because everybody is trying to understand the rise of Trump fueled by: Xenophobia, misogyny and isolationism.
There seem to be four macro trends driving the economic malaise many middle-class workers face.
We all know that markets have globalized over the past forty years. This has positive and negative consequences but the easy press stories cover the negative outcomes.
On the positive side of course globalization has benefitted US companies including technology companies like Microsoft, Apple, Google, Facebook, Oracle, Salesforce.com and so forth who have built global businesses and benefit from global audiences.
US consumers have also had tremendous gains in the dramatic lowering of costs of household goods and unprecedented improvements in convenience and capabilities of goods and services that make our life qualitatively better.
And there is an obvious negative externality that manufacturing jobs have shifted from the industrial heart of the US.
This should come as no surprise and we should focus on how to deal with the consequences of globalization rather than try to roll back the clock and pretend it doesn’t exist. Trying to disavow globalization is no better than the luddites of England trying to deny the industrial revolution.
The movement of jobs is a well understood economic phenomenon as outlined by the father of international trade economics David Ricardo in 1817 in which he posited that jobs should go to locations in which there was a “comparative advantage.” Anybody who studied economics would be familiar with this theory.
Said simply: if lower-wage countries have a comparative advantage in manufacturing due both to lower costs and a large availability of labor (the two are related) then manufacturing should be shifted. And in wealthier nations there is often a comparative advantage in jobs that are higher up the value stack including: innovation, design and management.
As manufacturing booms in lower-income countries wages rise, conditions improve and these countries develop new skills and new comparative advantages and more developed nations must continue to adapt.
If you want to understand the narrative of this trend there is no better book than Pulitzer Prize winning novel American Pastoral, by Philip Roth, amongst my favorite novels of all time. It profiles a multi-generational immigrant family and the journey from laborer to store owner to entrepreneur to industrialist to globalizer to break-down and rebellion.
American Pastoral also captures the impact of globalization on towns and workers and the shift from urban to suburban and takes on difficult topics such as the role that unions play in both improving workers rights and also in driving US companies to be less “comparatively” competitive.
What is most disheartening in the past six months is to watch both sides of the political spectrum regress and cater to the fears of those economically impacted by globalization.
For starters, Donald Trump is a moron with no coherent political or economic policy. He would have us start trade wars with China and real wars through carpet bombing and would encourage torture. I’ll address immigration later.
But equally I don’t feel the Bern. Six months ago some younger friends of mine started inviting me to Bernie Sanders dinners and rallies and I thought they had lost their minds. Cancel NAFTA? Are you kidding me? Trade with Canada and Mexico will be our single most important differentiator in the future world in which we become more isolationist (see my section on demographics).
And I feel the same about the far-left’s resistance to the TPP (trans-pacific partnership). Globalization won’t stop. So we can stick our heads in the sand and watch China dominate the next century by forging trade throughout its region and becoming a hegemonic power in Asia or we can engage.
No trade agreement will be perfect just like no laws are perfect as both are crafted through compromise by people with vested interests on all sides of an issue. But have a seat at the table and get the best deal you can and then fight to make it better — don’t crawl into a cave and light fires.
I understand the frustrations of the left who feel they have stagnant wages and fewer savings and frankly — those are also the fears of the right. The problems are very real and need to be addressed but Sander’s solutions are a step in the wrong direction.
Of course automation plays a large part in the economic disparities that exist. We have replaced many line workers with machinery and require less jobs through IT systems automating what others did with pencils and paper.
We have obliterated entire job functions that seem archaic now such as a travel agent. telephone operator or newspaper distributor and we can already begin to see the decline of more jobs such as taxi driver or x-ray technician.
Comparative economics through automation will push jobs to corners of the world where skilled people can write copy, edit videos, read x-rays, create graphics or perform quality assurance on software. This was well captured by Thomas Friedman in The World is Flat.
Anybody at the forefront of the technology world also knows that huge expected gains in AI (artificial intelligence) and robotics will continue to gut jobs and in this instance probably cause a massive disruption to white-collar workers as computers learn to do our jobs that require thought much better than we can do.
If you want to understand what a low bar the human brain actually has in performing data analysis relative to computers you might read Daniel Kahneman’s great work Thinking, Fast and Slow. It basically shows how fallible “experts” are in solving problems they are supposed to be expert in solving— and he doesn’t spare the investment industry.
The answer to automation and globalization is NOT to deny them — they are here and won’t go away. The answers of course are: education, training and retooling of workers at the same time as we incentivize innovation and entrepreneurship. In short, we live in a market. We can lead change or somebody else in the world will. Markets don’t stop because we stick our heads in the ground.
But I also believe we have a responsibility (and a benefit) to invest our profits from companies and from wealthy individuals to help our economies retool. It can’t be that we simply keep more profits and capture more wealth and don’t invest this in the future of our areas and people more impacted by change.
The third major issue for our economy is demographics. We know some obvious things: our population is living longer and our healthcare costs are increasing. We also know that our aging population doesn’t have the savings it needs to properly retire.
Every country has different demographic trends driving its future but know that economies only grow by either getting more people working or making each worker more productive. These are the two drivers of GDP.
And here’s the thing you need to understand about the US economy. Baby Boomers are now retiring en masse. They were born between 1946–1964, are now between 52–70 years old as of 2016 and there were approximately 76 million Baby Boomers born. The term comes from the explosion in the population post World War II.
As they retire they stop paying taxes and they massively decrease their spending in the economy as they switch to fixed incomes. The decreases in the tax base and spending of course fall to the next generation — my generation — of Generation X.
So what you have is a slightly reduced population behind the Baby Boomers who are going to have to fund people who are living longer and costing more. And because we have a “geriocracy,” in which older people vote more frequently and therefore highly influence government policies it doesn’t seem that costs will go down to fund retirement benefits.
This demographic trend is highlight in my favorite book of the past 5 years: The Accidental Superpower by Peter Zeihan. He lays out more brilliantly than any other analysis I’ve ever read about the roles of demography and topography in influencing the future of world order.
In short he predicts economic stresses to the US as Baby Boomers retire for about 15 years at which point the rise of Millennials invert the curve back to more favorable tax bases vs. retirees. He also goes through demographics of other world populations including Russia, China, Japan, Germany and so forth and the role this will have on their economic futures.
Zeihan’s work also inadvertently makes the strongest case I have ever read for doubling down on NAFTA and creating a regional superpower that will benefit all countries in our region.
Put up a wall? Keep immigrants out? That’s the exact opposite policy we need to compete effectively in the next hundred years.
Of course the other macro trend is climate change and fortunately it seems that all climate-change deniers have now left the election cycle.
The role of climate change is of course hard to predict but the combination of growing world population plus raising temperatures spells future world conflicts.
Some good primers for you here on the role of climate and economic order are: Thomas Friedman: Hot, Flat & Crowded or my favorite book to shock the system on the topic is Collapse, by Jared Diamond. I read it a long time ago so let me paraphrase. Professor Diamond argues that the world reaches maximum sustainability at about 10 billion people and thankfully population predictions have human population slowing before this level.
And this is a big but. The sustainability models were built around the world staying roughly at today’s economic development levels and as China and India reach Western standards of consumption this would be the equivalent of the world reaching something like 30 billion people.
Professor Diamond does a wonderful job of dissecting populations that have gone through collapses throughout history and while we always know the proximate cause (war, starvation, natural disaster) it has exclusively been through over exploitation of local resources.
We know what some of the obvious climate battles will be. The most obvious being clean water. But we also know that as the drive for alternative energy sources has increased this has and will continue to have an impact on the economic conditions of the Middle East.
Breaking down how this will happen, why this will happen and the role of fracking in all of this is Zeihan’s Accidental Superpower. You simply. Must. Read it.
And before you start celebrating about the decreased importance of the Middle East — and lest you forget to consider the human plight of the poor and innocent people in this region — remember the roles of 1, 2 and 3 above.
Globalization is driving accessibility to foreign territories with relative ease, automation is driving drones and autonomous devices with small cameras and sensors (and possibly one day less friendly things) and demographic trends will drive masses of populations in search of economic survival to seek out consequences in the world.
So putting our heads in the sand won’t help. Closing our borders and becoming anti-Muslim won’t help. Isolationism won’t help. And developing alternate energy sources without also helping to figure out how to help these petro-economies that we have historically helped prop up transition to the modern world economy will leave whole populations economically diminished and angry at those relatively better off. In many ways it will echo the frustrations we see at home but on a global scale.
So as a look at all of this I eschew the right and the left. I reject rejectionists. We need to lead from the center. We need leaders that speak the truth to their populations or we’ll see far-right movements in places like France, Denmark, the Netherlands or the US continue to rise along with far-left movements in the UK and US and elsewhere.
Nobody gains from this. Let us be rational. And whatever you think about the last woman standing, we have only one choice: to reject the fools to the left of us and jokers to the right.
Here I am. Stuck in the middle with you.