Longer Wait For 'Next Big Thing' Will Slow Growth And Innovation
Recovery from a long and deep recession will no doubt relieve some of Americans' anxieties about the economy, but it still leaves the important question of what's next.
Do we return to the way it was prior to the downturn? Or will we emerge from the hard times on a significantly different path? Either way, looking forward starts with looking backward.
The Great Recession of 2008-09 brought plunging GDP, spiking unemployment and nose-diving stock prices. Like an exclamation point, it ended an extraordinary era for the U.S. economy — a quarter-century of strong growth, low unemployment, tame inflation and great productivity leaps, interrupted only by a pair of short, mild recessions.
This run of good times sprang from six key drivers: paradigm-shifting technology, rapid globalization, easy credit and investment gains, unbridled consumer spending, low and stable inflation, and government's shrinking role in the economy.
Over the next six days, this Investor's Business Daily series will explore the prospects for each of these economic drivers in the decade ahead. All are likely to play out differently, suggesting the U.S. economy won't pick up where it left off before the Great Recession. We begin with technology.
In the 25 years ending in 2007, the U.S. economy rode the upside of a Kondratiev wave, a term economists use to describe decades-long surges in technological progress. More than a century ago, for example, harnessing electricity for light and power kicked off a long period of rapid innovation and economic growth.
In recent decades, it was the microprocessor that led to a parade of new and better products — computers, the Internet, software, cell phones, digital cameras, VCRs and DVDs, scanners, smart appliances, digital entertainment, GPS devices and so much more. Personal computers and the Internet — the most far-reaching of the new technologies — spurred ongoing revolutions in communications and commerce.
New industries rose to design, produce and sell these products, creating jobs for workers and wealth for investors. Telecommunications, computers, electronics, software and related services — key sectors energized by the microchip — grew in real terms from a $200 billion blip in 1982 to a $1.6 trillion behemoth in 2007.
The microchip's ripples spread beyond the tech sector. Railroads, oil exploration, manufacturing and other traditional industries used computers, scanners, the Internet and other technologies to cut costs and expand markets. The innovations helped spur a productivity surge that made goods and services cheaper and shifted economic growth into overdrive for a quarter century.
Today's New Capitalists Promise 3 Bil New Consumers Tomorrow
The World Bank describes three waves of globalization. The first took place between 1870 and 1914, and the second from 1950 to 1980. The third and current wave began in 1980, arriving just in time to become a key driver of an extraordinary era for the U.S. economy.
From 1982 to 2007, globalization boosted growth by opening new markets, compelling more efficient use of resources and lowering prices for consumer goods and inputs.
The quarter century of strong U.S. growth ended with the Great Recession of 2008-09, which has left globalization tarnished but still marching forward. In the decade ahead, cross-border ties will deepen and broaden, shaping America's economic fortunes in new ways.
Globalization's prospects are the focus of this second installment of a six-part Investor's Business Daily series examining the post-recession outlook for the six drivers that propelled the U.S. economy from 1982 to 2007. Part 1 pointed to technology's ebbing economic impact; after globalization, the series covers credit, the consumer, inflation and government.
Globalization always advances with freer trade and lower transportation costs, but the third wave's economic impact owes just as much to its other defining characteristics — huge new players and cheaper communications technologies. These two factors will be just as important in the decade ahead.
Before the recession, 3 billion new capitalist producers rose out of the geopolitical and ideological currents related to communism's decline and eventual collapse. China, India and nearly all the former Soviet bloc nations, plus parts of Latin America, junked state-run economic orthodoxy and unshackled their companies and workers, adding tremendously to worldwide output.
Since 1990, for example, China's output has risen by a factor of five for washing machines, six for steel, eight for color TVs, nine for mobile phones, 250 for room air-conditioners and 1,000 for motor vehicles. A large share of this production has made its way to foreign markets as Chinese exports soared from $91 billion in 1990 to $1.1 trillion in 2008.
So far, the new capitalists have been viewed as competitors, putting pressure on U.S. companies and workers to become more efficient. But going forward the arrival of these new economic powers holds the promise of 3 billion new consumers.
Simple math provides a rough idea of the opportunities for U.S. companies. Our country's 309 million people make up a small share of the world's population of 6.5 billion — so 21 of 22 potential customers are beyond our borders.
Wave Goodbye To Easy Credit
The word "credit" traces its origins to the Latin credo, or "I believe." Profits, paychecks and other rewards animate capitalist economies, but these financial incentives work only because of some basic beliefs — that debts will be paid, that contracts will be honored, that financial data will be accurate, that corporate insiders will act in good faith, that regulators and courts will enforce the laws.
When those basic beliefs waver, the economy suffers, sometimes mightily. In the past decade, private scandal and government laxity led to a loss of faith that crippled lending and investing and helped plunge the U.S. economy into the Great Recession of 2008-09. We're now coming out of the long, deep slump with a palpably different mindset on the financial system and its risks.
The country's transition from easy credit provides the basis for this third installment of a six-part Investor's Business Daily series looking at the post-recession realities for the six drivers that kept the U.S. economy strong and stable from 1982 to 2007. The first two parts looked at technology and globalization; after credit, the series covers the consumer, inflation and government.
During the U.S. economy's extraordinary quarter-century run, money for borrowing and investing was cheap and plentiful. The Federal Reserve's easy-money policies and a global savings glut kept interest rates low. Free-flowing credit helped fuel a period of rapid growth, low unemployment, low inflation and strong productivity gains.
Stock values rose to new heights, with the Dow Jones industrial average posting an average annual gain of 14.8%, including dividends. Book titles grew positively giddy over what may come: Dow 20,000, Dow 36,000, Dow 100,000.
Stocks weren't the only assets gaining in value. Large cities' home prices doubled from January 2000 to mid-2007 — and did substantially better in Miami, Los Angeles, Washington, San Diego and Las Vegas.
Getting richer was never easier. The ratio of total financial assets to disposable income — flat at about 6.5-to-1 for four decades — took off in the mid-1980s, more than doubling to a peak of nearly 15-to-1 in 2006.
The good times bred complacency, perhaps even naivete. We came to believe that asset prices would keep going up. We came to believe that those who ran businesses and managed money were all basically honest. We came to believe regulators were vigilant, dutifully checking corporate balance sheets to protect us from fraud and systemic risks like "too big to fail" financial institutions.
Caution Suddenly Back In Style For Once-Impulsive Consumers
Times were good, and Americans wanted the good life. A growing economy, low unemployment, soaring stock markets and easy credit gave consumers the money and confidence they needed for an epic buying spree.
Many households spent every dollar they earned, then tapped into their home equity and spent that money, too. Just keeping up with the Joneses wasn't enough; many of us were in a headlong dash to get ahead of them.
The good times ended with a dull thud as the U.S. economy plunged into the Great Recession at the end of 2007. The country comes out of that long and deep downturn with consumers transformed, abandoning their spendthrift and becoming more prudent in their finances.
In the decade ahead, free-spending American households won't fuel U.S. growth like they did during the quarter-century leading up to the recession.
The changing American consumer is the subject of this fourth installment of a six-part Investor's Business Daily series looking at the post-recession realities for the six drivers that propelled the U.S. economy from 1982 to 2007. The first three parts looked at technology, globalization and credit; after the consumer, the series moves on to inflation and government.
In the buying spree prior to the recession, the personal savings rate fell from more than 8% in 1982 — even then, low by global standards — to less than 1% in 2007.
Household debt exploded, rising from 60% of disposable income in 1982 to 130% in 2006. The primary contributor was added mortgage obligations as Americans bought homes for the first time, moved up to bigger and more expensive houses and discovered the piggy bank of cash-out refinancing.
In the recession, the savings rate spiked upward as Americans fretted about the economy, and many households are now bent on trimming their debt burdens. Keeping up with the Joneses just was just too expensive and stressful.
Cautious consumerism is likely to become a hallmark of the next decade, with fewer families trying to live beyond their means. We might see increasing demand for smaller homes, less splurging on luxuries and shorter vacations to budget-friendly destinations.
In big and small ways, consumers will be more careful with their money — eating at home rather than in restaurants, setting the thermostat a few degrees higher in the summer and lower in the winter, drinking more tap water, and improving homes with do-it-yourself projects.
A Different Mind-Set For The Fed: More Inflation Not So Bad After All
Thirty years ago, U.S. inflation was out of control, running at nearly 15% a year. The tough policies of Federal Reserve Board Chairman Paul Volcker cut the annual average increase in consumer prices to less than 3%, where his successor Alan Greenspan kept it during his nearly 19-year tenure.
Low inflation provided the stability necessary for a period of low interest rates and strong economic growth. The Fed deserves most of the credit for cutting inflation and keeping it low. During the recession that began in December 2007, however, the Fed allowed inflation to get too low. Indeed, prices fell at an annual average rate of 8% from July to December of 2008, exacerbating the weakness in real estate and other asset values and plunging property owners into financial hardship.
Faced with a financial panic and deep recession, the central bank then reversed course and flooded the economy with bank reserves, which helped arrest the economy's fall but left the Fed sitting on a powder keg of potential inflation.
In the decade ahead, a scarred and scared Fed — its independence in question — will seek to reduce the risks of recession, accepting the trade-off of higher inflation. What's more, government debt at $12 trillion and growing looms over us, providing political motives for raising inflation targets.
This shifting ground for monetary policy is the theme of this fifth installment of a six-part IBD series looking at the post-recession realities for the six drivers that propelled the U.S. economy from 1982 to 2007. The first four parts looked at technology, globalization, credit and the consumer; after inflation, the series concludes with the changing role of government.
Not all that long ago, the Fed was taking bows for steering the economy through a quarter-century of strong growth with low inflation. The Great Recession, though, exposed the central bank's unsteady hand — too loose while the housing bubble inflated, then too tight when it burst.
Once the economy tanked, the central bank scrambled to fight a stubborn recession by pushing its policy interest rate close to zero. When that proved ineffective because banks grew reluctant to lend, the Fed resorted to extraordinary measures, buying financial assets and making direct loans to inject additional money into the economy. In just a few months, the Fed's balance sheet ballooned from $820 billion to more than $2 billion.
Another Hurdle For The Economy: Bigger Government, Like It Or Not
The Reagan revolution began during a recession almost as severe as the recent one. The administration cut taxes and reduced government's role in the economy by deregulating, privatizing and freeing trade. These policies sent a strong message in uncertain times for the U.S. economy — government wasn't the solution.
For the next quarter-century, the political center of gravity held that government meddling retarded economic growth and freer markets drove it. Events vindicated this strategy. The U.S. prospered, the socialist Soviet Union collapsed and China emerged to lead the world in growth as it opened its economy to free enterprise.
Now, a deep, long recession has dimmed memories of capitalism's heady days and eroded public confidence in freer markets. An economic rebound over the next decade isn't likely to bring back the capitalism that reigned from 1982 to 2007. We will see government take a larger role in the economy — like it or not.
Expanding government completes this six-part Investor's Business Daily series on the post-recession realities for the six drivers that propelled the U.S. economy from 1982 to 2007. The first five parts looked at technology, globalization, credit and investing, the consumer and inflation. All six installments can be seen at ibdeditorials.com.
Unlike the early 1980s, government is now served up as the solution for a struggling economy. Heavy doses of Keynesian stimulus have raised government spending as a share of GDP from 39% in 2007 to 49% in 2009.
Hoping to save or create jobs, Washington has doled out tax breaks, subsidized spending on houses and cars, handed out money to state and local governments, and propped up financial firms and automakers. It did all this with money it didn't have, increasing its borrowing. By the end of this year, federal debt will approach 100% of GDP, up from 60% in 2006.
Even bigger government may be on the horizon. An expensive health care overhaul will go into effect over the next few years. Work is under way on new regulations financial services and other industries. Income-tax rates are likely to rise sharply — at least in the top brackets. Trade policy may take a more protectionist tack.
The quest for the right size and scope for government has bedeviled societies since the time of Adam Smith. Capitalism can't function effectively without the state to enforce property rights and provide public goods. Too much government, however, can ruin free enterprise economies by interfering with market signals that allocate resources efficiently and sapping incentives to get an education, work, save, invest, innovate and start companies.
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These six article originally appeared in Investor's Business Daily and can be found on Investors.com, Longer Wait for Next Big Thing Will Slow Growth and Innovation , Today’s New Capitalists Promise 3 Billion New Consumers Tomorrow , Wave Goodbye to Easy Credit , Caution Suddenly Back in Style for Once-Compulsive Consumers , A Different Mind Set for the Fed-More Inflation Not So Bad After All , Another Hurdle for the Economy-Bigger Government Like it or Not
Investor’s Business Daily, Inc. Used with permission.
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