I’ve been thinking lately about economic growth, prosperity, and disparities. Breaking them up into components starting with the last of the three, disparities in economic prosperity and growth. Disparities drive the social and political climate. Disparities too great for too long lead to unrest, questions of fairness and ultimately change, whether smooth as intended in modern democracies (USA election, UK’s BREXIT) or violent as in authoritarian governments (Syria, Venezuela). So it is important and necessary to view disparity in concert with how prosperity and growth can be achieved. By growth, I mean relative-wealth improvement. Growth has been slow for more than a decade, making differences seem ever more pronounced. By example: high growth, say 4 or 5 % means that even those experiencing below average growth are still seeing some decent improvements, 50% of average is still 2 to 2.5%. When the growth rate is 1 to 1.5% then the disparity of growth will seem to be greater, as those experiencing 50% of this rate are now below 1% growth… and for many they suffer the experience of negative growth. They are falling behind. Governments often try to smooth this out through grants, loans, taxes to those considered underprivileged, great… but what if a large segment that is falling behind is not where the elites driving policy are focused. What if they are not inner-city minorities? What if they are instead a near majority? They are a great middle-class that helped win two World Wars, helped build a great industrial nation. And what if they now feel cast aside? Well then we can expect change, and boy do we have change.
Okay so now what? We want growth and prosperity without so much disparity. Prosperity is another word for increasing wealth. Prosperity means improved buying power. In a corruption of the capital markets, government can allow a perception of prosperity through lowering the cost for some members of society in order to drive out some of the disparities. So for example, education grants, healthcare subsidies, food stamps, tax breaks, mortgage guarantees, etc. Obviously this is useful for the short-term, but corrosive and corruptive in the long-term as people become dependent on these breaks and gifts, resulting in government programs destined to continue to grow and to be manipulated through corruption. Which also brings to mind the question: who needs help? For so long it was inner-city poor and minorities. That so fit the model of the elites making economic policy that they effectively ignored small-town middle-America. To be sure some of the benefits provide by government have made it to middle-America. However, these short-term fixes are being rejected by those in the industrial and agricultural center of our country as insufficient. They see themselves as part of something bigger, and want and need longer-term solutions.
So now growth, there are two types of growth to consider, one built on growth of government, i.e. the biggest spender in our economy. The other is the growth of industry. By the way, we shouldn’t confuse the stock market improvements as growth; the markets are only an indication of a few experts and mostly crowd followers’ view of the future prospects of a basket of stocks. Growth is rather measured by GDP, Gross Domestic Product, which is a measure of how much productivity is improving and how much markets are expanding. Productivity improvements are essentially “improving supply” and growing markets, or “improving demand” are what is needed to realize growth. Without it an economy stagnates in no or slow growth mode. Short-term methods are possible with government spending increasing, effectively expanding the market (demand). However, there are limits to what a government can do by simply buying more. An alternative is for government to override free-markets by applying tariffs to imported goods, forcing a price advantage for domestic goods, thus also artificially increasing a demand for domestic goods over imports. These demand improvements work, but have limitations, buying more means growth in government size and therefore more taxes or more debt, both can be long-term buzz killers. Long-term demand should rather be enabled with expanding global markets and innovative products and services.
So let’s talk about productivity improvements. Productivity improvements fueled some of the greatest growth periods in our country’s history, things like highway infrastructure, port infrastructure, rail-infrastructure. Logistical improvements enable industry productivity by allowing goods, and people to move faster and more efficiently. The highway infrastructure improvements in the 50’s gave us supermarkets, housing booms, and lower cost goods through better distribution. These are long-term plays, because it then takes industry and entrepreneurship to take advantage of infrastructure improvements. Another example is energy projects that in the 1930’s delivered massive improvements and ubiquitous electrical power, the result was extensive industrial growth decades later.
What we need now is a dose of reality. The industrial growth we experienced in the 1950’s through 1970’s was a result of innovations in productivity enabled by infrastructure investments that were unique and not easily recreated (e.g. improved reliability of the electric grid is important to avoid disastrous failures and security issues, but doesn’t yield new productivity) and also the result of long-term improvements. New innovations provide growth opportunities, especially if they benefit from infrastructure improvements and time to incubate and grow. Think about high-bandwidth and secure cyber infrastructure. Think about identity security improvements to reduce drag on finance. Think about next generation in mobility and the infrastructure required to support it. Near-term investments in infrastructure can have long-term implications in productivity, growth, and even national security. National security, laws, and business favorable regulatory environment are necessary prerequisite for the USA to be the preferred place for entrepreneurial investment.
It will be an ever more complicated economy as the new administration attempts to balance addressing the disparity issues banging on the doors of Washington, the security challenges to our infrastructure, as well as managing the opening or closing of markets as a business man attempts to change the trajectory of growth and resulting economic prosperity. Should be interesting ride. But as we ponder this economy, we can take some solace in what a friend of mine pointed out a couple of days ago: that on a global basis over the last year, in fact over the last 25 years, 137,000 people a day on average advanced out of extreme poverty. Therefore, there seems plenty of hope for future global demand growth… if we figure out how to serve the needs of the world, we really will be great. Just my thoughts!