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InnOvation Capital & Management, LLC

IntelDigest

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AUGUST 9 , 2017

 

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We return to “Investing and the Markets” in the next few issues of  IntelDigest.  In the last three weeks, we have run a series of articles from the  IntelDigest  archive;  those articles … originally published in April/May … addressed investment in specific sectors.  Today, we begin a series analyzing market trends for the rest of 2017 and into 2018.

 

Market “Melt Up”

In recent interviews, veteran market strategist Ed Yardeni, of Yardeni Research, has lent support to the thesis that the stock market is more likely to keep rising through the rest of this year.  Yardeni noted that the recent record highs for the Dow Jones, Nasdaq, and S&P 500 indices were not driven by a surge in valuation multiples.  Rather, he described a “melt-up in earnings” … a bullish sign for the remainder of the year.

“The fundamentals are just cranking along at a decent pace here.  Earnings are doing remarkably well given that the economic data looks kind of slow.  But, somehow or another, companies are generating good revenues and good earnings.  I think that’s because the global economy is doing reasonably well,” said Yardeni on the CNBC  Futures Now program.

Although the three major indices are taking a breather this week after surging in July, all are likely to resume an upward trend after Labor Day.  We wrote in our April 26 issue:

“As we expect 2018-19 to feature both a Credit Default Crisis and a cyclical Recession, we think that these last few months of the expansion bring us the best opportunity for significant investment gains for quite a while.”

So, with Stop Losses on our portfolio tightened up, we expect to ride the last few months of the Bull Market.

Individual Stocks vs Stock Funds

The remainder of this letter will be devoted to Exchange Traded Funds (ETFs), which are low-cost, “passive” investment funds which simply track particular benchmark indices.

The number of publicly-traded companies … represented by individual stocks … has contracted significantly in the last two decades.  In 1997, there were nearly 7,500 publicly-traded stocks;  today, there are fewer than 3,600.  In addition, many companies have bought back millions of shares of stock since the market downturn in 2008.

One explanation for the market run-up of the last eight years:  a diminished supply of stocks available for purchase, and investor demand for equities because ultra-low interest rates ravaged the fixed-income markets.

Exchange Traded Funds

By contrast, the number of exchange traded funds (ETFs) has grown to almost 5,000 … greater than the number of publicly-traded stocks … and continues to increase.

ETFs represent an important investment tool for all investors, but especially those looking for an easy way to invest in a particular geographic region, market, sector, etc. The amount of assets under management (AUM) held in ETFs now exceeds $3.4 Trillion, a 17-fold increase since 2003.

ETFs are simple to understand, and appeal to investors who may have been disappointed by the relatively high fees and underperformance of “active” funds, where fund managers select stocks to include in the fund.  ETF sponsors can make the case:  why pay more in fees to underperform when you can track the benchmark for nearly free?

Considerations in Choosing ETFs

In choosing an ETF investment, you must carefully consider the cost, liquidity, and makeup of the fund.  There is a great deal of overlap in exchange traded funds.  Different funds may track the same underlying index.  And, as mentioned above, there are actually more funds than there are publicly-traded stocks being tracked!

Most important … be sure to do your homework and understand exactly what the fund does.  What companies comprise the underlying basket of securities?  Does the fund seek to replicate a standard benchmark index, such as the S&P 500?  Or, does it follow a very specific sector, such as cybersecurity or cloud computing companies?

What costs are associated with the investment?  ETFs charge a fixed-percentage annual running cost to shareholders, referred to as the “expense ratio.”  ETFs typically charge less than 0.50% of AUM, compared to actively-managed funds which may charge more than twice that rate.

ETF sponsors can usually afford to bring the expense ratio even lower because of economies of scale.  As an ETF gathers more assets under management, costs as a proportion of the overall fund size decrease.  Because the fund is simply tracking an underlying group of stocks, there are negligible transaction costs.

In addition, greater competition in the fund industry puts downward pressure on expense ratios.  Investors are ever more cognizant of the diminishing effects of fees on their return.  If you are looking at two near-identical ETFs which track the same index, which one would you choose?  The fund with the lower expense ratio will win out more often than not.

But, keep in mind that different underlying ETF assets come with different associated expense ratios.  If an ETF holds a wide range of emerging market stocks, the expense ratio would be higher than a fund tracking a standard benchmark index.  It is more expensive for an asset manager to replicate a basket of stocks across multiple exchanges, and the expense ratio reflects that.

The Vanguard funds are generally recognized as cost-effective ETFs.

Finally, one must be concerned with the liquidity of a potential ETF investment.  Liquidity is the ease with which you can buy and sell a security in the market without affecting its underlying price.  Some ETFs can suffer from a lack of liquidity.

Examine the financial statements of any fund in which you have interest.  A fund with Billions of Dollars in assets under management (AUM) usually will have no liquidity problem.  A fund with considerably less AUM is more risky.

Also, examine the underlying securities in the fund.  A basket of large-cap equities in developed markets is safer and more liquid than an ETF holding small companies in less stable sectors or geographical regions.

If you choose to buy a relatively illiquid ETF, please be sure to use “limit” orders.  When placing an order to buy or sell, specify the maximum purchase price (or minimum selling price) that you are willing to accept.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

JULY 12 , 2017

 

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

We complete a series on “Technology and Connectivity” in this issue of  IntelDigest.  Last week, we looked at the China-led megaproject, “One Belt, One Road,” and the increasingly more distributed Global Economy.  We posited that Globalization is more of an unstoppable force than a trend, and asserted that America should be leading the Global Economy into the future, NOT retreating from it.

In future issues, we will come back to specific topics in Technology, such as artificial intelligence, robotics, and cryptocurrencies.  But, we will complete this series with a more general look at technological development.

 

How Technology Advances in the 21st Century

Over the centuries, scientific and technological advances came incrementally, from the days of Galileo and Gutenberg through the Industrial Revolution, and began to pick up speed in the late 1800s with discoveries in physics, chemistry, electricity, sound waves, and electromagnetic radiation (light).

Since World War II, growth in science and technology has come exponentially, occurring at breathtaking speed.  And, the pace of change accelerates.  We can look forward to life-changing advancements, in just a few more years, in nanotechnology, materials science, and additive manufacturing;  battery technology and autonomous vehicles;  biotechnology, gene-editing, and medicine.

These advancements will certainly be “disruptive,” and will radically transform the lives of most of the inhabitants of this planet.  Emerging technologies in areas such as robotics and additive manufacturing, for example, are expected to be highly disruptive of labor markets around the world, inviting backlash from many workers.

However, technological changes do not affect all equally, because geopolitics plays a determining role in the diffusion and adoption of new technologies among cultures and societies.

 

 

 

Geopolitical Constraints

The ability of a society to prosper from developments in science and technology is dependent on numerous factors, from geography to natural resources, from infrastructure to defense strategy, from demographics to labor markets, from availability of capital to education policies.  Determining factors can vary widely from one country to another, and will create significant differences in each country’s ability to accept and utilize the type of advancements which we can anticipate in the very near future.

For example, Israel is a country which can be expected to embrace new technologies.  It has a highly-educated workforce, a culture which encourages education, and a history of advances in scientific and medical fields.  And, because of the perils of living in a dangerous neighborhood, Israel is a leading developer of weaponry and defense systems.

In addition, because of its harsh geography and scarce water resources, Israel has been at the forefront of developments in conservation, reuse, and desalinization of water resources.  Israel would most likely be among those countries which are early-adopters and beneficiaries of technological advancements.

Russia’s history has been dictated by military concerns. Russia (and the old Soviet republics) comprise a vast territory with substantially indefensible borders.  The susceptibility to invasion has been a primary concern of the society for centuries.  As a result, Russian priorities in science and technology have been devoted substantially  to military and intelligence applications.

This is not to say that Russians are not interested in being early-adopters of new technologies.  However, the state’s bastion-mentality tends to crowd out other interests, so that Russia tends to lag behind in technological fields (with the exception of cyber warfare, of course).

Japan is a country which shifted from a war-footing to leadership in consumer electronics in just a few decades. Then, recognizing a coming demographic disaster, it shifted again to become a world leader in robotics.

Japan faces a dwindling population and smaller workforce in the 21st Century.  Its inflexible labor markets are designed to protect existing workers’ rights, limiting the country’s ability to adapt quickly to shifting labor requirements.  So, Japan must be an early-adopter of new technologies … robotics and advanced manufacturing techniques … to compensate for an aging population and lost labor productivity.

The Japanese have had a historical aversion to immigration, so the social acceptance of humanoid robots, medical robots and related technologies is higher than most other countries.  Japan is a likely early-adopter of new technologies for use in the service sector.

 

 

 

The development of the China economy over the last 25 years has been no less than astonishing.  However, managing A Billion People over an enormous land mass is difficult and daunting.  China’s financial system and inflexible labor markets tend to hold back China and much of its population from the benefits of scientific and technological advancements.

Chinese technology has matured over those 25 years, from importing products and processes … to reverse-engineering foreign designs and manufacturing in its own facilities, with the help of Western companies.  The next step … mastering research, development, and manufacturing in home-grown industries which can compete in the Global Economy … will probably be accomplished over another 25 years.

Still, for a developing nation, China is relatively advanced in technologies that support national security initiatives, including aerospace, quantum-based technologies, biotechnology, and cyber security.

 

American Advantages

To this point in history, the U.S. has stood out as the unprecedented leader in the Global Economy.  Starting with the blessings of geography and the foresight of the Founding Fathers in establishing the Rule of Law, our country could stand on that solid foundation and grow into the leadership position which we have enjoyed for most of our lifetimes.

Americans have amassed abundant capital over close to 200 years since the beginning of the Industrial Revolution, enabling our country to take the lead in technological innovation, development, and deployment over much of that time.  Since World War II, the U.S. has stood at the forefront of research and development in almost all areas of science and technology.  Our academic institutions attract researchers from around the world, and our labor markets and regulations are flexible enough to support the invention, development, and integration of new technologies.

As the most developed capital market on the planet, the U.S. is in a position to deploy substantial amounts of capital to research and development in many different fields.  And, we have nurtured a startup and venture capital culture which drives innovation, particularly in the computer hardware and software industries.

Our national wealth exceeds 33 percent of global wealth … more than the next five countries combined … enabling the United States to continue to outspend our competitors in research and development.  And, unlike much of the rest of the developed world, the population of the United States is expected to keep growing.

With all of these accomplishments, our country should be poised to extend our leadership of the Global Economy far into the future.  But, we are in danger of taking backward steps … ceding dominance to others … because of the actions of short-sighted politicians.

It is in the best interests of our country, and the world at large, that our leadership in science, technology, and connectivity continue unabated into the future.

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

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JULY 5 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We continue a series on “Technology and Connectivity” in this issue of  IntelDigest.  Last week, we discussed the Global Forces … Trade, Technology, and Demographics … affecting the Global Economy;  the evolution of China as an economic power;  and, the coming Transformation of Jobs by a new Information Technology paradigm.

We began this series in the June 21 issue by decrying the Trump Administration’s policy of “Economic Nationalism.” Herein, we set out the reasons that the United States should NOT be ceding its leadership in the Global Economy.

Effects on the American Middle Class

In the U.S. and in many parts of the developed world, manufacturing industries have been fundamentally altered by shifts in technology and global trade.  The Middle Class has been contracting, and is at serious risk in the decades to come.

This is a matter of great importance for both the global economy and for democracy.  Middle Class families are the primary drivers of consumption, which fuels economic growth.  Consumption accounts for more than two-thirds of economic activity in the United States.  The American Consumer derives great benefit from the lower cost of consumable goods made possible by global trade and automation.

At the same time, the American Middle Class is at great risk of contracting further as technological advances and automation eliminate millions of jobs, for skilled and unskilled workers alike.  And, this will have a significant impact on American Democracy.

The growth of an American Middle Class in the early decades of the 20th Century changed American Politics.  We became a nation where a growing cadre of hard-working and educated citizens formed a large and influential bloc of voters between the very rich and the poorer classes.  We are in danger, as our Middle Class contracts, of regressing to a 19th Century-style body politic, where the rich have both the money and political power to dictate to the rest of the citizenry.

Emerging Markets

After World War II, global trade had been carried by the American Consumer for several decades.  However, that has been changing over the last 25 years.  Emerging Market nations now conduct the bulk of their international trade among themselves, not with the United States.  In 1990, emerging economies sent 65% of their exports to developed countries, such as the U.S. and Europe, and 35% to other developing nations.  Today, those figures are substantially reversed.

China’s annual trade with Africa is nearing $400 Billion per year, more than U.S.-Africa trade.  China’s trade with Latin America is almost $200 Billion, about the same as trade between Latin America and Europe.  As Emerging Markets connect more with their peers, they become less reliant on the developed world.

Most of the world’s oil now flows between the Middle East and Far East, across the Indian Ocean and through the Straits of Malacca to China, Japan and South Korea.  A full 80% of China’s oil and natural gas imports traverse this route, along with roughly 66% of China’s imported and exported goods.

Asian economies have been steadily expanding domestic consumption and services, so that the growth in global trade is decelerating relative to the growth of global gross domestic product.  Consumption in China now represents two-thirds of China’s output and contributes 75% of its growth.  Still, China has continued its investment binge in infrastructure and real estate, keeping commodities imports steady.

As societies grow wealthier, they tend to import more, borrow more, spend more, and travel more.  Asia’s rising Middle Class will likely be a driver of international trade even as its companies reduce their dependence on the West.

China is now developing the largest coordinated investment and construction program in history … “One Belt, One Road” … a MegaProject meant to weave many new and sturdy Silk Roads across the Eurasian landmass.  This project will include high-speed railways, pipelines, ports, bridges, and much more infrastructure development.  The overall goal is to increase trade and international cooperation by facilitating the passage of goods and services across borders.

Since the collapse of the Soviet Union, Europe has been steadily rehabilitating its former Warsaw Pact and Soviet Republic neighbors with modern infrastructure, while China has begun to do the same with the countries on its western periphery.  Central Asia has become the passageway for the supply chain between Europe and East Asia.  In the coming decades, these supply chains will solidify under “One Belt, One Road,” fusing the Eurasian supercontinent into an integrated commercial zone encompassing over two-thirds of the world’s population.

In the meantime, Europe’s trade with The East … China, Japan, India, Australia, and the Association of Southeast Asian Nations … already amounts to over One Trillion Dollars per year, exceeding Trans-Atlantic trade.  It is no wonder that the Europeans were eager to join the Chinese-sponsored Asian Infrastructure Investment Bank, despite objections by the U.S. Government.

Germany’s record trade surpluses will not be absorbed in the sluggish Eurozone, or by a protectionist America. Europe and Asia are brushing aside America’s unpredictability and getting on with the business of building a new Global Economy.

Global Opportunities

This should not be read as our trade partners aligning against us.  They will continue to use the American financial system (where necessary) and American technology (when convenient).  This is a simple matter of Supply and Demand.

The global economic system no longer relies on the United States of America.  It simply craves connectivity and opportunity.  It no longer matters where they come from. But, the most connected power will have the most leverage. It will supply the security, infrastructure, and other public goods desired around the world.

China has become a welcome and popular power in Africa and Latin America because it has sold them (and often built for them) the foundations of better connectivity.  They have demand for infrastructure, and China supplies it.

This is a more distributed Global Economy.  There are many major regional anchors, including the U.S., and more positive interdependence among economies.  Nations now have the benefit of exploiting comparative advantages with one another.

A more distributed globalization provides more opportunity for non-U.S. economies.  America is a debtor nation, but Japan, Germany, and China have the largest economies among the world’s creditor nations, generating profits from global lending and trade finance.

Emerging Markets’ faster growth rates and weaker currencies have inspired some of the world’s largest pension funds, from Canada to Norway, to expand their portfolio allocations to Asia, Latin America and Africa.  The Norwegian pension fund recently switched its focus from bonds to equity, meaning it is investing more in multinational corporations with exposure to Emerging Markets.

Betting on Globalization

So, the “long money” is still betting on globalization. America should be leading the Global Economy into the future, NOT retreating from it.

The U.S. remains (for the time being) the most powerful and most connected state in the international system.  We are the world’s largest oil producer, increasingly exporting oil to China and liquefied natural gas to Europe.  The U.S. Dollar provides liquidity to the global financial system, and American foreign investment drives capital formation in Emerging Markets.  The American network of military alliances provides security guarantees.  And, American Technology is craved worldwide.

American competitiveness is NOT enhanced by isolating itself.  American companies rightly favored the Trans-Pacific Partnership (TPP) and other trade agreements because they’ve long since outgrown our giant domestic market.  Without substantial margins abroad, they will have to cut investment at home.

Donald Trump’s punitive measures are self-defeating because they hinder America from competing in a world of growing opportunity.  The U.S. should be aggressively opening markets for American goods, services, and investment around the world.

Domestically, the Congress and Trump Administration should get down to the important business at hand, namely:

1. reforming the tax code to improve the position of American businesses in world trade

2. rebuilding infrastructure in the United States, which will make foreign investment in the U.S. more attractive

3. encouraging free markets for American technology

4. remodeling and enhancing educational and immigration programs to provide more job opportunities for our rising young workforce in a 21st Century Global Economy

We will complete this series on “Technology and Connectivity” next week in  IntelDigest.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
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JUNE 28 , 2017

 

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We continue a series on “Technology and Connectivity” in this issue of  IntelDigest.

 

Global Forces

Trade, technology, and demographics have evolved into the primary forces affecting the Global Economy.

Trade among countries and peoples has gone on for millennia, and became truly intercontinental with the Venetian traders (even before Marco Polo) a thousand years ago.  With every new innovation in communication and transportation, global trade has grown by leaps and bounds.  The Industrial Revolution and development of the steamship in the 1800s hastened traders to the far corners of the earth.  Post-World War II, the innovation of containerized shipping drastically reduced the cost of moving goods around the world.

The Information Technology (IT) revolution in the 1990s made it possible to move data and ideas across borders with lightning speed.  The very nature of the Global Economy has changed radically in just the last 25 years because of technological advances.  We have discussed the impact on “Work in America.”  Please feel free to go to the IntelDigest Archive to review the earlier issues, dated from mid-May to mid-June of this year.

Knowledge and technology have expanded opportunities in emerging countries.  Businesses and their workers have been able to join the global supply chain, producing a multitude of products … from semiconductors to machine parts … paving their own paths toward economic prosperity.

The future of IT promises more momentous innovations. One example will be advances in telerobotics, enabling users to overcome geographical boundaries, to interact with people in other countries and continents, to work at jobs in other parts of the world without leaving home.

 

As China Evolves

China has been the face of the economic evolution over the last three decades.  Demographics played a major role in its development.  Its massive labor pool allowed China to rapidly gain status as the “Factory to the World” for production and assembly of light manufactured goods.  In just a few years, Western companies moved manufacture of a growing number of high-end goods, such is iPhones, to China.  A worldwide Bull Market in commodities resulted from China’s industrial evolution, as raw materials were needed to produce goods for Western markets and build massive new cities around the country.

Now, a shift is underway, toward a growing services sector, production of more valuable goods, and a more sustainable long-term growth driven by domestic consumption.  This is a work in progress, and every step along the way impacts the Global Economy, illustrating the importance of China as the Second Largest Economy in the world.

As China’s economy shifts, slowing growth is cutting into the bottom lines of other economies around the world, both developed countries and emerging economies.  Commodity exporters had reaped the benefits of heavy construction and investment in China since the late-1990s.  Now, the reduced need for raw materials forces painful readjustments and financial stresses at home.

Meanwhile, advanced economies are concerned about Chinese competitiveness in manufacturing more high-end parts … semiconductors, transistors, liquid crystal displays for computer screens … which China previously imported from the U.S., Japan, Taiwan, and South Korea.

Beijing would like to see more high-end goods sold domestically, and less dependence on export markets for the Chinese economy.

Transformation

As the Global Economy changed rapidly over the last 25 years with the growth in China, be prepared for yet another transformation in world markets.  Deep structural changes are underway, which will likely last another 25 years.  Along with the maturation of the China economy, the old model of using labor-intensive, low-end manufacturing as an engine for growth is fading.

Information Technology supports a new paradigm. Productivity is a key driver of economic growth, and investments in technology which can raise output and lower costs are critical to competitiveness.

The dilemma is that advances and innovations in several technologies, such as robotics and advanced manufacturing, which have made industry more efficient in the 21st Century, have not left much room or opportunity for the unskilled or low-skilled worker.  Manufacturing can no longer be counted on as a major creator of jobs.

The best opportunities in manufacturing in the coming decades will be jobs involved in programming and maintaining the robotic machines which will increasingly displace humans for repetitive tasks.  Automation of routine services jobs and advances in computerization will continue to change the Nature of Work;  workers will have to learn the skills needed to fill jobs where human innovation and creativity is not as easily replaced by computers.

Next week, we will continue this series on “Technology and Connectivity,” comparing the effects of technology on our own society and on some of our trade partners and rivals.

InnOvation Capital & Management, LLC

IntelDigest

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JUNE 21 , 2017

 

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

Having devoted several issues of  IntelDigest  to the subject of “Work in America,” we begin a series on “Technology and Connectivity.”  This issue will constitute a bridge between the two series, as it touches on both areas.

 

Economic Nationalism

The prevailing policy of the current Administration is one of  Nationalism.  Donald Trump campaigned vigorously on an “America First” platform, and almost 63 million American voters decided that that sounded good to them. We have discussed, in several previous issues, the widespread concerns among millions of our citizens for their ability to hold a good job and maintain a decent livelihood in the 21st Century.

Some would say that a resurgence of Nationalism in stressful economic times is natural;  in any event, this will be a significant force in remaking (or, undoing) the European Union, and reshaping U.S. interactions with allies and adversaries alike.

However, this is a particularly bad time for Americans to adopt an insular, self-dependent attitude with respect to the global economy.

Unrelenting technological development and demographic trends support increased connectivity with the rest of the world.  There is a greater demand for skilled labor in the 21st Century global marketplace, in both services and manufacturing.  Advances in telerobotics and technology transfer across borders continue to grow apace, which will allow workers greater opportunities to have careers and good jobs in one country while continuing to reside in another.  Foreigners will certainly want to take advantage of such an option, allowing a worker the chance at a good job without having to emigrate and break up his or her family.

Why would American workers choose to close themselves off from similar opportunities?

 

American business executives realize that their companies’ competitiveness is not enhanced by American Isolation. Most U.S. companies favored the Trans-Pacific Partnership (TPP) negotiated by the Obama Administration, and generally favor most trade agreements.  They know that U.S. companies have generally outgrown domestic markets and need international markets in order to sustain growth.

Punitive measures by the Trump Administration against our trading partners are self-defeating;  they obstruct American businesses from competing in a world of growing opportunity.

American economic growth depends on opening foreign markets to U.S. goods, services and investment, while reforming our tax structure, immigration and education policies, and infrastructure in order to make investment in America more attractive.

The Trump Administration should take care that “America First” does not hinder our participation in global markets.

Global Trends

Despite oft-expressed anxieties about Globalization, the reality is that one of the most significant trends of the 21st Century is the unrelenting expansion of cross-border connectivity around the world.  The movement of people, capital, goods and services, transactions, and data grows every minute of every day.  As Americans, we have to worry that our country will fall behind because of political intransigence while other regions, entities, and nations deepen their connections with each another.

Donald Trump’s WorldView is that the U.S. should leverage its economic might … force the rest of the world to “play ball” if they want to access American finance and customers.  That may have been true in the past.  But, global trade relationships have been realigning, suggesting that such trade will keep growing with or without the United States.

We mentioned the TPP, above.  After President Trump pulled the U.S. out of the TPP, most of the other members of the Partnership decided to move forward, and welcomed China into the Partnership in our place.  Ironic, in that the Obama Administration had initially pitched the agreement to Congress as a means of containing the rise of China!

Another massive deal centered on China is the Regional Comprehensive Economic Partnership (RCEP), which includes ten Southeast Asian economies, as well as Australia, Japan, South Korea, and India.  All of the TPP and RCEP member economies are current or prospective trading partners for the U.S.  However, while America sits on the sidelines, China takes our place in global trade.

What will happen when these Mega Trade Deals move forward?  They will certainly integrate Asian markets in a way that will make them even harder for American firms to penetrate.  Indigenous Asian businesses will quickly move up the value chain to take the places that U.S. companies have had to themselves.

Is there any wonder that the largest U.S. companies oppose Trump’s efforts to erect barriers that would keep manufacturing, pharmaceuticals, and other sectors at home?  A proposed “border adjustment tax” would raise the cost of their imports.  Meanwhile, absent the TPP, how easy will it be for American multinationals to expand into markets … and compete with other developed economies … where the U.S. refused to join the trade partnerships?

Next week, we will continue this series on “Technology and Connectivity,” tracing the history of technological advances, and looking at the effects of technology on our own society and on some of our trade partners and rivals.

InnOvation Capital & Management, LLC

IntelDigest

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JUNE 14 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

In this issue of IntelDigest, we finish a series on the subject of “Work in America.”

 

Politics and American Jobs

The problem of “Work in America” played a very large role in the 2016 election results.  In his campaign, Donald Trump focused his message at a segment of the electorate which has been under economic stress and pressure.  Many middle-class Americans have felt “The American Dream” slipping away.  Trump leveraged this discontent and resentment, and he garnered just enough support to win the Presidency.

 

Lack of Work in America

The heart of the problem in U.S. Employment is that many American jobs, especially in manufacturing, have been contracting for decades.

Trump became President by speaking to a large group of voters … millions of Americans who were unemployed or underemployed … who were virtually ignored by other candidates.  However, he did so by deflecting the causes on foreigners … blaming competition from Chinese workers and undocumented Mexicans for the loss of jobs in the American heartland.  Actually, there is little truth to either claim.  But, these were Americans whose fathers had had much better jobs than they could obtain.  They wanted a “better deal.”  And, Trump promised to make a better deal for them.

But, foreign workers have played a very small part in the contraction of jobs in the U.S.  In reality, better efficiency and productivity have much more to do with the change in American manufacturing.  Some researchers have estimated that over 85% of manufacturing job losses in recent years are attributable to growth in productivity in U.S. factories, while closer to 13% can be traced to foreign imports.

 

Headwinds for the American Middle Class

Economic growth rates have been trending down for 40 years.  The number of people with “breadwinner” jobs … as a percentage of the working-age population … is at a 40-year low.

The primary factor in this trend, as mentioned above, has been efficiency and productivity (directly related to Technology, which we discuss later in this letter).  However, two other factors have had a significant effect on American Jobs:  Trade Policy and Tax Policy.

We have written about the North American Free Trade Agreement (NAFTA), which was negotiated in 1993.  One effect of NAFTA was to curb price inflation in the U.S.  The American consumer economy was able to expand … and our consumers received the benefit of low prices … by accessing cheaper labor in other countries.

However, American Manufacturing was already shrinking because of advances in efficiency and productivity.  The influx of cheaper goods from foreign countries only added to the distress of U.S. workers in manufacturing.

In the November 16 issue of  IntelDigest, we highlighted a paper by Dani Rodrik, a professor of economics at the John F. Kennedy School of Government at Harvard University. He argued that “unmanaged globalization” is undermining democracy.

“The promise of free trade is undeniable:  Everybody likes those everyday low prices.  But the consequences of the differential distribution of the benefits of globalization are becoming disturbingly clear:  For the upper classes, the world is their oyster.  For the lower classes, the world is their competitor.”

Those who can take advantage of the global economy can benefit from Globalization, while those who don’t have the resources and skills are left behind.

 

Tax Policy also affects American jobs.  For example, the U.S. is the only industrial country in the world with “global income taxation,” which makes an American Citizen’s earned income subject to U.S. federal income tax, no matter where in the world that the citizen lives or works.  Also, unlike other industrialized countries, the American tax system has no “value-added tax.”

This means that our tax policy unduly burdens wage earners, while rewarding individuals and corporations who use overseas labor.  This has contributed to a decline in real, after-tax wages over the last 40 years.  No wonder that the Middle Class has suffered.

We have discussed Tax Policy in  IntelDigest on several occasions, and will continue to return to the subject, as it is a vital factor in the “Future of Work” and “Economic Growth in America.”

 

How Will Our Economy Grow?

Growth of the U.S. Economy rests on continual increases in Productivity along with expansion of the Workforce.  Our leaders … both government and business …
must find ways to increase Work Opportunities for our citizens.  Increased Gross Domestic Product (GDP) … and the ability to “grow” out of our National Debt headache … depends on solutions to the problems of Work in America.

We have to reverse or counteract recent trends in U.S. Labor Participation in order to fill new jobs.  As we have discussed in recent issues, large numbers of American men in their prime have left the workforce.  This situation has developed over several decades, but has reached crisis levels.  If the trends continue, nearly a quarter of all men between the ages of 25–54 will be jobless by mid-century.

Coupled with the retirement/slowing of the millions of members of the Baby Boom Generation, we are simply not going to get the increase in GDP that normally comes from growth in the workforce.  The next generation of American workers, both male and female, must step up to keep the engine of the American Economy running.

If the “Lost Generation” of working males does not make its way back into the workforce to offset the retirement of the Boomers, the only option for American Business is to encourage Immigration, in contravention of the prevailing ideology of the Ruling Party.

 

Thinking About Solutions

An encouraging sign from the Congress and Administration has been a willingness to suggest some new ways of doing business.  Although we are far from the point of actual legislation … it is unlikely that we will see serious action on important matters such as Tax Reform and Jobs until next Winter, at the earliest … there has been talk of lowering business income taxes and adopting a value-added tax to discourage foreign production of goods for U.S. markets.

 

Technology and Its Effect on Work

Technological innovations are always at the forefront of advances in Productivity.  However, they seem to work at cross-purposes to the livelihood of the American Worker. Although new technologies are constantly creating new jobs in new fields, Technology aggravates the problems of Work in America to the extent that such advances make it cost-effective for machines to replace human workers.

As machines do more and more entry-level tasks, an American Worker who lacks the skills and training to rise above such work will fall to the bottom of the jobs ladder, and eventually drop out of the workforce.  The only chance to stay ahead of the machines is to obtain the education and training to work in new fields, often jobs which didn’t even exist a decade earlier.

 

The Future of Work: Automation, Information Technology, Artificial Intelligence

Where will Automation take us next?

Certainly, more robust Information Technology … Cloud computing and storage, faster computing speeds, more widespread application of digital technology to the analog world … will continue to transform our world, with inevitable impact on both manufacturing and non-manufacturing jobs.

The only “Sure Thing” about the coming decades is that Work in America will be constantly changing, adapting to new technologies.  For the American Worker, the catchphrase “Adapt or Die” will be words-to-live-by.

In our lifetimes, we have seen the invention and development of products, industries, and technologies which we couldn’t even imagine just a few years earlier. This trend will surely continue inexorably in the coming decades.  Beyond new products and services, perhaps we will see entirely new standards for measuring Work and Productivity, and compensating workers for their labor. Perhaps the very idea or Work will be redefined.

We will likely see, over the next 20 years, greater use of machines which can work on their own, with little supervision.  This certainly includes self-driving vehicles, which have already driven over One Million Miles in research programs on the streets of several U.S. cities. Fleets of autonomous trucks will be criss-crossing the country within that time frame.

Meanwhile, the development and expansion of Artificial Intelligence (AI) could have a major impact on employment in many sectors, not just manufacturing.  Some researchers believe that human and machine reasoning will converge over the next 15 years or so.

 

There are many more questions about the Future of Work. So, we will come back to this subject periodically to discuss advancements-to-date and Bright Ideas for the Future.

 

 

 

InnOvation Capital & Management, LLC

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We continue a series on “Work in America.” Please feel free to go to the IntelDigest Archive to review earlier letters on this subject, beginning with the May 17 issue.

Men Without Work

As we have discussed in this series, large numbers of American men in their prime have left the workforce.  This situation has developed over several decades, but has reached crisis levels over the early part of this century.  It is now one of the greatest problems in American society.

The collapse of work opportunities for American men has two main causes:  technological advances and greater opportunities for women in the workforce.

To a great extent, technological progress has eliminated opportunities for the low-skilled, especially in manufacturing.  Technological innovation has been marching forward … with ever-increasing speed … since World War II.  And it will continue apace into the future, affecting service industries and white-collar professions in addition to low-skilled manufacturing.

Increased opportunities for women in the workforce grew steadily from the 1950s through the 1990s.  Participation of women caused the overall work rate for U.S. adults to steadily increase, which camouflaged the steady decrease of men in the workforce over the same time period.

Comparing statistics from 1965 and 2014, more than eight times as many prime-age men were “economically inactive” and not pursuing education in 2014 than there were in 1965.  This trend has relentless intergenerational momentum;  Labor Force Participation Rates tend to deteriorate with each succeeding cohort in every age group
.

The detachment of so many adult American men from the ranks of regular paid labor poses a threat to the future prosperity of the United States.  It can only result in lower living standards, greater economic disparities, and slower economic growth than we might otherwise expect.

Everyone should applaud the March of Progress for both technology and women in our society.  However, we should apply the vaunted American Ingenuity to finding ways to pull forward those who have fallen behind in recent years.

Personal and Societal Crises

If the trends discussed above should continue, nearly a quarter of all men between the ages of 25–54 will be jobless by mid-century.  This won’t be good for our society … large numbers of unoccupied young males are rarely beneficial to social order.

We discussed last week the acute impact on society and community life of Men Without Work.  However, the personal costs for those affected by unemployment and underemployment are plain for all to see right now, and should provide an impetus for solving this most pressing of societal problems.

Among the many demons which plague the unemployed, we will briefly discuss:  Lack of Education, Disincentives to Work, Addiction, Criminal Records.

Education

Many of the aimless, predominantly-male Americans who are trapped in an unemployment cycle have no college education or specialized training to help them succeed in competition for good jobs.  Whether one’s plight is due to lack of resources or dedication or luck, prospects are unlikely to improve as time goes on.  Many do not progress beyond manual labor or low-end service work.

Too many become completely discouraged in their work life and retreat to a couch to play video games.  When they retreat from the workforce, the government stops counting them … what could be lower than being too insignificant to be called “unemployed.”

Disincentives

Our Great Society has adopted several well-intentioned social programs to provide Safety Nets for citizens who endure adverse circumstances, including unemployment. These programs are created on the national, state, and local levels of government.  However, some of the programs actually create a disincentive to work.

The point of these programs should be lending a temporary hand to those who fall on hard times;  society benefits by making them productive again.  But, open-ended benefits can do more harm in the long run, both to the recipient and to society-at-large.

In the wake of the 2008 Financial Crisis, claims for Disability Benefits skyrocketed, and the rolls of benefit recipients grew to approximately 14 million.  It is arguable that a significant percentage of recipients are not genuinely disabled, particularly in the group of prime-age non-working males who have been the subject of these letters.

Unfortunately, disability checks and means-tested benefits … although far from lavish … have come to represent a permanent alternative to paid employment for growing numbers of American men.

With regard to all government benefit programs, it is fair to question whether they represent helpful and productive incentives for the recipients.  And, we should not hesitate to change programs in order to improve efficacy … without falling back on ideological arguments, whether from the Left or the Right.

Addiction

Just as disability programs have inadvertently facilitated the exit of large numbers of men from the workforce, Medicaid has inadvertently facilitated an Opioid Epidemic in our country, especially among the unemployed and underemployed.

Statistic show that:

* A startlingly high number … some say 50% … of men-without-work take prescription pain medicines;  others use alcohol or other drugs

* In a 2015 report by the Drug Enforcement Administration, more Americans died from drug overdoses than from either traffic fatalities or guns

* A study from the Ohio Department of Health stated that “… fully 11 percent of Ohioans were prescribed opiates…” over the period of the study

* In a study of mortality, death rates rose sharply for those with high school diplomas or less … most of the rise in death rates was due to suicides, chronic liver cirrhosis, and poisonings (including drug overdoses)

This sound more like Russia … we have been reading for years about the devastating effects of vodka-and-drug-binging among Russians.  But, no …  This Is America.

How is Medicaid implicated in the Opioid Epidemic?  More than 1-in-5 of all civilian men between the ages of 25-55 are Medicaid beneficiaries.  More than half of prime-age people who are not in the labor force receive Medicaid.

 

 

Any Medicaid recipient who can get a doctor to write a prescription for painkillers (evidently, not a particularly difficult thing to do) can get the most expensive street drugs, such as OxyContin, for just a $3 co-pay. Pharmaceutical companies are more than willing to supply vast amounts of addictive drugs to American consumers, especially with the government paying most of the bill.

Coupling this insanely easy and legal method of acquiring Opioids with a flood of dangerous drugs on the streets from illegal cartels, there is no wonder that we have an unprecedented epidemic in our country.

Criminal Records

Many of the unemployed and underemployed run into difficulties like those we have discussed, and end up with a drug offense or felony on their record.  How will this affect their job prospects in the future?

It is much easier today for prospective employers (or landlords) to access databases and do background checks. Many jobs are simply off-limits to people with a felony or drug offense … even finding an apartment to rent becomes virtually impossible.

Thinking About Solutions

We will conclude this series next week, and hope to shed some light on a very difficult subject.  We will look at the thinking of Congress and the Administration on the prospects for putting people to work.  Hopefully, these would involve something more tangible than promising expansion of jobs in declining industries, as the President trumpeted on the campaign trail.

We will finish with a discussion of the Future of Work, automation and artificial intelligence in the American Economy, and analyze growth prospects for our economy and our labor force.

 

 

 

 

InnOvation Capital & Management, LLC

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MAY 31 , 2017

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If you are still wondering how Donald Trump was able to win the Presidency despite massive odds against him, perhaps this issue of  IntelDigest  will explain a lot.  We continue a series on the subject of “Work in America.” Please feel free to go to the  IntelDigest Archive  to review the earlier issues, dated May 17 and May 24.

Work in America

The heart of the problem in U.S. Employment is that many American jobs, especially in manufacturing, have been contracting for decades.

Donald Trump became President by speaking to a large group of voters … millions of Americans who were unemployed or underemployed … who were virtually ignored by other candidates.  By speaking to their anxieties, he won the White House.

Of course, he won over those voters, primarily, by blaming competition from Chinese workers and undocumented Mexicans for the loss of jobs in the American heartland. Actually, there is little truth to either claim.  But, these were Americans whose fathers had had much better jobs than they could obtain.  They wanted a “better deal.”  And, Trump promised to make a better deal for them.

But, foreign workers have played a very small part in the contraction of jobs in the U.S.  Economic growth rates have been trending down for 40 years.  The number of people with “breadwinner” jobs … as a percentage of the working-age population … is at a 40-year low.

The overall civilian labor force (comprising both men and women) grew steadily for much of the latter half of the 20th Century.  After a decline from 2000 to 2010, the employment rate has leveled off.

However, the Male participation rate has been in steady decline since 1950.

As we stated last week, that large numbers of American men in their prime are simply not working has become a significant political and cultural problem in our society.

Men Without Work

Approximately 10 million American men of prime working age (25 to 54) have simply dropped out of the workforce in recent years;  further, many of them have also
abdicated their commitments or responsibilities to society, and their role in community life.

Male participation in the civilian labor force has been steadily dropping for 60 years, through boom and bust years, periods of inflation and deflation, conservative and liberal presidential administrations, Republican and Democratic congressional control.

The trend has been relentless, and was in place long before automation began to really impact the manufacturing workforce, or jobs began to shift to China and other countries with lower labor costs.  However, it picked up speed after the Financial Crisis of 2008.

Forces at Work

To a great extent, technological progress has eliminated opportunities for the low-skilled, especially in manufacturing.  Researchers have estimated that over 85% of manufacturing job losses in recent years are attributable to growth in productivity in U.S. factories, while closer to 13% can be traced to foreign imports.

The impact on society is acute.  As economic life has become less secure, low-skilled men (both White Males and Men of Color) have tended toward unstable cohabiting relationships;  for the most part, they eschew traditional marriage and traditional communal religion.

A large percentage become more likely to stop working … or even looking for work … entirely.  Such a breakdown of family, community, and structure often leads to blaming themselves and feeling helpless and desperate.

The collapse of work opportunities for American men is really a crisis.  However, it has been largely an invisible crisis … seldom discussed in the media or academia or business or the halls of the legislatures which should be tasked with addressing the problem.  Where has the concern been for the last few decades?

The detachment of so many adult American men from the ranks of regular paid labor poses a threat to the future prosperity of the United States.  It can only result in lower living standards, greater economic disparities, and slower economic growth than we might otherwise expect.

What of the societal, cultural, and moral repercussions on American life?  Many men have lost their status as productive members of their families, and live as dependents of their wives, girlfriends, partners, aging parents, or the government.  The American culture was built on a foundation of hard work and self-reliance;  for many, the “new normal” of their lives is quite discordant.

For years, economists and policymakers serving under both Republican and Democratic presidents have been cheerleaders for employment numbers published by the federal government.  Within just the last two years, none other than the two most-recent chairmen of the Federal Reserve, Ben Bernanke and Janet Yellen, have been “encouraged” by the U.S. economy and the state of “full employment.”

As we stated last week, such proclamations of “full employment” are laughable.

The “real” unemployment numbers are 3-4 times the “official” statistics.  And, the great contradiction of economic life in America is that economic growth has produced markedly more wealth for “those that have,” and markedly less work for many American (mostly male) workers.

Is it not apparent, then, that a large voting bloc of American workers … untouched as they were by the (slow) growth of the economy … was dissatisfied with the direction of the country, feeling the sting of their own continuing recession, and heeding more extremist voices in the political landscape?

We will have more on Work in America and the Future of Work in the next two issues of  IntelDigest  … looking at mortality and addiction and social insecurity of the American Worker … automation and artificial intelligence in the American Economy.

And, we will ask, “Where will Growth come from” to improve Work in America?

 

 

 

InnOvation Capital & Management, LLC

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MAY 24 , 2017

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We continue a series of articles on “Work in America” here in IntelDigest.

The heart of the problem in U.S. Employment is that many American jobs, especially in manufacturing, have been contracting for decades.  Blame has been directed generally at imported goods, but statistics paint a different picture.

In reality, better efficiency and productivity have much more to do with the change in American manufacturing. Some researchers have estimated that over 85% of manufacturing job losses in recent years are attributable to growth in productivity in U.S. factories, while closer to 13% can be traced to foreign imports.

Labor Force Participation

The “labor force” from which we calculate unemployment statistics includes only those people who are either working or who wish to be working.  It ignores the retired, the disabled, nonworking spouses, students, and those who are not interested in working.

The fact is that a smaller percentage of the adult population is working now than in the past.  The percentage declined in the recession of the early-2000s and never fully recovered;  then, the percentage plunged again in the Financial Crisis of 2008.

Many Americans have no job, and many more don’t like the jobs they have.  Millions of unemployed, underemployed, or unhappily-employed reside in every American community, touching the lives of virtually every citizen.  And, obviously, contributing to a powerful voting bloc which had a profound impact on the presidential election.

Labor Force Participation is a vital factor in economic growth.  The numbers of people dropping out of the labor force is increasing, which is an unhealthy trend in a country which would like to push GDP growth to at least 3%, a level which it has not attained in years.  As more workers abandon the labor force, productivity could be affected.

If the economy goes into recession next year, GDP could drop.  And, federal budget projections will become worthless.

Disquiet In the Economy

The state of the U.S. economy is not enhanced when millions of workers have left the labor force.  Not only are they not producing, but most of them consume the fruits of the labor of those who continue to work.

There is similar dissatisfaction on the other side of the labor-management relationship.  Many employers complain that they cannot find enough qualified workers, or that too many workers need extensive training and/or unremitting attention in order to be productive.  Business owners cite the need for good workers as their primary need, over the availability of capital or loan financing.

This widespread dissatisfaction among employers, employees, and those who aren’t working is one big reason that Donald Trump is now President.  He paid attention to a large group of voters that others ignored, spoke to their anxieties, and won the White House.

A huge segment of the population was experiencing a yawning disconnect between the reality of their daily lives and the surging stock market shown on the business-news channels.  While Big Business is constantly in the news, the lesser-known fact is that Small Business startups have lagged Small Business closures for the last decade.

Wall Street has been doing much better than Main Street for much of this Century, and the strain on the American Can-Do Spirit has been conspicuous

Men Without Work

Prior to the Labor Force problems of the 21st Century … in the growing American Economy of the latter half of the 20th Century … the overall civilian labor force (comprising both men and women) was constantly growing.  The overall rate declined from 2000 to 2010, but then leveled off.

However, the Male participation rate has been in steady decline since 1950.

The fact that large numbers of American men in their prime are simply not working has become a significant political and cultural problem in our society.

 

 

 

Proclamations by the Federal Reserve and other government officials that the economy is near “full employment” are laughable.  Every American community contains appreciable numbers of working-age males who could be working, but are not.  They don’t appear in statistics as unemployed unless they are “actively looking” for work.  Or, they may count as “employed” because they did a few hours of paid work in a month.

But, for all practical purposes, they are unemployed and someone else is supporting them.

Recent studies indicate that:

* for every unemployed American male between ages 25–55, there are three more who are neither working nor looking for work

* the number of those males presently in the labor force is down almost 4 percent since the turn of the Century … almost 5 million men who, for whatever reason, have dropped out of the labor force

* between 2000 and 2015, the total paid hours of work by all American workers rose 4 percent (compared to a 35% increase in the previous 15-year period) … yet, the adult civilian population grew almost 18 percent

With the population growing far faster than the total number of work hours, it shouldn’t be surprising that so many people aren’t working.  The downturn in labor force participation is a trend that has been going on among working-age men for over 60 years.

“Balkanization” of American Politics

Our labor difficulties feed into the “Balkanization” of American politics.  There is a general sense in much of the developed world that we’re headed for more difficult times, with increasing government deficits, rises in unemployment, and uneven distribution of the benefits of society.

The negative aspects of our culture, society, and economic system are on display 24/7 on television, talk radio, and the Internet. Viewpoints become hardened, and we have been sorting ourselves into tribes based on how we consume news.

Most Americans receive their news from people who reside in the same ideological bubble … those whom we have “friended” … or those in the Media whose programs represent “our side” … which serves to reinforce our concerns, anxieties, prejudices, and point of view.

If you think that the Trump Administration and Republican Congress are taking us in the wrong direction, there are plenty of people who will agree with you and tell you so.  If you think the people opposing them don’t understand and are distorting the truth, there are plenty of sources that will confirm your thinking.  And, both sides talk/shout over each other.

Our news sources have always been polarized … to a degree … but never in our memory has they been so ubiquitous or so extreme.  And, news has never been so readily accessible, so that numerous “tribes” can live in the same physical neighborhood, yet hear different versions and interpretations of the same problems and events.

There is no unifying national experience, just a disjointed series of intra- and inter-tribal interactions

Ah, for the Good Old Days, when we all (or, most of us) trusted Walter Cronkite for the news.

More on Work in America and the Future of Work next week in IntelDigest.

 

 

 

 

InnOvation Capital & Management, LLC

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MAY 17 , 2017

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Today, we begin a series of articles on “Work in America” here in IntelDigest.  We will first address the current political situation in the U.S., as the two topics are very much intertwined.

The Political Millstone, Redux

We have discussed why the Bull Market of recent years took off after the Election and ran up for almost five months, reasoning that investor optimism was based on having a Capitalist entering the White House.  Unfortunately, as we stated last week:

“Because both financial markets and a large segment of the American Public are losing confidence in the ability of the Trump Administration and Congress to adopt stimulus measures for the U.S. Economy, we have entered a holding pattern in the broader markets.  We believe that significant advances in the markets will resume only when Tax Reform becomes a reality … Fall of 2017 at the earliest, and perhaps not until Spring, 2018.”

It appears that improving the U.S. Economy has not been a priority for the new President.  Mr. Trump’s actions … where he has actually taken action … have been focused on destroying or reversing any law or executive order put forward by Barack Obama.  This feels very much like a vendetta, not the level-headed actions of the Leader of the Free World.

We really shouldn’t be surprised.  Trump did not campaign as a fiscal conservative or a supply-side tax-cutter …. he was a fire-breathing Populist!

The investor community convinced itself that he was something that he is not, and bid up asset prices on the expectation that he would act quickly and decisively in areas where he, apparently, has little interest.  With reality setting in, the broad stock market will settle back and find its fair (lower) value.

 

 

 

Politics and American Jobs

In his campaign, Donald Trump focused his message at a segment of the electorate which has been under economic stress and pressure in recent years.  His core constituency is the white lower-middle class.  Many middle-class Americans have felt “The American Dream” slipping away. Where a middle-class family could reliably obtain a house, car, vacation, and a comfortable lifestyle over the last few generations, these goals have been harder and harder to achieve in the 21st Century.

According to the Pew Research Center, real wages for American workers have been flat or declining for decades. In addition, recent studies have shown that the real incomes of the top One Percent in the U.S. have grown by more than 30% just since 2009, while the income of all other Americans has barely budged.

Trump leveraged this discontent and resentment, and he garnered just enough support to win the Presidency.  He capitalized on the disenchantment of those who had gone from full-employment to unemployment or underemployment;  who felt that they had been getting a raw deal in 21st Century America;  who were willing to follow anyone who promised a radical change of government and bureaucracy and culture.  To many of his followers, his propensity to freely offend various (mostly non-white) people was viewed favorably as independence and a willingness to counter political correctness.

Fundamentally, America is now divided on class-based lines, with many in the mostly-white, mostly-lower-middle class segment firmly in Donald Trump’s corner.

Unfortunate for many in his constituency, the President has made no moves thus far which could improve the lot of these aggrieved voters.

Work in America

The heart of the problem for many of these Americans is that American jobs, especially in manufacturing, have been contracting for decades.  Blame has been directed primarily at imported goods, but statistics paint a different picture.

Many people believe that offshore manufacturing has led directly to the loss of most American jobs.  Certain facts lend support to this view:

* many tons of imported goods are brought into the U.S. every year;

* several foreign countries, most especially China, have been growing at rates several times the U.S. growth rate over the last 20 years

In reality, better efficiency and productivity have much more to do with the change in the American manufacturing landscape.  Some researchers have estimated that over 85% of manufacturing job losses in recent years are attributable to growth in productivity in U.S. factories, while closer to 13% can be traced to foreign imports.

 

 

 

Automation

Many Americans would be startled to walk onto the shop floor at many U.S. manufacturing plants … shocked to see how much of the space accommodates machines rather than human workers.

The Industrial Age began over 250 years ago with the inventions of a practical steam engine and a loom powered by water.  From that time, human ingenuity has been employed non-stop to increase productivity.  Newer, faster, more accurate machines have been invented every year to replace older technologies and processes, and also replace some human workers.  The resulting increases in productivity have always been viewed as good for the country and society, even with the loss of some jobs.

The Information Age has followed the same script, but now at vastly higher speed.  Advances in computing and robotics over just the last 40 years have been breathtaking, and have done far more to change society and eliminate millions of “old technology” jobs than any other factor, including imported goods.

Where will Automation take us next?

Certainly, more robust Information Technology … Cloud computing and storage, faster computing speeds, more widespread application of digital technology to the analog world … will continue to transform our world, with inevitable impact on both manufacturing and non-manufacturing jobs.

We will likely see, over the next 20 years, greater use of machines which can work on their own, with little supervision.  This certainly includes self-driving vehicles, which have already driven over One Million Miles in research programs on the streets of several U.S. cities. Fleets of autonomous trucks will be criss-crossing the country within that time frame.

Meanwhile, the development and expansion of Artificial Intelligence could have a major impact on employment in many sectors, not just manufacturing.  This raises many questions about the Future of Work.

This topic is very large, and we will be spending several weeks on various aspects of Work.  We will continue next week with discussions of Labor Markets and Labor Force Participation.