Eight years is enough.
This is the most contentious election cycle in recent memory, full of personalities and passions around serious national security and domestic issues. And yet, Bill’s Clinton’s old adage is still as true as ever: “It’s the economy, stupid.” The economic elephant in the room, shouting for attention, is that the productive foundation of the U.S. economy is changing more astonishingly than our leaders seem willing, or maybe able, to cope with.
Sophisticated technology and self-learning software are displacing human jobs, both physical and services. The Bank of England estimates that 48% of human workers will eventually be replaced by robotics and software automation, and ArkInvest predicts that 76 million U.S. jobs will disappear in the next two decades—almost 10 times the number of jobs created during the Obama years.
It took 150 years for U.S. employment to migrate from 98% farming to 2%, leaving plenty of time for workers to re-tool for the manufacturing economy. It’s happening much faster this time, propelled by the blistering acceleration—unprecedented in human history—of technologies that sensor, analyze, and intelligently manipulate huge amounts of data. The march of information technology is on its way to reducing the need for workers across virtually every industry, driving many from the labor market altogether, while enriching a small minority, quite possibly to the detriment of consumption and prosperity of society as a whole.
All is in fact not well in the economy. The unemployment rate is down to 5%—but mostly because people have given up looking for work—and as soon as they do return to the search, the unemployment rate will creep back up. Inflation readings are still significantly below the Fed’s target. A 2014 Stanford University study confirmed that the average American family’s net worth is declining at an alarming rate: Net worth has fallen for the bottom quarter of households by almost 70% from 1983 to 2013; and inflation-adjusted net worth of the median household is down by over a third during the same period, from $88,000 to $56,500—all as the top earners’ net worth has multiplied.
Aside from the initial success of the 2009 stimulus package in preempting the financial crisis from morphing into an immediate global depression, there doesn’t seem to be much evidence to support President Obama’s recent assertion, “Anybody who says we are not absolutely better off … is not leveling with you.” History will remember that the president’s unwillingness to negotiate serious post-stimulus legislation with Republicans in the days immediately after his first inauguration, “because I won,” triggered the Republicans’ own excessive eight-year standoff with the White House. The fact that the Obama Administration decided to fire its last political bullet to pass the Affordable Care Act—instead of working on a major infrastructure investment or other employment-growth promoting fiscal initiative—before ceding mid-term Democratic control of Congress, might well be remembered as the most monumental economic blunder of the Obama presidency.
Job creation has failed to keep pace with population growth, and the gridlock of fiscal policy-making has left the economy almost entirely dependent on the Fed’s unconventional monetary policies for the past eight years. There are very few people left who are willing to even try to make the case that monetary policy has done much more for the economy than stimulating financial asset inflation, helping the stock market investing class but offering little for ordinary American families. Bank credit demand and velocity is still languid, regulations are draining liquidity and risk-taking from the financial sector, and labor market participation is near historical lows. The economy is limping along with millions fewer prime-age jobs than historical average, and youth under-employment—or over-qualification for whatever they are doing—is up at 60%. And there’s nothing left for the Fed to do about it: Software and artificial intelligence are reducing costs while displacing workers, flying directly in the face of both the Fed’s employment and “price stability” mandates.
Voters are living this reality as it unfolds, and their frustration is intensifying because they’re experiencing something very different from what seems warranted by the self-satisfaction or breezy assurances they’re hearing from their leaders. President Obama is presently touring the country, congratulating himself for supposedly rescuing the economy after the 2008 financial crisis, while his Democratic Party lurches back toward the economics of government re-distribution, which have been discredited for at least the past quarter century following the collapse of socialism in Eastern Europe and Asia. The newly “presumptive” Republican nominee, Donald Trump, for his part blames other countries and threatens to tear up decades of trade liberalization and return to “America First” mercantilism.
While the politicians are defaulting to the tools and approaches of a fading economic era, the rising generation is thinking about what’s coming next. Fearing jobs will have disappeared by the time they have families, they’re flocking to the best straws they can grasp, whether it’s Bernie Sanders’ “free stuff” or Trump’s “I’ll make it great again.”
President Obama knows very well that the biggest challenge in the economy’s pivot away from manufacturing/services to information technology is in the disproportionate distribution of the income and wealth benefits to the relatively small proportion of society fueling the innovation and investment driving wealth-creation in the information economy. He described the information economy’s job displacement as a driver of rising income and wealth inequality: “In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year.”
The president had a point: It’s difficult to imagine that consumption by the top echelon of society will be enough to offset the decline from the larger numbers of a displaced and constrained middle class, who are living from one paycheck to the next and reporting they don’t have enough liquidity for any unexpected emergency expenditure. The inescapable fact is that fewer jobs and salaries, and more wealth in fewer hands, reduces demand, investment, and ultimately consumption across the whole economy. Might that help explain why the “new normal” economic growth is still down from 3% to at-best 2%, almost a decade after the housing crisis started?
Easy as it may be to blame U.S. trading partners, it’s not their fault. They’re suffering right there with us. For example, automation threatens to stall China’s 50-year arc of economic reform (and the political system sustained by it), which has always aimed at raising employment, wages, and standards of living as a foundation for the rule of law and political reforms. China still has over 100 million people employed in the manufacturing sector alone, compared with about 12 million in the U.S., with a penetration rate of only 36 robots per 10,000 workers versus 164 for the U.S., 292 in Germany, 315 in Japan, and 478 for South Korea. No wonder wage growth is stalling in China. What would 100 million factory workers be doing if China should eventually become a fully automated manufacturing economy?
It’s time leaders caught up with what’s really going on in the economy of their voters’ lives. Leadership means connecting the dots, starting with how technology is changing the global workplace, cost of living, people’s employment, and other time-allocation prospects. And it’s not all bad: We’re headed to a world in which fewer people may need to work at all, and those who do might have more time on their hands and need less money to buy cheaper and more plentiful products.
In fairness, President Obama floated some of the policies appropriate to the challenges and opportunities in his 2011 speech, like re-awaking the long-dormant government investment sector, creating hundreds of thousands of jobs by upgrading our aging transportation infrastructure and digitizing government; updating and re-positioning science and engineering research and education; and reforming our tax and social security programs to reduce unnecessary economic friction and “entitlement” payouts to those who don’t need them. There are creative ways to pay for all of this, including by the Federal Reserve Bank issuing “helicopter money” directly to the Treasury, from where it could be authorized and appropriated by Congress without increasing the national debt or taxes—though this could of course be inflationary and involve other complications. No silver bullets, but plenty to be discussed.
U.S. economic future is ahead, not in the discredited economic ideas of the past or leaders’ endless criticisms of each other and pandering to what they think polls suggest people want to hear. The nation is blessed with a free market that is “the greatest force for economic progress in human history,” Obama says, a force that has “led to a prosperity and standard of living unmatched by the rest of the world.” Figuring out how, in this new economy, to sustain collective prosperity, and preserve the foundations of liberty and social mobility, should be easy—especially relative to the genius that produced the bounty of wealth and progress achieved. This is the moment for leaders to move past the past eight years’ denial, pettiness, and gridlock, and re-start collaborating on economic solutions—exactly as intended by our great constitutional system.
Daniel J. Arbess is the founder CEO of Xerion Investments, an investor and policy analyst recognized for his prescient calls on some of the largest developments of the past 30 years; and a cofounder of No Labels, the bipartisan policy organization.