The Next Big Economic Displacement

The Next Big Economic Displacement

Well Underway

We managed our way through the Great Recession of 2007-10. Most of us have adjusted to globalization. Obsolescent industries are still struggling, particularly in sectors like coal mining and power generation, and too many bricks and mortar retail outlets. Lockdowns and general COVID fears have tanked, many perhaps permanently, so many restaurants, movie theaters, a few stage theaters and sports venues. Many businesses have learned how to downsize, keeping essential workers where they need to be, increasingly embracing remote working structures. Artificial intelligence, from data mining, robotic command and control, sales and consumer tracking, medical diagnostics, financial planning and analysis, etc. has roared in like a hungry lion.

Strange that with all of our clear economic impairment, the stock market has surged. The pandemic has given lots of companies the ability to clean house, learn which employees are truly unnecessary, and shift boatloads of work to IA software. While many corporate entities have watched revenues slide away, especially businesses that rely on in-person services and consumers, many others have benefitted beyond their wildest dreams, sometimes cutting off union and seniority mandates in a flurry of “well, we just can’t do that under these conditions” pandemic factors. These efficiencies have been implemented, and companies are still looking for further enhancements. They’ve learned how to find and deploy such changes. Big time.

With several COVID vaccines coming online, assuming herd immunity is not sabotaged by fear and mythology, there is an assumption that the world will resume to pretty much where it was before the pandemic. It is considered doctrinaire economics among too many Republicans that the economy will resume under a V-shaped regrowth model. I have tried so hard to understand how that is remotely possible, when so many small businesses have simply closed their doors forever and where so many jobs have been permanently lost to these new efficiencies. My best guess, under even the most optimistic scenario, is an elongated ramp up, one that could take a decade or more for most working stiffs absent some serious direct federal intervention, to “better than it was during the pandemic but not remotely as good as it was before that outbreak.”

Lots of folks have borrowed or deferred rent during these COVID times, and those anomalies have to be absorbed as well. We have watched as companies, owners of the expensive “replace human worker” technologies, literally take over the revenues that they used to pay displaced workers. Now the companies are effectively earning for themselves what they used to pay employees (expenses are now revenues), and many see massive benefits to smaller workspaces (fewer people and remote labor), putting more cash in their pockets. The big negative in all this, and we really have not witnessed this in a big way – yet – is that with fewer employees making solid salaries and wages, there will be an increasingly impaired consumer base. They will buy less and will be forced to leave higher cost housing for less financially demanding dwellings. That has not yet impacted the real estate market (which is soaring)… but it almost certainly will. Since over 70% of our economy has traditionally been consumer-driven, Houston, we may have a problem!

Writing for the December 31st Los Angeles Times, Sarah Ponczek lays it on the line: “At least in the stock market’s cold-blooded logic, 2020 will be remembered as the year when people became superfluous to the cause of progress… To recap, at a time when the pandemic put 22 million Americans out of work, equity prices nevertheless rose by $5 trillion, thanks to gains in automated tech titans optimized for lockdown commerce. The situation became a symbol for inequality in the virus age, as money flowed to the rich while the poor got hunger and hardship.

“While economists say there may be a reprieve — their consensus is for unemployment to fall back to 5% by 2022 — evidence is mounting that the stay-at-home trade and the insecurity it bespeaks will be harder than that to root out. Among it are signs that market forces are convincing corporate managers to shelve old-economy business investment and plow money into intellectual property.

“‘Companies have been more and more shutting their spending on [capital expenditure] off and accelerating their investment in R&D,’ said Rob Spivey, director of research at Valens Research, a firm that focuses on accounting analytics. ‘They’re focusing more on intangible assets as opposed to tangible assets, so if you’re not looking at that, you’re really missing the picture.’

“One fact that should sow concern at the end of any recession is that keeping a lean workforce is a time-honored way of driving profit growth. But for anyone counting on jobs to roar back as vaccinations proliferate, a subtler threat lies in the nature of the lockdown itself, a period when companies were rewarded grandly for figuring out ways of minimizing the role of humans.

The market’s invisible hand can be seen guiding corporate decisions in real time. While growth in investment in plants, property and equipment slows among Standard & Poor’s 1500 companies, Valens estimates that spending on intangibles will rise 13.9% this year, up almost five percentage points from what’s been typical over the last 10 years. (The firm uses research and development outlays as a proxy.)

“While the market isn’t the economy, it’s a system for rewarding innovation, conditioning corporate managers to its tastes. This year, those tastes have been for asset-light businesses in which automation and online commerce shoulder profits while labor-intensive models are left behind. When similar alignments took hold in the past, the tidings for the labor market were poor.

“Throughout history, economic recoveries heavy on intangible investments have been associated with slower labor market bounce-backs — in some cases twice as slow. Starting in the early ’80s, when it took fewer than 30 months for employment to return to its prior peak, the recovery has gotten progressively longer: to 50 months after the dot-com bust and 70 after the global financial crisis, data from Carlyle Group show. In each case, growth in outlays for intangibles expanded.

Nothing has defined the 2020 market more than the erosion in the value of human capital. Over 10 months of chaotic swings, companies whose profits rely least on people beat those that depend the most by 27 percentage points, according to an analysis by StoneX Group Inc.’s Vincent Deluard, director of global macro strategy at the firm.”

The fly in the unemployment metrics is what they do not measure (you have to deep dive into the numbers, seeking alternative measures): Those who have given up looking for work (one of the great drivers of the opioid crisis) and those who are under-employed. People may be working again after the pandemic, but how many of those workers will be earning at pre-pandemic levels? Without some significant federal stimulus packages and perhaps direct federal employment to address energy and infrastructure issues, this could be a very long recovery. Given the new Republican strategy of conflating socialism with social programs, getting that kind of support is going be very difficult… Republicans seem to know that if you help people in trouble, they might have to pay more taxes.

I’m Peter Dekom, and I wonder if this nation has lost its notion of pulling together for the betterment of all as a core American value?