Occupy capital markets!

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Here is the deal: I think there is a good chance that economic growth in the U.S. will be slower than normal going forward.  And that slow growth will probably hurt workers more than capital owners.  So by my reasoning, it probably wouldn’t hurt to be a little more aggressive in trying to become a capital owner yourself.

It goes without saying that a lot of this is just my personal opinion (about the unknowable future), but some major names in economics have signed-off on at least part of this world-view as well.  I’m just trying to provide some food for thought, and more importantly, action, as it relates to your financial well-being.

Alright, let’s start big and then get smaller.  How do you measure the size of the economy?  GDP (gross domestic product).  GDP is the market value of everything produced within a country.  So if the things produced in the U.S. are more valuable this year than last year, the economy, or GDP, has grown.  For production to be more valuable year-over-year, it is likely that production itself also grew, although this doesn’t always have to be the case.

So how does production grow?  The three main drivers of production growth are productivity, labor, and capital, where labor is simply the number of workers, capital is the amount of equipment, and productivity is a measure of how efficiently workers and equipment are used.  Low productivity could be caused by workers not having the right type of training for jobs, but it could also be caused by not having the right tools (ever tried to hammer a nail with a screwdriver?).  Economists can approximate productivity by measuring output per person.

Productivity is extremely important to economic growth, and the U.S. is no exception.  Below is a chart from Robert Gordon’s paper, “IS U.S. ECONOMIC GROWTH OVER? FALTERING INNOVATION CONFRONTS THE SIX HEADWINDS,” that attempts to measure productivity growth since 1300.  Gordon is a very respected economist that even guys like Ben Bernanke, the former U.S. Federal Reserve Chairman, admire (note: no relation to Kim Gordon)

What Gordon shows here is that major productivity growth may end up reverting back to pre-1700 levels by the end of this century.  In other words, he argues that the U.S. will nearly stop growing by the end of this century (no more 3.5% average GDP growth rates in the future).  But why the pessimism Mr. Gordon?

What is so different about the 19th and 20th century versus today and the future?  Gordon identifies three previous industrial revolutions that really kicked productivity and growth into a higher gear:

  • IR1 (1750-1830) with steam engines, railroads, cotton spinning
  • IR2 (1870-1900) with electricity, combustion engines, running water, and indoor plumbing
  • IR3 (1960-1990) with the rise of computing and internets 🙂

There are other notable one-time events that were a result of some of these changes, one important event being women entering the workforce in large numbers primarily a result of IR2.

This video, The Hockey Stick of Human Prosperity, illustrates the progression nicely:

In addition to these one-time changes, Gordon identifies six headwinds that are likely to slow growth going forward, including:

  1. demographic shifts (baby boomers retire and are replaced by a smaller workforce)
  2. rising inequality (more growth going to top 1% aka capital owners)
  3. globalization (more low-price competition)
  4. poor education effectiveness and increasing education cost inflation (less-skilled workforce)
  5. climate change (increase in energy costs due to associated taxes and regulations)
  6. consumer and government debt overhang (especially as baby boomers retire)

Here is the likely impact of each factor, cumulatively stair-stepped on potential economic growth:

Some pretty bleak stuff, eh?  To sum up Gordon’s argument, he says that we won’t see another major productivity-boosting industrial revolution anytime soon and that there are a lot of other problems further harming the growth outlook.

For me, the biggest weakness in his argument is that we actually COULD be on the cusp of another robotics and technology-driven industrial revolution.  Gordon’s response, which you can watch on TED Talks, is, “Would you rather go without running water and plumbing for a week or your iPhone?”

He thinks that more advanced technology will primarily benefit us in ways that aren’t as meaningful to quality of life (and productivity) as indoor plumbing, faster transportation, and automated manufacturing.  Even if he is wrong on that point, and I think he is a little bit (and Paul Krugman seems to agree with me here; so does Stephen King, the economist), he is still pretty convincing on the whole (Tyler Cowen has similar arguments to Gordon as well).

Artificial intelligence and the rise of “robots” might be one possible industrial revolution that hasn’t played out yet, but it still probably won’t improve quality of life for the average person as much as, say, indoor plumbing… unless you were able to drastically extend life expectancies, for example, but that would come with its own set of resource problems too.

Where this possible fourth industrial revolution MIGHT have a major impact is on labor productivity, or GDP per capita.  Theoretically, at some point in the future, we will be able to replace almost every human job with artificially intelligent robots, driving labor productivity through the roof (according to Kevin Drum, and assuming robots count as capital, not labor).

“yeah, but can a robot do this?!”… channelling my occupy street art sensibilities… and throwing in a little intergalactic to lighten things up.

The problem with a robots-driven industrial revolution is that capital owners wouldn’t really need labor anymore. Some people argue that this has already started to happen.  Take a look at the charts below from Bureau of Labor and Statistics’ “Compensation-Productivity Gap: A Visual Essay” to get a better idea of why.

The chart above shows that the non-farm business sector is spending less on labor and more on capital as a share of total output over time.  An easy example is to think of ATM machines replacing bank tellers.

Chart 6, above, shows that real hourly compensation has not kept pace with productivity since the 1980’s, presumably because businesses are able to achieve more growth with capital investments rather than labor.

What happens as robotics and artificial intelligence get exponentially more sophisticated?  The seemingly obvious answer is that an even smaller share of output goes to workers.  Less jobs means higher unemployment, lower salaries, fewer promotions, and most important for the financial independence crowd… wait for it… a longer path to financial security and/or early retirement (dum dum duuuum).

But there is still some hope.  At least 7 pundits think Robert Gordon’s analysis isn’t 100% correct.  However, even if Gordon is wrong, there is an undeniable trend favoring capital owners over laborers.  And if you aren’t making most of your money off investments, you are likely in the laborer camp.

Granted, these trends are moving pretty slow, but you will want to get ahead of them as soon as possible to minimize the damage.  Don’t be the frog that gets boiled slowly in a warming pot of cold water… JUMP OUT!  And by jump out, I mean cast your lot with the capital owners and occupy some fother muckin’ capital markets!

So the thought process so far goes something like this:

  1. Economic growth is probably going to get slower by the decade.
  2. And more share of economic growth is going to capital owners (versus workers).
  3. So minimize the damage to your own financial future by acquiring as much capital as you can and quicker!

On top of that, because growth is likely to be so much slower in the future, your safe withdrawal rate might actually need to be a little lower in retirement.  So you might need to save a little bit longer, until you have 30-40 times your annual expenses in savings versus 25.  It sucks to think about needing all that extra money, but, personally, this just motivates me to get more aggressive with my savings.  I’m not saying I buy into every single part of the doomsday scenario(s) above, but I am 65-80% in agreement.  What is the worst that could happen?  Things aren’t as dire as predicted and you end up financially independent a few years ahead of the game?  Or maybe your safe withdrawal amount is a little bit bigger than you need?  Better to error on the positive side in my opinion.

Additionally, on top of the economic doomsday scenarios, and this is just my personal bias coming to the surface, capital owners tend to have a disproportionate amount of power in our society.  Money begets power (and also sometimes problems).

Think about it… all the corporate money that goes into politics… guys like Warren Buffett paying lower tax rates than their secretaries.  The rules are generally tilted in capital owners’ favor (Wall Street bailout and no prosecutions, anybody? [man, this really is starting to sound like an occupy piece 😉 ]).  These are examples of the tension between democracy and capitalism, and I tend to think the biggest proponents of capitalism are generally the most successful at pushing their agenda (just look at the bias for low inflation versus lower unemployment at the Fed, for example).

However, if a lot of the proletariat do start losing the opportunity to find meaningful work, I think democracy might score a few wins over capitalism.  Specifically with more wealth and income transfers (taxes).  But I don’t think these kinds of taxes will be a game-changer; capital owners will still find a way to maintain their position of advantage most likely.

There is a little bit of good news in all of this, however.  The good news is that stock market returns tend to move independently from GDP.  Some people even say they move in the opposite direction (which again is just another reason to own more stock [capital] if you think GDP growth is going to putter out).  Although, this is a contested topic which can bring out some major snark in people (1) (2).  At a minimum, we can say that stock growth is much more complicated and not singly determined by any one country’s GDP growth… especially in this age of globalization and prominent multi-national corporations.

Another optimistic perspective is that you might be able to find growth elsewhere in the world as well.  Maybe the rule of thumb allocation for domestic vs. international stocks changes a little bit over time to favor more international and/or emerging markets.  These are potential plays as well.

But, at the risk of sounding like a broken record, the bottom line takeaway from all this information for me is:

  1. Get into capital markets as early as possible.
  2. Get into capital markets as comprehensively as possible (without sacrificing happiness of course).
  3. Error on the side of caution and withdraw your capital holdings conservatively.

So take a second to grieve the slow decline of U.S. exceptionalism, and then start trying to scramble your way out of that boiling pot and occupy some freakin’ stocks already!  And may I suggest checking out a few ROI analyses to get you started?

Spend well- FG ROI


*UPDATE: Things might not be looking as pessimistic from a growth perspective, but that still doesn’t change the fact that gains are accumulating to capital owners rather than laborers… they’re just accumulating quicker maybe (Washington Post Wonkblog).

*UPDATE2: Vox summarizes Thomas Piketty’s apparently very important economic book, Capital in the 21st Century.  The summary tends to support the thesis that you should get your money into capital investments as much and as soon as possible because Piketty says capital will grow faster than the economy as a whole, as it has in the past, leaving average workers at a disadvantage.

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