BSI

BSI
Creating Generational Legacies

Wednesday, November 30, 2016

What happened to our Economy?

Here’s one way of thinking about Bill Davidow’s seemingly insoluble problem of insufficient jobs.

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There was once a country with a well-functioning economy. It enjoyed a virtuous circle of increasing prosperity for all. Firms were well managed and drew on the full talents of workers. Workers became steadily more productive. Innovation flourished. Customers were thrilled. Firms made more money. The gains in productivity were shared fairly with the managers and the workers who created them. 


The increased pay for citizens enabled them to spend more on products and services. As they spent more, firms were inclined to invest more. Some workers used the money to launch new businesses, some of which grew into big businesses.


As banks made money by financing investments, they were highly respected members of the community. Investments in turn generated more jobs for workers. Workers became more productive and had even more resources to spend. Many more new businesses were created. As the economy grew, everyone was better off. The future looked bright.


Then something went wrong. It was as if a strange new set of economic diseases began to infect everything. As globalization, deregulation and new technology empowered customers, firms found it more and more difficult to monetize gains in productivity. Customers increasingly demanded and extracted improvements for free.


Firms focused more closely on their own gain. Gains in productivity were not shared with workers. As salaries of workers stagnated, they became dispirited. Citizens had less money to spend. As firms perceived a lack of demand, they invested less in new products and services. Real economic growth slowed. 


Because salaries were stagnant, there was no money for workers to start small businesses—formerly the main source of new jobs.


The economy went into a spiral of decline. To make executives more entrepreneurial, firms gave them generous compensation in the form of stock. But instead of becoming more entrepreneurial, executives extracted resources from their firms and handed them back to the owners—the shareholders and themselves. 


As the economy slowed, there was less need for banks to finance investment. So bankers began making money from gambling, rather than investing in the real economy. The financial sector and the stock market grew but because they weren’t grounded in real products and services, real GDP stagnated and there were increasingly severe financial crashes. As bankers profited from the ensuing volatility and slid into rampant illegality, they became disrespected members of society. 


As the economy slowed and firms found it steadily more difficult to make money, they resorted to shipping jobs overseas in a desperate effort to cut costs and silence workers’ unions. In the short term, they were rewarded by the stock market for cutting costs, but the firms soon found that they had undermined their own long-term capacity to evolve and grow their businesses. When many firms did this, whole industries were lost and could not be retrieved. As a result, the sectors where the country could compete steadily narrowed.


As a result, in a further effort to cut costs, firms invested less in shared resourcessuch as pools of skilled labor, supplier networks, an educated populace, and the physical and technical infrastructure on which competitiveness ultimately depends.


These management actions in turn gave rise to serious social problems (loss of jobs, stagnating income, growing inequality) and eventually a decline of the public sector (an inability to fund health and pensions, or investments in the commons such as infrastructure, training, education, and basic research, fields that the private sector had abandoned.)


As new firms used new technology to produce the same output with much fewer workers, and as rate of new business creation declined, the prospect of not creating enough jobs for the entire population became a serious prospect. Most of the new jobs were in low-paying local service jobs not subject to international competition.


Because the education system was focused on producing students who could regurgitate the right answers, rather than ask the right questions, even graduates were not well suited to the emerging entrepreneurial economy.


As the future for average citizens was bleak, and income inequality increased, social unrest spread. In politics, demagogues emerged, proposing desperate remedies like “erecting trade barriers”, “getting rid of immigrants”  “taxing the rich,” or “printing money.” As social cohesion frayed, thoughtful observers wondered whether the country could even survive.

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No economy has ever functioned with the uniform growth and prosperity that I have just described. Nor are the economic diseases of our world today as uniformly grim and dispiriting as the misfortunes I have just recorded. Yet every one of these phenomena has been happening in significant parts of the economy today. An economic horror story has been unfolding almost unnoticed, and this imagined disaster is not far from our reality. 


http://www.forbes.com/sites/stevedenning/2014/10/29/the-surprising-truth-about-where-new-jobs-come-from/


http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/


http://www.forbes.com/sites/stevedenning/2013/03/10/the-surprising-reasons-why-america-lost-its-ability-to-compete/


http://www.forbes.com/sites/stevedenning/2016/11/15/will-trump-discover-why-so-many-americans-were-left-behind/


I believe that Bill’s problem of the shortage of new jobs needs to be seen in this wider context of an unfolding economic disaster that is only partly related to problem cases like the newspaper industry, which inexplicably and nonchalantly failed to take action to deal with the obvious pending problem of technological disruption. 


What we have is a whole series of problems emerging simultaneously causing economic stagnation. In this context, no one single action will solve the problem of jobs, which is part of a bigger set of problems.

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