Posts Tagged ‘Great Depression’

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Technology is not always a good thing, it depends. Technology can kill jobs. As a result, fewer jobs may mean less demand, which may lead to less output. Innovation can lead to recession. This may have happened in 1930s. After all, the US Great Depression followed (with a time a lag of 16 years) the greatest 50 year period in innovation that has ever been known. Innovation is back in vogue. Now a company which specialises in finding jobs for young people has warned that automation is killing jobs. Is it right?

Will Davies, is the managing director of aspect.co.uk, a company which claims to be a pioneer in providing job training for young people.

Mr Davies said: “The growing number of unemployed young people in Britain is a major problem but, unfortunately, its causes run deeper than any short-term cause, such as a recession.” Almost one million people aged 16 to 24, 20.9 per cent, are unemployed across the UK, which is one of the highest rates since record keeping began in 1992, and Mr Davies says: “Automation is displacing traditional jobs – whether or not we are coming out of economic crisis.”

The Davies remedy is for the government: “to incentivise the private sector to develop new industries that have a need for manual labour.” He also says: “Young people’s minds are being cluttered by the Internet and their attention spans shortened. Many of them simply are not equipped to take the jobs that do remain out there.”

He makes good points.

But be careful not to view the future from the very narrow perspective of a country coming out of a very deep downturn. There is evidence that companies are re-shoring – that is to say, returning their manufacturing to home territories. That will help.

The government can also help by trying to create a more entrepreneurial minded country. New businesses create jobs. At least some unemployed people have skills and hobbies that could be translated into business ideas. But the money available is pitiful. It is odd that the Bank of England and UK government are willing to take the risk of creating a recovery from rising household debt, and house prices, but say using QE to fund investment into entrepreneurs is too risky.

It was also told today how there is evidence that graduates are good for the economy. See: We don’t need no education, we don’t need no thought control, well actually it appears we do. If nothing elsea good education, and especially an education to degree level, can help to overcome the problem Mr Davies alluded to – that of the internet shortening attention span.

And yet for all that, the problems and opportunities of innovation is not being grasped by economists. It does not help that they don’t seem to realise we are in the midst of a quite remarkable new technological revolution; one that may easily surpass the greatest era of innovation seen to date. See: Age of Symmetry

Economists are busy denying that innovation is having much impact, busy ignoring what’s staring them in the face because their faces are averted and they are immersed in theory. Consequently they miss the remarkable revolution that is occurring. They are letting us down. The near one million young Brits who are unemployed are among their victims.

© Investment & Business News 2013

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The Luddites were sometimes right. Technology might be a good thing in the long run, but in the short run there are casualties. Actually, there are always casualties, but it’s possible that innovation has sometimes created economic depression before it created something special. It may be like that today, and 3D printing is a prime example.

Consider the age of symmetry. It lasted from around 1867 to 1914, and was perhaps the golden age of innovation. In fact, if you look at the history of innovation from learning how to tame animals to the Internet, it is possible that more innovation occurred in that half a century or so than throughout the rest of history put together. Yet 13 years later, the US entered the Great Depression, and the global economy limped forward into world war. It may have been a coincidence of course, but then again, does it not kind of make sense that innovation can create economic hardship?

Innovation can increase productive potential, but without a corresponding rise in demand the result of innovation may be fewer jobs. Fewer jobs mean less demand and things can become worse.

This does not mean innovation is bad and always destroys jobs; it just means that it can, under certain circumstances, particularly if the government does not try to counteract the negative impacts of innovation with stimulus. Maybe this has been happening of late. It does feel as though modern technology has left two types of jobs: the highly paid skilled jobs, and the manual jobs, such as cleaning. There is little in the middle.

And that brings us to the next wave of innovation: nanotechnology to the internet of things, might not these changes cut though the economy like a sickle though grass?

Take 3D printing: it’s hard to see how this can do anything but destroy jobs. It is hard to see this, but not impossible.

3D printing may provide the opportunity for local craftsman, experts in CAD, design, and materials to provide bespoke products for the customer, at a price that puts such products in reach of the mass market.

A similar point was made here the other day. See 3D printing: game changer or just fair game for the cynics? 
It was good to see others drawing similar conclusions. Kevin O’Marah of SCM World recently wrote “Store-based retail is getting killed by Amazon-addicted consumers whose loyalty is paper thin. Suppose, however, that stores did more than just carry product.

Additive manufacturing (aka 3D printing) has the potential to custom-make many consumer products given progress in the materials sciences that will go from simple resins to metals, ceramics, fabrics and more. Add some well-trained staff and the store could be a place where consumers come to solve problems and experiment with ideas. Imagine the retailer REI deploying these ideas for its ultra-loyal outdoorsy customer base – it’s not hard to see how this beats Amazon.” See Futureworld: 3D printing is the tip of the iceberg 

Maybe 3D printing won’t just have one effect, but will have different effects at different times, and in different sectors. It may lead to job losses and a recession for a while and in some regions, but it may also ultimately create a huge number of skilled and well-paid jobs, creating more wealth for most of us.

© Investment & Business News 2013

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Permanent! Do recessions and economic depressions cause permanent damage to the economy, or do we see a catch-up period in the years that follow? In some ways it is like asking whether going on holiday damages your total level of productivity. Do you work extra hard in the days before going away and then when you return, so that within a few weeks, as far as backlog of work is concerned, it is as if you never went away? Do holidays cause permanent damage to output?

The answer to that question is quite important because it may determine whether the UK will boom later this decade. One thing we can say is this. The Great Depression in the US during the 1930s was very nasty, but within a decade or so of it ending, US GDP was much greater than it would have been had growth followed the pre-depression trajectory.

Recessions caused by financial crises tend to be different. They tend to be more severe and it can take longer for recovery to occur. Various economists have had a go at calculating the permanent loss of GDP that occurs after a recession caused by a financial crisis. Estimates vary, but, according to Capital Economics, they are all – or nearly all – within the 2 to 10 per cent mark. That is to say once the dust has settled and things have returned to normal, total GDP is between 2 and 10 per cent less than what it would have been had the financial crisis never occurred.

Of course the causal link may be the other way round. It may be that GDP in the years leading up to a financial crisis is illusionary. It is not so much that such a crisis causes permanent loss; rather it is that total output was not real, not really real, and largely constructed from the economic equivalent of smoke and mirrors.
Right now

UK GDP is around 15 per cent short of what it would have been had things carried on, or as most forecasters had predicted before 2008. By the end of next year, the gap between actuality and what one might loosely call potential is likely to be around 16.5 per cent.

So let’s say that permanent damage caused to the economy lies somewhere halfway between the 2 and 10 per cent figures, and is 6 per cent. That means the UK will eventually claw back no less than 10.5 per cent of GDP lost during the downturn. Let’s say this happens between 2015 and 2020 – not an unreasonable assumption – and that underlying growth is 2.5 per cent. During this half a decade annual growth should average around 4 per cent a year. And funnily enough, this is precisely what Capital Economics expects to happen.

In the build-up to the financial crisis Capital Economics was definitely one of the more bearish of commentators, and made its name for forecasting something of a crash in UK house prices. Indeed, when it comes to forecasts of UK house prices it remains distinctly bearish. Yet, earlier this week it forecast what one can only really call a boom for the UK economy within two or three years.

It suggests the loss to the UK’s permanent output was limited by two key factors. Firstly, spending on R&D as a proportion of GDP has actually been higher since the recession began. Theoretically potential output continued to grow, even if actual output didn’t. It also suggested that because unemployment did not rise to the kind of levels seen in the past, there was less permanent damage. The rationale behind this is that people who have been unemployed for an extended period of time often lose hope, and become less productive in the future.

© Investment & Business News 2013

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The data speaks for itself. In the final quarter of 2012 US corporate profits were 11.8 per cent of US GDP. To find the last time the ratio was so high you would have to rewind the clock all the way to the beginning of time.

Maybe, it would be more accurate to say you would have to rewind the clock to the date when data was first available, which an economist might say is indeed the same thing as the beginning of time. In fact quarter on quarter data only goes back to 1947. Year on year stats are available from 1929, however. As far as the data is concerned Q4 2012 was a record.

It may surprise you to learn that until just under ten years ago, the record for corporate profits to GDP belonged to 1929, with a ratio of 9.9 per cent. It is a shame the data does not go back further, because 1929 is an awkward year for a story to begin. It was, after all, the year when Wall Street crashed, and the point when the US Great Depression began. So had corporate profits surged just before 1929, and was the high level of this ratio a cause of the Great Depression, or was it normal for corporate profits to GDP to be so high back then? We can only really speculate.

What we can say, however, is that, according to data going back 80 or so years, the only two periods when US corporate profits to GDP approached 10 per cent or went over it, the US economy was either in, or about to enter one of its two worst periods of economic performance during that period. Is that a coincidence? Maybe it is, but there are good reasons to think this apparent correlation is not random.
Drilling into the numbers we find that the ratio of profits to GDP actually passed the 1929 record in Q4 2005, fell back in 2007 and 2008, hit a new record in Q4 2011, and has pretty much being going upwards ever since.

The downturn in the US has some odd things about it. Employment has been improving, but is still lower than we need it to be. GDP has been growing, but, just as is the case in the UK, households have been struggling. US median wages, on the other hand, have seen an awful performance. US median wages, relative to inflation, were lower last year than in 1995. As households have struggled, markets have soared, with the Dow and S&P 500 hitting all-time highs in the last few weeks.

Investors and corporate bosses may say: so what? They may say it is good that profits are rising, that an increase in profits will be followed by an increase in hiring. But that is not how it is panning out. Sure we are seeing a modest rise in M&A activity. Sure dividends and share buy-backs are increasing. But to a very large extent US companies are sitting on the cash, as indeed are large UK companies.

This cash sloshes around the banking system, and much of it finally ends up buying US and UK government bonds.

To grow, the US economy needs to see demand rise, and without seeing a corresponding increase in debt, demand can only rise if wages go up.
Without this rise in demand, sooner or later the surge in corporate profits will stop, and go into shuddering reverse.

It may seem counterintuitive, but the rise in the ratio of profits to GDP is not in the long term interests of companies. It is most certainly not in the interests of the people who work for them, and it is not what we need to create sustainable economic growth. So what is the solution? See: Will a rise in the minimum wage put an end to zombie companies? And: Is it time to increase the minimum wage?

©2013 Investment and Business News.

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