Wednesday, March 28, 2012

Economy: As Good As It Gets?

History shows that after every recession the economy recovers and gets better than before. But the recent recovery has been painstakingly slow and many pessimists claim that this time is different. The other day the "New York Times" had the headline "Are the Good Times Never Coming Back? ( They wrote: "There is growing chatter in economics circles about the unsettling possibility that the nation may never recover completely from the recent recession". The article reports about economists who claim, that "the present situation is about as good as it gets".

These pessimists argue that the slow pace of the recent  recovery (disappointing job market, slow rising GDP) reflects a long-term deterioration in economic prospects.
They claim that the pace of growth is faltering because the work force in the U.S.  is expanding more slowly as in the past. "Population growth has slowed, and so has the pace at which women are entering the labor market" quotes the "New York Times".

This argument is flawed because it has 2 fundamental mistakes: For instance Apple doesn´t need any U.S. workforce to expand and to produce more iPhones and iPads. These devices are manufactured in China by Foxcom. Therefore the relevant workforce for producing goods isn`t the U.S. workforce. It is the global workforce. I reckon that many pessimists are too much focused on the U.S. and Europe and ignore the globalization and the growing influence of Asia & Latin America.

The pessimistic argument has a second mistake which counts even more. Even if the U.S. growth of workforce is slowing down it doesn`t  hamper the economic growth. For instance recently acquired a company that produces robots which could replace workers in their warehouses (forbes). Therefore the online company could grow even when their workforce would stagnate or shrink. You could also find more and more industrial robots in car factories and other plants.

Robots are just one example of the automatization process which has been augmenting the efficiency & productivity of the global economy since the 19th century. Today an average worker can produce many more goods & services than in the past thanks to technological progress. This is the one of the main reasons why the job market is recovering so slowly.

However the automation process is raising the efficiency of the companies and therefore expanding their profits. Rising company earnings create more wealth via stock market gains & climbing dividends and will animate more investments which will finally create more income and jobs.

The "New York Times" also reports that "many claim that the financial crises that ended in spring 2009 was particularly traumatic". This is true and might explain the disappointing pace of the recent recovery because the post-recession trauma is slowing down investments. But rising company profits and the climbing stock market prices will heal this trauma over time.

I guess that another obstacle for growth also will lose importance and heal over time. Many skeptics claim "that high levels of debt are restraining growth", writes the New York Times. Indeed high public debt, especially in Europe, is enforcing sharp cuts of public expenditures (austerity policies) which cause lots of headwinds for the economic upswing at the moment. But these cuts will lead to a leaner government and will create more space for the private economy which is more dynamic & productive than the public economy. I reckon that the condensation of the public economies in the U.S. and Europa will augment growth in the future. I claim furthermore that the rising company profits and the general economic upswing will spill more money (tax income) into government cash boxes and in that way, reduce the debts soon.

History shows that globalization & technological progress in combination with a rising efficiency of the economy will raise company profits, production and personal incomes to new heights. I am convinced that these developments will continue and might even accelerate because there is a flood of innovations and improvements in many fields (iPads, robotics, medicine, engineering, nanotechnology etc.) which could fast-track technological progress.

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