Sunday, October 2, 2011

Growing Slowly

The US economy is not going to get much worse. It will improve. But, it won't be like the economy in past years. Why?

Unemployment is here to stay and especially for those in the bottom half of the skill pool. The future will have a permanent unemployed part of the American population. The unemployed will survive by various "safety nets" funded by government. It is hard to see how they will ever be legally employable again in any great numbers.

The absence of work opportunities for the unemployed suggests that their children will be disadvantaged as well, since useful employment will not be a day-to-day feature of these households. The US will have a perpetual underclass, basically created by government fiat.

For the upper middle income and the rich, the "new economy" will seem much as before. Using "outsourcing" and technology, the wealthiest part of America will find a way to get by without the unskilled labor force that once had a home in this economy.

The rags to riches stories will be things of the past. Just as in modern day Europe, economic and social classes will be frozen, economic growth will move along at a snail's pace, and social and economic mobility will come to an end.

This unfortunate future is the result of pricing the low income part of the labor force out of the market. Business just cannot afford them anymore thanks to the blithering array of taxes, mandates, litigation fears. All of these things that government has decided to do to "help" workers, simply makes them toxic to employers. We've gone past the tipping point.

These obstacles that shackle poor folks are not that formidable for high income, highly skilled folks. Their incomes are high enough and their skill sets are high enough that they can still be employed -- at least for now.

One way to see what has happened is to imagine that the minimum wage has been raised to $ 50 per hour. Who then will get a job? Those with the skills that are worth more than $ 50 per hour to the employer. Everybody else is flat out of luck.

This doesn't mean that the economy can't grow. It can and will. Europe has grown and gotten used to the idea of double digit unemployment and a permanent underclass with no social and economic mobility. (Europe arrived at this situation by the simple expedient of passing laws that forbid companies to fire anyone). It has taken the US a bit longer to get to the "creeping stagnation" economy, but we're there now.

As the West slowly trudges along, Asia, Eastern Europe, Africa, Latin America and perhaps even the Arab world have a real chance to take over center stage in the world economy. The West has abdicated. It remains to be seen who will supplant the West -- most likely China and the countries on China's periphery.

All of this is why stocks are probably a pretty good bet. Some companies, indeed many oompanies, will do fine in the world that is coming. There will be growing demand from China, Brazil, India, and the rest of the world for products that the West has long taken for granted. This doesn't mean that stocks won't stumble a bit when the inevitable European sovereign defaults begin. But, the defaults are inevitable and everybody but Tim Geithner knows it. The real stock market bottom has probably already passed, but if hasn't, then wait until Greece, Spain, and Italy default and the German and French banks are nationalized and then buy stocks with a reckless abandon.