Tuesday, May 27, 2014

GDP Growth

American Q1/2014 GDP growth that was to be 3% (when discussed in late 2013) was finalized last week....drum roll; its -0.7% (I presume that the media will blame the weather).  Why is the economy underachieving what everyone believes to be the right way to go?

There are several reasons:  First off, median income continues to fall, America's middle class is seeing real wage contraction and has done so since the mid 1980s.  There is no doubt that the contraction in high paying blue collar jobs is a culprit, personally I blame the financial services that accounted for less than 5% of GDP in 1980 and today accounts for nearly 10%.  This "value added" has to be paid for.

Looking at machinery from cars to telephone via white goods (washer etc) one inescapable truth is that the craftsman is a dying breed.  Two years ago my range oven "died" it was $900 to replace the electronics or $1,200 for a new range oven.  Guess what I did -- I bought a new oven.  Worse part is that you don't need a technician to change the broken parts, a few screws and the motherboard (on an oven) is replaced.  BTW who though that it was good idea to install delicate, heat sensitive electronics on an range oven?

The technically proficient blue collar workers have been replaced by the ignorant "Chinese factory worker" who installs the same component 2,000 times a day the exact same way -- thing of him/her as a cheap robot!

Back to GDP -- how can the economy grow when only the rich are seeing any income growth; they simply consume less (more savings) and therefore the economy cannot grow. Moreover, with an aging population consumption patterns shift -- a young family consumes much more than older (nearer retirement) couples.

We are therefore seeing a number of forces that conspire to keep GDP growth in check:

  1. Median income continues to fall (ACA aka Obamacare may help)
  2. Aging population shift consumption patterns
  3. Higher unemployment and lower skill employment affects earnings potential -- hence spending patterns

The value of investing in education;  A cautionary tail -- Friend's son just took over the sales and administrative responsibility of a consumer goods distribution regional network in Europe.  The retiree got his job when he was 25, had the equivalent of a high school diplomat.  His replacement has a MBA from a second tier European University (still very good), but in 30 years the job that was accomplished (until 3 weeks ago) by a High school graduate has been taken over by a MBA.  The cost of educating the replacement has been astronomical when compared to his predecessor -- what that value for money? 

This is a bit like the GDP growth stories out of China where cement factories are still being built (or cities for that matters) when there is already massive over-capacity (like a couple of hundred time the demand).  Building a $200 million cement plant that is un-needed still counts as part of GDP growth.  Can we make the same statement about education; were university graduates are taking over jobs done until recently by people that had not even finished high school?

I hear horror stories about education standards when young men and women graduate high school virtually unable to read or count -- its actually policy here in Quebec, to graduate from one year to the next in high school you only need a passing grade in half your classes!  

Who is school for the student, the teachers or society.  To me it looks like someone is getting cheater her -- the students for not having a real education and the tax payers that foot the bill.  I cannot speak about the teachers because such insane rules doesn't issue from professors...



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