The Macroeconomics of American Populism

Greg Loving, Contributor

 

The effects of automation, globalization, and financialization on employment and our responsibility as future business leaders

With much of the news coverage of the next presidential administration focused on the personalities occupying the White House, it’s easy to lose sight of macroeconomic trends that are just as responsible for the new wave of populism sweeping the United States. Consider just three data points:

  • Automation: 47% of all jobs in America today are at a high risk of being automated.
  • Globalization:  When deciding whether to move activities outside of the US, businesses choose to offshore 84% of the time.
  • Financialization: Aggregate shareholder distributions (dividends and share repurchases) have exceeded 100% of earnings in the S&P 500 since 2014, starving funding to R&D and long-term strategic investments.

In terms of understanding the reason for Donald Trump’s election, these three facts illustrate the ways in which the economic progress has left many behind, how many participants in the global economy fail to feel its benefits, and how reinvestment in human capital has been insufficient. How to deal with these trends will be a defining challenge for the current cohort of business school students, both in the classroom as they complete their MBA and in their careers beyond.

47% of all jobs in America today are at a high risk of being automated.

Automation

Contrary to the common narrative, 85% of manufacturing jobs lost in the US over the past decade were not due to unfettered global competition, but rather automation. Furthermore, advances in artificial intelligence now threaten routine jobs in many non-manufacturing sectors of the economy. Consider the example of autonomous vehicles. While this advance has been rightly heralded for its potential to save lives by reducing car accidents, it also has the potential to disrupt the occupations of millions of professional drivers. At 2.4 million jobs, driving is the most popular occupation in the United States. While it may ultimately be in the national interest to make the tradeoff in favor of automation, we’ll need to grapple with the consequences.

The common response to the specter of technological unemployment is that progress has always resulted in greater employment. When the Model-T upended the horse and buggy, new jobs were invented such as mechanics, taxi drivers, and assembly line workers. But the information technology revolution has been about replicating capabilities of the human mind, a fundamentally different prospect from what came before. Employment data also suggests what we’re seeing today is unprecedented. In the decade from 2000 to 2010, there was zero net job creation in America. Detractors will attribute this to the Great Recession, but it was consistent with long-term trend lines. Net job creation in percentage terms has decreased over every decade since the 1970s. Furthermore, recovery time to pre-recession employment levels has increased in each recession since 1974, taking six and a half years after 2007 versus one and half in 1974. Even if you accept the argument that technological progress will generate employment in the long-run, it’s hard to see a scenario where there isn’t temporary labor dislocation as workers try to keep pace with exponentially accelerating Moore’s Law. As we’ve seen in the industrial Midwest, a “temporary” situation can last for the better part of a working career. This is clearly a prospect with significant societal implications.

In the decade from 2000 to 2010, there was zero net job creation in America.

Globalization

There is a consensus that globalization has had a positive net effect on the world’s economy, but it is also true that there have been local winners and losers. The Economist recently conducted a poll demonstrating positive correlation between gains in GDP per capita and attitudes toward globalization by country. The US has seen a 12% improvement in GDP per capita over the past five years, with around 40% of respondents indicating that globalization was a force for good. On the other side of the globe, Vietnam saw a 28% improvement and more than 90% responded positively. Outcomes within the US have also been uneven – the Factory Belt turned into the Rust Belt while the Bay Area became Silicon Valley – but disproportionately impacted the middle class. Median real income in the US peaked in 1999 and has been declining since. We should celebrate overall gains in human prosperity, but recognize that the US middle class has not had a wholly positive encounter with globalization to date.

Critics will claim that given rising labor rates in China, we should expect lost jobs to soon be re-shored but this too is misguided. Even if Chinese competition ceased tomorrow, there are vast reservoirs of low-cost labor in other areas of Asia and Sub-Saharan Africa eagerly waiting to enter the workforce. For example, China’s share of the market for American shoe imports slipped from 87% in 2009 to 79% in 2015. Vietnam, Indonesia, and Cambodia picked up all the extra work. Combined with the steadily falling cost of robots – which China is aggressively embracing – it is very hard to see how status quo policies will restore the competitiveness of the American worker.

Financialization

Perhaps most relevant to the average HBS student is the financialization of the US economy over the past several decades. Since the 1970s, the financial services industry share of total US business profits has grown from around 15% to as much as 40% in the 2000s. While profits are not a bad thing, misallocated capital is. This growth has been accompanied by a massive increase in shareholder distributions by public companies and transaction fees for banks. To meet the ever-increasing pressure for EPS growth quarter after quarter, companies forego investments in R&D to fund share repurchases. Not only does this lessen the likelihood of discovering job-generating innovations, but it is obviously unsustainable once distributions consistently exceed earnings as they have for the past several years. Take Intel, which has long lobbied the government to spend more on nanotechnology research, ultimately resulting in the creation of the National Nanotechnology Institute (NNI). The irony is that in 2013, Intel’s expenditure on buybacks was four times the total NNI budget.

The result of this circular reference error is a growing concentration of wealth among those holding equities. Moreover, the portion of middle-income participants in the stock market has fallen by 22% over the past decade, further accelerating inequitable outcomes. While I view all of this as an issue, I reject the notion that the financialization of the US economy is due to individual greed. Rather, it is a systemic but correctable issue arising from perverse incentives and regulatory capture by the financial lobby.

Why it Matters to Us

HBS and other elite business institutions have catalyzed these events by teaching future managers how to automate, offshore, and financialize for decades. In the Fall RC curriculum alone, we had cases that promote the substitution of labor for capital, demonstrate the economic benefit of labor arbitrage, and extol the wisdom of activist investors promoting financial engineering schemes that sacrifice long-term investment. And while both sides of a case are always presented, one could argue that the long-term externalities of these practices – notably accelerating inequality – have been under-represented in the classroom. In the US today, more than 40% of all wealth is held by the top 1%, up from around 25% in the 1970s. 76% of all wealth in America is held by the top decile while the bottom half owns a mere 1% of wealth.

America has never had a perfectly equitable income distribution, nor do I think that utopian vision should be our objective. Indeed, inequality can be a driving force that inspires the entrepreneurism and hard work that defines our national narrative. However, we have reached levels of inequality comparable only to the decade preceding the Great Depression. If these trends continue into unprecedented territory, democracy, and a skewed income distribution ultimately cease to be compatible. When most Americans feel that they aren’t getting a fair share of the nation’s prosperity, they will simply vote themselves a greater share of the public treasury. The ensuing crisis-borne policies would likely be bad for our nation’s competitiveness. Recent flirtations with populism are not the ultimate realization of this possibility but do reflect movement in that direction.

The people I’ve met at this school bear no resemblance to robber-baron caricatures of the elite – on the contrary, they have been some of the most compassionate individuals I have met. Statistically, however, graduates of HBS will secure an average salary of more than $150k in their first post-MBA role, putting us at the 96% percentile of individual wage earners in the US. Six years later, our average salary will be $290k, just over the 99% percentile. So let’s be clear, when we’re talking about the beneficiaries of these trends to date, we’re talking about us.

When faced with the prospect of rising inequality, there is an understandable tendency among top earners to view the problem as unfair but ultimately irrelevant. After all, through hard work and good choices we’ve become the winners of the 21st-century economy. We must resist this urge. Without a course correction, this may cease to be somebody else’s problem and instead become a question of maintaining the very social contract that our market economy relies upon. Furthermore, the potential implications are sector-agnostic. Without purchasing power – how can we expect there to be consumer demand for the products and services our businesses produce? Our future individual prosperity will be a function of how proactively and effectively we address these very challenging social issues.

Make no mistake, I am not advocating a resistance to automation and globalization, but I am arguing for further discussion of these issues in the classroom today and in the boardroom tomorrow. Already, there are encouraging signs as competitors in the President’s Innovation Challenge take aim at some of these seemingly intractable issues. Two enterprising students in New F are working on a software platform to connect the various stakeholders within the public-private labor ecosystem, with the objective of making it more efficient for workers to retrain with relevant skills after their previous occupations are disrupted. This semester the newly founded Future of Work Club will be organizing to discuss these issues and actionable solutions.

Finding ways to generate shared prosperity is our generation’s moonshot.

Greg Loving (HBS ’18, Section F) hails from the great state of Kansas and has a formal background in engineering. His plan of eventually having a home on the moon is driven by his belief that the future of humanity is in space.