A Look at Economic Growth During a Great Correction

We’ve a couple of corrections to deal with today, Fellow Reckoner. First, a minor one. Then something much larger…

In yesterday’s issue, the guest column was mistakenly attributed to Frank Holmes, whose insightful material appears occasionally in these pages. The essay that we featured, however, was actually penned by Mr. Jeff Clark, an editor with Casey Research. Our apologies to Mr. Clark for this oversight. A version of the column — complete with corrected byline — can be viewed here:

After the Fall: How Far Can Gold and Silver Climb? — By Jeff Clark

Now onto the second order of business, the other correction…something Bill has long been calling “The Great Correction.”

Fellow Reckoners already know that what we’re seeing play out today is hardly the garden variety, single — or even double — dip “recession” the talking heads on television squawk about daily. Indeed, the very nature of a double dip implies that, somewhere between the first dip and where we are today there existed some kind of “recovery.” Various politicians and economists spent the better part of the past couple of years selling this idea to Johnny and Janey Main Street, trying to convince them that what happened in 2008 was merely a blip on an otherwise uninterrupted upward trajectory. Things would soon return to “normal,” they said. There was even a whole season branded the “Summer of Recovery.”

Of course, there was no such recovery. Stock markets are still down 30% — more or less — from their pre-crash highs. Meanwhile, millions more Americans have joined, first, unemployment lines and, second, parents’ and friends’ couches, too disillusioned to even bother looking for a job. The longer they remain unemployed, the larger the drain they become on the welfare state designed to pay them not to work. And even if they do get back on the job, they will likely toil for less than they were paid ten years ago; another sign that the Great Correction is doing its work. News out yesterday confirmed that the average wage of an American worker has actually declined over the past decade — down 7% to $49.5k.

“Economists talk about the lost decade in Japan,” Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities told CNN. “Well, with these 2010 data, we can confirm the lost decade for the American middle class.”

There you have it: The first lost decade of the Great Correction. Japan — proving these things CAN go on longer than is generally expected — just embarked on its third zero-growth, go-nowhere decade. And the Japanese had a private savings base to cushion the initial blow. The Americans have no such thing. They were already deep in the red when their star-spangled correction came due.

More importantly, many jobs that were lost during the past few years will never return. Not at any wage. They’re gone for good. That’s not necessarily a bad thing in and of itself, of course…it’s just the way it is. As technology evolves, it replaces much of the need for human labor. You might think equal or higher productivity with less human input would be a good thing. You might likewise think that being afforded more free time to spend on other productive endeavors would be a good thing too. And you’d be right. But you’d also be unpopular…and unlikely to win any kind of election.

Back in the early 19th century, for example, English textile workers protested that the introduction of mechanized looms was gutting their sector, leaving tens of thousands of people without work. Those in the agricultural sector who were replaced by threshing machines thought likewise. The machines simply did a better, cheaper job than the workers…and they didn’t stop to take cigarette breaks or complain about the weather. The result was a huge increase in productivity, but fewer job openings for unskilled workers. Needless to say, not everyone was happy about this progress. Angry bands rallied behind General Ned Ludd — after whom the Luddites were named — to burn factories and destroy the machines that had replaced them. [We don’t know if they used hammers or tools to break the plant equipment but, sticking to their core philosophy, they could have employed dozens more vandals if only they restricted their actions to hands-only destruction…and twice as many again if they instituted a one-handed destruction policy.]

Today, you might think people would peg Luddite “logic” for what it was: ass-backward and myopic…at best. And yet, just a few months ago, a prominent US congressman accused Apple of killing jobs in the United States because bookstores like Borders and Barnes & Noble could no longer compete with the iPad and its eBook application. The giant retailers couldn’t cut it in the marketplace and had to close their doors. Thousands of workers went with them. Apple had out-played and out-innovated the competition, in other words, just like the looms and threshers of the early 19th century. And yet, rather than inspire applause, this innovation was met with condemnation.

Not only had the company out-innovated, scorned the congressman, Apple had chosen to manufacture its products in a country where…gulp…labor was cheaper and more competitive than minimum wage advocates would allow for back home. How dare Apple not overpay on costs, seemed to be the allegation. And how dare they be subsequently able to offer a cost-effective technology that millions chose freely to buy…including the congressman himself!

There’s no point breaking loom frames, threshing machines and iPads because advancements in technology mean it takes fewer people to produce the same or greater output. Instead, smart individuals and companies will learn to do what Luddites and giant bookstores failed to do: they will adapt and embrace technology and use it to their own competitive advantage.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning