US Economic Recovery: Positives versus Pitfalls

Technology-led growth creating “a tale of three cities”?

16/03/2015

U.S. Council talks to MBAs about American growth (l to r) Edward T. Reilly, Claire Huang, Kate O'Sullivan, John Schmitz, Eric Weber / Photo: Jordi Estruch

“It’s not a time to be triumphant; it’s a time to be thoughtful,” John Schmitz told an audience of IESE MBA students in Barcelona. “I’m optimistic. Growth is OK. But the economic situation is complicated. Deeper analysis of the labor market and wage stagnation raises troubling questions.”

Schmitz was one of four members of IESE’s U.S Advisory Council introduced by Associate Dean Eric Weber in a discussion held on the Barcelona campus on March 13. The council advises and supports the school in its activities in the US, and the panel of members had been invited to share their thoughts on the state of the US economic recovery, and take questions from MBAs.

A former White House lawyer specializing in regulatory and anti-trust issues for Ronald Reagan and George Bush Sr., Schmitz is partner at Bingham McCutchen, and currently splits his time between Berlin and Washington D.C. advising transatlantic companies. His experiences, he explained, gives him a vantage point of the economy from both a European perspective and a US government policy one.


New Metrics for Economic Health

Wages are not rising in real terms for 99 per cent of the US population, said Schmitz, and income distribution is a “profound and troubling issue that both Republicans and Democrats are following closely.”

The Fed, he said, is finding the official unemployment rate – the number of people who have looked for work within the last four weeks – “increasingly less useful” as a gauge of the economy’s health. Instead, it is following Germany’s example and starting to look at the labor force participation rate – the ratio between the number of people available for work and the overall size of the population in their age range.

Edward T. Reilly who, as president and CEO of the American Management Association, oversees the professional training of 100 million people a year picked up this point. “Some 12 to 15 million people in the last five years have dropped out of the labor market; they’ve given up looking for jobs, and the jobs that are available are not of the same quality in terms of pay or security.”


A Tale of Three Cities

Claire Huang, chief marketing officer at JPMorgan Chase, said that this very low-income group inhabits one of what she called three “cities” that provide a snapshot of the recovery in terms of spending. The population of this city, she said, is growing in size by nine percent a year – much faster than US GDP. They aren’t spending and, as such, can’t help the economy to recover.

The second city – of middle income Americans – is “shell-shocked” and won’t start spending until their incomes start to rise. Only the third city, the “super-wealthy one percent,” is spending freely. The evidence for this, said Huang, is the “very active” market in New York City for houses that are worth over $5 million.


Technology: The Solution or the Problem?

This situation is not good for the economy in the long term, said Reilly, as it is creating and will continue to create social problems. The working and middle classes are not doing well, he said, and things are set to get worse as the Internet of Things replaces jobs in the same way that information technology had. Education is key to finding a solution, but it won’t be easy.

“Driverless cars will make all drivers obsolete within 25 years. What will happen to people who drive for a living? They aren’t all going to go Silicon Valley and re-train.”

As general manager of industry affairs for Microsoft, panel member Kate O’Sullivan has plenty of experience of Silicon Valley. But even the world’s tech hub, she said, isn’t immune to income inequality problems.

“People who work in libraries, schools and restaurants can’t afford to live in San Francisco any more. They have to travel an hour-and-a-half to get to work. There are a lot of success stories there but also a lot of cautionary tales about pricing ‘normal’ wage earners out of the area.”

The panel were still optimistic that technology would continue to be a positive force for growth. “Cities that incorporate tech have done well,” said Schmitz, singling out Austin, Texas; and Washington D.C. as examples to follow.

Eric Weber observed that a lesson could be learned from emerging economies, where entrepreneurs used technology to solve specific problems, rather than using it to “create new needs.”

He pointed to the example of secure and accessible payment system developed in Kenya that repurposes cheap, “non-smart” Nokia phones. The system, he said, is much more relevant to existing needs than a more expensive, higher-tech system like Apple Pay.


A Booming Future?

The panel agreed that future economic growth might be on the horizon as the “baby boomers” reach retirement. The US birth rate doubled in the prosperous two decades following World War II, creating a sizeable cohort of sixty- and seventy-somethings, now reaching the end of their working lives. And unlike previous generations, said Reilly, whose pensions were held and administered by third-party financial institutions, boomers were more in control of their own funds.

Claire Huang added: “As of five years ago, baby boomers had $20 trillion in investible assets. That’s more than the US GDP. If we can market a new wave of services to them and get them spending, they’ll generate jobs.”