Welcome to the Great Transition!

Stop thinking of recovery and double dips, what’s happening now is far bigger than a business cycle and taking us into uncharted waters. Here are three ways our economy is transitioning and what that means for jobs, growth and America as the world leader.

Shift of Economic Center of Power from West to East
According to Eisuke Sakakibara, former Vice-finance Minister for International Affairs of Japan, speaking at the Business Times Singapore Investment Roundtable on What if there is a double dip? posted by William R. Thomson on September 12, 2011, “The centre of gravity of the world economy is shifting from West to East and we have to cope with it. Such a transition is certain to be very difficult. I would say that the 1930s Depression marked the failure of the transition from the UK to the US and the transition this time is much larger than that of the 1930s. (There could be) some kind of simultaneous, worldwide recession, or even a Depression, sooner or later. Look at what is happening to the US economy and the European economy. China and India are not big enough yet to substitute for these.”

The Economist’s “East or famine,” (February 10, 2010) backs up Sakakibara’s view, “If GDP is instead measured at purchasing-power parity (PPP) to take account of these lower prices, Asia’s share of the world economy has risen more steadily, from 18% in 1980 to 27% in 1995 and 34% in 2009. By this gauge, Asia’s economy will probably exceed the combined sum of America’s and Europe’s within four years. In PPP terms, three of the world’s four biggest economies (China, Japan and India) are already in Asia, and Asia has accounted for half of the world’s GDP growth over the past decade.”

The article points out that “Winston Churchill once said: ‘The longer you can look back, the farther you can look forward.’ The new economic order is in fact a resurgence of a very old one. Asia accounted for over half of world output for 18 of the past 20 centuries. And its importance will only increase in the coming years. Rich countries’ growth rates are likely to be squeezed over the next decade as huge household debts dampen spending, and soaring government debt and higher taxes blunt incentives to work and invest. In contrast, growth in emerging Asia (almost four-fifths of the region’s total output) is likely to remain strong. Robust growth should also give governments in emerging Asian economies the confidence to let their currencies rise, which would further boost the relative size of their economies in dollar terms.”

And the Economist predicts that “By 2020 Asia could well produce half of some big Western multinationals’ sales and profits, up from a typical proportion of 20-25% today. Asian staff eagerly await the day when they can fix the times for international conference calls, so Europeans and Americans have to put up with after-midnight discussions with the Beijing office. That may be the best test of whether economic power has really shifted east.”

Consumer Economy is Gone and Not Coming Back
In “We’re Spent,” David Leonhardt, (New York Times Sunday Review, July 16, 2011) declares the death of the consumer economy. “The notion that the United States needs to begin moving away from its consumer economy — toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs — has become so commonplace that it’s practically a cliché. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back.”

Leonhardt says, “Sure, house and car sales will eventually surpass their old highs, as the economy slowly recovers and the population continues expanding. But consumer spending will not soon return to the growth rates of the 1980s and ’90s. They depended on income people didn’t have. The choice, then, is between starting to make the transition to a different economy and enduring years of stop-and-start economic malaise.”

Cautioning that now is not the time for the government to stop spending, too, Leonhardt says, “The prospect of that cycle is one reason an impasse on the debt ceiling, and a government default, could do so much damage. But the debt-ceiling debate doesn’t have to be yet another problem for the economy. The right kind of agreement could help soften the consumer bust and also speed the transition to a different kind of economy.”

According to Leonhardt, “The biggest flaw with the past stimulus was that it imagined that the old consumer economy might return. Households received large tax rebates, usually with little incentive to spend the money (the cash-for-clunkers program being the exception that proves the rule). People did spend some of these across-the-board rebates, and kept economic growth and unemployment from being even worse, but also saved a sizable portion.”

Leonhardt wants tax cuts to businesses, “but only to those expanding their payrolls and, in the process, helping to solve the jobs crisis. Along similar lines, a budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested. These are the kinds of investments that have brought huge returns in the past — think of the Internet, a Defense Department creation — and whose price tags are tiny compared to, say, Medicare or the Bush tax cuts.” Sadly, he doubts that the political climate will allow this to happen but observes that a protracted process in Congress will mesh with a consumer bust that will last for a very long time.

Freelance Workforce is the Industrial Revolution of Our Time
Sara Horowitz writes in “Freelance Workforce is the Industrial Revolution of Our Time,” (The Atlantic Monthly, September, 2011) that the U.S. workforce is experiencing a dramatic transition. She says, “It’s been called the Gig Economy, Freelance Nation, the Rise of the Creative Class, and the e-conomy, with the “e” standing for electronic, entrepreneurial, or perhaps eclectic. Everywhere we look, we can see the U.S. workforce undergoing a massive change. No longer do we work at the same company for 25 years, waiting for the gold watch, expecting the benefits and security that come with full-time employment. Today, careers consist of piecing together various types of work, juggling multiple clients, learning to be marketing and accounting experts, and creating offices in bedrooms/coffee shops/coworking spaces. Independent workers abound. We call them freelancers, contractors, sole proprietors, consultants, temps, and the self-employed.”

Horowitz says, “This transition is nothing less than a revolution. We haven’t seen a shift in the workforce this significant in almost 100 years when we transitioned from an agricultural to an industrial economy. Now, employees are leaving the traditional workplace and opting to piece together a professional life on their own. As of 2005, one-third of our workforce participated in this “freelance economy.” Data show that number has only increased over the past six years. Entrepreneurial activity in 2009 was at its highest level in 14 years, online freelance job postings skyrocketed in 2010, and companies are increasingly outsourcing work. While the economy has unwillingly pushed some people into independent work, many have chosen it because of greater flexibility that lets them skip the dreary office environment and focus on more personally fulfilling projects.”

Identifying three major trends that will have an enormous impact on our economy and our society, Horowitz says:

1. We don’t actually know the true composition of the new workforce. After 2005, the government stopped counting independent workers in a meaningful and accurate way. Studies have shown that the independent workforce has grown and changed significantly since then but Washington can’t fix what it can’t count. Since policies and budget decisions are based on data, freelancers are not being taken into account as a viable, critical component of the U.S. workforce.

2. Jobs no longer provide the protections and security that workers used to expect. The basics ¬ such as health insurance, protection from unpaid wages, a retirement plan, and unemployment insurance ¬ are out of reach for one-third of working Americans. Our current support system is based on a traditional employment model, where one worker must be tethered to one employer to receive those benefits. Given that fewer and fewer of us are working this way, it’s time to build a new support system that allows for the flexible and mobile way that people are working.

3. This new, changing workforce needs to build economic security in profoundly new ways. When it was passed in the 1930s, the New Deal provided workers with important protections and benefits ¬ but those securities were built for a traditional employer-employee relationship. The New Deal has not evolved to include independent workers: no unemployment during lean times; no protections from age, race, and gender discrimination; no enforcement from the Department of Labor when employers don’t pay; and the list goes on.

Horowitz concludes, “The solution will rest with our ability to form networks for exchange and to create political power. I call this “new mutualism.” I believe that new mutualism will be at the core of the new social support system that we need to build for the new workforce.”

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