The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
Today’s economic realities show sporadic as well as weak growth, both domestically and internationally. In agriculture, economic challenges are magnified as the industry continues to adjust after the recent years of stellar economic growth and the commodity super cycle. The industries of agriculture, manufacturing and energy benefited as a result of the demand from emerging nations, the weak U.S. dollar and the increase in alternative energy sources such as ethanol. The era of 2008 to 2013 in rural America could be considered the Mount Everest of profits and asset appreciation, specifically for land. As the past is important for the future, let’s examine historical economic growth rates and factors.
During the recent time of aberrant profits in agriculture, the large Coastal economies as well as the Southern economies faced significant recession, actually the deepest since the 1930’s Great Depression. Centered in real estate, the Great Recession rippled through the service sector with negative effects for the majority of the U.S. population. Individual wealth, consumer spending and retirement accounts all felt the impact, particularly with the Baby Boomer and Veteran generations.
Internationally, the rich nations of the world including those in the European region, Japan and others felt the impacts of the Great Recession through the interconnected global banking sector. During the same time period, emerging nations experienced record economic growth, building infrastructure and creating a middle class of 320 million people, which is approximately the size of the U.S. population.
Economists often say the United States is like the “best economic house in a bad neighborhood.” In other words, while not robust, the U.S. economy continues to outperform other economies around the world. However, when one examines this recovery expansion period, it is currently in its 86th month and remains unremarkable. In fact, the U.S. Department of Commerce that measures growth in recovery periods agrees this recovery period is underperforming.
History of Economic Growth
The world GDP (gross domestic product) grew by a whopping 7.6 percent and 4 percent annually following World War II and the Korean War, respectively. Even in the later stages of the Eisenhower Administration, the economy registered in at 5.6 percent growth rate. One of Dwight D. Eisenhower’s campaign slogans was “I like Ike!” which became extremely popular. Of course, the phrase capitalized on the post-war conversion of military technology and infrastructure growth to benefit the general economy. Factors such as infrastructure improvements, growth of suburbia, the interstate road system, technology upgrades in most manufacturing sectors and the post-war rebuilding of Europe and Japan combined to create an economic environment much like the recent commodity super cycle.
During the Kennedy and Johnson years, 1961 to 1969, growth was a stellar 4.9 percent despite major assassinations and the constant challenges from the Baby Boom generation against government, institutions and the buildup of social programs.
The 1970s had short, abrupt economic recoveries of 5.1 percent and 4.3 percent annual growth rates. The U.S. and global economies were stymied by oil shocks, political discontent, the Vietnam War and turmoil in the Middle East. High rates of inflation were also experienced in the 1970s, which led to high interest rates and interrupted growth.
Moving on to the 1980s, American agriculture and manufacturing were experiencing times of economic crisis and restructuring. The term Rust Belt became popular as the Northeastern and upper Midwest regions of the U.S. deteriorated after multiple closings of plants and general decline of the industrial sector. The United States started its move to a service-based and high-tech economy. Post-recession growth rates in 1980 and 1981 were 4.4 percent and 4.2 percent annually. Paul Volcker, U.S. Federal Reserve Chairman at the time, presided over the longest expansion to date, which was 106 months. During Ronald Reagan’s presidency, the Soviet Union dissolved and Germany reunited. This provided a psychological boost for investors and consumers invoking the feeling of good times both domestically as well as globally.
Recessions in 1991 and 2001 were due to war, terrorist attacks and stock market adjustments. These factors moderated the recovery of the U.S. economy. The growth rate was cut in half compared to previous periods at 3.6 percent and 2.8 percent respectively, regardless of which political party controlled Congress or the White House. Agriculture and rural America muddled along with flat commodity prices. Government payments were allocated to bridge the gap in profitability and cash flows as the farm crisis of the 1980s continued to impact the 1990s.
Next, the global economy was hit by a financial bomb. The real estate collapse and the banking crisis, particularly with the interconnected global banks, placed the U.S. and world economies on the brink of a depression. The growth during the recession and post-recession was centered in agricultural regions including the United States, Canada, Australia and even Russia and others who produced large amounts of commodities.
Today, we are in the midst of the third-longest recovery period in history, which is 86 months and counting. The current growth rate over this period was 2.1 percent with an average rate of 1.2 percent in 2016. This brings into question economic policy, globalization and the stimulus policies of the U.S. Federal Reserve and other central banks. Specifically, why is economic growth so underwhelming with all the incentives domestically and abroad? In general, the global economy seems to be in a slow growth orbit.
Examining future growth rates, the combination of psychology, technology, demographics, public and institutional policy shifts, and public and private debt levels are all converging as headwinds against stellar growth. One must keep in mind that emotion and psychology play a large role in consumer confidence and business investments despite the many sophisticated prediction models that may indicate otherwise.
First, we need to examine debt levels and their impact. Most developed countries around the world are increasing their debt levels at astronomical rates. At the end of the Clinton Administration, federal debt was approximately $5.7 trillion. Due to military cuts and increased tax revenue, the Congressional Budget Office reported a budget surplus the last two years of the Clinton Administration. On a side note, this was important for agriculture because the 1996-1997 crisis in the Southeast Asian economies, also known as the Tiger economies, suppressed commodity prices as well as net income. Government support was dedicated to boost income and bridge the financial gap. This support was critical for agriculture and also helped maintain land values.
Since that period, the federal debt has ballooned to over $19 trillion. The debt is over 100 percent of U.S. GDP, which is an alarming increase over the 40 to 50 percent range of the past. In addition, more than 40 percent of the current federal debt is financed by other nations. Unfortunately, most of the debt has little investment to improve productivity, which would enable growth.
All of the rich nations of the world including those in the European region, Japan and even China have increased debt levels. In fact, Japan’s debt ranges around 250 percent of its GDP. Again, little investment has been allocated to increase productivity, which now challenges growth. China, the second-largest world economy, misallocated capital into infrastructure. This resulted in lost cities and incomplete roads, which impacts growth in the near term but is not sustainable in the long term.
The bold actions needed to curb debt levels were circumvented, particularly in the United States. The 2011 Gang of Six committee proposed a bipartisan plan to cut three dollars from the federal budget for every one dollar in tax increases. Largely ignored by a dysfunctional government, this approach could be a good start to tackle this drag on productivity.
Right now, world institutions are experiencing the typical 50 to 70 year cycle where the rate of change in economics and technology is ahead of a government’s ability to keep pace, thus creating dysfunction. Of course, the world is familiar with dysfunction. In Europe, the 1870s and 1880s were a time of unrest and change. This created mass migration to North America and other parts of the world during that time period. The 1920s, 1930s and 1960s also saw their share of dysfunction as well. The increase in income to debt levels along with the ineffectual action from government, and the noise of daily and social media, have created a type of “funk” or stagnating culture for businesses and consumers alike. Most importantly, these factors continue to inhibit economic growth.
Next, technology’s role in future economic growth is critical. Yes, technology can improve efficiency, productivity and quality of life. The more we integrate biotechnology, engineering and information, the more gains we create. The downside of technology is that it creates levels of regulation that can exponentially increase. This is particularly true with intellectual regulation and the attempt to eliminate all liability and risk regarding a new technology. While some degree of oversight is undeniably necessary, one regulation layer has a tendency to quickly necessitate a second layer, again in the attempt to eliminate risk. Of course, through cost and inefficiency, this eventually negates any positive, economic benefit intended by the new technology. In the next five years, more debate on technology’s negative impact on productivity is likely to occur worldwide.
Educational systems in the United States and abroad have historically been the catalyst for productivity gains. Post-World War II deployment of veterans with the G.I. Bill was a boost to efficiency in the industrialization of manufacturing and service-based economies. This government support increased incomes, which advanced the growth of housing and developments. In turn, it boosted the economy.
In the past 50 years, more people have earned college and graduate degrees, which has been important for the growth of services and the service-based economy. However, economic inflation coupled with the increase in student debt proves a challenge for Generation X and the Millennials. The postponement of marriage, children and housing purchases worldwide continues to stifle economic growth. The economy in today’s current recovery period is growing at a paltry 0.9 percent annual pace compared to post-World War II of 2.4 percent. Some contend that the methodology to measure growth and innovation is not aligned with emerging trends such as cloud capacity, smart phone apps and more. However, even with strong job growth and low unemployment rates, many Americans do not feel more financially stable. The education system that boosted the economy 50 and 60 years ago is now riddled with increased bureaucracy and inefficiencies. As a result, debt levels continue to grow, while the economy does not. Perhaps the younger generation along with new technology can better tackle our complicated issues such as efficiency and debt.
Finally, one of the major factors inhibiting world economic growth is demographics. Rich nations and, to some extent, emerging countries are experiencing an aging population. As Baby Boomers or the “Pig in the Python” as the generation is often called, grow into retirement and later adult life, there is a tendency to become more conservative financially. One of the greatest fears in life is lack of income to support senior years. Instead of riskier business investments or stocks, the Baby Boomers are saving cash. Spending patterns of this demographic are also becoming more conservative, which impacts the large service-based economies of the world. Additionally, the Millennial generation is also heavily in debt, but in general exhibits a more financially conservative philosophy. Cumulatively, the trends of these two generations are serious challenges for stellar future economic growth, both domestically and abroad. In fact, much of the growth of youth comes from emerging nations. In Mexico, 47 percent of the population is under 25 years of age. Unfortunately, they do not have the income or wealth to drive the domestic and global economies. In short, demographics could be the most compelling factor in the equation for economic growth over the next couple of decades.
Historical economic growth patterns and factors are an important background. However, what do they mean for agricultural businesses, the industry or the lending sector today? Well, the stellar growth of decades ago is not one of today’s economic realities. World economies will grow, but at a modest rate. There will be extreme volatility as result of the lessening information gap and increase in real-time information flows throughout the world. Whether in production, agribusiness or lending, those in agriculture must plan, strategize, execute and monitor to extract profits from a modest growth cycle. Expect and plan for quick, abrupt cycles and occasionally, accelerated growth. As highlighted in economic downturns, protect and maintain financial liquidity and flexibility in business management strategies.
In conclusion, whether it is in a business or an entire country, historic trends and data are important in gauging progress and performance. Today’s economic realities are different from those of the past. The world economy is fully interconnected, magnifying challenges and opportunities. The return to stellar economic growth will require new solutions and bold actions, but in the meantime planning for reality secures sustainability.
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