Planning for the Great Transition of the Early 21st Century
Column by Tom Binnings
The economic headlines are certainly disturbing. The U.S. economy is creating jobs at a snail's pace. Challenges in Europe and political impasse in Washington, D.C., are leading economists to increase the probability of a double dip recession. The simple solutions to increase deficit spending and banking liquidity to stimulate the economy have not created a strong recovery. While the financial sector and big business is flush with cash, there is uncertainty, and uncertainty is a formidable foe to investment and hiring.
Many economists and financial pundits explain the situation by pointing out how difficult it is to recover from financially induced recessions. It is difficult -- taking at least three years and sometimes a decade. Unfortunately, the current economic climate is even more foreboding than most past recoveries from banking crises. The U.S. and world economies are undergoing fundamental changes where the future norm is unknown and the present is best described as a state of widespread disequilibrium.
The Great Recession earned its name because of the substantial drop in employment from the beginning of the recession. More than 6 percent of jobs were lost relative to the employment prior to the recession. Most recessions since World War II resulted in a 1 percent to 3 percent drop in employment. Even worse than the magnitude of the drop was the length of time it took for employment losses to bottom out -- over two years. This typically occurs within one year. Even worse than the length of decline is the extremely slow recovery. We are two years from the bottom; yet we have recovered less than 20 percent of the jobs lost. Typically all of the jobs lost in a recession are recovered within two years since the beginning of the recession.
Looking at past recoveries, one observes a disturbing trend going back to 1981. Beginning with the 1981 recession, each subsequent recession's recovery has become longer implying fundamental change in the macro economy making job recovery and growth increasingly difficult.
Welcome to the Great Transition of the Early 21st Century. Until a new economic order settles in, turbulence is the norm. Economic times such as these can radically change lives impacting individual psychology, social dynamics, cultural norms and expectations as well as politics. Fear of the future frequently dominates, and conflicts tend to escalate. This is what we face in the U.S. and globally -- the old equilibrium is no longer sustainable. We endure greater stress while waiting to see what the emerging equilibrium will look like and how different it will be.
In this environment, planning is critical. Scenario assessment and looking for common themes under different scenarios can be helpful even though risks are greater regardless of how one slices it. The most relevant underlying changes, trends and transitions to focus on include:
The strategic planning process, whether formal or informal, needs to brainstorm how these factors might impact the future.
For years, the transitioning factors created a relatively stable economic, social and political environment based upon federal support of the good life of lower volatility and higher incomes, greater debt availability at every level of society, cheaper imported goods (including oil), and a steady stream of innovative, exciting new products and services for consumption. Baby boomers, the largest generation in American history, progressed through their life cycle with higher productivity and earnings. Those households able to save for retirement were rewarded with generally bullish investment markets.
On the government and business levels there were always some foreign nations accumulating dollars from our trade deficit willing to loan or invest excess dollars back to us whether through the bond, mortgage or stock markets -- after all, the United States represented the safest haven and our economy was one-third of the world economy 20 years ago.
As the factors driving yesterday's successes evolve and revolt toward the future the only guarantee is tomorrow will be different. Technology has created labor displacement, especially among the less skilled where education has not kept pace. Globalism is politically and economically compelling -- changing the nature of past relationships. Consumerism and demographic changes alone will greatly alter market opportunities and threats. Peak oil and the prospect of global warming's correlation with carbon based fuels will make energy relatively more expensive for the foreseeable future. The federal tower of support and rule making, which has produced more than a half century of relative successes appears to have met its limitation where essentially everyone is gaming the system. The proverbial money tree is showing signs of stress and the line of rent seekers patronizing the substantial power structure of federalism to change the rules in their favor is very long indeed.
Our world has changed. Sitting around praying for a return to the good old days is a wasteful endeavor. Now is the time to anticipate and to act rationally and incrementally through trial and error. Emotional fear has little to offer other than the motivation to move forward collaboratively, judiciously, and with openness to the potential of the future to be greater and more sustainable than today and even the past.