My 5 Questions About the Economy

Last week, a radio show asked me what my biggest questions about the economy are. I'm not good on the spot, so I gave a long, rambling non-answer. Now that I've had some time to think about it, here are five things I want to know.

1. What happens with the fiscal cliff?
The fiscal cliff is probably the single most important issue we've faced in the last three years. In the next 50 days, Congress and the president have the opportunity to A) put forth a legitimate deficit-reform bill that instills confidence in American businesses and consumers, or B) do nothing, go over the fiscal cliff, and throttle the economy back into recession (the Congressional Budget Office estimates unemployment will rise to 9.1% if we go over the cliff).

There could be a third option: a short-term deal that punts the hard deficit decisions down the road again. I actually think that's the most likely outcome. But given Washington's history of partisan flamethrowing and gridlock, the odds that something ugly will happen are uncomfortably high. What's dangerous about the fiscal cliff is that the worst outcome will happen if Congress does nothing -- which is the one thing our legislators are really good at.

2. Will there be a long-term shift in labor versus capital?
The economy has moved in three long cycles over the last 100 years. From the early 1900s through the 1930s, workers did poorly while owners of capital did very well. From the 1940s through the 1970s, workers did great while owners of capital did so-so. And from the 1980s through today, workers have done poorly (most real wages have stagnated) while owners of capital have done extremely well.

I want to know: Are those three periods coincidental, or does the economy move in consistent cycles that favor labor in one, then capital in the next? If it's the latter, then it's possible that the next 50 years could be more favorable to workers and less to owners of capital.

There are so many complex variables involved here -- globalization, taxes, innovation, productivity -- that I don't think it's possible to predict what will happen. This could, however, become one of the most important trends of the next half-century.

3. Will China go the way of Japan?
Twenty years ago it was assumed that Japan would become the world's economic superpower. It grew faster, was more productive, and had more ambition and potential than any other country in the world -- just how we see China today.

Of course, Japan didn't live up to expectations. One big reason was demographics. As Japan's elderly took up a larger and larger share of its population, its labor force didn't have the vitality necessary to keep economic growth booming. (More on this here.)

China could face a similar dilemma. Due to its one-child policy, China's working-age population is projected to decline by 200 million by 2050.

I want to know: How will relaxing the one-child policy and other shifts in China's demographics play out over the coming decades? Answer that, and you'll have a good idea where its economy is heading. 

4. How will demographic shifts affect America?
America is blessed with one of the youngest populations in the developed world. But we are getting older. Working-age individuals (age 15-64) currently make up 66% of the population. That's expected to fall to 60% by 2050.

Not only will older Americans make up a larger portion of the population, but they are living much longer than before. Two weeks ago, BlackRock CEO Larry Fink noted that a healthy 25-year-old female can now expect to live close to age 100.

How will this change the economy? Will it mean the new retirement age is 80 instead of 65? And if people are living longer, will they need to save much more for retirement? What does it do to Social Security? If a lower portion of the population is of working age, will young Americans have an easier time finding a job? What does it mean for health care costs? Or pension fund obligations? Interest rates? It could affect so many things in so many different ways that it's mind-boggling.

5. What impact will health care costs have on wages?
A big reason average wages have gone nowhere in the last decade is that rising health insurance premiums took up a larger share of compensation. Most employees were given a nice raise in recent years -- it just came in the form of health insurance.

But there's evidence that growth in health care costs has topped out. Annual growth is now near the lowest level in 50 years.

I want to know: Is that trend the reality or just noise? If it's real, workers could see higher real take-home pay for the first time in years.

What do you want to know about the economy? Share your thoughts below. 


Read/Post Comments (12) | Recommend This Article (42)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2012, at 5:11 PM, Brent2223 wrote:

    Is the fiscal cliff higher than the debt ceiling?

    If we make sure the ceiling is higher, maybe we could just walk off the cliff onto the ceiling, instead of falling off of it? Maybe raising the debt ceiling was just to mitigate the height of the fiscal cliff? And for pete's sake, why doesn't someone just build a ladder?

    Problems are so much easier to deal with when they're hidden behind stupid buzz words to dumb it down.

  • Report this Comment On November 12, 2012, at 6:21 PM, xetn wrote:

    What about the huge off-budget liabilities (social security, medicare, freddie mac, fannie mae, etc) estimated to be increasing at the rate of $11 Trillion per year? Don't you suppose that might have some small impact on the economy?

  • Report this Comment On November 12, 2012, at 7:04 PM, 2beewise wrote:

    I have a different take on longevity. With companies like Monsanto ("My Saint" in Spanish) and most of the big food processors, all of whom are adding or allowing highly toxic chemicals to "flavor" our food stuffs, it's my contention that from this time forward life expectancy will be on a long decline. I believe this because the "Monsanto's" of the World are able to remain above the law. En masse they are practically a country unto themselves; coal, petroleum, and power generating industries work hand-in-glove with the food industries and against the interests of the consumer - the 99%. I'm a biologist and I'v been engaged in the environmental arena for over 50 years, so I'm speaking from my own observations and not from a body of research. However scientists like Carl Sagan 40 yr. ago, were warning of this impending crisis.

    This may seem like an out-of-place post but the above impacts are measurable and will only get worse exponentially.

  • Report this Comment On November 12, 2012, at 8:17 PM, colleran wrote:

    Both Japan and China face a more formidable challenge than aging populations. They both have a top-down, consensus-based society. It is no mistake that we don't buy Japanese software or use web sites developed in Japan. Building high-quality cars works well in a consensus-based society. Think of all the management classes that show how groups make better decisions than individuals.

    The problem is that entrepreneurship does not live well with their societies. Everything is focused on the group, not the individual. While Japan did well after WWII with innovative products, in the last 20 years there has been very little. They completely missed out in the smartphone revolution, for instance.

    I think both Japan and China will have to fundamentally change their societies in order to compete in the next decades.Entrepreneurs in the US and to some extent, Europe, are going to drive growth with Japan and China falling further behind.

    Some think that China will not be a growth story until their government has been replaced with some form of democracy. There are already rumblings in the new middle class in the country.

    Well it is a Chinese proverb that says we will live in interesting times. I just hope they are not too interesting. We need both these countries to succeed and grow.

  • Report this Comment On November 12, 2012, at 10:57 PM, kyleleeh wrote:

    <<I think both Japan and China will have to fundamentally change their societies in order to compete in the next decades.Entrepreneurs in the US and to some extent, Europe, are going to drive growth with Japan and China falling further behind. >>

    The iphone and ipad have created many more jobs for people in China then they have for people in the US.

  • Report this Comment On November 13, 2012, at 12:47 AM, JDWallin wrote:

    Question 2 refers to the "owners of capital", and to whom exactly does that refer? Does it mean friends of mine who are retired teachers now living off their TRA funds? Does it mean the little old lady next door to us who worked as a waitress for 40 years and now has nearly a hundred thousand dollars saved up and in the stock market earning over seven hundred dollars a month in dividends? For any country to conduct business there must be some source of capital. I've come to believe it should be funds from anyone (you, me, or anyone else) who is willing to put off consuming today in order to earn a bit for that sacrifice so that someone else (willing to pay that bit) might use those funds for some useful purpose. I certainly do not believe the less than 1% interest banks pay to be worth putting off my consumption today. But apparently someone else, who is involved with authoring this article, knows a better way.

  • Report this Comment On November 13, 2012, at 1:00 AM, jfrankh57 wrote:

    You did not address one area I think is significant. The cost of energy is rising. The present occupant of the Oval Office has declared a war on cheap fossil fuels. We may get over the hurdles that abound for cheap renewables, but I expect there will be a steep cost for some time to come. Innovation will be great as long as the will to innovate is not stifled by this and onerous regulations/fees/oversight/etc.

  • Report this Comment On November 13, 2012, at 1:17 AM, NCalifornia101 wrote:

    2beewise – I don’t think your comment was out of place and I do appreciate your thoughtfulness in keeping this as a financial post and nonpolitical! I think the point you discussed is a valid concern to our countries long-term “health”.

    As a healthcare engineer, I see the negative effects of our poor diet, right alongside rising healthcare costs and rising healthcare company stocks. As a FOOL, I don’t think rising healthcare company stocks due to the “"Monsanto's" of the World” is a wise long-term move for our country. This, unfortunately, might someday help to move some of my investments overseas.

    I am routing for the “Whole Foods” folks but for some reason I still haven’t invested in them!

  • Report this Comment On November 13, 2012, at 6:17 AM, peretranquile wrote:

    I share the view on longevity expressed by 2beewise. What is the impact of businesses like Monsanto on population demographics, specifically the age structure of populations ? Could Monsanto and other giant industrials change the demographic potential for economic growth, and how ?

    The accumulation of toxic compounds in products and the environment and so in human bodies is expected to increase mortality, mainly among the senior population who have accumulated more over their lifetimes (- only since these compounds began being used).

    Would this culling process advantage an economy by maintaining a youthful age structure, or would it offset these advantages by adding costs for the chronically sick, being managed through their decline? Will younger generations be obliged to pay escalating costs of treatment as populations face catastrophic illness earlier and more often in their lives ?

    There may also be growth where seniors liquidate their economies to pay for dependence and terminal care, but less lifestyle spending as the next generation loses the inheritance windfall.

    The accumulation of environmental toxins may be more or less common in different groups and classes of populations. Have the working classes, with less savings to deploy for dependence and terminal care absorbed more toxins from their diets and working conditions than those with better paid jobs ? Will those with less to spend die conveniently sooner ?

    And the question does not resolve neatly since the young and the very young seem to be more susceptible to the complications of the toxic environment, with increasing rates of childhood cancers, and endocrine problems, including infertility. How will this affect the future population age structure ?

    And now that these practices are spreading to developing countries, what will be the future impact on global populations ?

    Will we come to see investing in these kind of companies the same way as investing in pariah Tobacco ? Is the best medium /long term investment healthcare & big Pharma ? Should we encourage lower risk food production through investments or subsidies ?, and if the solution to the worlds big problems really requires euthanasia, shouldn’t we vote for it rather than delegate it to large corporations ?

  • Report this Comment On November 15, 2012, at 1:37 PM, Darwood11 wrote:

    The "fiscal cliff" is only three years of importance because of short term memory. David Walker, the former Comptroller of the US was travelling the country about 5 years ago to get any interest in this serious problem. He resigned.

    Labor versus Capital? How quaint. Perhaps the greater and more pertinent question is "Labor versus Employable Skills." Yes, we have about 11.8% of our work force in unions. What about the needs of the employers? Do the "employees" have marketable, or employable skills? That, in my opinion is the larger question. Can you do Geometry, trigonometry, or have computer skills beyond booting and texting? Can you provide "critical thinking skills?"

    China? Well, let's see. with over 1.3 billion citizens, and 300 million in the so called "middle class" which means they make about $3000 annually each, per year, that only leave 1 billion in the lower class. and a few Billionaires at the top. Do I sense a problem? Just a rhetorical question!

  • Report this Comment On November 16, 2012, at 12:48 AM, jbcerebral wrote:

    MH's articles are of superb quality. I always find them insightful, concise, and relevant. Keep up the excellent work Morgan! Thanks.

    ~Cerebral7 (Josh B.)

  • Report this Comment On November 16, 2012, at 11:30 AM, czbill12 wrote:

    Darwood11....good points indeed. And Morgan, good points in general, but the problem is, these articles do not always allow the deeper dive...hence why the comments are worth reviewing. And I know you don't do this just to poke the collective bear.... :-)

    Good stuff.

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