By: Jon Roberts, Principal, TIP Strategies
There is something irresistible about making New Year’s predictions. Never mind that things always turn out differently than we expected. It’s an exercise worthy of the effort. From an economic (and economic development) perspective, 2015 was certainly an odd year. The biggest news was probably the precipitous decline in oil prices.
Source: International Monetary Fund, Global price of WTI Crude [POILWTIUSDM], retrieved from FRED, January 18, 2016
The effects of this decrease will continue to be felt in the new year. While good news for consumers, the drop hit oil-producing regions especially hard (nationally and internationally). The ripples are being felt in the renewable energy market and in the automotive industry (with lagging hybrid and electric car sales). It even has significant implications for the reshoring of manufacturing companies (due to the reduction in shipping costs). Of course, the job market in domestic oil and gas producing regions has suffered accordingly.
So what does this mean for 2016? Will prices remain low? My friend Chris Tomlinson of the Houston Chronicle predicted the coming price drop, and I’m persuaded that he’s right. Prices will remain low throughout 2016.
From energy let’s move to technology, especially automotive technology. By now we’ve come to realize that some of the biggest breakthroughs are in relatively mundane sectors. Uber and Lyft are nothing more than apps that rely largely on ordinary mobile devices. The implications of these services, however, are wide-ranging. Can we imagine a generation for whom car ownership is of little importance? We can, because they are already among us. Add to that radical breakthroughs in driving-assisted technologies, and the future of the auto industry suddenly begins to look very different from what it does now. Is this a prediction for 2016? Yes it is. But the changes will be incremental. And it’s only when we look back from, say, 2025 that we’ll realize how profound the changes have been.
On a related note, the Tesla battery factory in Reno deserves prominent attention. Tesla’s site selection can be seen as a way to stay in California without paying California taxes. It’s less than a four hour drive from the Tesla HQ to Reno, and a lot less if you are in a Tesla without CHIPs to patrol you (funny how word associations change). What Tesla’s energy innovations mean for 2016, especially in light of low oil prices, makes for interesting speculation. Will there be fewer Teslas sold? Or will the firm’s auto sales be only a small part of a larger battery technology play? Elon Musk is spearheading a move on the energy grid, targeting commercial and residential customers. I think it’s safe to assume that the impact of battery storage in the building industry will be as significant as anything in the automotive realm. Commercial battery storage will make news in 2016, but the implications will be with us for the rest of the decade.
The other inescapable economic story of 2015 was income inequality. The following chart (courtesy of National Public Radio) gives a remarkably broad perspective on the subject:
Source: World Top Incomes Database via Quoctrung Bui/NPR, Note: Income is inflation adjusted in 2012 dollars
Going all the way back to the 1920s, we can see that the “rise of the 1%” doesn’t begin in earnest until the early 80s. And it doesn’t exceed the rate of income growth of the bottom 90% of earners until after the year 2000. So the question for 2016, and well beyond, is: What will the chart look like? Will the extremely wealthy get more so? And will it come at the expense of the bottom 90%? The answer to the second question is usually assumed to be yes. But, in reality, the equation is complicated. Income inequality is not inherently negative. If we could achieve a significant reduction in poverty, even if a large disparity remained, would that be a bad thing? The better way to frame the question is how much “inequality” can the economy tolerate? This brings us to Thomas Piketty’s much-discussed thesis. If the rate of return on wealth exceeds economic growth, then inequality increases—and that (implicitly) becomes unsustainable. 2016 won’t bring an answer, but we can safely predict that it will be a pressing topic. Why? Because 2016 will see one of the most contentious elections ever. Among the issues will be income inequality and what to do about it.
One topic, however, will be conspicuously absent from the political debate: the impact of technological advances on the economy. Why is that? Because the relationship of technology to economic growth is difficult for politicians— and economic developers—to address. Technology companies–and the Silicon Valley model–remain the Holy Grail of community leaders. The reality, again, is much more complicated. At TIP, we have been arguing for years that the job growth potential of tech companies is nowhere near what the economic development world assumes it to be. Jerry Davis, a professor at the University of Michigan’s Ross School of Business, makes this point convincingly in an article for Brookings, in which he points to research documenting the growing disconnect between high-valuation companies and job creation. (See table below.) With the exception of Walmart, the top five US corporations in terms of their market capitalization in 2012 employ a fraction of the workforce that firms at the top of the list did 50 years previously.
Corporate (and stock) valuation is not a function of employment and hasn’t been for some time. Interesting, then, to compare corporate valuations with the income growth graph. To put it bluntly, there is a negative correlation between the use of technology and the need for workers—skilled or otherwise. It may be regrettable that none of our presidential candidates are willing to tackle this issue, but it will be front and center in cities and regions across the country.
Energy, equity, and technology are sure to be pressing issues in 2016. We would do well to rethink the relationship between economic growth and employment growth. Let that be our New Year’s resolution.