Stumbling To Scarcity

Abundant labor, energy, and information combined to generate the economy we’ve known since 1990 or so. Hence, it may be a problem that all three of these are now in the process of changing direction.

  • The COVID-19 pandemic, along with US-China trade tensions, is accelerating the re-localization of global supply chains. Technology was already doing this (hundreds of thousands of jobs have already come back from offshore) but the trend is accelerating. Louis argues labor is no longer in surplus, which leads to price (wage) pressure.
  • Fossil fuel prices are rising faster than “green” energy sources come online to replace them. Energy and food prices seem to be entering long-term uptrends. These are related because energy is necessary for growing and transporting food. The same is true for commodities generally, so it seems we will also lose the advantage of cheap, abundant natural resources.
  • Knowledge is ceasing to propagate as freely as it did a few years ago as companies try to maintain monopolies, public debate becomes more constrained, and governments see technology as a military advantage they must protect.

Louis concludes:

Setting aside the near-term data—whether year-on-year inflation figures, the growth of US money supply, the surge in the US budget deficit, or the growing US trade deficit—we face an important structural question. Do we still live in an age of abundance? If so, the environment will remain fundamentally disinflationary over the longer term. Or are we now entering an age of shortages?

Admittedly, there appears to be no shortage of capital in the world today; and central banks do not appear keen to engineer any such shortage. But beyond that, the “abundance versus shortage” equation might be changing in front of our eyes. In the coming decade, it is unlikely that knowledge will be shared as freely as in the past two decades. Labor is unlikely to be as plentiful as it was in the early years of the century. And, most visibly, a number of commodities are already showing telltale signs of shortages—you can’t find them.

I think the problems Louis brings up are very real. But like my view on inflation, I think they are “transitory.” Reshoring was already increasing. Over the next few years, I expect the reeducation and redeployment of unskilled labor to skilled jobs will become a major factor. Just as businesses in the early part of the last century took farm workers and made them factory workers, the same will happen all across the spectrum.

What does this mean for financial markets? The inflation vs. disinflation question is important but only scratches the surface. This is structural. The mega-trends that enabled the economic growth we enjoyed for so long didn’t form overnight and won’t disappear overnight, either. But as they change, growth prospects in the traditional sense diminish. It’s not as simple as buying miners because gold will go up. Bigger things are happening.

Wage Inflation

I want to go deeper on Louis Gave’s labor point. He looks at China’s 2001 admission to the World Trade Organization as a key event. Companies moved jobs to places with lower-wage workers as a vast new supply of labor became available. This produced a flood of inexpensive goods from Asia to the West. In theory, the Western workers whose jobs were being moved overseas were going to be retrained for better things. That didn’t happen.

Moreover, low-wage countries that couldn’t compete with China became even more impoverished, leading many of their workers to seek work in Western countries, at wages high by their standards but a bargain for their Western employers. This affected the overall wage level, capping growth for other workers.

The chart below shows inflation-adjusted annual US wage growth since 2000, considering average hourly earnings and average weekly hours. That adjustment is important because sometimes fewer work hours can offset a higher hourly wage. You can see that until 2020, real wage growth only rarely touched 3% and didn’t stay there long. Often it was negative wage growth. By this measure, real wages rose a total (not annualized) of about 11% from 2000 to the end of 2019. 

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