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The Way Forward for the US Economy

“I believe the best social program is a job!”

-Ronald Reagan

With the third quarter of 2014 in the history books, this is a good time to take “stock” of the market’s year to date performance. So far, large companies have outperformed small and the US has outperformed international markets. Stocks measured by the S&P 500 Index returned 8.34% through the first three quarters. The Russell 2000 Small Cap US Index was down 4.41%. The international index MSCI EAFE lost 1.38%. Emerging market’s, MSCI EM index gained 2.43%.

Evidence of modest growth in the US economy continues with an average of 224,000 new jobs being created in each of the last three months. While the unemployment rate has declined to 5.9%, this headline number masks the fact that the share of the population that is working stands at 59%, the lowest level since 1978 under the Carter Administration.

The revolution in technology continues to bring change to our society at an accelerating rate. It echoes the Industrial Revolution, an event so portentous that our labor force went from 90% farmers in 1790 to half of that percentage in the first 100 years. That drop was followed by a 95% decline in the number of farmers as a percentage of population over the next 100 years. If you had told this to a farmer at the time, they would have worried that nobody would have anything to do.

This modern industrial revolution is in its fourth wave: Mainframes 1960’s, personal computers 1980’s, internet 1990’s, and mobile 2000’s. The rate of change has been accelerating since at least 1980, the year freshmen began showing up at college with desktop computers.

The Technology Revolution is certainly a partial explanation of the low labor force participation rate. The future is bright for those who have skill interfacing with technology, whether they are a machinist or a developer; but

in the same way that the Industrial Revolution dislocated farmers to factories, the Technology Revolution is dislocating people who are unskilled in computers. The job future is bleak for those who do not interface with technology. Those computer games we wouldn’t let the kids play probably did have a purpose.

This dislocation, a polite economic term for lost jobs, has opened the political door to populism: ”If you’ve got a business, you didn’t build that.” This misadventure is an echo of another Illinois lawyer and populist orator William Jennings Bryan, who promised government relief to farmers and railed against the Gold Standard in the election of 1896.

It is a sad irony that the populist progressive policies of printing money, high taxes and business impeding regulations hurt most those whom they claim to champion.

The way forward for the US economy is to get past fighting over pieces of the pie, and get on with growing the pie. Tax and regulatory reform are the policies that will eventually lift all boats. Meanwhile, let’s keep smiling. We had the big story right. Government policies have led to low growth and low interest rates, making the markets the most attractive investment opportunity over the last five years.

Robert W. Rathbone
Investment Advisor