Comeback Kid

For the past four years, I’ve been struck by the similarities and differences between the Great Recession (and its aftermath) of 2007-9, and the double dip recessions of 1979-82.

Most commentators and younger people (those under the age of 20 or so in 1980) lack a full appreciation of just how bad things were then. In 1973, after one of the periodic wars that have plagued Palestine/Israel since the late 40s, the price of oil quadrupled in a very short time. OPEC countries, mostly Muslim, in effect staged a boycott in protest, reducing output, leading to gasoline shortages in the US, and skyrocketing prices, going from 35¢ a gallon to $1.40 seemingly over night. One of the side effects of all that was the loss of gas station attendants. Before that episode, someone would come to your car, fill it with gas, and wash your windshield.

The oil price spike was also fueled by rising inflation, and was OPECs way of trying to help rein in the price spiral. President Ford instituted the WIN program (whip inflation now), with little success. Prices continued to rise during the 70s, and in 1979, after the Islamic Revolution in Iran and the subsequent US Embassy hostage crisis, OPEC struck again, ratcheting down production, causing prices to rise four-fold once more. Lines re-appeared at gas stations, and a gloomy recession took hold.  Inflation and unemployment both took off, to levels of 10-12% each. The word “stagflation” entered our vocabulary.

Inflation became the first target for policy makers. Paul Volcker, the Fed Chairman, drove interest rates so high that he stymied a recovering economy, generating that double dip recession which kept so many Americans out of work for so long. Then Ronald Reagan was elected. He and his budget director, David Stockman, devised a budget based on stimulus spending and tax cuts, and our debt rose more rapidly than at any time since WW II. But finally, the economy took off again, after more than 4 years in the doldrums. It was Morning in America.

But while we had been fighting the stagflation wars, an East Asian country had been rapidly growing its economy through the combination of hard work, rapid industrialization, and a penchant for savings and investment over consumption. By the mid 80s, as the value of the US $ dropped, and the Yen rose, it seemed as if Japan was going to vault past us. Their management practices were promulgated and pushed onto a dying US industrial base. “Just-in-time” inventory management and “continuous improvement” became business buzzwords. To see clear examples of the Japan miracle in action, take a look at the difference in a Honda Civic (or any Toyota or Nissan car) between 1974 and 1987, and look at how little changed in the product line of US auto manufacturers. Sony, with its Walkman, bestrode the world of consumer electronics, and purchased Columbia Pictures. That, along with major real estate purchases in our power centers of NYC and LA, seemed to presage the ultimate takeover of our economy by the Japanese before the turn of the century.

While this was going on, though, two guys on the west coast were hard at work just trying to make life better and easier for people at work and at home. Bill Gates and Steve Jobs (yes, they did have help) ignored the doomsayers, or probably never even heard them, busy as they were, and laid the foundations for industrial empires of an entirely different nature from railroads or metal bashers.

At the end of the 80s, the Japanese housing bubble burst, their stock market (funded by borrowing on inflated land prices) collapsed, and they’ve spent the past 20 years trying to recover from that, while trying to support too many oldsters with too few youngsters. They no longer are seen as a threat to US economic hegemony.

This century, China has been able to parlay several of its assets into astounding growth, and is poised to take advantage of our economic weakness. True, things are a bit different. China has ten times the population of Japan. China has its own natural resources, and is able to act imperially in places like Africa and Latin America in ways that Japan no longer could after losing WW II.

China is now making everything for us … consumer electronics, clothes, trinkets, they all come on a slow boat from China. They own massive shares in US debt, and have a unified authoritarian leadership who do not seem at all interested in the niceties of modern civilization, like ensuring quality construction in bridges, product safety even in things like food and drugs, or health care and old age pensions for its citizens. So everyone predicts that sometime in the next 10 years, they will overtake us, in some way or another – higher GDP, more diplomatic power, whatever.

But I don’t necessarily believe it. There are signs that low cost Chinese manufacturing will not last forever. There is no longer a surging migration from subsistence farming into growing urban centers. Wages in Chinese factories have risen 4-5 fold in the past few years. The actual value of product assembly is the least significant part of an equation that includes design, transport, marketing, and retail. Being close to your customers actually does matter, and mixing all elements of the production process creates a synergy allowing for much more rapid product design and development.

Two high profile companies this week have been featured in national publications for bringing manufacturing back home – GE with the rejuvenation of its Appliance Park in Louisville KY, and Apple, seemingly ready to start assembling high end iMacs in the US again. Apparently, there is no longer a cost advantage to sending all our manufacturing work overseas. A hint that better times are actually upon us: This week’s jobs report shows a drop in the unemployment rate to 7.7%.

I’m suggesting that, 2-3 years from now, we may begin to realize that the US economy has much more resilience, innovation, and growth potential then we’ve been assuming since the housing bubble burst here. And China, for all its size, its monolithic state capitalism, and aggrandizement of manufacturing expertise, may just find itself running out of steam, just as Japan did 25 years ago. Its demographics, thanks to the One Child policy are already headed in the same direction.