Source: Mauldin Economics
I have been promising a review of Nicholas Eberstadt’s very important book, Men Without Work: America’s Invisible Crisis. The book is relatively short at 216 pages, but it is packed with meaty facts and insights. One of the reasons I seldom read an actual physical book anymore is because I can highlight text and make notes in my Kindle app on my iPad and then find those notes and highlighted sections on my Amazon page for later review. I actually highlighted 36 pages with 22,000 words from this book to go back and review. And while I will be using a lot of quotes in this letter, I hope this simply spurs you to order the book and read it for yourself. The “invisible crisis” that the author is writing about is at the very center of our economic and political turmoil.
At its heart, the book is about the fact that there are some 10 million American men of prime working age (25 to 54) who have simply dropped out of the workforce, and the great majority of them have not only dropped out of the workforce, they have also dropped out from any commitments or responsibilities to society. It is not just the labor force they are not participating in; they are not participating in the normal ebb and flow of community life.
This is not a recent phenomenon. I used the following graph last week, but it is important to illustrate the point. Male participation in the civilian labor force has been steadily dropping for 60 years, through boom and bust years, periods of inflation and deflation, Republican and Democratic administrations and congressional control; the trend seems to be relentless – except that it has been accelerating since 2009.
The trend was in place long before automation began to really impact the manufacturing workforce or jobs began to shift to China and other countries with lower labor costs.
Further, this is not just about men not participating in the labor force. “Deaths of despair” among middle-aged white men are increasing at an alarming rate. What I find odd and even more disturbing is that this seems to be a uniquely American trend. This week’s issue of The Economist highlighted this problem with a great chart that compares the US and other developed countries. Quoting:
AMERICAN workers without college degrees have suffered financially for decades – as has been known for decades. More recent is the discovery that their woes might be deadly. In 2015 Anne Case and Angus Deaton, two (married) scholars, reported that in the 20 years to 1998, the mortality rate of middle-aged white Americans fell by about 2% a year. But between 1999 and 2013, deaths rose. The reversal was all the more striking because, in Europe, overall middle-age mortality continued to fall at the same 2% pace. By 2013 middle-aged white Americans were dying at twice the rate of similarly aged Swedes of all races (see chart). Suicide, drug overdoses and alcohol abuse were to blame.
You might think that rising mortality is the flipside of falling incomes. Recent trends in median per-person income for households headed by white 50- to 54-year-olds mirror their mortality rate. Income rises in the 1990s and then falls in the 2000s, ending up roughly where it started. But split people out by education, and the reflection fades. The income of college graduates has followed a similar pattern (most of the surge in the value of a college education happened before 1990). But their mortality has steadily fallen. And deaths of despair are much rarer among blacks and Hispanics, whose incomes have been on similar paths.
Ms Case and Mr Deaton have now updated their work on these so-called “deaths of despair”. The results, presented this week at the Brookings Institution, a think-tank, are no happier. White middle-age mortality continued to rise in 2014 and 2015, contributing to a fall in life expectancy among the population as a whole. The trend transcends geography. It is found in almost every state, and in both cities and rural areas. The problem seems to be getting worse over time. Deaths from drugs, suicide and alcohol have risen in every five-year cohort of whites born since the 1940s. And in each group, ageing seems to have worse effects.
The authors suspect more amorphous, long-term forces are at work. The fundamental cause is still a familiar tale of economic malaise: trade and technological progress have snuffed out opportunities for the low-skilled, especially in manufacturing. But social changes are also in play. As economic life has become less secure, low-skilled white men have tended towards unstable cohabiting relationships rather than marriages. They have abandoned traditional communal religion in favour of churches that emphasise personal identity. And they have become more likely to stop working, or looking for work, entirely. The breakdown of family, community and clear structures of life, in favour of individual choice, has liberated many but left others who fail blaming themselves and feeling helpless and desperate. (Emphasis mine.)
Larry Summers did a review of Eberstadt’s book for the Financial Times. In a blog post about his review, he offers this rather sobering prediction:
Job destruction caused by technology is not a futuristic concern. It is something we have been living with for two generations. A simple linear trend suggests that by mid century about ¼ of men in the US aged between 25 and 54 will not be working at any moment.
I think this is likely to be a substantial underestimate unless something is done for a number of reasons. First, everything we hear and see regarding technology suggests the rate of destruction will pick up. Think of the elimination of drivers, and those who work behind cash registers. Second, the gains in average education and health of the workforce over the last 50 years are unlikely to be repeated. Third, to the extent that non-work is contagious, it is likely to grow exponentially rather than at a linear rate. Fourth, declining marriage rates are likely to raise rates of labor force withdrawal given that non-work is much more common for unmarried than married men.
On the basis of these factors I would expect that more than one third of all men in the US between 25 and 54 will be out of work at mid-century. Very likely more than half of men will experience at least a year of non-work out of every five. This would be in the range of the rate of non-work from high school dropouts and exceed the rate of non-work for African-Americans today.
My only real quibble with this analysis is his suggestion that the gains in the health of the workforce over the last 50 years will not be repeated. The technology that I’ve been looking at lately (and much of it is not public) convinces me that younger generations are going to live a great deal longer than they now dream possible. By 2040 and certainly by 2050, expectations of a lifespan and a productive healthspan of over 100 years will be common. I am talking about a radical shift in the entire human aging process. Of course, this trend doesn’t address the emotional and sociological aspects that Summers, The Economist, and Nicholas Eberstadt are referring to.
Where Will the Growth Come From?
I’ve made this point over the years but it is worth repeating again. There are only two ways for an economy to grow. That’s it. If you don’t have these two elements you’re not going to have economic growth.
One way is that the workforce increases, and the other is that you increase productivity. If Summers is right that 1/3 of working age males are essentially going to drop out of the workforce, then, when we couple that with Baby Boomers retiring in the coming decades (or at least slowing down somewhat – well, except for me and possibly you), we are simply not going to get the increase in GDP that normally comes from growth in the workforce.
Further, it is really hard to increase productivity in much of the service sector. How much more productive can a bartender or a cashier be? Or a taxi driver? Yes, we can eliminate their jobs with technology, but that just reduces the workforce side of the equation.
I know that many politicians indulge in the wishful thinking that we can somehow recover the economic nirvana that we enjoyed from the ’50s through the ’90s because both productivity and the workforce were growing. Even though the participation rate of males was falling, the participation of women in the workforce was rising far faster, so the overall workforce was increasing.
This whole workforce issue, as I deal with the truly difficult challenge of researching and writing a chapter on the future of work for my upcoming book, is forcing me to rethink a great deal about how the economy is likely to behave and how successful investing will be conducted in the future. I cannot remind you strongly enough that past performance is not indicative of future results.
I don’t see us turning the workforce situation around unless we somehow manage to transform our negative imagery about immigrants and start to aggressively seek out productive young, educated immigrants from around the world. I am not going to hold my breath on that one.