The Wall Street Journal’s “Tinkering Makes Comeback Amid Crisis” stirred my thoughts on the limits of America’s dependence on a knowledge-based economy. The article focused on engineering students at prestige universities wanting to actually create physical things. Students are migrating from the virtual world of software science to hobby-ing with computer controlled milling machines in their dorm rooms, school workshops and membership machine shop clubs.
The Journal’s “Obama to Warn Asia Against Relying on U.S. Consumers” reports that the President is reiterating his call for the US to get back to making things for itself and the rest of the world. In “Larry Summers and Jeff Immelt Preparing for Post-Consumer Economy” and "US Needs to Convert from a Consumer to an Industrial Economy", I highlighted that companies such as Eaton (ETN), Ingersoll-Rand (IR), Parker Hannifin (PH) and Rockwell Automation (ROK) could be the beneficiaries. Now it appears that both the President and these companies are developing a young following.
While the President will be emphasizing balance during his Asian trip, the underlying message to the world is that the US consumer is finished, spent out, and will never return. The President doesn’t want foreigners to lend us any more of our own money to buy any more of their trinkets. The inherent conflict between the Administration and the Federal Reserve is the sustainability of our economy based on recycled dollars. Obama would rather recycle the Pound, Euro, Yuan and Yen in our favor. Bernanke still believes that the US consumer will save the world.
The previous conventional wisdom was that it is too expensive to make anything in the US, so we must concentrate on the high value-adding knowledge-based economy to be competitive. That proved a failure as each time the Fed pumped up the “economy”, i.e. money supply, it only created asset bubbles – not more industrial capacity or real innovation. True innovation and the real knowledge-based industries evolve in fits and starts; therefore they will never be enough to drive an economy as large as the US.
Now it’s time to take a step out of fantasyland. The US needs a “core” economy that supports all skill levels, personal spending that matches personal income, and an energy policy that matches consumption with its percentage of the world population and its accesses to resources.
Whether the Fed likes it or not, the central bank can no longer play US consumers like a violin. We are already diverting too large a portion of our consumption to energy. So that leaves the availability of work for all skill levels as the central focus.
It is time to end all the rhetoric about the need for better education and fair trade for the US to compete in the world. Both are overused excuses in the same manner as pharmaceutical companies say they must gouge consumers to support research. While the quality of our education varies substantially, the high-end is still extremely competitive. Education and skills are not stubbing our economy. And trade will become fairer as our consumers adjust spending to match their incomes.
So what will force the economy to reindustrialize? I believe it will come when many of the knowledge-based commerce businesses such as banking, finance and accounting become utilities. Yes, the Bank of America (BAC) Electric Co., the Citigroup (C) Electric Co., the JP Morgan (JPM) Electric Co., the Wells Fargo (WFC) Electric Co., and even the Faux Goldman Sachs (GS) Virtual “We are not a retail bank” Electric Co. As services lose their ability to value-add, industrials will pick up the slack and jobs will fill in at all skill levels.
I am not advocating the doom of the knowledge-based technology sector, just a substantial decline in the knowledge-based services sector because of the realization that most services have never been value adding. And non-value adding services could never have been the foundation of a sustainable economy.
I am betting that President Obama’s vision of the US and world economies will be right by default.
Disclosures: Author is long BAC, C and WFC.