by David S. Waddell
I remember flying into Shanghai in 2007 over vast agricultural fields punctuated with six- to twelve-lane highway bridges spanning irrigation canals but without connected highways on either side! Confused as to their purpose, I asked a government official why these bridges existed. He explained that China’s development plan included moving the Chinese population into cities connected by vast networks of highways and high-speed rail. On course, China has now urbanized 56 percent of its total population, up from 26 percent in 1990, which prompts the question: What’s so great about cities?
Cities are simply defined as higher density population clusters, but something economically magical happens when populations congregate. For starters, the establishment and growth of urban clusters rapidly increases investment activity. Consider Nashville: Of the 190 development projects now under way in Nashville, 40 exceed $100 million according to the Nashville Business Journal. This capital deployment drives new business formations, lower unemployment, and higher personal incomes.
Overall, urban environments also greatly increase labor productivity. Reductions in transportation costs, higher specialization, and hive-like communication networks lead to vast improvements in per capita GDP levels compared with less dynamic rural environments.
by David S. Waddell
Surprise! Donald Trump won the Presidential election. Additionally, the Republicans swept Congress, creating a legislative freeway for conservatives. Fortunately for investors, the 13 prior congressional sessions dominated by Republicans (President, House, and Senate) since 1901 produced average annual returns of over 8 percent for the Dow Jones Industrial Average. The last time we had a red river flowing through Washington with major tax and trade reform afloat was 1980. Washington fatigue, after the poor political and economic performances of the 1970s, led to a populist revolt catapulting a previously Democratic outsider from California with a spotty acting career into the Oval Office. History may not repeat, but Donald does rhyme with Ronald.
By the end of the 1970s, politicized central bank policies, oil price shocks, and misguided price controls boosted consumer price inflation to over 14 percent in 1980. Jimmy Carter took to the microphone and delivered his “great malaise” speech, blaming America’s ills on Americans’ bad attitude. Ronald Reagan broadcasted his “Are you better off than you were four years ago?” message soon after promising smaller government, less regulation, lower taxes, and revived prosperity. To break the stagflation logjam, Reagan combined tight monetary policy with loose fiscal policy. Monetarily, the Federal Reserve raised interest rates to 20 percent by June of 1981, squelching inflation down to 3 percent by 1983. Fiscally, Reagan’s Economic Recovery Tax Act of 1981 reduced capital gains rates 28 percent, personal income tax rates 25 percent, and accelerated depreciation allowances to boost business investment. Once the cuts took full effect in 1983, growth surged. For the four years prior to tax reform, the economy averaged annual growth of .9 percent. Over the four years post, the economy grew 4.8 percent annualized. The stock market responded in kind. Spurred by high growth, low inflation, and stable interest rates, U.S. stocks rose 19.5 percent annualized between the years 1983 and 1986.
by David S. Waddell
You may recall from your freshman economics class that GDP = C + I + G + NE. Translation: A nation’s economic output equals consumption + capital investment + government spending + exports – imports. To grow an economy you must grow consumption, capital investment, government spending, and net exports in some proportion. However, when assessing a nation’s growth capability this equation overcomplicates things. More simply, we can combine a nation’s labor force growth rate with the productivity growth rate of that labor force. Therefore, to project a nation’s GDP path we only need some demographic data and some productivity projections.
by David S. Waddell
Capital is a migratory species. Money moves in search of a host that will protect it, nurture it, and expand it. Early transactions relied on unlimited bartering options: You have corn, I have meat, let’s negotiate. This made transactions possible but greatly limited commercial mobility.
As societies evolved, a combustive combination of reduced political, logistic, and communication frictions liberated global trade and money migration potential. Up until the 1800s, trade between nations only accounted for 5 to 10 percent of global economic activity. This number doubled entering the 1900s and has since grown exponentially to over 60 percent today.
With 60 percent of the world’s economy border hopping, the competition for resources has become fierce. Globalization — the integration and collision of nations, cultures, and capital — defines our time and our potential for prosperity. In the following series of columns, I hope to provide some perspective on my own journey to understanding the implications and opportunities inherent.
First, let’s “follow the money.”
The United States has long held the lead in attracting global capital. Our hospitable combination of reliable property rights, advanced capital markets, national stability, and capitalist culture make us a prime destination for migratory money. Of the $1.7 trillion in total foreign direct investment last year, the U.S. welcomed $384 billion of it. However, large corporate mergers and acquisitions account for the majority of this figure, and most economists classify the value of M&A as “neutral.” The real productivity-enhancing investments fall under the banner of “greenfield” capital flows. These flows include new capital projects that create jobs and enhance productivity. Of the $713 billion in greenfield capital flows last year, only $59 billion came to the U.S. In fact, North America attracted less greenfield investment flow than any other region. Asia attracted the most with 45 percent of capital flows, while India took top honors with $63 billion in new projects. Europe acted as the lead capital provider, sending out $100 billion more than it took in. Overall, Asia, Latin America, and Africa added productive capital while Europe and the U.S. provided it. According to these net capital assessments, global economic investors prize growth over stability.
Globalization drives nations toward equilibrium. Rich countries fund poor countries in an effort to receive a return on modernization. China’s rise since 1980 has astonished observers but merely reflects the rapid and efficient capacities of the networks that span the globe. Today, the U.S. has a GDP per capita of $55,000; up three-fold from $14,000 in 1980. Over the same period, China increased its per capita GDP 40-fold from $200 to $8,000. While prosperity rose in both nations, the speed differential has clearly bred fear and resentment within the U.S. The U.S. may have adopted a foreign policy of “containment” towards China, but the capital markets demonstrate opposite intent. Unfortunately, while globalization aims to allocate resources efficiently, it does not allocate them equally. This leads to national power transfers, wealth disparity, and corrective politics. These factors act as globalization decelerators. The economic quest for equilibrium will severely stress the political status quo. That’s what makes globalization tantalizing … and terrifying.
David S. Waddell is CEO of Waddell and Associates. He has appeared in The Wall Street Journal, Forbes, and Business Week.
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