Welcome to the Superstar Economy

One of my favorite finance professors at KU, Mark Hirschey was fond of telling students that we are moving towards a Super Star Economy where top talent was well compensated and everyone else just kind of muddled through. He liked to give the example that the top five comedians earn something like 90% of the revenue for comedians, and the rest are just try to get into that top five.

While I can't validate Prof Hirschey's claim about comedians, it intuitively makes sense. I think we are moving towards a world economy that recognizes and compensates really talented people, while making mediocre talent of all stripes a commodity. In other words, I think the law of one price will soon prevail in labor markets in much the same way it prevails in other markets.

Unfortunately, I think that a lot of the discussion around this issue has focused on the negative aspects of the new world of global talent. Even when I read my own writing on the subject I think: "Jesus, the US is in real trouble". While the US may be in real trouble, I think it is more accurate to say the US is at a real tipping point, at a juncture where our nation can powerfully lead well into the next century, or simply become one of a handful of nations that achieve a very good, but not great level of parity in the future.

Just to be clear, while our nation and economy face some big problems, I am not one of the people who believe in the impending collapse of the US, to the contrary, I favor the view that the US has more opportunities for greatness now than at any point in the recent past.

However, I think the real story is the story of the individual, not the nation. I think that the story of the next decade will be the successes and failures of individuals and organizations confronting change rather than the story of nations.

Over the next week I hope to explore this issue in more depth. Today I will start with excerpts from two of the superstars of the discussion, Bill Bonner and Stephen Roach. Both Bonner and Roach are pessimistic about how this transition will turn out for Americans, their views are well thought out and important for any investor to understand. Over the next week I will work in more of my own views as well as the views of other noted experts including Tom Friedman and the esteemed Marc Faber.

Bill Bonner

"The rich are getting richer. But the middle and lower classes have less
money to consume this year than they did the last. If we’re right, there
will soon come a time when Americans will no longer be able to say that
they are the richest people on the planet. Instead, there will still be
plenty of rich people in the U.S. The rest of the population will be no
richer than people in other countries. The advantage from being born in
America will have disappeared in the globalized labor market.

"Here in Nicaragua, we are looking at both the past and the future. The
past is all around us. People cut fields by hand and drive ox carts to
market. But the future is here too…because rich people in Nicaragua can
live as well or better than anywhere on the planet. There are fine
restaurants…beautiful beaches…the latest technology and entertainment.
Plus, you don’t have to be Bill Gates to afford a staff of domestics.
Lumpen rich people have drivers…maids… gardeners…secretaries.

"Will it be so different in the U.S….when labor competition lowers the cost
of household help? Will the rich be able to live like rich people
again…even while the country as a whole loses ground?

"Or will the lower classes despair and revolt? Will they stop envying the
rich and, instead, begin to eat them?"

From Morgan Stanley's Stephen Roach

"Globalization and the powerful cross-border labor arbitrage it has spawned has turned the US labor market inside out. The manufacturing share of US employment hit another record low as 2005 came to an end -- down to 10.6% of total nonfarm payrolls, or about one-third the share prevailing as recently as 1970.

"At the same time, employment and compensation is being squeezed in services as well, where offshore outsourcing is moving rapidly up the value chain. The speed of this transformation is what's so daunting. Just five years ago, white collar outsourcing was confined to data processing and call centers; today, courtesy of IT-enabled connectivity, it has moved to the upper echelons of the knowledge-worker hierarchy -- software programming, engineering, design, doctors, lawyers, accountants, actuaries, business consultants, and financial analysts. The Internet is living up to its reputation of being the most disruptive technology in the history of the world. "

Timothy Burger
timothyb(at)timothyburger.com