Irwin M. Stelzer: Sooner or later, the piper will be paid
By: Irwin M. Stelzer
Examiner Columnist
July 24, 2009
Three inter-related forces are beating on the economy: Cyclical (the recession); secular (long-term trends), and presidential. Here are some guesses as to the shape of some of the industries that will emerge from the interplay of these forces.
The housing industry's problems are cyclical, and will abate as a rising population and more reasonable pricing whittle down the unsold inventory of homes. Government will force some long-term changes, most notably the use of more insulation and energy-saving devices.
But a few years from now things in this industry will be largely indistinguishable from pre-recession days, with the important exception of more stringent credit conditions imposed on buyers seeking mortgages.
Not so the financial sector, which will both consolidate and fragment. Goldman Sachs (trading), and JPMorgan Chase (investment banking) will mop up a larger share of the businesses at which they excel, while at the other end small, boutique advisory firms will thrive, driven by refugees from the big banks and the scrutiny of government regulators. Opaque markets will be more transparent, there will be new jobs for regulators, and we will still be discussing compensation issues.
Other industries are in the midst of secular change, the most obvious being the media industry, where newspapers are trying to figure out how to charge for the content that readers have come to expect will be free, publishers are trying to figure out what to do about Kindle and other electronic publishing devices, and film makers are trying to figure out what to do about pirates.
My guess is that the last newspaper standing in each market will prosper, electronic distribution will make books cheaper and accessible to larger audiences, and filmmakers will prosper as a richer world devotes a larger portion of its income to entertaining itself.
That takes care of a few industries that will be changed by recession and by longer-term forces. Then there is Obama.
General Motors will produce cars that please the politicians rather than consumers, and remain on life support unless the government sets in place regulations that limit buyers' choices to the sort of tiny vehicles GM is allowed to produce.
The electricity supply industry will have some more unreliable solar and wind power, enriching equipment manufacturers in China and Germany. There will be far less nuclear power than the industry's advocates predict, mainly because political opposition and constantly rising costs will restrain the industry's growth.
There will be lots more coal plants, most of them in India and China, and very few in the United States, where overt and covert rationing of electricity will replace the good old days of adequate and cheap supply, with negative consequences for the competitiveness of American industry.
The Obama factor will also affect the health care industry, if Congress eventually passes anything like his proposed remake. Insurance companies are delighted with the bargain they struck with Obama.
In return for their promise to insure people with pre-existing conditions they will get a government mandate forcing some 20 million healthy, young citizens to carry insurance. But when the tax-subsidized lower rates of the government insurance company, if one comes to pass, drives them from the field, they will regret having sold their birthright for a mess of pottage.
One last industry - pharmaceuticals. The big drug companies have promised to reduce prices to seniors by $80 billion over the next decade in return for a presidential promise to remove from any reform package the right to re-import drugs that can be bought more cheaply after they are first sold in Canada at government-dictated prices.
They have also wrung from Congress a longer period of protection for their brands from competition by generics. Good news for the industry, at least until the monitoring of its agreement to produce savings leads to price controls.
There's more: The construction industry will grow as more money is channelled into infrastructure projects, the lobbying industry will flourish as the government claims a larger portion of the nation's economy and politics replaces the market as the determinant of which companies prosper, and the number of small business start-ups will drop as increased taxes on entrepreneurs reduce the possibility of financial success.
Just a few thoughts from an economist who is not an investment adviser, for those of you thinking about re-entering the stock market.
Examiner Columnist Irwin M. Stelzer is a senior fellow and director of the Hudson Institute's Center for Economic Studies
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