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A Labor Day Reflection

Sigma Investment Counselors

September 4, 2012

A three-day weekend is always a welcomed change from routine and this past weekend was no exception. As I read the varying newspaper commentaries about the holiday over the weekend, I too began reflecting on the impact that labor has had on our economy. Americans have traditionally been thought of as industrious and hard-working and this certainly has had a material impact in propelling the United States to the wealthiest nation in the world. As we were all taught growing up, there is no substitution for hard work.

Why, then, I mused, are certain economies struggling today? In particular, I thought about Greece and the devastation that their people are experiencing as their economy implodes. Economics can be complex, but it does not have to be. Think about a simple, one-hundred person economy with each person in it performing a unique function – doctors, farmers, tradesman, educators, etc., all doing their thing and trading their services. As long as everyone is working and producing, the economy functions well. The older workers pool their excess earnings or “savings” for the day they are no longer able to work. As older and diminished-skill people retire, younger able bodied people enter the workforce and take their places. The pattern works.

Now, imagine what happens when many workers decide to drop out of the workforce while able-bodied. Imagine too, that they do so with inadequate savings to finance their retirement. Economic production begins to decelerate very rapidly. Then, imagine an even more implausible scenario wherein everybody retires. No production takes place. Zero. Savings are rapidly depleted. Social bonds break down. While implausible, this scenario serves a useful illustrative purpose. First, it is clear that when you lose the production of those workers you are committing economic suicide. Second, when you rapidly deplete your savings (or capital, which is the other essential ingredient to a productive economy in concert with labor) the burden on labor when it restarts is significantly greater (think about digging trenches with a shovel versus a backhoe). Seen through this lens, one of the primary problems in Greece becomes more understandable. In the United States, and other modern economies, early retirement without sufficient savings also will lead to undesirable outcomes if left unchecked. One solution, therefore, is to discourage early retirement of able bodied workers.

All comments and questions are welcomed.

Bob Bilkie, CFA

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