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THOUGHT LEADERSHIP FROM ISA ECONOMIC DEVELOPMENT CONSULTING

Here are a selection of recent articles and thought-leadership pieces from ISA Economic Development Consulting that have appeared in magazines, newspapers and other media in recent months.

THE UNITED STATES ECONOMY IS DOING MUCH BETTER THAN THE REST OF THE WORLD (March 2024)

For much of the world, the past few years, including last year, have been particularly difficult from an economic standpoint. However, for the United States economy, 2023 proved to be a surprisingly strong year, despite lingering inflationary pressures, high interest rates and persistent labor shortages. Moreover, while economic sentiment among the US public has risen, it still low enough to suggest that the US economy has been performing poorly. However, it has not, especially when it is compared to its contemporaries around the world.

 

To be sure, the United States has faced a series of economic challenges in recent years. For example, inflation rates rose to their highest level in four decades, prompting major interest rate hikes that have badly impacted many sectors of the economy. Labor shortages, driven by demographic trends and changes in working habits, have remained a thorn in the side of the US economy, as well as in the side of Northeast Ohio’s economy. Meanwhile, many key sectors of the US economy have been stagnant in recent years, including the manufacturing and agricultural sectors, two cornerstones of Ohio’s economy.

 

Despite these challenges, the economy of the United States has performed relatively well of late, particularly when compared with its international rivals. For example, while Europe’s economy remained stagnant in 2023 and other major developed economies struggled to generate significant growth, the US economy expanded by 2.5% last year. Much of this growth was driven by the technology and professional services sectors, two areas in which the US holds a dominant global position. Meanwhile, the United States continued to attract much more foreign investment than its rivals last year, while productivity growth accelerated after years of decline. Finally, inflationary pressures fell sharply last year, easing the financial burden on US households. 

 

The fact that the United States is outperforming other developed economies is not a recent development. So far in the 21st century, the US economy has expanded by 2.0% per year, well above the 1.1% annual growth recorded in Europe, or the 0.7% annual growth recorded in Japan. Moreover, the US’ lead over its main economic rivals has widened in recent years. At the same time, the United States has attracted far more foreign investment in the 21st century ($5.5 trillion) than any other economy in the world. This is due to a number of factors, including the attractiveness of the US’ vast consumer market, its high degree of economic competitiveness and its strong position in many of the fastest-growing sectors of the economy.

 

Despite this recent success, the United States cannot be complacent. For example, 2024 could prove to be a more difficult year for the US and global economies than 2023 proved to be. There are many potential pitfalls facing the economy this year. For example, the uncertainty surrounding the US’ presidential election in November could weaken business and investor confidence. Likewise, the potential for further inflationary spikes caused by higher commodity prices or shipping costs will remain in place. Finally, the outlook for the economy outside of the US is rather poor, with the global economy forecast to grow at a slower pace in 2024 than in any year since 2020.

 

Nevertheless, the United States economy still has significant growth potential and this could see the US through these challenges over the remainder of this year. In fact, the United States economy has a higher growth ceiling (the highest rate of growth that an economy can reach without overheating) than nearly all other developed economies. Likewise, the United States will remain the world leader in terms of attracting both investment and talent. In fact, the US economy is likely to continue to outperform other developed economies, even in the face of rising levels of political dysfunction at home and abroad. If policymakers and business leaders take the right steps, the US economy has the potential to have a very bright future, one that can remain the envy of the world.

AI AND ITS IMPACT ON THE ECONOMY (June 2023)

The roll out of ChatGPT and a host of other forms of artificial intelligence has led to a dramatic increase in interest and awareness of artificial intelligence. Despite the fact that these tools had been in development for many years, the capabilities of some of these AI tools have generated shock, awe and curiosity. For example, while it took Instagram 2.5 months and Facebook ten months to reach one million users, it took ChatGPT just five days to reach this milestone. If the world wasn’t aware of artificial intelligence beforehand, it sure is now.

 

Given the powerful and wide-ranging capabilities of artificial intelligence, there is little doubt that AI will have a profound impact on most areas of our lives for the foreseeable future. The one area that I want to focus on in this article is artificial intelligence’s impact on the economy. On one hand, AI has the capability to solve some of the long-term problems that are facing the global economy, as well as the economy our economy. On the other hand, AI also has the potential to be so disruptive as to sow chaos and destruction. How we manage AI will go a great way towards determining our long-term economic future.

 

For years, I have been arguing that the only path to long-term economic expansion and prosperity is through higher rates of productivity growth. With population growth slowing in our region and around the world, and with trade and investment levels that are much lower than in the past, our only means of generating higher rates of economic growth will be through higher levels of productivity growth. Unfortunately, productivity growth in most major economies has been trending downwards for many decades now and there seemed to be no end in sight to this decline. 

 

However, the emergence of artificial intelligence has raised hopes that productivity growth can be revived on the back of AI-based tools and processes. Some economists believe the artificial intelligence can eliminate many of the bottlenecks that are currently constraining productivity and economic growth. If so, AI could prove to be a positive game-changer when it comes to generating economic growth in the future.

 

Another factor that has been hampering economic growth in our region and around the world is the fact that labor shortages continue to worsen for most sectors of the economy. Worse, recent demographic trends indicate that these labor shortages are not only here to stay, but that they will worsen dramatically in the future. As such, this is another area in which artificial intelligence could solve a pressing economic problem, for AI could dramatically reduce the demand for labor in many sectors of the economy. 

 

At the same time, like other new technologies in the past, artificial intelligence could create many new jobs and occupations that have not existed in the past. For example, 60% of today’s workers are in occupations that did not exist in 1940. Therefore, it is widely expected that AI will not only solve labor shortages in many sectors of the economy, but will also create a variety of new jobs that do not yet exist. Furthermore, these new jobs are likely to be much more productive than the jobs that will be replaced by various forms of artificial intelligence.

 

Two sectors of the economy that are expected to realize significant improvements in productivity thanks to artificial intelligence are manufacturing and healthcare. For our region, this presents a unique opportunity as manufacturing and healthcare are the foundations of our region’s economy. As labor shortages remain the leading constraint on growth for the region’s manufacturing and healthcare sectors, artificial intelligence has the potential to mitigate the economic impact of our region’s demographic decline and allow these sectors to continue to flourish in our region. In fact, artificial intelligence has the potential to completely transform the region’s economy for the better, possibly ushering in a new era of growth for a region that has fallen behind many of its peers in recent decades.

 

Many economists believe that artificial intelligence has the potential to drive much higher rates of economic growth in the coming years. Other economists believe that any positive impact on the economic from artificial intelligence will only be realized over the longer-term. Furthermore, there are many experts who warn that the spread of artificial intelligence could lead to widespread social and political unrest that could actually harm the economy rather than benefit it. Regardless, there is little doubt that artificial intelligence will transform many sectors of the global economy, including many of those here in our region. As such, it appears that we are on the cusp of a major economic revolution, much like the Industrial Revolution of the late 18th and early 19th centuries. This will transform our world, and our region, hopefully for the better.

HOW TO RESOLVE NORTHEAST OHIO'S LABOR SHORTAGES
(May 2023)

It is no secret that Northeast Ohio is suffering from a severe shortage of available labor. We see this in many aspects of our everyday lives, as many sectors of our region’s economy are being badly impacted by a lack of workers. When one looks at demographic data for our region, we can see that the working-age population (people between the ages of 18 and 65) of Northeast Ohio has shrunk in recent decades. As a result, there is no bigger threat to the health of our region’s economy at the moment than this decline in our working-age population.

 

Granted, labor shortages are not unique to Northeast Ohio, In fact, many areas of the United States are suffering from comparable shortages of labor. Overseas, the situation is even worse, with workforces declining at an alarming rate in many areas of Europe and Asia. For example, by the year 2050, China’s working-age population will decline by an astounding 200 million people. As we compete with other regions and countries for business and investment, Northeast Ohio’s available labor pool will be crucial in determining the region’s level of competitiveness.

 

It is our comparative competitiveness that will determine the health of our region’s economy in the future. Without a doubt, labor shortages will be the biggest challenge to our ability to improve Northeast Ohio’s economic competitiveness. Without a larger pool of skilled and unskilled labor, businesses will not be able to grow in our region, while investment will go to more labor-rich areas of the country, or overseas. Sure, automation and artificial intelligence can offset some of these concerns on the supply side, but our competitive position will nevertheless be weakened without an influx of available workers to our region.

 

One answer to Northeast Ohio’s labor shortages is to improve our existing pool of labor, or those people who already live in this region. One way to do this is to improve our region’s education standards, with a particular focus on skills that are sorely lacking in our region’s talent pool, such as information technology and engineering. However, our region is also suffering from a shortage of unskilled labor, something that can be solved, at least in part, through increasing the labor participation rate among younger men in Northeast Ohio. Finally, by improving our public services, such as child care and public transportation, we can make it easier for people in our region to find employment while not sacrificing their quality of life.

 

Still, our region needs to also focus on attracting more young adults from other areas of the United States. In order to do this, we need to focus on investments that improve the region’s quality of life from a younger person’s perspective. This means focusing on those aspects of life that are important to young people, such as our region’s nightlife, its cultural offerings, its outdoor activities and other such lifestyle considerations. Of course, one aspect of our region that is already attractive to younger adults is our relatively-low cost-of-living, something that allows younger people to build up savings at an faster pace than in more expensive parts of the US. In this area, we have made major strides, but much more still can be done to attract more young people to the region.

 

Our focus on attracting young people to Northeast Ohio should not just be on attracting people from other areas of the United States. In fact, would should be targeting young and talented people from around the world. Without immigration, our region’s working-age population would have been shrinking for a long time now. In fact, it was younger immigrants that provided the labor force for Cleveland’s economic boom in the latter part of the 19th century and the early part of the 20th century and this is something we need to replicate if Cleveland’s economy is to take off again. The fact is, young immigrants settle down in our region, raise families here and their children and grandchildren find it easy to integrate into the fabric of our region. Our history has shown us how valuable immigration can be to our region and we cannot ignore this opportunity given our current labor shortages.

 

The issue of labor shortages is the single biggest challenge facing the economy of Northeast Ohio today. One look at other cities in our region, or in other parts of the world, shows the negative impact that a shrinking working-age population can have on an economy. For Northeast Ohio to thrive in the coming years and decades, we need to avoid a similar fate, but we can only do this my expanding our region’s workforce. If we focus on utilizing the skills and expertise or our existing population, and fill in the gaps by attracting young people from across the US and around the world to Northeast Ohio, we can put our region’s economic future on much firmer footing. If we don’t, we will have missed a unique opportunity to improve our region’s economic future.

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