For starters, the U.S. needs to begin to transition from a consumer driven economy to a more evenly balanced one emphasizing investment, manufacturing and exports. Although there are no easy fixes ahead, the move to an investment and export led economy is essential to America's future prosperity.
A just released survey of economists (U.S. Incomes Seen Stagnant Through 2021) forecasts that U.S. income levels in 2021 will still be less than they were in 2000. Here's the bad news in brief:
"From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marks the worst 10-year performance in records going back to 1967. On average, the economists expect inflation-adjusted incomes to rise over the next decade, but the 5% projected gain isn't enough to reach prerecession levels.
"Standards of living in the U.S. will continue to decline as we deleverage and emerging markets take over as the growth engine of the global economy," says Julia Coronado of BNP Paribas."
A big reason underlying the survey's predicted stagnant American real income levels is the ongoing debt deflation related deleveraging in the U.S. and other developed markets. Another major contributor is the anticipated continuing rapid growth in emerging market countries.
As Its Economy Sprints Ahead, China's People Are left Behind compares the current structural underpinnings of the Chinese and U.S. economies. We consume too much and save too little while in China it's just the reverse.
Going forward, the central message is that each country will have to alter its consumption to GDP relationship:
"Economists say that for China to continue serving as one of the world’s few engines of economic growth, it will need to cultivate a consumer class that buys more of the world’s products and services, and shares more fully in the nation’s wealth.
But rather than rising, China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent. That figure is by far the lowest percentage for any big economy anywhere in the world. (Even in the sleepwalking American economy, the level is about 70 percent of G.D.P.)
Unless China starts giving its own people more spending power, some experts warn, the nation could gradually slip into the slow-growth malaise that now afflicts the United States, Europe and Japan. Already this year, China’s economic growth rate has begun to cool off."
In contrast to China, U.S. consumer spending at 70% of our GDP has been twice as high as the Chinese level of 35%.
Clearly, the U.S. needs to base future economic growth on manufacturing, business investment and a serious focus on exports. On the other hand, China needs to emphasize the domestic consumer segment of its economy. In other words, each country needs to develop new habits.
In contrast to the U.S., Chinese consumers have long prioritized savings over spending. As a result, ample funds have been available to Chinese industrial companies to support investment and export growth.
While we don't need to replicate the Chinese model, we very much do need to slow the consumer spending and debt binge we've been on for far too long.
As Chinese consumers begin to spend more freely, that will also create the opportunity for additional American export growth. All this will take years to complete, of course, but it has to happen and the sooner we start the better.
Now let's turn our attention to India's labor situation. It will help us understand our American challenge better.
Strike Adds to Problems at Indian Auto Plant recounts the story of India's labor glut and provides a glimpse into the extremely low compensation levels of many Indian workers:
"Union workers are also angry over the growing use of contract workers, who are paid far less than regular employees and — unlike permanent workers — can be laid off without government approval. In some auto factories, contract workers make up more than half the staff.
Monthly manufacturing wages in India range from 6,000 rupees, or about $120, for contract workers, to about 35,000 rupees (about $710) for highly skilled and experienced workers. While those wages are better than the average income in India — about $81 a month — living on them at the lower end of that range can still be tough.
Still, while government protection against layoffs gives union autoworkers some leverage, they know they have few employment alternatives . . . ."We have chosen to look at China and India as examples of today's worldwide labor conditions simply because they are so big. Combined the two countries have a total population of more than two billion people. By comparison, the U.S. population is slightly more than 300 million.
Both China and India have an enormous labor surplus in relation to demand. The salient point is that excess labor in relation to demand is a worldwide problem and is not just an issue for our U.S. workforce and economy.
As their marketplaces develop, countries like China and India will provide big growth opportunities for American products. Market based competition will create enormous improvements in living standards for the entire world. That will also result in much larger markets for the goods and services supplied by U.S. companies.
But in the meantime, we have a problem to solve in the here and now. While China, India and others pay relatively little for labor, developed countries such as the U.S. have a much, much higher level of compensation.
So when we hear the mainstream media and politicians dwell on the "unfairness" between the earnings of the have and have-not American workers, we aren't being given the real story. The real story is both short and simple.
The worldwide market for skilled workers has grown dramatically as markets for goods and services in developing countries have come on stream. Great demand.
In these same underdeveloped markets, an abundance of semi-skilled and unskilled available workers are now actively seeking work as well. Huge supply.
Accordingly, the growing pay inequalities within the U.S. are a simple matter of worldwide supply and demand. There's more demand for sophisticated products and a heavy supply of semi and unskilled labor.
Growing worldwide markets will reward entrepreneurs and require more knowledge workers. At the same time, the fast expanding global work force has produced an abundance of semi-skilled and unskilled workers for the jobs available.
Meanwhile, today's established pay and benefit levels for American semi-skilled and unskilled workers are enormously higher than current world pay scales for similar work. That will represent a competitive and employment issue for years to come.
To solve this problem will require our objective and collective attention.
But first, we have to get past the denial stage and stop all the name calling. Only then can the truth telling and genuine problem solving begin.
Thanks. Bob.
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