Sunday, August 16, 2015

The Real Income Inequality Issue Americans Must Face ... Chinese Competition, Globalization, Good Jobs and Government as Savior

Chinese factory workers are paid a very small percentage of what our American factory workers are paid. That's the real income inequality issue facing Americans today, and there isn't an easily apparent or ready solution.

In addition to the small fraction of a paycheck the Chinese workers receive compared to U.S. based employees, the Chinese don't pay ~12% of their compensation to the government in the form of Social Security taxes. {NOTE: Here the company pays half and the employees pay half. Still, our government run Social Security system is in effect broke.} And the Chinese workers don't get company matching contributions for 401(k) plans, pensions, costly medical benefits and other 'fringes' which typically amount to 30% or more of the U.S. employee's total compensation package.

And neither do Chinese companies, as well as other companies throughout the world, pay the comparatively extremely high taxes on profits that American companies manufacturing in the U. S. are required to pay.

And one more thing:  they aren't hit with high local property taxes levied on U.S. employers to support the world's highest cost public school system.


At the same time, American consumers aren't stupid. We shop for the best values, regardless of where the products are manufactured and who makes them.

Think Wal-Mart, clothes, shoes, TVs, personal computers and cars, as examples. 

Sometimes I wonder why companies bother to make anything here anymore. 

See Steelworkers to Rally for Wage, Health-Benefit Pacts for a current example of how our competitively clueless private sector union 'leaders' act.


And if that's not enough of a head scratcher, there's always the currency play to consider. So let's do that today.

When the currency of the lower paid Chinese workers weakens compared to the currency of the higher paid U.S. domiciled employees, the problem for the vastly higher paid but similarly skilled workforce becomes even more severe, if not insoluble. And that's what we have facing us squarely today.

Currency devaluations are largely a political event. And so it is today with China's recent currency devaluation and its further certain negative impact on both the U.S. economy and jobs.

Of course, it's not all bad news for Americans. Prices will fall for U.S. consumers. Thus, it's bad for U.S. jobs but good for U.S. consumers.

Today the Chinese and other low cost producing countries are manufacturing more and more of the things we buy. That means lots of American jobs for both blue and white collar workers have been and will continue to be lost to Americans.

And high school and even college graduates are having a difficult time getting that first good job, let alone keeping it.

College is expensive and those entering our colleges are often unprepared to compete in the global job market. As a result, too many of our graduates end up in the unproductive government sector. In fact, as a nation we even encourage that outcome.

The weakening Chinese currency relative to the U.S. dollar will make an already poor outlook for good jobs in America even more troubling.

To make a bad situation even worse, more U.S. citizens will now turn to the government for answers and security. 

That in turn means an uncertain future lies ahead for our young indebted graduates (both high school and college) as socialism and wrongheaded government 'solutions' become the 'go-to' solution.


China's Renminbi Devaluation May Initiate New Phase in Global Currency War says this:

"For years, . . . as other countries, seeking to secure an economic advantage, let the value of their currencies slide on international markets, China held firm on the value of its money.

But this week, China jumped into the fray. In a surprise decision on Tuesday, the country’s authorities began sharply devaluing its currency, the renminbi. While the plunge paused on Friday, the renminbi was still down 4.4 percent against the dollar this week, a huge drop for China.

The abrupt move opens a new phase in what some analysts see as a long-raging global currency war, a development that could leave the United States exposed and undermine efforts to pull the world economy out of the doldrums. . . .

Countries that don’t join the devaluations, like the United States right now, can end up suffering, if they export less and import more. A steep drop in the value of the renminbi could also intensify some of the forces that, in the view of some economists, have caused the American economy to underperform.

“The risks of a deflationary, secular stagnation in the U.S. would be increased by a large devaluation of the renminbi,” said Lawrence H. Summers, the former Treasury secretary....

“We’ve been in a currency war for six years,” said Stephen S. Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale University. “China is now moving on its currency, and other countries are using their currencies as a tool to relieve distress, and that is potentially destabilizing.”. . .

The fear among some analysts is the currency tensions could worsen some of the entrenched problems that they say exist in the global economy. . . .


“We are in a period of trade war — make no mistake,” said Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University. “People say it’s a zero sum game. It’s not — it’s a negative sum game.”

In the past, international authorities have taken bold steps to quell extreme moves in currency markets. Not wanting a repeat of the competitive devaluations of the 1930s, they set up a system of fixed exchange rates after World War II that severely limited how much currencies could fluctuate.

After that fell apart in the early 1970s, major countries occasionally intervened to moderate currency movements through international agreements like the 1985 Plaza Accord, named for the Plaza Hotel in New York. At the time, the accord helped arrest a soaring rally in the dollar. 

Few, if any, analysts believe similar interventions are needed right now. But if currency tensions cause economic turmoil, eyes may turn to the world’s largest central banks for help.

In the financial crisis of 2008, the Fed in effect became the central bank to the world, extending emergency loans to foreign banks and funneling dollars to other countries to make sure financial systems didn’t seize up. . . .


But the Fed is thinking about raising interest rates, perhaps as early as next month. When interest rates do go up, it could make life even harder for countries in the developing world, which could experience capital outflows. Also, companies in emerging markets that have borrowed in dollars will have to spend more of their local currency to pay back their dollar debts.

Seeing what a Fed increase could do, some analysts assert that the central bank will not raise rates next month. But if it does increase rates then, some central bank watchers say it should use cautious language to calm markets.

“It will have to be the most dovish hike in history,” said George Goncalves, rates strategist at Nomura Securities, referring to an interest rate stance that carefully seeks to avoid an unnecessary tightening of monetary policy.

Still, the global economy may weather this storm without any big moves by international policy makers. Many economists believe that, despite its rise against other currencies, the dollar is not dangerously overvalued.

China, they add, has many reasons to avoid an uncontrolled plunge in the renminbi. A particularly important reason is that Chinese entities have borrowed over $1.6 trillion in foreign currencies. A big drop in the renminbi would make that harder for some Chinese companies to pay back, because they would need to earn more renminbi to service their obligations.

“A sharp devaluation is not in China’s interest,” said Li-Gang Liu, a China economist at ANZ Research. . . .

“If China is going through the correction that many have predicted over the past decade,” said Benn Steil, a director of international economics at the Council on Foreign Relations, “the currency might have quite a bit further to fall.”

Prolonged turbulence and economic pain may then force world leaders to think hard about whether the international system can be changed. The enormous amounts of easy money pumped out by the Fed over the last decade helped stoke booms in other countries that became unsustainable. And as the Fed has pulled back, the adjustment has been jarring for huge economies, like Brazil and China.

“The system is coming back to bite us in the rear,” said David Beckworth, an associate economics professor at Western Kentucky University. “Maybe this experience teaches us that we are more interconnected than we ever were.”"


Summing Up

It's getting uglier by the day, and there's no simple or easy solution in sight --- at least I can't see one.

And the worst part is that as a society, we are looking more to government to solve our income inequality problems.

As long as we continue down that road of divisive 'intramural' competition and ignore the realities of global competition, the future doesn't look good for strong economic growth, good jobs and a prosperous America.

And in today's sound bite centered political environment that is continuously displaying outright buffoonery, the divisive road to nowhere is the road our politicians have chosen.

I'm not going there.

And that's my take.

Thanks. Bob.

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