Little has not already been said about what is needed to fix the US economy. The Right is advocating for federal debt reduction, loosening up of regulations and the lowering of all sorts of taxes. The left is going with mainstream economic theory like using government spending to stimulate the economy, and some unusual (for democrats) ideas like targeted tax incentives that will hopefully lead to more hiring.
Reducing government spending in the face of a recession is flat out wrong and doesn’t warrant discussion unless basic economic theory has recently shifted. Government spending will help but it surely will not solve the unemployment problem that the US now faces.
The point is that far from being the disease, the high unemployment is but a symptom. The problem is far bigger. Its structural. First, if you listen to business leaders (who by the way have billions of dollars sitting on their balance sheets) you will hear the word “demand” a few dozen times. Businesses are not hiring because of high taxes, high interest rates or high seas. The problem is demand. Demand for the goods and services that these businesses are bringing to market just isn’t growing. There are three main agents that have led to this state of affairs.
The first is a problem that has been building for a few decades. Wage stagnation. While executive pay at US corporations has skyrocketed, the pay for all the lower level employees has remained at early 1990s levels when adjusted for inflation. Workers overcame this wage stagnation through debt (insert credit cards and home equity lines) but all that changed with the housing bubble. When the bills figuratively came due, cash to pay off that debt was found to be insufficient and demand for ‘everything’ fell off a cliff.
The second cause is globalization itself. As technology has continued to disrupt all manner of business models, good paying US jobs have gone offshore in pursuit of cost savings. The rapid advancement of computing power without a matching increase in cost has enabled emerging countries like China and Brazil to undercut US prices for manufactured goods and increasingly services. Conventional wisdom is that as the US loses these previously high tech jobs, the market will begin to produce even higher tech US-made goods and services. What is surprising is how hard that move up the tech food chain has proven to be. Jobs in information technology such as computer programming which were expected to be somewhat safe from outsourcing are increasingly being lost to India and China. Once lost, it is not easy find replacements for them. It will take a while to train the workforce for these new set of high skills that will be required to thrive in the changed landscape. As an example, the fastest growing internet companies looking for very specific skills that few workers currently possess. The pace of change in the technology space also happens to be so rapid that what in high demand today could be obsolete in less than five years.
The final agent is government. In the past decades, the Federal Government spent significant sums of money to spur innovation. Think the space race with Russia which led to a multitude of technological advancements including the unheralded microwave oven. Then there is the big one. The internet. The internet of course came courtesy of the Department of Defense. Not Al Gore as you might have heard. Recently, the Fed has cut back on spending to support research and development.
It is not all doom and gloom though. There are still great opportunities for the US. The US is still the most exciting place for private sector innovations, largely driven by the great universities. There is also the inevitable economic tit for tat. As the Chinas and Indias of today cash in the so called low cost hanging fruit, the pickings will get slimmer and they too will face the same outsourcing conundrum. But lest we forget, as this emerging countries advance, the world becomes a richer place. This prosperity will bring additional demand for US goods which are still highly desired.
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