U.S. Economic Stimulates Benefits Everybody - Except U.S.

[oldreliable67]

Most observers are aware that many, if not most of the world's emerging markets are experiencing a resurgence of growth, while that of the industrialized countries has languished by comparison.

In an interesting Bloomberg opinion piece, China Drains Obama Stimulus Meant For U.S. Economy, Andy Xie (independent economist based in Shanghai; formerly Morgan Stanley’s chief economist for the Asia- Pacific region) posits that the Obama U.S. economic stimulus has, like water, run downhill and benefited emerging markets much more than it has the U.S. To wit:

"Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot."

The core of the problem, though, he says, in a lack of competitiveness:

"What really ails the West is declining competitiveness. Globalization is pitting the Wangs in China or Gandhis in India against the Smiths in the U.S. or Gonzalezes in Spain.

Multinationals such as General Electric Co. or Siemens AG decide on whom to hire. The Wangs and the Gandhis offer productivity but have little money. So they are willing to accept low wages to accumulate wealth. The Smiths and the Gonzalezes have wealth and won’t accept Third World wages. When their governments give them money to spend, their demand just makes the Wangs and the Gandhis richer and themselves poorer with rising national debt.

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes."

This is an interesting less-than-mainstream analysis. What do you make of it?

 

[phattonez]

Why are we losing competitiveness? Taxes, social spending, and minimum wage laws. And don't forget the demonization of business, that doesn't help either.

 

[Mirepoix]

The multinationals manufacture in China or India and sell in the US or in Europe. But one day the demand in the developed countries will fall and the demand in China and India will not be high enough to compensate it. The multinationals play a dangerous game, because now credit will not help any more the citizens of the developed world to consume.

 

[imagep]

I don't think we are loosing competitiveness in the sense that we are no longer as productive as 3rd world workers. Free trade, better transportation systems, and better communication systems now facilitate trade with foreign countries that in the past would not have been economically or logistically feasable.

So maybe it would be fair to say that we have been loosing "relative competitiveness" - in the sense that the cost of trade with foriegn competitors is now lower than ever.

 

[oldreliable67]

I don't think we are loosing competitiveness in the sense that we are no longer as productive as 3rd world workers. Free trade, better transportation systems, and better communication systems now facilitate trade with foreign countries that in the past would not have been economically or logistically feasable.

So maybe it would be fair to say that we have been loosing "relative competitiveness" - in the sense that the cost of trade with foriegn competitors is now lower than ever.

How then do you measure productivity? Merely on the number or volume of goods and services produced or on the all-in cost, including labor, other overhead, etc., of the gjoods and services produced?

"The cost of trade with foreign competitors?" By this, are you asserting that the cost shipping, particularly in bulk and across oceans, is now lower than ever? Trade barriers lower than ever? Elaborate a bit, if you would, please.

 

[donsutherland1]

I don't think we are loosing competitiveness in the sense that we are no longer as productive as 3rd world workers. Free trade, better transportation systems, and better communication systems now facilitate trade with foreign countries that in the past would not have been economically or logistically feasable.

IMO, a part of the persistent non-crude oil portion of the chronic U.S. trade deficit does, in fact, reflect an emergent competitiveness issue, even if it is not politically correct to mention that problem. With respect to the labor issue you raised, two quick points:

1. Developing world workers don't have to be as productive (in terms of their output) as U.S. workers to allow for a comparative advantage in labor for the developing world. Costs matter.

Take the following hypothetical illustration:

Developing world workers:
Cost (wages, benefits, etc.): $0.80 per unit (completely variable for simplicity)
Production capability: 75 units per hour

U.S. workers:
Cost (wages, benefits, etc.): $1.00 per unit (completely variable for simplicity)
Production capability: 100 units per hour

Setting everything else equal, let's say a company needs to produce 300 units per hour. If it hires 3 American workers, its labor cost would come to $300 per hour. However, if it outsources the work to four developing world workers, its labor cost would come to $240 per hour. Hence, even as each American worker can outproduce his/her developing world counterpart, cost differentials still provide a comparative advantage in labor for the developing world. Of course, that's a highly simple illustration. But the reality is that the skills/productivity gap between U.S. and developing world workers has not been closing so much more slowly than the wages gap, at least for now, that the comparative advantages have been disappearing. In fact, the reverse has been true in numerous sectors, including various high tech fields.

2. Globalization has lifted barriers that would have precluded the ability of companies to leverage far-flung comparative advantages in the past e.g., wiped out the savings due to formidable shipping costs. Knowledge is transmitted more rapidly. Shipping is much less costly than it was in the past. Hot spots of innovation have developed or are developing in many locations outside the U.S.

In the end, while it might be comforting for political leaders to assert that 'given a level playing field, in other words 'fairness,' U.S. workers can outcompete any worker anywhere,' that simply is not true in many industries. Cost disparities exist that overwhelm any output advantages that U.S. workers might enjoy in those industries. Just as firms have different cost structures, so do countries. Those differences are the result of many factors. They are not a proxy for unfairness.

In the longer-run, the U.S. faces additional threats to its competitiveness from declining educational attainment relative to that of students in many trading partners (and current short-sighted budget policies that treat a dollar saved in education costs as equal to a dollar saved from any other program, even as education has long-term benefits that such thinking ignores, will likely strengthen that unfavorable trend), reduce the long-term, a relative savings dearth, R&D spending that is not growing as fast as that in a number of major trading partners, an aging population, high domestic non-financial debt, etc.