The American economy will remain strong because.... 15

[EngineerDave]

Assess the validity of this statementz;

The American economy will remain strong because we are a nation of spenders. This continual flow of money for goods will keep a strong service sector going for many years. While we don't have all the benefits of a great number of manufacturing jobs, we will have a increasingly larger proportion of service jobs.

Never mind the trade deficits, because where will China and India sell all their goods, if the US is not buying?

The American as the worlds most avid consumer is saving the economy by spending spending spending (while I secretly hoard my money and preach for others to spend!)

I know this is greatly oversimplified, but what do you think?

 

[ewh]

I'm wondering where we will get all that money we're going to spend.

 

[funnelguy]

EngineerDave, I think you have accurately summed up governmental economists' current thinking on the matter. For that matter, the trend to a servce based economy has been championed for more than 30 years.

So, someone needs to define what a healthy economy would be... Booming stock market? Steady increase in inflation adjusted buying power of the middle class? Is the discussion limited to the US?

 

[ietech]

Service Sector??? How does one survive and raise a family on $8/hr to $11/hr, minimum if any benefits, and many times the jobs are part time or on-call --- I guess there are some who can????? It's not the kind of life I like to envision for my children and grand children.

I'm in California and the service sector folks really struggle for a simple existance here. Even higher paid folks have a hard time in CA

 

[stel8]

I am not an economist, but I believe that a healthy economy is one in which revenue equals spending. If not so, at one time the bubble will burst. Spending and spending is not the answer. And the problem is not limited to USA - it is global. Many other countries are developing faster, and in time probably the economic order will change.

The Roman empire was a great consumer with colonies providing the necessary goods and labour. The British empire sustained the industrial revolution and its wealth based on colonies' work. They both disappeared. Why we don't learn from past history?

 

[EngineerDave]

Yeah, but anymore most manufacturing jobs are only at glorified service sector wages, plus the opportunity for overtime.

If I read this board everyday, I get more depressed.

 

[ietech]

EngineerDave,

Don't be depressed, at least these posts show that there are more than just a few folks who CARE about what is happening to our country and economy. Probably most people to some degree.

Unfortunately there isn't a strong enough network of us to influence the U.S. gov't the way special interest groups can. Thus laws and organizations are created to benefit only a few of the wealthy here and not the population as a whole. i.e. NAFTA, WTO, FTAA.

 

[Hush]

I took a course in macroeconomics in school, all I remember from it is I was bored silly. So my view point is simplistic, ignorant, and probably flat out wrong but here goes anyways.

Strikes me that some of the most spectacular economic failures have been at least partially due to isolationism and protectionism, whether voluntary or enforced (Cuba, North Korea, Iraq, Soviet Union in it's death throws, Mexico 10 years back, Japan now)whereas some of the best economic results have been acheived by countries lowering tariff barriers and cutting subsidies (Ireland, New Zealand, and Canada).

 

[stel8]

The truth is that design/manufacturing will shrink more because we are "working ourselves out from the jobs." Faster, cheaper and better will wipe out jobs similarly as agricultural jobs were reduced from 20% (in the old good times) to 3% today. There is no stop to this shrinkage no matter what kind of political system we adopt.

I agree with Hush that open markets could be the answer to maintaining at least the design/manufacturing where we have the edge and still make money. It does not make sense to produce oranges in Canada to just have Canadian products.

 

[TheTick]

Like any individual ailing rust belt company, the U.S. as a whole needs to produce things that the rest of the world's consumers can and will buy, be it service or product.

"Great ideas need landing gear as well as wings."--C. D. Jackson

 

[funnelguy]

Like missile guidance systems, nuclear reactor technology and Harleys! Oh, and McD's franchises and Enfamil for babies in countries where the water isn't safe. No, I'm sure there must be something else...

 

[rbcoulter]

Going to a service economy may be fine. My question is how do you sustain the U.S negative trade deficit indefinitely? Seems to me that something has to give at some point.

 

[StressGuy]

I see the economy as a big bucket of water. You can stir that bucket as fast as you can (i.e. stimulate spending/economic activitly).

But, the bucket has a hole in it - the trade deficit, over $400 billion lost from the country this year alone.

You can stir that bucket all you want, eventually, if you don't plug that leak, there's going to be nothing left to stir.

Having a trade deficit with one country, like China, is one thing, but when we have a net trade deficit with the whole world, it's a slow recipe for failure. And, every year, more of the "new economy" "knowledge worker" jobs that were supposed to help refill that bucket are being sent away and making additional holes.

On a related note - I read today that the retailers are looking at big dissapointments for the Christmas shopping season. It amazes me that the same Wall Street guys who praise the Wal-marts and IBM's for cutting Americans out of jobs are then surprised that Americans feeling insecure about the remaining jobs (or just out of work altogether) aren't spending money on more stuff. And lets face it, just about everything we buy in America these days, particularly from oversees, is stuff we really don't need. Business is out to kill its own golden goose.

Edward L. Klein
Pipe Stress Engineer
Houston, Texas

All opinions expressed here are my own and not my company's.

 

[Lat60Long150]

If the Holiday retail sales end up in a downturn don't allow yourself to be completly hauled in by the notion it's an indicator of the economy. The market and the economy are two different areas. They do relate at some graphic intersections. If the Holiday retail sales end down, I'd put the cause on consumer credit card debt. Like maxed out. This nation is made up of a lot of spenders that have gotten themselves into a cycle of paycheck to credit card to paycheck. Payments on these cards are minimum. There are six different ways credit card companies can figure the same purchase. Daily balance. Average daily balance, etc. What's in your wallet? Spending is a habit and saving is a habit. The US consumer has some very bad habits.

 

[funnelguy]

Interesting. The radio announced a growth in GDP for the third quarter of something like 8 percent. Highest growth rate in 20 years. Same ABC announcer was talking up job growth and wage increases. That was a day or two ago. Last night the local Fox TV affiliate ran a segment about how poorly retail sales is doing this holiday season. The talking head actually talked about how much better off we were for all the cheap goods available. Quoted prices for electronics and bicycles. The news segment almost came off as an infomercial for retail stores.

So, shouldn't we be spending money like drunken sailors? Maybe Bush could get the federal government to forgive all credit card debt in the US. Maybe that would get retail sales going again.

 

[psnowhill]

It's funny, I took micro, macro and engineering economics and it seems like most people in our country don't remember anything taught in any of these courses. StressGuy hit it on the head. This country runs a continuous trade deficit, meaning we by more products from oversees than other people buy from us. Since the stockmarket collapse of 2000-2001 foreign investment is also significantly down. The world is draining us and we are not injecting any money into the economy by producing enough grants for R&D that would lead to products that everyone else wants to buy.

The only thing never taught in any of my courses is how the Fed is responsible for injecting money into the system. If grants rely on tax dollars only and there is no net flow of money into our country, then how will R&D eventually be paid for? It seems to me the government must become more involved in supporting research through feduciary assistance other than providing money to banks for loans. In a time when the country appears to be hemorrhaging fiscally, what is Greenspan doing, and what can be done to offset shrinking tax revenues (outside of raising taxes)? If the present cuts in research dollars and the evaporation of venture capital continue, you can kiss our technological edge goodbye. No new products or technologies means no net or even balanced revenues. The country must maintain diversity, if we all become grabage men and front desk clerks, how on earth will we expect to balance our spending/revenue sheet!?

 

[GregLocock]

An on-line friend of mine wrote:

"The question is do you trust markets (product markets, labor markets etc.) to adjust quickly enough to ensure an equilibrium in which those markets clear at an adequate level.

Economic theory says that if markets function well enough, they will clear at a competitive price. Now if manufacturing jobs are too expensive in one area (and it is not absolute expense which matters, so no, not all jobs will go to China because you have to factor in relative productivity and other cost factors) they will be migrated, which is an eufemism for people will loose their jobs in one area and get new jobs in the other.

The displaced workers in area A (let's say for arguments sake this is America) will now have to seek new jobs at a new wage rate determined by their skill level in a new area of work. This is a painful process.

If area A does not create sufficient new jobs in other market segments (not necessarily services, it can be higher grade manufacturing), the price of labor in area A will drop in order to adjust and clear the market at the new price level.

But in this case, the USA is very effective in creating new jobs in higher value added segments. Apart from a business cycle slump, there is no structural stagnation in the US economy. And, as all consumers can now buy the manufacturing products from area C (let's say China) at a lower price, their overall buying power increases and their demand for other products and services, many of them created in the USA, will go up.

Take the example of the steel tarrifs. By artificially attempting to stop the migration of US steel jobs to other areas, the price of steel in the US went up. Sectors using steel as a an input product had to pay a higher price for their materials, and became less competitive as a result. As these sectors like car manufacturers are much larger than the steel industry, the effect of the steel tarrifs has been a net loss of jobs in the USA.

The same goes with the manufacturing jobs going to China, and the service jobs going to India. As long as the US stays competitive as a whole, this is a net benefit to the US economy. In addition, as the buying power of these other countries rises, their demand for all kinds of products, many of them made in the US, will go up. The entire world economy, including the US, benefits. This is not a zero sum game, but a question of globally optimising the use of inputs including labor.

Don't fall for scare mongery. Trade is good for everyone, and the loss of jobs to China is acceptable, if there are no market disturbances that prevent the clearing of markets. So, if the Chinese are manipulating the value of the remnibi (which they are) there may be cause for concern.

Just two words of caution:

- People that are being hit with this displacement are always in a world of pain - there's no denying that. Economic theory is fine, losing your job is not.

- All this hinges on efficiently operating markets - which may not always be the case. If there are significant market disturbances, better double check your assumptions. "



Cheers

Greg Locock

 

[401K]

In my opionion we are going to face some very serious economic times. My only worry is that the big problems won't happen until after the 2004 election. Which will mean that we might be stuck with a president who can't come up with real economic answers. Only tax cuts to the most wealthy. I think that most of the wealthy used the tax cuts to invest in overseas business which only resulted in more lost jobs.

We need to build an economy like the one we had in the 1990's. One in which the government tried to balance the budget as best they could. During that time an average uneducated person working in a manufacturing or service job could usually achieve a middle class lifestyle. The latest trend however has been that the rich have been getting richer and the number of people living in poverty has been getting higher. This trend is only going to get worse as we try to raise the bottom line a little higher and ship all of our good jobs overseas.

 

[GregLocock]

As a matter of interest, has the poverty line tracked COLA or has it remained at the 1990 level? If the objective standard of living that defines poverty has not shifted, and the number below it has increased, then I think you have a valid case.

On the other hand, if, as I suspect, the poor have not improved their standard of living as quickly as the rich, then I think you are on very dodgy ground.

Cheers

Greg Locock

 

[funnelguy]

Nice post, psnowhill.

Two questions. First, does anyone remember when the method used to calculate inflation and COLAs in the US was changed and what the changes were?

Second, have there been major improvements by the US to protect intellectual property? Why would anyone invest in new product or software development if it was clear the development would be pirated and with no consequence to the thief? (Or thief's nation...)

Happy New Year to All!