America Stagnates – Global Competition And Lack Of Pro-Growth Tax Policies Stifle The Economy – Urgent Need Of Policy Changes; Will The President Lead?

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By Paolo von Schirach

February 7, 2013

WASHINGTON – The American economy has yet to recover from the spending binge that led to the 2008-2009 financial collapse. Simply stated, most American households are spending less as they are trying to pay back the debt they accumulated during the go-go years. And they are doing so while their homes (housing recovery notwithstanding) are worth much less.

Painful de-leveraging

As US GDP is driven mostly by consumer spending, thrifty consumers are bad news for the economy. Hard to say how long it will take for this painful de-leveraging process to lead to more acceptable levels of household debt, an essential precondition for higher level of consumer spending in the future.

Competition from low cost Asian workers

But this is not all. As the financial and housing debacle destroyed the value of real estate, while everybody got into debt, America was also hit badly by systemic global labor market changes whose net effect has been and will be to eliminate many jobs while hurting the earning power of the US middle class.

Whatever the at times grotesque demonization of “outsourcing” as a sinister plot hatched by evil US corporate leaders, the truth is that in the global market place there are now hundreds of million of new, able bodied Asians workers. Most of them are reasonably skilled and willing to do the very same jobs Americans do at a fraction of the cost. This is a fact. While cheap labor advantages are not for ever, (indeed we already see wages moving up in parts of China), for the moment they determine the location of many labor intensive economic activities.

Low labor costs, combined with ”hyper-connectivity” provided by inexpensive communications, plus reliable and lean supply chains made transferring manufacturing to Asia possible. As a result of this gigantic change, many US middle class jobs have disappeared, while there is no chance for wage increases for employed US workers who have to compete with cheaper Asians.

More US manufacturing

As for the hopes of a US manufacturing renaissance, they may actually be real, at least in energy intensive sectors. Some corporations want to relocate to the USA in order to take advantage of low electricity prices due to abundant and cheap American natural gas. However, a few more factories do not translate into more jobs. IT systems, automation and more robots are actually eliminating factory jobs at a fast pace.

No innovation, mediocre education

To add more misery to the picture, the American marvelous technology/innovation engine has stopped. At the moment, we have no great breakthroughs opening up entirely new fields, just as it happened with the IT revolution in the 1980s and 1990s.

And if you really want to be pessimistic, you have to add a mediocre to bad public education system that produces sub par high school graduates, many of whom end up getting a semi-worthless college degree.

Disappointing public policy

In order to reverse this economic stagnation, we need better education, more private and public resources devoted to R&D and a tax system that encourages business creation.

But instead we have a semi-broken Washington government machine that is not even capable of passing budgets, let alone frame new pro-growth policies. Due to bitter ideological feuds, the President and the Congress are able at the very best to pass short term stop gap measures, so that America will not go into default and so that we do not need to shut down the Federal Government. And these band aid deals last for just a few months.

Indeed, today’s “policy debate” is about the short term and long term consequences of the “sequester”, an emergency, across the board spending cut provision encompasing all discretionary spending (defense and non defense) that will soon kick in lacking broader agreements on spending and taxes between Democrats and Republicans. And we call this governing?

We know what needs to be done: tax and entitlement reform

And yet, all the centrists and all the smart economic and fiscal policies experts in Washington know exactly what needs to be done. There are Blue Ribbon Commissions Reports and plenty of studies generated by think tanks that provide the basis for substantive reforms.

In brief: America badly needs tax reform based on simplification and the closing of loopholes designed to protect special interests. A modern tax code will create incentives to create new enterprises and to invest in future technologies. At the same time, America needs a long term, bipartisan agreement on entitlement reform that will take into account the growing number of seniors (and therefore the cost of programs dedicated to them), while trying to reform health care, so that its costs will stop growing at a faster pace than the economy. Entitlement reform can and should be phased in gradually, without hurting current recipients. But it needs to be done.

Confidence

A new, credible and sustainable tax and fiscal reform package that will encourage economic activities, while signaling the beginning of a real inflection in America’s public spending, over time would do wonders to re-inject confidence in the system.

Confidence, in turn, will stimulate investments and business growth. All this has been said by wise people many times. Remember Simpson-Bowles and their “Debt Commission” December 2010 Report? It’s all in there. It is time for Washington, starting with the White House, to lead and take action.

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