David Stockman: We Are Losing Manufacturing Jobs

WASHINGTON – In his Contra Corner blog David Stockman (Budget Director under Ronald Reagan) has been warning us that we live in Fed-induced economic fantasy, possibly a hallucination, in which soft numbers pass for indications of solid growth.

Back to where we were

The ugly truth is that, notwithstanding the unprecedented length of the Fed-mandated zero per cent interest policy, America is barely back to where it was  before the 2008 recession. As for jobs growth, it is real. However, we should carefully look at the economic reality behind these numbers. What kind of jobs are we creating?

Jobs losses in manufacturing, gains in health care

Indeed, the just released August figures provide a warning. The mildly good headline is that we have added new jobs, (+ 173,000). However, this is a bit less than what was expected, and this is a bit disappointing.

If we break this number down, the real story is that the smaller than expected jobs growth is due to a net decline in the sectors that actually have an impact on the real economy: manufacturing and mining, (-17,000 jobs). This has been compensated by significant employment growth in services, such as health care.

Stagnation

Which is to say that America is stagnating where it matters: in the true wealth-creating sectors of the economy, while we add jobs in (low pay) services sectors that depend largely on public financing, notably health care. The fact is that nursing assistants, while valuable, do not generate any new wealth, factory workers do. The soft August jobs numbers do not fully reveal this disturbing reality.

Now, the loss of some manufacturing jobs is not so terrible. Because of technological progress and automation, (robots), factories can keep their output while employing fewer people. But, below a certain level, these losses spell decline.

The end game

And if we combine the two trends –loss of jobs in industry and employment gains in low added value services– we begin to see the end game: a feeble economy that no longer generates any real wealth.

How Stockman sees it

This is how Stockman himself presents the issue in his Contra Corner blog. The figures and the graph below, copied from his recent entry, are truly alarming.

“Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition of 1.5 million waiters and bartenders”.




Hollande’s Poor Efforts At Attracting Foreign Investors To France

By Paolo von Schirach

February 18, 2014

WASHINGTON “France is not afraid to open itself up to the world. We realize that the mobility of investment is part of making a country successful”. This is what French president Francois Hollande recently said to an audience of high-caliber international corporations assembled in Paris to listen to his sales pitch. Well, if this quote indeed captures the substance of Hollande’s message, the picture is depressing, if not outright scary. You do not lure foreign investors by saying: “We are not afraid of you, really”.

Low taxes

Sure there is more. Hollande talked about tax advantages for investors and new measures aimed at making it is easier to set up shop in France. Well, thank God for that. But, guess what: any government worth anything, from Georgia to Vietnam, is already doing all this. Foreign investors expect a “one stop shop” investment promotion agency that will make it easy for them to get established. They expect quick registration of their business. They expect a competitive taxation regime. They expect labor legislation and norms that will make it easy to hire workers and dismiss them, if necessary.

This is a great country

What would make investors pay attention is a pitch that would focus on what a great place to do business France really is. “We have a highly educated, English-speaking, sophisticated work force. We have some of the best research  universities in the world. They nurture the best scientists, engineers and business managers. We have excellent vocational training facilities that will provide the best workers. We have state of the art telecommunications and infrastructure. Make France your hub, the center of your value chain and supply chain, and you will prosper because we offer you proximity to your markets and to your key suppliers. And, best of all, we can guarantee the best quality of life. Here you have safety, affordable housing and first class education for your children, and of course, superior culture, beautiful nature and entertainment.”

You are better than anybody else

Now, assuming all this were true, this would be a real sales pitch. You get investors to pay attention only by stressing how great you are, and not by telling them that, in truth, you are not afraid of them and that “France is going to become simple”. No, Mr. President. First you make France simple and extremely attractive; and then you advertise it as a great place to do business.

Only those who have needed high-value commodities do not need to promote themselves

The only countries that do not need to make a special effort to lure foreign investors are those that can produce scarce and valuable commodities desperately needed by international markets. They can rest assured that investors will come to them, no matter what. But if what you offer is a mostly a good location, it has to be really great. Or, at the very least, it has to be a lot better than what your neighbors or other potential competitors around the world can provide.

First you create a true investor-friendly environment, and then you advertise it

Getting rid of legal, immigration and administrative obstacles that discourage investors is a good start. But it is only a very modest start. The truth is that France is a sick country that grows only a little, while it contemplates the erosion of its past competitiveness. If president Hollande really believes that by saying “We are not afraid of you” investors will come in droves, he needs better advisers.

 




Matteo Renzi To Lead Italy Out Of The Swamp Of Terminal Decline?

By Paolo von Schirach

February 13, 2014

WASHINGTON – And so Italy is getting a new Prime Minister. Matteo Renzi, head of the Partito Democratico, will replace the incumbent, Enrico Letta, also of the same party, because now, as party leader, he believes that it is up to him to lead the nation as well.

Party Leader and now Prime Minister

In principle this sounds reasonable. Matteo Renzi went through an open and transparent primary process within the Partito Democratico just a few months ago (December 2013) from which he emerged as the clear winner, outdistancing other contenders by a large margin. Indeed, he got an impressive 67.6% of the votes cast.

Given Italian political practice, it is entirely reasonable that the triumphant leader of the biggest party within a ruling coalition would also aspire to become the Prime Minister. With some grumbling, Enrico Letta recognized this reality by resigning. And so, the boss of his party gets the top job, (even though he was not elected by the nation, but only by his fellow party members). Fair enough.

Modest chances of success

That said, the notion that an energetic, good-looking new party leader –Matteo Renzi– now Prime Minister, will engineer the radical transformation Italy badly needs is not just a dream, it is a laughable proposition. And this is not about Renzi’s leadership and vision. He may have it. This is about Italy.

Sadly, the country is semi-comatose. It takes a heroic level of optimism to believe that a clear-headed young leader –assuming Renzi is all this– will get the country out of the swamp, rekindle innovation, investments and enterprise and re-generate hope and enthusiasm.

Terminal decline

Italy has been losing ground for about 10 years. The global recession simply made things worse. The national debt is now at 133% of GDP. Its unemployment rate is at 12%. Youth unemployment is at 40%. Most alarmingly, the best and the brightest leave, or have already left the country, seeking better opportunities elsewhere.

Beyond fashion, wine, olive oil and Ferrari luxury vehicles, Italy has no leadership position in anything. No major players in high-tech and electronics, only a second or third tier player in aerospace. Worst of all, Italian companies do not invest much in R&D, nor are there any significant public sector funds allocated to this critical area. And, please, do not forget organized crime: Mafia, Camorra and ‘Ndrangheta being just the best known branches. Finally, in case this is not enough, Italy is one of the most corrupt countries in the western world, with dismal positions in the universally respected Doing Business rankings compiled each year by the World Bank.

Fertility crisis

Beyond that, consider the fertility rate collapse, (1.4 children per woman). This well consolidated trend indicates that Italy will soon be a geriatric ward. Lots of old people who get pensions and medical care, with very few active people supporting them.

You want more? Tens of thousands of desperate illegal immigrants land in Italy every year, coming mostly from the poor Maghreb and sub-Saharan Africa. And, with due respect, these are not the equivalent of the bright, highly educated PhD. holders coming to America from India and China who then create successful start-ups in Silicon Valley.

How can anyone do well trying to run Italy?

Newly minted Prime Minister Matteo Renzi may have vision, and he may turn out to be a passionate national leader. I wish him well. But at least on the basis of what we know, there is no reason for enthusiasm. Please note that, keeping up with a well established, if pernicious, Italian political tradition, Renzi is another full-time political operative.

In plain language: he never run anything in the real world. He never had a real private sector job. He rose fast from local politician to national leader. But this is all within a political party. This is not about his ability to run anything in the hard world of industry, competition and globalization. His current job is Mayor of Florence, a second or third tier Italian city of 370,000 people who stopped producing anything interesting about 500 years ago. Yes, it has been a long time since the days of Michelangelo.

Party functionary

So, who is Matteo Renzi? A party functionary who got to the top leadership because he is a good politician, at least within the context of his own party. Does this mean that he understands modern capitalism, supply chains, the role of IT, competitiveness and globalization? And what about the urgent need to drastically reform gigantic entitlements, invest in education and strategies to attract precious foreign investments?

Does he get all this? Do the people around him get all this? I hope he does. I hope they do. But I doubt it.

Mission Impossible

Look, governing a large post-industrial democracy is very difficult, even when things are going well. Trying to get Italy out of its historic decline will take more than speeches and bold slogans. It will take a credible, sustainable action plan that has the long-term and sincere buy-in of most key constituencies: capital, labor, the now dispirited young, public servants, retirees.

I wish Matteo Renzi best of luck. I mean it sincerely. But this is “Mission Impossible”.




3 D Printers Are Amazing; But They Also Tell Us That Factory Jobs Will Soon Disappear

By Paolo von Schirach

January 29, 2014

WASHINGTON – We know a lot about the dark side of globalization. Information technology, plus improved and low-cost logistics allowed a gigantic shift of most manufacturing activities from high labor cost Europe and America to low labor cost Asia, first and foremost China. And so, thanks to the new opportunities to outsource manufacturing created by globalization, Europe and America lost millions of jobs.

Old jobs are gone

Most of these jobs are gone –for good. And that’s the way it is. Some politicians try to gain points by blaming “evil” corporations that “choose” to export jobs to low-cost countries. This argument assumes that there is indeed a choice. Sure, how would you like to make T-shirts in North Carolina that would retail at $ 10 or 15 a piece when the same T-shirt made in China or Bangladesh retails for $ 5? Which company can stay in business with competitors selling essentially the same product at half the price or less?

More to come

Be that as it may, we have not seen the end of this tale. In fact, today’s Asian winners may be tomorrow’s losers. Picture this. If you are a Chinese migrant worker who left poverty in a rural village seeking a better life as a factory worker, your luck –such as it is, as working conditions in Chinese factories are grim– may end soon. In part it may be because your Chinese employer may want to relocate the factory to another country (Cambodia, Bangladesh) where labor is even cheaper. But most likely you may soon be unemployed because technology will cause your job to simply vanish.

Amazing 3 D printers

This is no exaggeration.  You may have read about 3 D printing. Well, at the moment this futuristic technology that allows you to literally “make” objects at home, without the support of a small factory or workshop, is still in its infancy. But it is getting better every year. Primitive 3 D printers could only make simple plastic parts. Now they can make metal parts. Soon enough they will be able to make fully functioning complex products.

Want a toaster?…

So, imagine this. Today here in the US, if you want to buy a toaster you go on-line and look for a good product at a good price. You find one on Amazon. In just a few minutes, you can place your order and complete your transaction. Your toaster will be delivered to your door by UPS or FedEx in just a few days. Low cost, simple, clean an efficient.

Your toaster was made in China by the migrant worker mentioned above who had left the village seeking a better life. It was shipped to America inside a container that had been loaded onto a mega container ship that landed in Los Angeles. Then the  container was moved by rail or truck to a large warehouse managed by Amazon. When you place your order on-line, the toaster you selected is placed on a plane or truck and delivered to you via UPS, FedEx or US Mail. The chain that begins in a factory in China and ends up at your door is long and complex. But it is lean and efficient.

…Make it at home

OK, fast forward to tomorrow. Tomorrow you will have at home a new generation 3 D printer that can actually “make” the toaster. You want a new toaster? You go on-line and you buy the specs for your toaster that are included in a  software package. You download the specs into your 3 D printer and the printer “makes” your toaster. Sounds far-fetched? Not really. We are not there yet. But we are getting there, probably sooner than we can all think.

No more jobs

If this is indeed the future, imagine all the implications. The implications are that the factory in China that makes the toasters is redundant, and so are all the people employed there: workers, supervisors, managers, janitors, you name it. Furthermore, the complex logistics network necessary to move the toaster from the Chinese factory into a container ship and then to the Amazon warehouse is also redundant. And that means that all the people who support it are redundant: from the shipyard workers who make the container ships to the truck drivers who move the container from port to its final destination. And this is not the end. FedEx and UPS, whose business is mostly about moving all these boxes with toasters, TVs and hair dryers in them, become redundant.

You get the picture. When your home is the factory, all the factory jobs and all the services jobs necessary to move products from A to B will vanish. We are not quite there yet. But this is the future.

Is the future really great?

The techno-enthusiasts claim that all this is great. They confidently predict that, while old jobs vanish, new jobs will be created to support the new amazing technologies of the future. May be. But what happens if there is a 10 year time lag between the vanishing of traditional manufacturing jobs and the opportunity to create new ones? For 10 years former factory workers will be unemployed or under employed. And, later on, many of them, (if not most of them), will lack the skills to work on the new technologies that have replaced the old factories.

The “Luddites” fight back; but they lose

And so a gigantic economic transformation brought about by truly disruptive technologies will become a social and political problem. Long ago, the “Luddites” in England fought against the mechanization of the textile industry by destroying the new machines that were displacing manual workers. But it was a losing proposition. The machines won. They always do.

Who takes care of the losers?

When the new machines will take over, what will happen to all the displaced workers? Who will take care of them? We better have  a plan, because very soon many societies will have to deal with this problem.




If Solar Power Became Affordable, Developing Countries Would Be Transformed

WASHINGTON – When it comes to electric power generation and distribution, in developed countries we are used to this basic model. Large power plants produce electricity. From these sites, relying on a complex network of power lines, electricity is delivered to customers, be it industrial plants, offices or individual homes. The fuel used for generation can be coal, gas, nuclear or hydro. More recently we have developed wind, solar and biomass.

A new model

Well, in the not so distant future, this complex architecture founded on several large sources of generation from which transmission lines deliver electricity to the end users may become obsolete. A The Wall Street Journal story opens a window on a possible and completely different future, a future that can soon become reality, assuming that technologies keep improving  and costs keep going down.

Simply stated, soon enough we shall be able to have our own miniature power plant at home, no longer relying on electricity coming to us through a grid, care of the local utility company. We are clearly not there yet. But we may get there soon, probably sooner than we think.

Miniature solar power plants in your own home

In America we have plenty of power generation. Going forward, the new shale gas boom guarantees that there will be plenty of gas-fired power plants. Still, at the same time, solar power generation, while still relying on subsidies and tax breaks, is becoming more efficient, its cost are going down.

According to industry and many experts, we will soon get to a point in which it will be cheaper for individual users to install their own domestic solar power plant (based on solar panels that generate electricity) rather than pay a monthly bill to the utility.

A revolution

When we get to that tipping point, this will signal the beginning of a revolution that will have a number of large and important consequences. The first one will be the growth of the solar panels industry and of all the services associated with it. The second one will be that individual households as well as industrial plants, office complexes and commercial centers will be energy independent. The third one will be that most of the complex national and regional regulations that have been created to manage power generation and distribution will essentially become obsolete. The fourth one will be the death of the large power plants, along with the death of all the industries that support them: think of coal mining, storage and transportation, for instance.

More broadly, locally produced affordable power will improve basic economic conditions. Households will no longer have to pay electricity bills that include the cost of maintaining an expensive grid. Overall, affordable energy will be a boost for many energy intensive industries.

Biggest impact in developing countries

But, while this technological innovation will radically change the economies of developed countries, the biggest transformation will occur in emerging markets. Indeed, tens of thousands of rural communities in Africa, India and elsewhere that currently have no electricity will no longer have to wait for governments to invest in power generation and transmission so that electricity will come to them. They will be able to  produce their own, on site, without any recurring fuel costs. This will be a real revolution. Sunlight is free.

No development without power

It is a painful reality that without power these villages are essentially cut off from any meaningful economic progress. If you think about it, there is no hope for real development without electricity. Not much is possible without it. At dark, almost everything has to stop. People cannot read at night. Besides, medical facilities cannot store medications. Shops cannot refrigerate food. You cannot have workshops or small factories. Power tools cannot be used. And forget about basic amenities like street lights, cinemas, bars and restaurants.

But if, indeed, on the basis of the experience in more developed countries, local communities in emerging economies will be able to install affordable solar power generation on site, electricity would create an incredibly important short cut to development.

Right now the key obstacle for any plan to bring power to emerging countries, especially to isolated, off grid communities within them, is the large capital cost of building power plants, plus the cost of fuel, and the  high cost of constructing transmission lines.

Well, if truly cost-effective solar power can be deployed at the village level, no need to focus on huge investments in large-scale power generation and distribution.

Hundreds of millions will step into modernity

Look, I am not even remotely suggesting that all this is happening right now. But it looks as if it is just beginning to happen. As technology keeps getting better and costs keep going down, it should become realistic to think of business models that will allow scaling up affordable renewable energy solutions for the hundreds of millions of Indians who have no power. Likewise, even city dwellers in Pakistan, Nigeria or Zambia who are used to frequent power cuts due to unreliable supplies will have a chance to break off from the grid and finally have their own uninterrupted power supply.

It is impossible to have basic development without the support of reliable and affordable electricity. Until now not much has been done to create adequate electricity generation in many poor countries because of the very high cost of this effort.

If new solar technologies will radically change the model, while bringing down cost for individual users, then a huge barrier to development will also come down.

And life will change for hundreds of millions around the planet.




Only 63.2% Of Americans In the Work Force, Lowest Figure Since 1978 – Fed Policies Cannot Change This Trend

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/09/02/disruptive-technologies-like-3-d-printing-will-kill-millions-of-jobs-can-we-adjust-to-this-new-era/

September 8, 2013

WASHINGTON – Lacking any significant public policy initiative focusing on the never healed US economy, most analysts have become Fed watchers. The only game in town is guessing if and when the Fed will phase out QE3, (quantitative easing), and if so, how fast and what it will mean. Such a move will have an impact on interest rates. In fact,  belief that the Fed will soon stop the easing program as US employment slowly trends down has already caused long-term interest rate to go up.

 Fewer Americans are working

Still, whatever action the Fed will undertake on QE3, the most recent employment data underscore a negative historic trend; and I am not sure that Ben Bernanke and his Fed colleagues sitting in the policy making Federal Open Market Committee, (FOMC),  can reverse it just by manipulating interest rates. 

Simply stated, while unemployment is going down (we are at 7.3%) and more jobs have been created in August, (plus 169,000), the broader trend shows that fewer and fewer Americans are now in the work force. Even worse, fewer and fewer young adults have a job.

Indeed, the percentage of Americans now employed is the lowest it has been since 1978, when Jimmy Carter was in the White House, and far fewer women were in the labor market. Furthermore, looking at the data, we see that the percentage of Americans aged 16 to 24 now working is only 54.8%, down from almost 70% in the 1970s.

Young people without a job

Sure enough, there may be fewer young people in the work force today because more of them are in college. Still, many analysts conclude that this huge drop indicates that far too many young Americans cannot find a job. And the longer they are out of work, the harder for them to find employment in the future.

Likewise, it is clear now that the lower unemployment numbers (we are down to 7.3%) are deceptive,  because the drop is largely due to people who simply stopped looking for work and therefore are no longer counted. Add to this picture the large number of workers who have accepted part-time jobs while seeking full-time positions and we get a rather sad outlook.

People out of the job market

So, here is the future, for a large number of unskilled or semi-skilled  Americans. We have a large army of unemployable people, young and old, while many if not most openings are in low skills, low wage sectors. In simple language, for millions of Americans there is no longer an open road leading to the American Dream. No upward mobility. No career ladder. No comfortable, middle class life style.

Can the Fed, all by itself, change  any of this? I doubt it. Low interest rates may help stimulate economic activities; but they cannot become a substitute for fundamentals.

Well, if so, what is missing in America?

Jobs killed by globalization and automation

No easy answer. Still, I see at least two trends, both of them negative. The first one is a combination of the impact of globalization and automation. The net outcome is loss of employment due to the migration of jobs to low wage countries, (globalization), combined with employment lost due to increased deployment of computer controlled machines and more sophisticated and more affordable robots, (automation). In other words, especially in manufacturing, you lose your job because it went to China, or because a robot now can do what you used to do.

Inadequate public education

The second trend is the lowering of education standards in America, right when we would need a powerful national surge to boost the reach and the quality of public education. Indeed, precisely because everything is becoming more and more high-tech, whatever good jobs opening there will be in the immediate and long-term future, they do and will require sophisticated expertise. And there is no way to land one of them without command of math and science, and therefore the skills necessary to master complicated programs and state of the art computerized machines.

The automation trend is ongoing and unstoppable. As a result, while we may see a stronger US manufacturing sector –and this is of course good news– do not expect employment growth as a result. Factories do and will employ fewer and fewer people, even as they experience higher demand. In fact, in the not so distant future we shall have completely automated factories, with no workers.

Combine this historic trend with localized production thanks to 3 D printing (see link above to a related piece) and other innovation, and we can start predicting the eventual disappearance of factory jobs. Hard to say how long it will take, but we are headed that way.

Of course, we could do a lot more about improving public education, and indeed there are many initiatives. But it seems that we are still way behind, without any real sense of urgency backing new undertakings. Lacking significant progress in this crucial area of “human capital build up”, millions of young (and poorly educated) Americans will be left behind and unable to catch up in this fast-moving world.

The future belongs to the super skilled

Education is indeed most critical. Looking ahead, it is clear that the only way to get a piece of the future is to be highly skilled —in fact, make that super skilled.  The future belongs to the smart innovators, to those who will create new things, new services or new processes, and many others who will support these efforts.

The others will get the scraps. Sure, we can imagine that even in the future there will be a need for janitors, nursing home staff, store clerks and landscape workers. But those will be, as they are today, mostly dead-end jobs.

 

 

 




Elon Musk, Tesla Motors’ Founder, Came to America Because He Believed That This Country Would Offer Opportunity

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/08/07/electric-cars-are-not-selling-well-but-quality-will-improve-for-heavy-trucks-though-the-future-fuel-is-natural-gas-not-electricity/

August 12, 2013

WASHINGTON – I wrote recently that it is going to be a while before electric vehicle (EV) maker Tesla Motors and others like it will be able to radically transform the US automotive industry. (See link above to related story). Indeed, while Tesla’s model S is doing very well, it is on track to sell at most 21,000 vehicles this year. This is obviously very good for a company that sells very expensive, high performance EVs; but it is hardly transformative.

The value of new ideas

Still, having said that, it is really important to reflect on the incredible value of entrepreneurs like Elon Musk, Tesla’s founder. What needs to be stressed here is that Musk is a true, modern trail blazer. Musk ventured into practically virgin territory with what appeared to most analysts a really crazy idea: making a high performance, high price, sporty EV. Remember that many years ago when Musk got started people thought that EVs should be designed for young or middle aged tree-huggers, people focused on saving the planet. Whereas Musk focused on an entirely different market: quality conscious wealthy people interested in a brand new experience: a high performance (and consequently high price) EV.

Well, this is beginning to work. Of course, when it comes to market expansion, much will depend on Tesla’s ability to roll out equally interesting but much more affordable electric cars. We shall see.

Enterprise is our future

But this is not the point today. The point today is to celebrate Elon Musk and many others like him. These are the people willing to take huge chances in order to see if they can indeed push the envelope. It is obvious that when it comes to innovation many “Grand Ideas” are destined to fail. But some will not. And the record shows how, failures notwithstanding, many determined entrepreneurs will keep going at it. May be on their second or third try they will come up with something really important.

Focus on stagnant sectors

And we should be grateful for all these efforts. Indeed, it is mostly because of people like Musk that America can keep its position as technology leader. In a recent TV appearance Musk  indicated that innovators should really focus on sectors that have been stagnant, sectors that no longer deliver any special value. Real entrepreneurs should really look at ways in which they can introduce disruptive innovation that will cause a real paradigm shift. He talked for instance about the “Hyperloop”. This is really science fiction stuff. A totally new idea for an ultra fast inter city transportation system that is light years ahead of even the best super fast trains that still rely on tracks and locomotives, however advanced.

The “Hyperloop” is on the drawing boards, and most likely it will not happen any time soon. Still, this is just an example of Musk’s ability to think big and think boldly, even when some of his ideas may invite jokes.

Once again, many “Bold Ideas” that promise huge technological transformation will be failures. Sometimes costly failures. But it does not matter. Hopefully, those who tried and failed will not be discouraged. They will learn from their  lessons and try something else.

Policy makers have to keep America’s unique pro-business environment

That said, US policy makers must realize that they need to put in place every possible incentive for innovators. Indeed, for America to keep its coveted position as the world’s premiere “Innovation Hub”, it needs to attract people like Elon Musk who are willing to think big and take big chances. To this end, we need to do our best to reaffirm America’s credentials as the best place for true innovators. Do keep in mind that Tesla’s Elon Musk was born in South Africa. He came to America because he thought that the US would be an ideal home base. If people around the world stop believing this, if we lose this edge, the smart innovators will go somewhere else. 

 




With A Slowing Economy, China Is On Its Way To Becoming A “Normal” Country

By Paolo von Schirach

July 15, 2013

WASHINGTON – If you listen to Beijing Government officials, everything in China’s economy is moving along according to plan. And the plan is to rely less on growth led by fixed investments and exports, while boosting domestic consumption. Turning things around in the second largest world economy may take a while and, understandably, there may be some small shock waves here and there. But China’s leadership will eventually manage to steer the country in a new direction, based on sound, self-sustaining foundations.

Extraordinary growth may be over

Well, this may very well be the intent. But it is not at all clear that the Chinese Communist Party leadership is in total control, while there are indications that the economic fundamentals may be far weaker than the official statistics would suggest.

China’s incredible rise was built essentially on two strong pillars. The first one was construction, including an incredible modernization of all key infrastructure, (ports, airports, highways, high speed rail). The second one was export-led manufacturing made possible by a few factors: public policies favorable to investments in new plant and equipment, ultra-cheap labor provided by migrant workers coming from the impoverished country side, and the vastly improved infrastructure backbone mentioned above. Chinese factories could produce cheaply and deliver fast to their overseas customers.

Construction sector and exporters

The fact is that these two basic ingredients may not work as well as before. Construction turned into overbuilding largely led by speculators. Now, there seems to be over supply. So, expect far less construction and therefore less business for the many sectors that supplied the construction sector.

The export led boom worked extremely well in its early stages of China’s take-off, when it was all about penetrating and conquering new markets. But all this has been done. Therefore it would be foolish to expect the same levels of export growth that Chinese toy or small domestic appliances manufacturers experienced in the 1990s. Besides, China’s cheap labor advantage is slowly but surely evaporating.

Besides, and this is a key new issue, in order to keep let alone grow their export markets, going forward China’s manufacturers will have to compete on quality as opposed to just price. And this promises to be a lot more complicated. Creating and nurturing innovative enterprises with cutting edge technologies is a lot more complicated than mass producing cheap coffee makers for Wal-Mart.

Shadow banking

On top of all this, we now know –even though only vaguely– that there is a huge Chinese shadow banking system, escaping regulations and controls, that is over exposed to a massive amount of bad loans. How much money is involved, nobody really knows. But it looks as if the Government will have to intervene in order to prevent major financial shocks.

The environment has to be fixed

Last but not least there is the urgent need to fix the environment. 30 years of growth, no matter at what cost, have caused enormous damage. Official studies now estimate that people living in the Northern part of China, on average are losing 5 years of life on account of maladies caused by pollution. This is a lot more than a nuisance. It is a crisis. And it will have to be addressed swiftly. The logical corollary is that large amounts of capital will have to go into cleaning up the mess. Therefore it will not be  available for other purposes. 

The real facts still unknown

Mind you, this assessment is an approximation based on partial and perhaps inaccurate data. We do not know how many construction firms in China have gone bust. We do not know how many state-owned corporations survive only because of easy credit provided essentially for free by state-owned banks. We have no idea how large the shadow banking system that provided credit to medium and small sized private sector companies really is. We have no idea how long and how much it will take to fix China’s environment, water and air.

But, if history is any guidance, I suspect that the real problems are much bigger than the authorities are willing to admit.

That said, by comparison with other struggling world economies, China’s 7.5% rate of growth is still astonishingly high. But trajectories in the long run matter more than yearly snapshots. China is still growing, but its rate of growth is steadily falling. 

All according to plan?

The notion that all this is according to plan, and that the Chinese consumer will soon pick up the slack and re-energize growth does not look credible. If the export and construction boom is over, millions of Chinese workers will become unemployed or under employed.  Beyond that, millions of rural Chinese trapped in the country side no longer have an open avenue (factory jobs in big cities) leading to improved economic opportunity. New growth led by consumer spending must be predicated on rising disposable income levels, and that assumes a buoyant economy. A so-so economy will not do it.

Assuming lower growth, I am not quite sure where all this new cash fueling consumer spending will be coming from. If this is indeed so, having exhausted its special –and in the end temporary– economic advantages, China may be well on its way to becoming “normal” again.




New US Employment Is Often Under Employment In Low Paying Sectors

By Paolo von Schirach

June 15, 2013

WASHINGTON – Sometimes the real “news” is not news at all. Surprisingly, once a new conventional wisdom is accepted as “the truth”, the real facts that tell a different story are simply ignored or explained away. Case in point, the high US unemployment rate and the types of jobs actually created by this rather weak American economy.

Good news?

We are now at point in which an unemployment rate still stubbornly above 7%, (right now at 7.6%)  is considered good; because, hey, it used to be 10% or 9%. “So, we are making progress“. Indeed we are. But this is the worst recovery in recent history. The US economy used to grow at an average rate of 3%. Now it grows at an average of 2%. The difference is enormous. The negative implications of slower growth in terms of diminished future wealth are obvious and truly dramatic.

All is well

But if you watch TV business channels, all the various commentators stress that we are doing fine. We  have emerged from a deep recession. Our rate of growth is not great, they admit, but it is OK. And yet, compared with recent history, this rate of growth is close to calamitous. It means a loss of 30%, year after year. And you think this dramatic economic slow down will have no long term consequences on capital formation, standards of living, purchasing power and ultimately US  international competitiveness? Are you kidding me?

What kind of jobs is this economy creating?

But the worst “non news” is in the deliberate lack of analysis of the kind of new jobs created by this anemic economic expansion. Anybody even minimally curious would quickly learn that, while the economy is growing and new employment is created, much of it is under employment consisting of low paying jobs in services, with a high proportion going to health care. Now, new jobs in nursing homes may be good for those who get them, but they are not exactly “force multipliers” and drivers of economic growth.

Furthermore, we know of medium and small enterprises that purposely hire people for only a limited number of hours in order to exclude them from the costly health care benefits envisaged by the Affordable Care Act, (universally known as Obamacare).

The real picture: slow growth and too much under employment

So, there you have it. Sluggish growth renamed adequate. Lousy unemployment numbers now accepted as the new normal. And, worst of all, part time and low paying jobs counted as if they were like the solid manufacturing jobs of 30 or 40 years ago.

Quite clearly it is difficult to predict the cumulative consequences of  systemic under employment and low paying jobs in sectors that do not boost US international competitiveness. But intuitively anybody can figure out that all this does not indicate future, self-sustaining and robust growth. 

Contrarians are easily dismissed

Occasionally a contrarian expresses this healthy skepticism on some TV talk show. But he is generally treated as some kind of weird Cassandra making dire predictions at a time of plenty.

“How can you say this  –asks a skeptic host– when the Dow Jones has reached new heights, and we are having respectable growth?”

“Is everybody else wrong? How can it be?”

“The Fed will keep interest rates low for years and years, so this is the right time to invest in the stock of companies destined to succeed”.

“Not so”, replies the skeptic. “This is a Fed induced stock market bubble; and over time the impact of low paying jobs in weak sectors will be felt throughout the economy. The American economy is far weaker than it appears”.

All true, I am afraid. But it is a lot easier to ignore these unpleasant considerations and focus on the Dow Jones above 15,000.




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.