I have let my displeasure be known over the pork laden spending in the stimulus package that was rushed through the congress. The continuing strings of bailouts and life support for value destroying banks is not going to help the US economy either. But there are more potent forces that have the potential to murk the future of US economy and unless the government policies do not firmly and intelligently address these issues, we are in for a long dark period of economic blight.
Labor shortages and immigration policy
We complain about jobs being outsourced to reduce cost. We complain about skilled immigrants coming to US and taking over our skilled and good paying jobs. But the fact of the matter is that pretty soon, we will not have a domestic labor pool large enough to fill the positions in this country.
This is a result of the demographic shifts that are occurring in US today. It is projected that severe labor shortages will start occurring by 2015 due to the fact that baby boom generation will start retiring. Improvements in medical care has also steadily increased the life expectancy in US. This will have an effect of increasing the ratio of dependents in the society (primarily older citizens) to the working class. As a result, this will cause great strain on already meager savings rate as well as increased government spending on social programs. This in turn will reduce the capital available in the society to invest in economic growth.
Some of the effects will be mitigated as more and more people will choose to and be able to defer retirement, partly due to lack of savings and partly due to the fact that better medical care means more people are able to remain active for longer.
For long term economic health, we need to produce more children now so more can enter the workforce in the future. Additionally, more emphasis needs to be put on improving education and ensuring that a larger proportion of children go on to finish college so they are able to take on the highly skilled jobs of tomorrow. But still, this is a long term project that we need to commit to as a nation and I am gladdened to see a renewed focus on education and higher learning from Obama administration.
But for the short term, there will still be a shortage of workers for many years and about the only way to mitigate this (if we want to keep the US economy strong and growing) is to allow more and easier immigration for skilled workers. Canada recognized this sometime ago and so did Australia and as a result with right set of skills, immigrating to Canada or Australia is a much simpler and shorter process. Even Germany and other European nations are realizing this and easing their immigration policies. But we as a country are clamping down on immigration. Immigration has always been a political hot potato and the recent populist measures coming out from the Obama administration (examples include Buy American provisions to limit outsourcing, and, Bank of America rescinding job offers to foreign nationals MBAs from US schools due to some obscure prohibition on H1 visas as part of the TARP bailout, etc) do not impart confidence that we really do understand the coming disruptions in the labor market. Government policies are clearly not aligned with the provable facts in this case.
And frankly, given the economic conditions in US and the growth in China and India, we have now started witnessing a growing and alarming trend of reverse migration.
Increasing deficits and debt burden
The unnecessary and large spending that this administration (and also the bailouts during the Bush administration) has engaged in will push the deficits to historically record levels getting very close to being unsustainable in the long term. According to the administration, the deficit will peak at around 12% of the GDP. As a point of reference, US tax revenues are typically around 20% of the GDP. A typically sustainable deficit is around 3-4% of the GDP which is President Obama’s goal for the year 2013.
So where will the money come from? The deficit is being created by borrowing/creating money. Either way, too much money is being pumped into the system very rapidly and this will most likely result in very high levels of inflation (think double digits) by the time President Obama’s term ends. On top of this, the deficit reduction will be paid for by increasing taxes on high income earners (mostly small business owners) and cutting down on war expenses.
Think about this for a moment. Four years from now, we are likely to see high inflation (things are becoming more and more expensive to buy), low business growth (higher business taxes eat up part of the reinvestment capital) and beginnings of a shrinkage in the labor pool in this country. The brief economic spurt due to infrastructure and other stimulus would have run its course.
Hmm, can you say more outsourcing for cost reductions as well as to find workers and possibly avoid or defer paying what is the 2nd highest business taxes in the world in US.
But this is not all,
US coporations will lose the tax deferment benefits for the overseas profits that is not repatriated
As a further obstacle to outsourcing American jobs, the Obama administration is likely to end the deferment of US corporate taxes on American firms on their foreign incomes. Currently, US firms are able to defer US corporate taxes on the incomes they derive from their subsidiaries outside of US as long as they keep the earnings overseas. When the income is brought back in the US, these companies do have to pay US taxes on the income that is brought back. This is almost the only way the US companies are able to compete overseas in spite of the 2nd highest corporate taxes in the world in US. Unfortunately, this deferment may now end, which according to President Obama, will discourage US companies from shipping jobs overseas. However, I think the more likely outcome will be that US companies will no longer be competitive in the world markets.
So in addition to making business environment more difficult at home, we are also likely to see US companies becoming less competitive overseas and unable to outsource. For a multinational and global company in US, this might mean it is time to move their base to a different and more business friendly country.
There is a reason the stock market is getting more and more worried as more of Obama’s plans and government policies are detailed. There is a reason why some have openly called Obama as anti-business. Whatever his real leanings may be, it is going to be a really tough act for Mr President to align his vision for revival of the US economy with the facts of economic reality.
More Related Articles
- State of the Union: Can Barack Obama Kickstart the Economy?
- Obama planning to cut deficit in half despite the cost of economic stimulus
- What Does the Future Hold for Small Business Lending?
- Should we Spend or Save to Help The Economy
- Earth Day: Participating in the Green Economy
- Federal Budget Deficit and National Debt Projections Point to Uncertain US Economic Future
- Obama economic stimulus package is a disaster
{ 8 comments… read them below or add one }
While certainly not perfect, the economic stimulus bill that was passed is likely to do more good than many other measures. Really, though, the cost of the recent bill doesn’t concern me as much as the TRILLIONS that preceded it — going mostly to dying financial institutions. So far, $11 trillion has been promised to “economic stimulus” efforts, with more than half of it going to banks. The economic stimulus bill is barely a drop in the bucket.
Miranda’s last blog post..Lending Club: $100 Giveaway and Review
This whole stimulus bill that was pushed through, and all of this new spending is ridicules. It does nothing to create long term jobs. These are all short term projects that they want to do. What are all of these people working on these projects going to do once everything is fixed? They will be jobless without any where to turn and the economy will go back down. If we are going to throw money around, lets throw some into creating jobs outside of the government. One job resource that could use a jolt of life is our manufacturing industry. I was reading articles over at americanboom.com about how much of this problem could have been avoided if we had not outsourced all of our manufacturing to China. We need to stop relying on the government to bail us out and start bailing each other out. If we support companies that employ Americans then maybe they will not move to China.
@Miranda, the numbers are staggering and would require the feds to be very ruthless in soaking up the excess money in the system in the future. The question is whether inflation will become a problem before the economy starts recovering or after.
@Kenny, I share your sentiment about the spending and doing intelligent things with the money that the government is spending. I personally think that the manufacturing sector will make a comeback in the US, but not necessarily due to anything the government is doing.
Arohan’s last blog post..M&A starts up in Health Care, economy still in the tailspin
Sir,
I am a capitilist and ex-employer that never understood the following: boss X wants to pay as low as possible, but boss X hopes all other bosses pay handsomely so that services/goods of boss X will be able to be consumed directly or indirectly. (We paid well, by the way.) All this posturing on going against outsourcing etc. by yourself does not really add up. Why? On holiday in Australia now, I see numerous well qualified persons with skills required sidelined by India Incorporated et al. They also have bills to be paid, locally, before even earning a cent. These are also smart people. Hence I cannot really relate to people who do not understand the real world in which the real economy runs containg real people with real problems. I would suggest that you have some relevant points, but may overlook the concept of regional economies. Note that I have been successful up until this ghastly mess created by companies very adept at outsourcing. In addition more and more people are seeing that business, politicians and government senior civil servants are too cosy for comfort – for all, with hindsight. This is a big problem that is becoming more and more evident. The days of the government being there for the consumers or population seem to be over. Hopefully your president sees that, I suspect he realizes that the strength of a nation is also defined by the strength of its economy which is jobs. When people are required, then bring them in, but do not extend their plight of cheap labour, albeit I suspect that will change too.
@Ged, Thanks for your comment! I did not intend to present arguments either for or against outsourcing in this article. The article mainly talks about the demographic shifts that are occuring in United States that will leave the country severely short of workers in 5-10 years in the future and I opined that one way to deal with this coming shortage of workers is to allow more immigration so these jobs stay in US and these employees pay US taxes and contribute to US society.
Regarding the topic of outsourcing, even though it causes a great deal of short term anxiety, it is nothing more than allocation of production (for goods or services) that occurs in any trading relationship. It is just more efficient for all concerned when production occurs at the lowest cost. Other side of the story which is typically overlooked is that the consumer benefits with the low cost. If the consumer benefits are greater than the production losses, than the society overall benefits. But frankly, I do not wish the US to turn into purely a nation of consumers which was what seemed to have been happening.
Arohan’s last blog post..Who is the next Warren Buffett – Part 3 Leucadia National
I agree with the diagnosis here, but not about the need to explicitly produce more children in order to fix a current economic crisis… that’s a scary thought. World is already overpopulated and can’t support its population…. more American kids is not going to help that… we need to rebalance the inequal structures which cause kids dying by age 5 throughout Africa, rather than grow more kids in America (that is, more than usual, anyway)…. I just hesitate to turn an economic problem into a biopolitical one… the economic problem should be very easy to solve (stop overspending, with all of its consequences), just politically unpopular.
MoneyEnergy’s last blog post..The Only Things You Should Use Your Credit Card For
@MoneyEnergy, short of more immigration, that may unfortunately become a realistic option soon enough. There are several examples where this is already a problem. Japanese population is on average old and they have a closed immigration policy and that is becoming a problem. China’s one-child policy worked well to control the population but will now start to backfire as they will have each wage earner starting to support 2 ageing parents. France, Germany and Sweden have policies that either explicitly reward parents for having more children or make the cost of additional children smaller by providing subsidies. All this is being done to improve the sagging fertility rates in these countries as it has wide ranging economic implications for the future. I may be a bit early in advocating this but I can almost guarantee that we will be hearing more on this topic in 10 years time. Again, this will do nothing to solve the current economic crisis, but will help to avoid a future one.
Arohan’s last blog post..Treasury to purchase toxic assets off the bank balance sheets in another unnecessarily complicated plan
We need to stop relying on outsourced all of our manufacturing to China.
.-= family medical insurance´s last blog ..Obama Mandatory Health Care – Why this is the Time to Buy Health Insurance =-.