US Economy – Future Outlook is not Rosy

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.