rominent economists and financial writers developed an economic game plan for northern Indiana companies to advance amid constantly mounting global competition, discussing strengths and weaknesses of today's economy while offering ideas for companies to surmount tough business challenges.
For more than two hours during the Fifth Annual Economic Forecasting Summit sponsored by the Northern Indiana Workforce Investment Board, Inc., the five panelists and moderator offering lively commentary on topics including Michiana manufacturing, skills needed in productive workers, education and training, the approaching tidal wave of retirements by Baby Boomers, consumer spending, employee pensions and health-care benefits, federal deficits, the economic impacts of foreign affairs and war, financing a soaring national debt, China's and India's economic juggernauts, and a complex mix of factors necessary to attract businesses to Michiana.
"As Indiana goes, so goes the country in terms of manufac-
turing," David Huether, chief economist of the National Association of Manufacturers (NAM), commented March 23, 2006, at the Century Center in South Bend. Manufacturing production across the United States currently is sprinting at an all-time high, although factory employment numbers are languishing at low levels. "The reason, quite simply, is productivity growth," he said.
Manufacturers 'Exceedingly Productive'
For instance, productivity growth in U.S. manufacturing has risen 24 percent since about December 2001, a date corresponding to the end of the last recession. Additional digging into the numbers, moreover, shows that the current recovery is proceeding at a breakneck pace.
Manufacturing growth during the period from December 2001 to December 2005 catapulted 75-percent faster compared to the first four years of the prior recovery from a recession, Huether explained. "So manufacturers are exceedingly productive."
Moderator Terry Savage, personal finance columnist for the Chicago Sun-Times, kept the discussion focused and flowing, and, at this juncture, inquired about why U.S. manufacturing productivity has grown so strongly.
Some sectors of the overall economy that by definition have been very productive—such as computers and electronics—have become a bigger share of the manufacturing sector, Huether noted. The other main component in growth, he said, comes from continuing investments by manufacturers in new capital products and processes. For instance, a Virginia company that makes apple sauce and juice produces more of its products today with 200 factory employees than it did 10 years ago with 800 workers—"and it's all due to higher technology."
And what impact have all those multitudes of "made in China" goods had on U.S. manufacturers?
Some sectors have been devastated, such as apparel, textiles, and, more recently, furniture, Huether said. However, the story at this point is a bit more involved. "If you look at the trade deficit with China, which accounts for 40 percent of the trade deficit in manufacturing, what you see is multinational [corporations] ... in Asia are moving their production processes to China," he noted, "so instead of importing products from Korea, or Taiwan, or Hong Kong, we're importing the products from China." The NAM chief economist added, "Imports from China have surged, but imports from the rest of Asia actually have declined in the last five years." The overall U.S. trade deficit from all sectors of the economy rose to $723.6 billion during 2005.
While U.S. productivity gains have been mighty, these stronger numbers should not be used to mask current challenges facing manufacturers. Education and training issues reside near the top of a list of crucial business challenges confronting employers.
Yet Challenges Persist
"There needs to be a stronger commitment by businesses to work with the education system," Huether said, "to let them know what is going to be needed for the workforce when kids graduate high school." Furthermore, Richard Brown, chief economist and associate director of risk analysis for the Federal Deposit Insurance Corp. (FDIC), noted that both employers and individual workers have much at stake concerning training and education.
While economists generally agree that global trade elevates nearly everybody, "in the short-run, however, there are winners and losers. And the returns to non-specialized labor are really under assault here," Brown said. For example, the net-worth ratio for households headed by college graduates compared with those led by high school graduates widened to 4.3-to-1 in 2004 from 3-to-1 in 1995.
Moreover, Huether cast partial blame for low-skills in some workers at the feet of some primary and secondary educators. "One of the problems right now is there is a disconnect between the community colleges and the needs of employers." NAM has been working "pretty hard to try to bring local communities and colleges together and marry them up more with employers so they can figure out what the skills are that industry needs—to make sure that community colleges are actually producing students who have those skills," he said.
U.S. Public Education Lagging Globally
In a related area, the math and science scores of fourth-grade children in the United States are in the middle-of-the-road internationally, close to the scores of fourth-graders from Finland and France. However, the math and science scores of U.S. eighth-grade students "start falling" compared to students in other nations, and the declines continue throughout high school for U.S. children, Huether said. "We're being out-competed. Our education system is not doing a good enough job of getting our kids the proper math and science education to be able to go on to secondary and post-secondary education and have the skills to compete in the international marketplace."
In about 1994, the United States, Japan and China all produced about the same number of engineers. "Fast forward to today," Huether noted, "and China's producing double the amount [number] of engineers than we are; we're producing the same number of engineers as South Korea, which has an economy about a tenth the size of ours."
The discussion turned to a controversial idea of providing parents of public school students with vouchers (to attend a private school) in an effort to better educate children by forcing competition upon public and private schools. Carl Steidtmann, chief economist and director of consumer research for Deloitte Touche Tohmatsu, remarked, "More competition does make a better result for the consumers [students, parents and taxpayers]; now it doesn't always make a better result for the producers [teachers and educators], and in this case the producers certainly seem to have a very strong political grip on the whole process. But from a consumer's perspective, competition, without exception that I'm aware of, results in a better course, and better products, and better quality for the consumers." Unions representing public school teachers, for the most part, have opposed vigorously the voucher idea.
Turning his attention to general consumers of goods and services, Steidtmann aligned himself as "very optimistic about the economy." His optimism in part springs from numbers he has crunched regarding consumer debt issues: "you wouldn't have a very low default rate if consumers were being crushed by consumer debt. I think the economy will continue to go along quite strongly."
Nonetheless, the gaps in income distributions throughout the United States have widened since 2002. "What we are seeing in the U.S. is a growing inequality of income distribution: the rich are getting richer and the middle class and the lower income groups are suffering," Steidtmann observed.
Labor Force Anxiety Concerns Writer
Along this line, author and journalist Daniel Gross, editor of STERNbusiness of New York University's Stern School of Business, as well as a "Moneybox" columnist for online Slate magazine, said that while the big-picture numbers look good (such as the Dow at a six-year high) there nonetheless exists a rolling—and, at times, roiling or disturbing—anxiety within the labor force. There are three types of volatility at issue in the economy. "Today, peoples' income is much more likely to bounce around from year to year, in greater volumes, than ... in the past. And that happens at all levels of the income ladder," Gross remarked.
The second element is job volatility. "An amazing feature about the U.S. economy is its capacity to simultaneously create a large number of new jobs and destroy a large number of jobs," he said. The U.S. economic factors at play here include outsourcing, moving facilities offshore, sudden bankruptcies, and a high rate of mergers and acquisitions.
The final element contributing to deep anxiety, Gross said, is benefits and pension volatility. In the 1980s, nearly 80 percent of U.S. workers were covered by a defined benefit plan. But in today's environment even healthy companies such as IBM are squeezing costs from benefits and pension plans. "We're seeing across the board, blue-collar and white-collar, people being asked to pay more for health care, an effective reduction of benefits," he noted. Throughout the economy, there is much greater reliance on 401K plans, yet people in the 40s and 50s still may have very little money saved in those plans. While these trends may not emerge in the aggregate numbers for a few years, Gross said, nonetheless, they currently are "enormously influencial on people's psychology about what they can afford, about what their situation is, about how they feel about the economy. These are trends that have been with us for a while but are really gathering strength."
The United States doesn't have the kind of safety net and social benefits that some other countries do have; thus, some real emotional and physical aches and pains occur for people who lose jobs. "We have, today, a system where you can go from having everything at your job," Gross said, "to sort of having nothing in a day. And that creates a lot of fear and resistance to change, and it builds up resistance to let the global processes happen."
Rocking the Boat with Bloated U.S. Deficits
Turning to huge federal budget deficits as U.S. troops fight wars in Iraq and Afghanistan, Savage asked the panel how long the U.S. government can maintain its posture of borrowing billions of dollars from investors abroad.
"The impact will start to hit us in fiscal policy because of the cost," Anthony Chan, managing director and chief economist of JP Morgan Asset Management, responded. A professor from Columbia University conducted a study to calculate all the costs of the Iraq war, not only the financial costs of reconstruction and defense, but also the costs of caring for wounded soldiers for many years, as well as additional interest on the national debt. The professor found the costs to be more than a trillion dollars so far, he noted.
"So, we're already starting to see, to a degree, an unwinding of the tax cuts we have [had since 2001]. So forget about making them permanent in 2010. Those [cuts] are starting to go away."
So what happens, Savage inquired, if there ever comes a time when foreign lenders say to U.S. treasury officials "[something to the effect of] 'we don't like your spending ways and your increasing deficit, and we're not going to lend you money anymore.'"
Chan replied, "You've hit the nail on the head. This is a very important issue." In his travels to China and other Asian countries, government and business officials in those nations often talk about how their central banks invest large amounts of money in U.S. treasury markets, he observed. In addition, Chan has heard negative comments from foreign representatives regarding situations where a domestic company from their home nation has tried to purchase a U.S.-based company—but "then hands go up [in the U.S. Congress and elsewhere] and people talk [so much] about national security" that a proposed purchase collaspes.
"Well, there is a lot of frustration with that, and some day a backlash will eventually [occur] if this continues. [Foreign investors] will say, 'Maybe we don't want to continue to accumulate [U.S.] dollars, maybe we don't want to invest in U.S. dollars, maybe we want to diversify," Chan said.
In the 1980s, moreover, there was a roaring debate among economists whether huge deficits would cause higher interest rates or, simply, whether they didn't matter. After examining data covering the last 35 years, "it's clear to me that when you have these big deficits, [then] interest rates don't rise as long as the economy is growing slowly," Chan explained. Once the U.S. economy grows as fast or faster than its estimated potential, he added, "then you start to see the upward pressure on interest rates." In a large-deficit environment, therefore, central bankers want to keep the economy from growing too rapidly because too much acceleration will bring higher interest rates, Chan observed.
However, U.S. government and business officials "will continue to see foreign investment in the United States because this simply is the best place in the world to invest money," Steidtmann retorted. "We have an educated labor market, relatively pro-business government [policies], relatively low taxes, a stable fiscal system; all of that brings money into the United States." The U.S. budget deficit currently stands at about 3.5 percent of the gross domestic product (GDP), but "the deficit really becomes a problem in the future when all these promises—particularly those promises of Social Security and Medicare—start to come due," he said.
Concerning Iraq, a trillion dollars sounds like a lot of money, but that amount has been spent over three years, and "to put it in context, that's about three percent of GDP," Steidtmann explained, noting that during the Vietnam War, the U.S. government spent nearly 8 percent of GDP. During the most intensive periods of the Korean War and World War II, the United States spent about 15 perent and nearly 100 percent of GDP, respectively, he said.
Boomers Impact Workplace and Consumption
Shifting focus to the impacts of the Baby Boomer generation, Steidtmann noted that some 80 percent of boomers responded in a survey that after retirement, they still intend to work part-time. "So, there's a real challenge on the part of businesses to figure out a way to restructure work itself to incorporate a huge increase in the number of people who are really in [the labor force] for part-time work," he commented.
Some observers fear that a sharp decline in consumption by Baby Boomers, as members of that generation retire, could bust apart some markets, especially retail ones. But neither Steidtmann nor Gross sees events unfolding this way.
"Baby boomers are extraordinarily talented consumers, and because there are so many of them, at every stage of life they go through, businesses roll-out services and products to appeal to their life cycle," Gross said. "Why do you think we got Viagra at the time we did.... There are people in their 50s, 60s, and 70s consuming like there's no tomorrow. So I don't think we should be worried so much about that [potential bust]."
For his part, Steidtmann commented, "You may get a [mild] bust; it's not going to be something like falling off a cliff. It's going to be much more stretched out as this generation really tries to sustain its mid-life experience compared to previous generations."
Tips for Michiana Economic Development
An audience member asked the panel both how other communities have diversified their economic foundations and for suggestions of specific companies, either domestic or foreign, that Michiana economic developers could seek to recruit.
In talking to bankers and business officials all over the country, FDIC officials frequently are asked how a particular region can become the next Silicon Valley, Brown noted. "That's a complex chemistry [to make it happen]; you need world-class institutions. Think of Stanford; think of MIT; you need entrepreneurs in the community, you need financing, you need venture capital. In many cases, banks become involved in specialized financing, funding start-up companies. And, in addition, cultural amenities are very important to young workers," he said.
As an example of diversification, Huether cited Spartanburg, S.C. In a previous era, Spartanburg was a textile production center but "they were ruined by the international competition, and what's happened: They've attracted investment; they've attracted foreign investment." Automobile maker BMW has located a major facility there, and now roadsters and other vehicles are manufactured in Spartanburg, Huether noted.