panel of economists essentially connected the dots to explain why Michiana's struggling economy is interwoven with both a milder yet still surging U.S. economy and an accelerating global marketplace, both of which become more com-
petitive every day.
"As much as I believe in free markets and free trade," said Russell Lamb, senior economist for Econ One Research Inc. of Washington, D.C., "as economists it's easy to think about the fundamental economic principle that with free trade, the economic pie is bigger. You create more wealth, and there's more wealth to be divided. But with free trade there are certainly going to be people—always going to be people—who are going to get a smaller slice of the economic pie than they got before. How do we compensate those people?"
Moreover, Federal Reserve Board Chairman Ben Bernanke has talked about a need to "protect those workers who are caught on the downside of globalization by offering them more than a three-month package of skills training," Kathleen M. Camilli, founder and principal of Camilli Economics, LLC, New York, added during the 2007 Economic Fore-
casting Summit March 29 at the Century Center in downtown South Bend. WorkOne of Northern Indiana, the Northern Indiana Workforce Board, Inc., and TCU Investment Services were the principal sponsors to the summit.
Some Michiana residents have a negative view of how globalization and outsourcing of jobs to places such as India, China, and Mexico have impacted the economic atmosphere in northern Indiana and southwestern Michigan. In dis-
cussing these issues, the economists not only explained the broad economic principles in play but also talked about how global competition affects individuals.
Low-Cost Imports Keep Inflation Down
"If you keep everything made in China out, Wal-Mart has to source it here," moderator Terry Savage, the personal finance columnist for the Chicago Sun-Times, said, adding "it would make some jobs here but not good-enough jobs to pay off the fact that your shower curtain you bought at Wal-Mart costs a lot more." Thus, "with history on our side," she noted, "we know that the lower cost of imports does benefit consumers [because] it keeps inflation down."
As economists, James Diffley, managing director of Global Insight US Regional Service Group, based in Boston, said, "we've done a terrible job, historically, of explaining the benefits of free trade to people. Simply put, when we allow cheap goods in from China and other places, we're lowering costs to American con-
sumers; we're lowering costs to American businesses; that's all pretty good."
Turning to the Midwest economy, however, he noted that a recent mild slowdown in the U.S. economy has delivered a very hard punch to Indiana, Michigan and Ohio. "So a mild reduction in national demand pushes this area down to very stagnant conditions," Diffley said. Moreover, the Midwest also has endured a difficult hit from the housing decline.
The housing bubble occurred primarily in California, the Pacific Coast, the Northeast, and Florida, where home prices doubled and some even tripled. "You didn't see that in the Midwest, you didn't see that in Indiana; you saw modest ... appreciation," Diffley observed. "What happens when housing slows across the country, and when the economy slows down just a bit, is the first areas of the country that saw home price declines were not California, were not New York; rather, it was Indiana, Ohio, and Michigan because you took modest appreciation, modest economic activity and turned it into zero to negative growth. That's severe."
'People are Uneasy'
Noting that "people are uneasy" in current conditions marked by a "tremendous period of uncertainty in the U.S. economy," Lamb remarked that "for individuals—the ole' flesh-and-blood people—it doesn't really matter if the U.S. economy is at two-percent or four-percent [growth], if you lose your job—you're out of a job!"
The expected outlook "for the U.S. economy on a macro-basis is good. I think growth is going to be two, two-and-a-half percent," he said. "But I think in spite of that, in spite of unemployment being at unbelievable lows based on historical norms, people are uneasy. And there's a great sense of uncertainty about the economy both on a macro-basis and a micro-basis," Lamb added. "Macro-wise, we have uncertainty about the housing market certainly, and issues like sub-prime mortgages. But a lot of uncertainty about energy markets, a lot of uncertainty about the value of the dollar, our trade relations, the willingness of countries abroad to finance this incredible consumption boom that we've had in the U.S. economy in the last five to six years, but on a micro-level, individuals—particularly individuals in the heartland—are more uncertain about the economic future."
Even in light of such uneasiness, especially among workers in Michiana and the Midwest, Congress and federal policymakers should avoid imposing protectionism on the U.S. economy, the economists agreed. "Of course, we have many scholars in our country that say, 'globalization is good, open borders, free trade, all of that is good because you're pulling people outside of our country up out of poverty and into the middle class; you're creating a middle class abroad and you'll be able to sell more goods into that middle class," Camilli maintained. "So we don't want to go in the direction of protectionism. I think it's really important to remember that in history, these periods of openness do tend to end in protec-tionism and a closing-in on oneself."
The process of pulling large numbers of people out of poverty—a phenom-
enon spurred largely by U.S. con-
sumption—has spawned a situation that on a micro- or small-group level is frowned upon but on a macro- or large-scale measure is celebrated, in some instances, by economists: Income inequality.
"If you look at the five levels of income," said William Wilson, managing director and chief economist of Chicago-based Keystone Business Intelligence India, "the top incomes have grown faster than the bottom two during 90 percent of the time [in the U.S. economy]; that isn't necessarily a problem. The problem is when the incomes of the bottom two are actually contracting. During the late-1990s, you had an increase in income inequality, but it wasn't a big deal because all five levels of income were increasing, yet in the case of the top, it was growing faster than the bottom."
Considering the global marketplace, in China and India "you have enormous increases in income inequality," Wilson explained, "but this is something good because incomes are growing at every level. Market reforms in China have lifted three-hundred-million people out of poverty over the last twenty-five years. Despite the huge increase in income inequality, market reforms started a lot later in India, they didn't start until 1991, and about one-hundred-fifty-million people have been lifted out of poverty in India over the last fifteen years, despite a large increase in income inequality."
When Will Foreigners Buy U.S. Goods?
So when do these newly empowered members of the middle classes in China, India and elsewhere begin buying goods and services made in the United States, so American workers will experience rising income levels, Savage inquired.
Noting that his drive from a Chicago airport to South Bend featured panoramas of thousands of acres of corn, Lamb said "they already are buying lots of things from the U.S.; they're buying corn, and soybeans, and groceries, and for agriculture in rural America, it's a huge business. And it's been a tremendous driver for ten to fifteen years now."
Moreover, manufacturing companies in the Midwest have increased exports of their goods at double-digit rates during the last three years, including 11-percent growth last year, Wilson observed. And a large portion of these increases are going to emerging markets around the globe. "If you look at Midwest agriculture and manufac-
turing exports, ten years ago that share going to China was twelve percent; today, that share going to China is twenty percent," he said. "One in five dollars of Midwest exports are now going to China."
Furthermore, U.S. policymakers, including Bernanke and Treasury Secretary Henry Paulson, have traveled to China to discuss the enormous trade gap between the two countries (differences in favor of China of $232.5 billion for 2006, and $21.3 billion for January 2007 alone). In a trip to Beijing during early 2007, Bernanke and Paulson carried a goal to "encourage the Chinese to have their growth led more by domestic consumption, domestic investment, and less by exports," as well as to lift restrictions on their currency, the Yuan, Camilli said.
"The Chinese government either needs to make the decision to make these changes on their own, which they initiated in a series of reforms in 2004 and said they were moving in that direction—but very little has happened—or maybe its going to take a U.S. recession to drive home the point that they need to change," she added.
In another indication of the U.S. economy's interlinking nature with foreign markets, both Lamb and Wilson noted that an enormous number of dollars leaving the U.S. through trade return via investments by China and other foreign governments in U.S. government bonds, thereby helping to finance the federal budget deficit and to compensate for the below-zero savings rate of U.S. households.
"We're saying that we're consuming too much, or our current account [trade] deficit is large because we import more than we export. But the fact is that foreigners want to invest assets in the U.S. economy, so they're willing [like China] to run a capital account [or trade] surplus," said Lamb.
Turning attention to education, Diffley noted that for a vast majority of jobs today as well as for emerging jobs in the near term, "we do know that the math and science requirements of new industries are increasing, so it's not enough to be as smart as we were, we have to be smarter." Remarking that he oversees specialists who measure local economies nationwide—from New York City, to Elkhart, to Los Angeles—Diffley cited Indiana's very low rank in terms of educational attainment of adult Hoosiers. "When businesses are looking to locate in an area," he said, "before they consider taxes, they look at the available quality of the workforce. And that's a very important local issue for economic development."
For his part, however, Lamb stated that assessments of the U.S. educational structure seem too harsh and not cognizant of how the K-through-12 systems as well as post-secondary institutions foster a creative spirit in many individuals—and educators use subtle measures that aren't easily gauged to help students grow in creativity.
"How many people know what economic growth in Japan was from 1990 to 2000?," Lamb said. "Just postivie or negative; it was negative the whole decade. How many people go from the United States to get PhDs in economics in Japan? Zero. How many people go from the United States to get economics PhDs in France? Maybe one." He added: "I don't want to say there are no problems in the U.S. educational system, but I think we've been too harsh and critical on ourselves when you look at the performance of the U.S. economy. We do a really good job of making creative, innovative people—entrepreneurs who go out and create things."
With companies planning to bring to operation nine biofuels plants in Indiana, the worldwide energy markets drew sharp comments from panelists. "Four years ago there wasn't a single economist that predicted oil prices in the 60-to-70 buck range. Noone saw this coming," Wilson remarked. "And what makes this distinctly different from the previous oil price increases is that this was an oil demand shock."
An Energy Demand Shock Jolts Oil Prices
In 1973, the Yom Kippur War between Israel and an Arab coalition led by Egypt and Syria spurred an oil embargo that caused a supply shock; moreover, the Iranian revolution in 1979 also triggered a supply shock, as did the 1991 Gulf War when a United States-led coalition expelled Iraq from Kuwait. "The rise in oil prices from four years ago, from 25-bucks-a-barrel to a peak of $77 before falling down into the 60s now, was purely a demand shock," Wilson said. "A result of the fastest growth in the global economy in over three decades. Both China and India are scrambling for energy resources. Neither India nor China are very well endowed with fossil fuels." India is expected to double its energy consumption by 2020 if the country succeeds in sustaining its current growth rate of about 7.5 percent.
Moreover, energy markets will continue to alter the geopolitical environment worldwide, Diffley noted. "We're also empowering with tremendous wealth the countries of the world who are endowed with oil resources. Russia is in a much stronger position than they were 10 years ago. And, of course, the Middle Eastern countries," he said.
Responding to a question about the contribution of corn-based biofuel to overall energy issues, Lamb said, "There is no single answer to the energy problem. It's not going to be from alternative fuels; it's not going to be from conservation. It's going to be a set of policies and a set of behaviors that moves us away from dependence on foreign oil."
Global warming and other environmental issues are connected to worldwide energy markets, certainly, but these issues also are linked to public opinion and attitudes about free markets in China, India and other fast-developing nations. "Richer countries do a much better job of taking care of the environment than do poorer countries," Lamb maintained. "What concerns me is that we are so sold on the idea that there is, first of all, global warming, and, second of all, that it's man-made, and, third of all, we made it all in the last twenty-five to forty years." The United States is "at risk of instituting policies that limit economic growth so severely that we can't grow ourselves into greater environ-
mental stewardship; which is, globally, what we ought to be thinking about," he argued.
California was the first state to impose stringent carbon dioxide emissions reductions with a target of seven percent below 1990 emissions levels by the year 2020. Noting that California's 1990 population of 29 million is projected to swell to 42 million by 2020, Wilson said, "The problem is unless you get a global consensus to reduce emissions, it's not going to happen. What will happen is California will lose its manufacturing base, who will move to states that have less restrictive emissions standards."
Such a worldwide consensus for emissions reductions will be possible under only certain conditions, several panelists said. "The fact is that clean air is in economics what we call a 'luxury good': Only rich countries care about it. You really need a per capita income of about 10-grand [$10,000] a year before citizens will begin caring about a clean environment," Wilson said. India has grown fast, but the per capita income is only $700 annually, and 300 million Indians have an income of half that amount, thereby experiencing a $1-a-day existence, he noted.
"Indians don't care about a clean environment and won't any time soon, at least within a generation," Wilson said. "The same thing for the Chinese. Right now, the U.S. is the largest emitter of pollutants, but that will change in three years given the growth of China's manufacturing base. China will surpass the U.S. So, unless you get a global consensus, which isn't going to happen anytime soon until China and India get a lot richer, you're not going to get a worldwide reducation in emissions."
Neither Did Mid-19th-Century Americans Care
about the Environment: Camilli
Looking to history on this issue, moreover, huge numbers of residents of the United States didn't care about protecting the environment during booming economic growth in the middle 1800s, Camilli added.
Turning to corporate profits, Wilson predicted strong results for the next two years. "What's very distinctive if you look at corporate profits right now, as a percent of U.S. GDP [Gross Domestic Product], it's about 14 percent, that's like six percentage points above the norm."
Corporate American very well might use profits to create a "surge in capital spending," Wilson added. In addition, there has been a "tightening in the labor markets; right now, average hourly earnings, for the first time in this cycle, were growing twice as fast as underlying inflation. That will fuel consumer spending and wage growth, which will keep the economy strong, which is why I don't see the Fed cutting interest rates any time soon."
This page was last updated on: Monday, November 23, 2009