Recession is upon us, economists seem to agree, and now we need only discuss how to get out of it. One popular solution is to cut interest rates and print money. That has worked in the past for most of the U.S., but it did not work for Rust Belt states and cities such as Michigan, Cleveland, and Buffalo. The Rust Belt was unattractive to new business investment due to its high labor costs, high taxes (many of which were necessary to pay for commitments made decades earlier, either bonds or pensions for public employee unions), and inner-city crime (Detroit). Companies did invest the newly printed money, but they invested it in other regions of the U.S.
The Federal Reserve Bank is cutting interest rates, printing money, and ladling out the public’s cash to mortage speculators. When folks get their hands on this money, will they invest it in things that will cause the U.S. GDP to grow in the long run? Consumers will buy stuff, presumably manufactured items made in China or oil from Venezuela and the Middle East. Companies will invest some of the money, but presumably where they think it is most efficient to invest. In the old days, U.S. companies nearly always invested somewhere in the U.S. China was closed to foreign investment. India was tangled in bureaucracy and regulations. South America was unstable politically.
How does the U.S. stack up right now as a place to invest? Our workers are expensive because the cost of living here is high and their taxes need to be high enough to pay for a lavish government sector and an Iraq adventure that Joseph Stiglitz estimates will cost $3 trillion, a sizable fraction of our annual $14 trillion GDP. Our college graduates are roughly equivalent in ability to other nations’ high school graduates (story) and a lot of our high school graduates could not compete on the world market for any jobs other than manual labor. Our transportation system is comprehensive, but traffic jams can take an hour or more out of a worker’s day. Unlike other countries, we have no plans to implement congestion pricing. In communications, we lag countries such as South Korea in broadband speed and percentage of households connected; we lag all of Europe and most of Asia in mobile phone coverage. Our consumer market is huge, but it is also brutally competitive and most consumers have all of the stuff that they need; emerging middle classes in India, China, and Arab countries represent more of a profit opportunity.
If we handed out $500 billion right now to U.S. businesses and told them to invest it, how much of that investment would happen here in the U.S.?
Is there a joker in the deck?
We have the mass suburbs. A bulk of the population where housing is priced so the bulk of the earnings for moderate income folk is transferred to folk of much greater net worth. Does this enhance the overall effectiveness or efficiency of the country? Seems somewhat unlikely.
But there are spaces in between. All that “flyover” country that does not appear on radar for so many folk.
Where do you move, if you can, to escape the mass-suburb economic trap? Do effective folk move (within usual sight) to the most-expensive part of the mass suburbs (where their wealth is more easily extracted) … or somewhere else?
The demand on real estate for the spaces in-between may be entirely anomalous without factoring in the effect of the Internet.
Is there off-radar a potential of sorts that can be realized when the economic disparity with emerging nations dissipates?
I do not know the answer to any of this … but there are enough clues to wonder.
What bothers me the most is the education and ability levels. Most (not all) of the other problems would disappear if the populace in general was better educated with an ability to take action……
Advantage of the U.S. – powerful and stable government, a population bred and trained to work in the corporate workforce, and relative lack of government interference in business. With the falling dollar, it’s becoming cheaper to hire Americans also.
Living in the heart of the crimeridden, flyover rustbelt it makes me downright angry to think the taxpayers, via the Federal Reserve, bailout a NY financial institution while the rest of us have to find a way to live and compete in a brutally competitive world market.
It’s ironic if our “rustbelt” company fails it will be an example of “not being able to compete” while those in the financial & monetary risk management shoveled out money to themselves last year in act of fallacy and stupidity. And with apparently no fallout and little personal loss since the tax payers are now helping.
No doubt we’ll hear about some job losses with time on Wall Street as good business sense comes back. Time for the wall street unemployed to live in your own poorly executed house of cards. And I promise I to show the unemployed wall street types all the mercy they have shown to those in “flyover” states.
Hopefully Dubai, Inc will buy all the financial US companies and restaff with much cheaper, better educated, and more thoughtful employees.
Just to play Devil’s advocate here:
You can say much of the same about the EU, which is the largest economy in the world. As far as our schools being so bad, if US colleges are so poor, you wonder why so many, presumably smart, international students come here.
Also, a smaller economy is going to mean less money for foreign wars – that’s a plus. The only way some people are going to stop killing is when they can’t buy any more bullets.
It is impossible to “invest” dollars outside the US. If you try, you end up trading the dollars to someone for, say, rupees which you then invest in India. But then that person has some dollars burning a hole in their pocket. Ultimately, the dollars have to be converted to actual stuff, and that happens in the US.
For this reason, your analogy with the Rust Belt does not quite carry through.
PS I’m living in Ireland and paid in Euro but I think in US$, so to Bear Sterns and Iraq and other US$-lowering things I say: Thanks for the Raise!
I have two teenage girls that attend a highly placed technology high school here in Southern California. They are completely bogged-down in homework that they can barely manage to haul around in their backpacks and are totally focused on test-taking.
I have spent much time in Japan and Taiwan where I observed school children attend school from 7:00 to 4:30 and then attend cramming school from 5:00 to almost 8:00 six evenings a week.
My children may not be competitive with these poor burn-outs in Asia and it’s not for trying that our schools will likewise try to rob our kids of their childhood by overextending academic demands to the point of exhaustion.
Not only are we in a race to the bottom economically with China and the like, we are also racing to eviscerate our children’s childhoods as well.
Can’t we come up with a better example to base our society? Can we dream of a more fulfilling lifestyle? I can only hope.
As Tanta says at Calculated Risk: We are all Sub Prime now.
You left out the primary thing that is making everyone look twice at any US investments – currency risk (though all of the stuff you cite is factored into that). If I believe that any investment in the US is going to be paid out at 90 cents on the dollar, and any investment elsewhere is going to be paid out at 1.10 per dollar, that is probably going to be the primary factor in my decision-making.
Well, if your business is agri-business, you would invest as much as you could. $17 a bushel wheat will make many farmers incredibly rich. Thank you ethanol!
Another observation: Have you noticed that the only way other nations improve their economic situation is by emulating the US more closely. For instance China and India had to relax their regulatory restrictions in order to drive economic development. Yet, many in the US feel that we must constantly strive to be like other nations (especially Europe et al). The first set of problems for the rust belt (high taxes, high union wages) are related to leftward leaning labor and fiscal policy.
Now government intervention to save investment banks leads us further into into a quasi-socialist morass. These banks should be allowed to fail. Government shouldn’t be subsidizing ethanol and it shouldn’t be in the education business.
May I also say the formal education is overrated. How many degrees did Edison have? Compare that to the number of patents…
Sorry for the rant. Keep up the interesting work.