I attended a housewarming on Sunday and met a guy who had founded and run a software company that employs nearly 1000 programmers, some here in New England and some in India. He is now retired and looking for new investments to make. How does he feel about the U.S. as a place to do business? “I think that the U.S. is going to blow up due to the expansion of government obligations. I’m not sure if the government will default on its debt, stop paying pensions, or generate hyperinflation, but I know that the current situation isn’t sustainable.” Due to fears of dollar devaluation and inflation here, this guy did not want to hold any additional dollar-denominated investments. As far as programmers went, he would prefer to hire them in India rather than take on the obligation of payroll taxes and health care expenses here. He had enjoyed a positive experience with his team of programmers in India (this is somewhat unusual in my experience; the folks I’ve talked to at multinationals have been impressed with their Chinese colleagues, but not with departments in India).
It is possible that the best minds of economics are doing exactly the right things with the U.S. economy, e.g., indulging in massive deficit spending, tossing in stimulus spending on top of the usual trillions in federal spending, having the Federal Reserve buy up Treasury bonds (i.e., print money), borrowing from our grandchildren, sweetening public employee salaries and pensions, ladling out subsidies to government-favored industries, etc. But even if these are the right things to do, if they scare business people away from investing in the U.S. the result will be economic stagnation (which actually means “decline” from an individual perspective, since the population continues to grow even as the economy does not). Maybe federal and state governments should invest education and PR to explain to folks how they are not going to default (to explain why reports such as Morgan Stanley predicting government default are wrong).
State and local governments won’t default on their bonds, for the most part. They’ll just default on their pension obligations, close schools, tear up roads, turn off lights, outsource police, etc. They’ve already started. Gradually,they’ll get around to raising revenues in ways that don’t rile up affluent donors. More privatization, user fees, etc.
Of course your friend would rather hire IT talent in India, according to Google in 2005 the average programmer made about 6423.00 USD in India. Yes that is six thousand four hundred twenty three US dollars.
I submit that the payroll taxes and heath insurance have little if any impact on his decisions. Cheap exploited labor rather is what made him wealthy. The real question is why do we care what this man thinks when he thinks so little of United States. He obviously cares little for its workforce or his impact on it. Nor does he care what his role as a business owner in the United States is.
It is quite hypocritical of him to make his money here deeply padding his pockets and then cry about how poor the investing environment is. This all while helping to create that environment by shipping US jobs overseas. All to typical of the new conservatives.
I too find the current path unsustainable. Our plan is to buy a small home on 5-10 acres (no debt), liquidate the 401K, spend time with kids, learn new skills (tech and otherwise), work on personal projects, grow some veggies and hopefully find enough work at rates competitive with offshore to pay a few bills. I figure if I pick up enough work I will eventually be able to outsource some of it to my kids whom I can employ at ridiculously low rates. Most of my friends desire to do the exact same thing but are a few years behind us in the planning.
Mike K,
What is your plan for raising the price of labor in India? What is the solution? Just pay more than market rate? Which company goes first? Not hire the people at all? You think they would be better off with no job?
For what it’s worth, your friend’s fears about inflation are likely misplaced. Deflation is a larger threat and may already be happening: http://globaleconomicanalysis.blogspot.com/2010/07/are-we-trending-towards-deflation-or-in.html
Jeremy: Economists’ predictions have been mostly wrong, especially about the future! Regardless of whether or not this guy turns out to be right about U.S. dollar inflation, he is refraining from investing because of concerns. It is his concern that is keeping him from creating jobs here.
Mike K: First, he’s not my friend, but someone whom I met for the first time on Sunday (as I thought I’d implied in the original post). You assert that the Indian programmers are “cheap” and “exploited” and cite their 2005 salary of $6423; http://www.rediff.com/money/2005/jun/30income.htm says that the average Indian income per capita was $285 in 2005. So the cheap exploited programmer earned enough to support a family of 22 people. The guy wasn’t “crying about how poor the investment environment is” in the U.S.; he is simply looking for investments in foreign countries instead. You assert that he “shipped US jobs overseas”; as his product was entirely new, both the jobs that he created in both the U.S. and India can be regarded as new jobs. I don’t see how he can reasonably be accused of shipping a US job over to India if that job had never existed before he started his company. You ask “why do we care what this man thinks?” He created more than 1000 U.S. jobs with his last company. If you believe that the U.S. does not need any more private sector jobs then the answer is that there is indeed no reason to care about what businesspeople think. If our politicians, very few of whom have any business experience, are able to transition the U.S. to a fully planned economy, the sentiments of private investors will certainly become irrelevant since expert planners will allocate a government supply of capital in an optimum fashion.
Ethan: Although my personal point of view is not relevant to the original posting, I don’t share his or your dramatic forecast. In January 2009 I wrote that “maybe the most likely scenario [for the U.S. economy] was a long gradual downward slide, sort of like England in the post-World War II period” (see http://philip.greenspun.com/blog/2009/01/28/is-the-us-turning-into-the-uk/ ). In the 1.5 years since I wrote that I haven’t seen anything that would lead me to change that forecast. Some sectors of the U.S. economy keep producing wealth and our government tries to channel as much of that as possible to politically powerful groups whose own wealth-creation days are over, or, as with government workers and retirees, whose wealth-creation days never started.
Phil,
I am not sure my forecast and yours actually differ that much. I am not headed for the hills because I fear any sort of dramatic sudden change in living standards, this is mostly a matter of preference, economy only being a very small part of the decision. That part largely being one of disgust at the misuse of our taxes and my deep rooted desire to live on much less and as a nice side effect produce less in the way of taxes. Liquidating the 401K sounds a bit on the dramatic side but I am convinced that the long term security of that money is questionable at this point and I believe I can make better use of it now and still for long term benefits. Always enjoy your posts.
Ethan: I should add that even with the U.S. economy going sideways for a few decades, some investment here will still be profitable, just as some investors in England circa 1955 ended up making money. On average, however, those mid-1950s investors in England would have been much better off investing in Australia.
“Jeremy: Economists’ predictions have been mostly wrong, especially about the future! Regardless of whether or not this guy turns out to be right about U.S. dollar inflation, he is refraining from investing because of concerns. It is his concern that is keeping him from creating jobs here.”
I was about to throw in some arguments about inflation vs deflation, but this is more to the point. The blogger Jeremy quotes (one of the best, by the way) has discussed that issue as well: why invest or create jobs here when you never know when the next bout of fiscal or monetary insanity is coming or where the next blow to private property and contract law is going to land?
http://www.mackinac.org/4035
“Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? … Are new restrictions to be placed on capital, new limits on profits? … It is impossible to even guess at the answers.”
It still wouldn’t make much monetary sense to hire local IT people, e.g., even if taxes/health care costs in the U.S. were much lower. Sure, there would be less incentive to hire foreigners, and more Americans will have jobs, but is lesser government intervention going to dismantle the IT industry in India?
Businessmen are primarily supposed to care about $ maximization, not providing $ to fellow citizens. I think it’s a _bit_ unfair to blame the government for instincts characteristic of a capitalist society.
Osman: It is a mistake to assume that companies will always hire the lowest cost programmer, wherever he or she might happen to be located. If that were true, all employed programmers would be in Cambodia. Even if a Chinese or Indian programmer is as skilled as an American programmer, a U.S. company might be better off hiring the American because communication costs will be lower (not the cost of a phone call, but the number of hours spent communicating what needs to be done; the American programmer can visit customers and users in person). Most programmers are ancillary to some other kind of business. If a factory moves from the U.S. to China, a certain number of IT jobs will also move because it is difficult for a remotely located programmer to do the work.
Thank goodness their are people like the businessman mentioned who created 1,000s of jobs for people and now that is retired, is willing to find other risk/investments to continue pursuing his desires. If he was like the majority, who work for someone else and never take the high risk involved in a business there would be no jobs for the masses who will not step away from the security of working for someone else.
It is interesting that people employed by others never tell their employer they are making too much. I wonder how many people employed and have a job, pay a greater amount to have their yard mowed than normal and offer to purchase the yard mowers insurance and pay their retirement account and social securtiy. Or pay the waitress/waiter a much great tip than 15% and instead just pay them a flat rate of $20 or $50.
No the majority of people working for someone else, pay the yard mower, the waiter/waitress what is the norm. Shame on them for calling the business owner, who actually has the risk, greedy. Instead of being “thankful” they have a job, they feel they are owed more”.
When I was young, I onced ask my mentor, “should I take a job if I feel I am more valuable than what I am being offered”? His reply “if you have no better offer at the time, you are not more valuable.” He continued, “if you can not find a job in which you are paid what you feel you are worth, then step out, take the risk and create your own business/opportunity”. I replied but wonder if it does not work or the risk appear to great?”. He replied then “go work for what someone is willing to pay you and be happy you have a job”.
Ok, bad assumption on my part.
This is off-topic / raw venting, but if businessmen have reasons to shun the U.S. economy, so do ordinary citizens for dumping the businessmen they’ve helped make rich. I recently paid $1000 to my dentist for a 1-hour gum clean up; I could’ve gotten the same job in India etc for $100 (10x times less).
The bureaucrats are condemned for their interference (perhaps fairly), but shouldn’t there be some discussion on how businesses have helped create an environment where the government is encouraged to intervene? You’ve talked about the desirability of not being generous with the minimum wage, and the Wall Street thugs, and the genius bureaucrats in Washington (w/ History and Political Science degrees from Georgetown and Oxford) — but for an ordinary citizen (i.e. a wage slave) the concern perhaps is supporting the lifestyle of a doctor / plumber / lawyer / landlord.
There are clearly flaws in our government as there are in all other systems, but there is an implication in many of these posts/comments intended or not that because at the moment india and china (or other emerging economies) are (possibly) better investments that it is because of a difference in government policies (that ours are worse somehow). While our government is certainly making many mistakes (often in trying to satisfy contradictory requests see earlier excellent posts) on the whole its done quite an excellent job for 200 years and still functions mostly okay. On the contrary most of the emerging economies are emerging now (despite being formed in some cases thousands of years earlier) because they have had terrible governments (and other problems). The reason they are worth investing in now is because they’ve been so impoverished that they will essentially work for free relative to preglobalized western labor rates. Their governments though still by and large far worse by almost any metric than ours are just stable enough that people are willing to risk investing in them. To see if their new governments will actually be better than ours we’ll have to wait until they catch up and wages equalize (either by them coming up or us going down).
Until then fear canada, whose motto is good governance and who will gain a large fraction of the arable land created by global warming.
Osman,
Try to sell caskets or become a florist in Louisiana. Businesses have not created an environment which encourages govt. to intervene, many businesses and special interest in fact work with govt. to craft said interventions in order to protect their markets and prices. Govt also intervenes to justify its bloat. They intervene in my eggs, my milk, my car, my house, my education, my insurance, my pets, my vets, my dentist, my doctors, my restaurants, my retirement, my water, my t.v., my internet…where do you see “limited govt.” here? Govt. is made up of people like you and me who want to keep their jobs, except they have tanks and paperwork and guaranteed pensions and control of the educational system and…did I mention tanks?
My guess is I could could learn how to clean gums in about 4-8 hours. I have castrated pigs, milked cows, thrown grenades, rebuilt a 350, nurtured my dog during seizures, cleaned wounds and attempted a home birth with my wife, cleaning gums should be a cinch. So ask yourself, why did you pay $1000 for this service? Why does dental care cost so much in the US? I am sure there are many things dentists do which require extensive training but cleaning gums probably isn’t one of them. Why isn’t there some stay at home mom cleaning gums down the street? I’ll tell you why, because about 1 month after setting up shop, said at home gum cleaning service will likely experience a no-knock raid courtesy of her local Swat dept.. The fact is, you paid $1000 because you were being robbed. You have been robbed by the dental profession, you were robbed by the politicians who pass protectionist laws, and your were robbed by anyone who would ever enforce such a stupid law.
But think of how much you saved by not traveling to India to get your teeth cleaned. If the dentist up the street would do it for less, go to him.
If you had a neibhorhood kid, that was willing to mow your yard for $30 and be happy. What would you think if the bureaucrats decided that everyone hiring a yard mower had to pay a minimum of $75. Perhaps you would decidee to just mow it yourself. Are you greedy for deciding to spend your own time mowing instead of paying the kid $75? You must be, cause you think the businessman should be kind and pay you more, even if it is not smart. If minimum wage is smart, then why don’t we just raise it to $50 an hour. We would all be happy then right? Wait a minute, everything would cost more and many like the yard mower scenario, would also not have jobs. The last decade, 88 percent of all businesses that started failed. Since you feel we should guarantee better for the employees, then what guarantees does the owner/risk taker have.
If the owner pays the employee more, should the employee be responsible and do the right thing and pay some back to the owner if the business does not make it? Closing: I used to be broke, made a 13 on my ACT, didnt do well academically, however my mentor taught me a couple of simple things I learned. Get a job, spend less than I make, take a little and consistantly invest it and never stop. And by golly the formula worked! I have tried to teach it to many and only a very tiny few, could ever follow the “spend less than you make”. I don’ t blame them though cause the good old beaurocrats will take care of them. You know, the system that rewards inproductiveness, take from the productive and give to the non productive. I’ve been surprised that the government has not required the schools to have those that work hard and make A’s give some of their grade to those who do poorly. Now that would be bad for my son who has worked his but off and always made A’s but would be great for my daughter who (bless her heart) inherited my academic desire and does terrible grade wise and will not study.
zhenre: I did not mean to imply that China’s government was superior to the U.S. government in what it does, though in fact a system in which it is possible to bribe an official for overnight approval may be better for GDP growth than one in which approval requires decades of litigation and paperwork. There may be some superiority of the Chinese system in that the government consumes a much smaller percentage of GDP and hasn’t bankrupted itself with health care and pension promises. And I don’t think it is as simple as “the Chinese have been impoverished for a long time so their wages are low” because otherwise Africa would be attracting a lot of industrial investment. Why not give the Chinese some credit for studying and working hard while Americans were watching NASCAR on television? (see this WSJ story on sophisticated glass manufacturing, in which the only capable vendors were in China and Europe)
Getting back to the original post, however, I don’t think the relative attractiveness of India and China are relevant to this particular investor. If the U.S. were all by itself on our own planet, he would still refrain from investing in our economy due to fears that the government will confiscate wealth from producers in order to pay its past promises and that satisfying demands from cronies and political allies of the current government will require vast tax increases. If he couldn’t invest in India, our entrepreneur would be buying gold bricks and burying them in a secret corner of his backyard (to avoid falling victim to a gold confiscation system similar to what Franklin Delano Roosevelt imposed on Americans in 1933 (see http://en.wikipedia.org/wiki/Executive_Order_6102 for why it might be safer to be registered as a stockholder in an Australian company than to own gold as a U.S. resident)).
Phil,
You dodged Mike K’s main point. You said: “As far as programmers went, he would prefer to hire them in India rather than take on the obligation of payroll taxes and health care expenses here.”
However, the difference in wages (at least $70k) is far more significant than the difference in payroll taxes or health care. So, even if we abolished Social Security and Medicare, and eviscerated the social safety net, we still wouldn’t match India in costs.
Also, this is the first time I’ve heard India being described as a freer economy than the United States. The Index of Economic Freedom (put out by the Wall Street Journal) ranked the U.S. as the 5 most free economy in the world. And India — it did not even make the top 40.
http://en.wikipedia.org/wiki/Index_of_Economic_Freedom_historical_rankings
Phil,
“…though in fact a system in which it is possible to bribe an official for overnight approval may be better for GDP growth than one in which approval requires decades of litigation and paperwork.”
I think you’ve hit on something key here. Economically speaking, corruption is “bad” because it fosters inefficiencies, some players have a leg up on the open market because they knew who to bribe.
However, if it’s a nearly “standard” thing, and everyone knows who to bribe, in effect, it’s not really a cause of inefficiency anymore. It’s still distasteful, of course, but it still keeps everyone competitive.
And, in the the US, we have the opposite. As you mentioned, setting up certain kinds of ventures requires decades of paperwork and litigation, and in the end, getting approval simply requires “knowing” what form you have to submit (see setting up an FAA Part 135 operation), since that information is not available from any sanctioned source. In effect, the “non-corrupt” system we have is economically equivalent to old-fashioned bribery in its exclusivity.
Wallace_Bone: I didn’t mean to dodge Mike K’s point. And certainly India is a bureaucratic tangle. However, classical economics has employment on the same supply and demand curves as anything else. Increasing costs by $25,000 per year, for example, through payroll taxes and the world’s most expensive health care system, will tend to reduce demand for U.S. labor. The fact that an employer is willing to pay $50,000 per year extra for a U.S. employee does not mean that he or she can afford to pay $75,000 per year extra. The entrepreneur in the original post, however, is not primarily frightened by current U.S. costs. With the federal government now spending almost twice as much as it takes in, he is frightened by what taxes are going to look like in the future.
I suspect many people would agree that U.S. government spending is out of control. Is there anything useful that we citizens can do about it?
Fair enough Phil. Payroll taxes are highly regressive and they are essentially a tax on jobs. They are singularly destructive of employment.
That’s why a lot of progressive groups like the Center for American Progress actually favor payroll tax holidays or payroll tax reductions, and replace them with other funding sources such as a national sales tax.
However, what causes people hesitation is that this is sometimes seen as a stalking horse for liberatian fantasies about abolishing Social Security and Medicare. In a free market without any Medicare, 90% of 65+ year old men and women would be priced out of any health insurance at all. Libertarians have never had a good answer to that fundamental market failure.
Wallace: What do Libertarians say about Social Security and Medicare? I looked it up in Boaz’s Libertarianism (1997). On page 221: “The former chief actuary of the Social Security System, A. Haeworth Robertson, calculates that Social Security currently costs 15 percent of taxable payroll but that by [around 2050] the cost will be somewhere between 26 and 44 percent of taxable payroll.”
What would happen to older Americans if there were no Medicare? We did that experiment for approximately 350 years, so we should have good data. Boaz cites “a 1957 survey by the National Opinion Research Center found that ‘about one person in twenty in the older population [65+] reported that he was doing without needed medical care because he lacked money for such care.'”
Social Security and Medicare are not magic means of creating wealth. If our society is not wealthy enough to support people for 50 or more years of comfortable retirement (e.g., a bus driver in Boston who retires on a full pension at age 41 and lives to age 91) and not wealthy enough to buy everyone a $300,000 death in the ICU, then it doesn’t matter how we propose to fund these things.
An even greater question than “what if there were no Medicare”, is what if there weren’t people like the retired person this topic began on that were willing to risk there funds (retirement) investing in businesses. If there weren’t people like them, there wouldn’t be as many jobs for people to have incomes to be taxed to pay for the many things we are supposedly entitled to.
Stan: In a planned economy there is no need for entrepreneurs. The Soviet Union had near-zero unemployment. Roughly 50 percent of the U.S. economy is planned and/or government-sponsored. There are quite a few folks, e.g., current long-term unemployed, who might reasonably believe that they would be better off if that 50 percent government share of the economy went up to 100 percent. Capitalism was discredited in 2008.You could argue that the U.S. was and is operating under a “crony capitalist” system rather than a free market system, and therefore it is unfair to abandon capitalism based on the Collapse of 2008, but apparently the average voter and average politician have decided that a planned economy will work best.
“The folks I’ve talked to at multinationals have been impressed with their Chinese colleagues, but not with departments in India”
I’m very curious to know why this might be so. Have your friends reported consistent reasons one way or another? Are they technical/logistical/cultural/…/…?
JK: The general knock against Indians was that they followed specifications to the letter, regardless of whether or not it made sense. So if the spec wasn’t perfect, the result might be ridiculous, and it is difficult to write a perfect and precise specification in the English language. The Chinese engineers and programmers, on the other hand, were more like their American counterparts in spending some time thinking about what would be useful for the customer or end-user, questioning or going beyond the spec when necessary.
Thanks Phil, that was an entertaining answer. I can believe this quite easily (yes, I am Indian) 🙂
Phil,
You seem to be a great admirer of China and a big hater of government involvement in the economy, so I am curious as to your opinion of this article:
http://www.nytimes.com/2010/08/30/world/asia/30china.html?_r=3&hp
I heard of this article through Jeff Miron’s blog, an outspoken libertarian who happens to also be an economics professor at Harvard:
http://jeffreymiron.com/2010/08/will-china-surpass-the-u-s-continued/
According to Jeff:
“In other words, China is engaged in ‘planned capitalism,’ an oxymoron if ever there was one. China may achieve high growth for a while under this approach, but the inefficiencies of central planning will show themselves over time.”
Murali: Don’t confuse thinking that China might be a better place to invest than the U.S. with ” a greater admirer of China” (though of course I do admire the millenia of Chinese cultural achievement).
Thanks for the link to the nytimes article. It doesn’t change my thinking about China or about human nature. When a person attains great power, he or she tends to believe himself 100X smarter and more capable than average. The natural inference from this realization is that the powerful person and his hand-picked subordinates would do a better job planning the economy than would a market of average citizens. That’s why we had a government-spending stimulus package in the U.S., where the 1000 or so most able Americans chose highways to repave, etc., rather than a simple payroll tax cut where mediocre small business owners would have decided what to do with the extra money.
How can China grow 10 percent per year with this kind of drag on its economy? The Chinese are hard-working and well-educated and can overcome a lot of obstacles, including their government.
One issue that Jeff Miron did not discuss is debt. The U.S. owes about 500 percent of GDP, either through bonds or Social Security and Medicare obligations. We would all have to work hard for five years, consuming nothing, to pay off our obligations. The Chinese have no debt. All of their efforts can be used to pay for current expenses (e.g., their inefficient government, which nonetheless consumes a much smaller percentage of GDP than the U.S. government) and investment for the future.