Competitive Intelligence

The Jobless Recovery: Do Productivity Gains, Forced by Cost-Cutting, Mean the Rules Governing the U.S. Economy have Changed?

Three articles in yesterday's newspapers got me thinking about the U.S. economy and the apparently jobless recovery we're moving towards in the latter half of '03. Read them here:

From the New York Times http://www.nytimes.com/2003/08/02/business/02ECON.html?pagewanted=print&position=

From the Washington Post

http://www.washingtonpost.com/ac2/wp-dyn/A13503-2003Aug1?language=printer

From the LA Times

http://www.latimes.com/templates/misc/printstory.jsp?slug=la-fi-jobs2aug02001424§ion=/printstory

I also noticed a couple of left-of-center pieces from AlterNet that I thought were interesting:

Transgenerational Financial Terrorism

Take This Jobless Recovery and Shove It

Jobless Recovery

While the recession officially ended in November 2001, it doesn't appear that hiring is following past recovery trends by kicking in to drag us back to growth. So the question is: what if higher unemployment and slower wage growth are signs of a fundamental change that might be permanent?

In the up years of the economic cycle, firms produce a just a little more product than the market and customers will want to buy. This excess builds up in inventory until the firm realizes it doesn't need to make so much and lays off a few workers to meet real demand, at which point the stockpile shrinks and workers are eventually rehired to produce more again. Now, to get an economy going, government can do just a few things to get consumers and businesses spending again and putting people back to work - that is, cutting interest rates, reducing taxes and just buying more itself - which the Feds have been doing to little apparent effect.

Consumers have kept the economy stumbling along with low interest rates that have allowed them to extract money from their homes through mortgage refinancing; but, rates have started rising and people are getting more worried about their financial security, so this lending has slowed lately. Therefore, a decent recovery won't start until businesses start spending again, delayed because of the current overcapacity and modernization that had been done in the late 1990's when it was relatively easy to raise capital to invest in production modernization by selling new stock. So, companies aren't spending because they just don't need to.

When will firms start spending again? For many, never. They've moved production offshore to cheaper markets, where any increase in consumer demand in the U.S., will be met with hiring, not of American workers, but of foreign ones! We can blame the end of the Cold War and the globalization that followed as market economics took over in former command economies around the world, that brought back the rules of "Comparative Advantage" with a vengeance. It used to be, we wouldn't trade with many countries because they were political competitors; today, economic competitors are the source of dramatic disinflation in production costs, the chief benefit of which is cheap goods for American consumers. On the home front, the effect has been to increase interest rates, which could cause home values to start dropping since people won't be able to afford as much house as they could a couple of months ago.

With earnings season in full-swing, corporate profits have been fairly robust of late, but companies aren't seeking to hire new workers. Instead, they're trying to find ways to squeeze fixed-overhead costs (read, "people") out of their business through productivity enhancements - which is exactly what statistics are showing. Rising productivity has been the source of these new profits - and the rise in the stock market that has accompanied them - demonstrating that companies can stretch current workforce to meet their needs. In other words, growing top-line revenue, without growing middle-line expenses, leads to greater bottom-line profits.

And, finally, there's the recent trend of white-collar overseas outsourcing - especially in IT. The complaints of steel and auto workers of the 1980's are taking on new meaning among accountants and programmers who find themselves competing with sophisticated and creative knowledge workers in places like India, Israel, South Africa, Eastern Europe and the Philippines where costs of skilled labor are a fraction of what they are in the U.S., and competition for such jobs is so high among a relatively new and well-educated workforce that outsourcing companies can't sign companies up quickly enough to send U.S. jobs abroad. By some estimates, more than a million jobs have moved abroad in recent years. The devastation in the high-technology (computers and software) sector has left no one untouched by layoffs among friends and family, causing even greater devastation among economies in states like California.

And, this is the paradox (and price) of becoming the dominant economy in an increasingly globalized world. The more prosperous we are, relative to the rest of the world, the less secure that prosperity becomes. In the end, the only way to prevent exporting jobs is to select one of two choices: reduce our own living standards so that we can be competitive in the global marketplace; or, help raise the standard of living everywhere else to the point they have no unique comparative advantage based on commodity factors (like cost of doing business) alone.

- Arik