Column

GOOD, BAD AND UGLY

The newest U.S. economic problem is the loss of white-collar jobs to Asia

DONALD COXE May 26 2003
Column

GOOD, BAD AND UGLY

The newest U.S. economic problem is the loss of white-collar jobs to Asia

DONALD COXE May 26 2003

GOOD, BAD AND UGLY

Column

The newest U.S. economic problem is the loss of white-collar jobs to Asia

DONALD COXE

ON MAY 6, the Federal Reserve announced it was concerned about excessive disinflation. Investors assumed the Fed would rev up the monetary printing presses. Bond and stock markets soared; the American dollar plunged, boosting gold prices.

Disinflation—a sustained slide in prices for goods and services that promotes rising asset prices—has occurred near-continuously since 1981. Disinflation is a Good Thing.

Deflation—a sustained collapse in prices for goods, services, stocks and real estate— has not occurred since the Depression (except in Japan). April’s U.S. producer price index (wholesale prices), released last week, fell 1.9 per cent, the biggest drop in 56 years. Deflation is a Bad Thing.

Most economists say that deflation can be averted: just print enough money. Students of Japanese deflation agree that the excess monetary creation and mania for real estate and stocks in the 1980s created a bubble that the Bank of Japan finally decided to prick in 1990-1992. It has been engaged since then in demonstrating the challenging physics of reinflating a pricked bubble. That disaster was Fed chairman Alan Greenspan’s excuse for continuing to print money enthusiastically from 1997 to 2000 amid the mania in tech stocks. Since the disease didn’t metastasize into real estate, the Fed said this wasn’t a Japanese-style bubble and the stock market would correct itself without economic damage. That was one terrible call.

The economic downturn that began when Nasdaq collapsed still bedevils the industrial world. Massive over-investment in Internet gear not only brought down the technology industry, destroying millions of jobs, but devastated the usually reliable telephone industry. As long-distance charges across the Web went to near zero, jobs for engineers, accountants, telemarketers, phone centre personnel and other white-collar positions began migrating massively to Asia, a process that has been gaining strength by the month. Cost-cutting is the ruling

management mantra.

This is technology deflation. When educated English-speakers in Asia can compete for good jobs in the industrial world without leaving home, then people who earn one-tenth or one-fifth what North Americans earn become formidable competitors. In earlier economic cycles it was manufacturing jobs that migrated to lowwage economies. That process still occurs— in spades—but it is part of a more ominous trend. Printing more money in the U.S. and Europe does little to improve the competitive position of local workers. Ironically, it creates greater consumer demand for imported goods and services, thereby speeding up the export of jobs. This export trend has become the Americans’ biggest economic problem.

THE INDUSTRIAL world is drowning in a torrent of imports from China at prices that keep falling even as the volume of imports increases

Meanwhile, deflation is being imported. The industrial world is drowning in a sustained torrent of imports from China at prices that keep falling even as the volume of imports increases. During the deflation of the Great Depression, protectionism kept global market shares roughly stable as economic activity declined—misery was shared. This time, China gains market share, though its customers’ economies tread water. Those Western manufacturers who keep their plants open must cut prices, so China promotes price deflation even for goods made in the West.

Many economists have argued that the Japanese deflation experience is unique, because of the demographic deflation that saps that country’s economy. The long slide in Japan’s birth rate has meant the nation has

not been replacing itself for decades. Who wants to pay up for real estate when the population is heading toward zero (sometime, actuaries project, in the 24th century)?

Is Japan’s demographically driven deflation irrelevant to us?

Maybe Japan’s just ahead of the curve. Demographic deflation now spreads across the industrial world. The most powerful driver of our new kind of deflation isn’t tight money or China or technology, but birth control. In this decade, populations will peak in Germany, Italy, Spain, and other countries within the Eurozone. Construction of homes, schools, hospitals, office buildings, shopping centres and highways to meet the needs of an expanding population is the one major industry that is virtually immune to offshore competition. When that industry enters permanent decline, many of the basic economic relationships that have defined what we know as appropriate fiscal and monetary policies no longer work to create demand for domestic workers. Nor can such nations count on growing national wealth from rising home prices.

The U.S. has the strongest demography in the industrial world—just above the replacement rate. Why? Because of the growing number of Latinos. Not only are they immigrating, they have high fertility rates once they’re here. Latinos are already more populous in this country than African-Americans, and they are the most powerful force in maintaining the home building industry’s status as the most vibrant sector of the economy. Indeed, had home building not stayed strong when the economy slid into the tech-driven recession, this would have been the worst economic downturn since the Depression.

Japan avoided outright depression because of its permanent trade surplus—which means it imports jobs. The U.S. runs a permanent trade deficit that now exceeds five per cent of GDP, so it has been exporting millions of jobs. Will the central bankers in the U.S. and Europe avert deflation and restore strong economic growth? If you back the bankers, buy more equities. If you think they’ll fail, buy more bonds and gold stocks.

If you’re like me, you diversify your assets, because you can’t predict the outcome,

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca