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Monday, March 23, 2009

Race to the Bottom (or middle)?

During several recent conversations and e-mails I have had with clients there has been a recurring theme that although we may see some short -term recovery in the US economy due to all of the gov't intervention, we have longer-term problems that may result in lower standards of living here. The idea is that since we have lost much of our manufacturing base, growing economies like China and India will assume the lead in the global economy, with a result being the US getting poorer while these countries get richer.  This is a common theme in the on-going debate about the effects of globalization.  

I do not subscribe to this view.  I think it assumes that global economics is a zero-sum game, meaning if there are winners, there have to be losers.  That has not been true over the last century of economic growth.  As economies enter the global market place, they improve not only their own prosperity, but the prosperity of all global participants.  Trade takes place because it is good for both sides, or else there wouldn't be any.  The countries that have not prospered over the last century (think most of Africa) have not failed because other countries were taking advantage of them, but because they have serious internal governance problems. (This is obviously oversimplification, but I believe the general point)

I am not trying to sugar coat the current situation or the effects of globalization.  There have certainly been losers and there will continue to be more losers.  Unskilled labor in the US and other developed nations will have a hard time maintaining their standards of living.  However, educated labor around the world will likely benefit as globalization expands and innovation continues.  One clear fact is that level of education and standard of living are directly related.

There has been much conversation in this country about growing income inequality, which we have indeed experienced.  However, the cause of the inequality is not greedy corporate executives or their political cronies.  The clear cause if the difference in education levels.  There is more global demand for highly skilled labor than there is supply of these workers.  Thus, they are able to command higher incomes.  Meanwhile, lower skilled labor has difficulty increasing wages.  (Yes, there are more causes, but education seems to be number one.)

We really can't know how the global economy will proceed over the next decade.  The modern economy is incredibly complex and in my opinion impossible to model or forecast.  All economic predictions should be taken with a grain of salt.  What I do know is that every time the end of advancement and prosperity has been predicted, the economy comes roaring back.  Also, whenever we are told that we have conquered the business cycle, we are in trouble.