If you haven't noticed that the news is full of stories about companies laying off (firing) thousands of workers while they ship jobs overseas, you must have spent the last year on Mars. The employment picture for high tech is particularly bad, but we are not the only class of employees whose jobs and income are vanishing. In general, the service sector of large companies and much of manufacturing is vulnerable too.
I'm usually an optimist, one who looks on the bright side of things, accentuates the positive. So it's quite unusual for me to talk negatively, and even more so to write about situations that have a strong negative view to them. It is fair to say that writing this article was not enjoyable, but I felt compelled to write down what I have been thinking about for several months.
In Part I, I will outline the problems affecting us in broad terms. I will use the best estimates available to me. They can't be exact numbers - that won't be possible until after the events. The numbers will be first approximations, in the ballpark but possibly off by fifty percent in either direction. However, the results of these problems are clear even though the actual amounts can't be accurately predicted.
The parts of our society, business and government, that are primarily responsible for creating this situation are also the parts that will be crucial in solving the problems. Things like this happens because, despite their best intentions, it is not unusual for people to not think about what happens five or ten years later. Long term planning is a major weakness in the US, in personal, business and government arenas. It is not helpful to concentrate on the blame side because we will need their understanding and help to solve the problems.
It is useful to keep in mind an old aphorism - consider this classic:
"The way to hell is paved with good intentions"
But government is only part of the problem. They are also where an important part of the solutions will lie. Most of the problems arise from the excesses of corporations and actions arising from unexamined assumptions by individuals. All of these factors will be outlined in Part I.
After expanding on the causes of the problems, including the past, present and future problems, I'll soon follow up with Part II that details my conclusions and the probable results. More than this, I'll also outline some steps that you as an individual can take to minimize risks and improve your chances of getting through this rough water without drowning.
There is no single cause for all the problems, just as there is no single cause for the economy's decline. As I see it, these are the major factors affecting the economy:
The cost of the war is staggering. High-tech war does not come cheaply, but it is very effective against all opponents who don't have it. All the news we hear is about how effective it is, not how much it is costing. Different sources on the cost vary, but estimates range around two Billion dollars a day during the active part, and about half of that in the transition period that follows.
The crucial elements of this cost are not discussed at all. How does this spending of real dollars effect the economy? Some of the money winds up overseas and has no benefit to the US economy. Some is not spent by the soldiers until they go home, and some gets spent by dependents back home. Those dollars that are spent do not have a high multiplier effect as they are spent in the US, so the net effect of salaries is quite small. The net effect on the economy is not small, and will be negative.
The economics of this subject has both positive and negative effects. On the positive side, some money is going into research and development of improved detection machines and a small number (approximately 30,000) new government employees have been hired. The high tech equipment has a big multiplier effect, but government employees do not. However, all of this is government funded from tax dollars, which is a net drain on the economy.
In actual use, these security precautions cause delay and overhead to be added into a significant part of the economic system, with little if any benefit. Overall, the bigger security system, which is still expanding, carries a cost to the economy. This cost could be anywhere from a billion dollars a year to a billion dollars a month in nonproductive costs. The total cost is difficult to estimate because the overhead is extremely diffuse and hard to figure
This is the biggest and most complex issue of all. In a slow but relentless process, the strength and apparent benefits of the US economy has caused other countries to start imitating us in that area, and in many cases, with subsidies from their governments. Over the past decade, those foreign economies have become significant suppliers to US companies because of favorable costs and tarrifs. The side effects of that transfer of skills and knowledge are now clear, and they are painful.
We have oh so cleverly trained our suppliers to become our competitors when we bought the short term benefits of lower prices. What a great plan. It reminds me of the Roadrunner cartoons, with the US as the coyote, unfortunately. He couldn't see consequences ahead, and neither could the US. Now its time to pay the piper, and we've just started paying.
What is worse, in an effort to cut costs to stay competitive, much of the US industry is accelerating this process. We are now laying off skilled professionals by the tens of thousands and sending their jobs and knowledge overseas. This plan amounts to hitting yourself on the head harder because the first time hurt. Again, the short term mentality, inculcated by financial people and Wall Street, is now paying negative dividends, bigtime. This will make our current economic malaise into pneumonia, with no penicillin in sight.
In another short sighted move, the US opened the immigration gates wider in a effort to provide more low cost workers for the agriculture industry. This particular piece of stupidity ignores the fact that those worker's children won't be satisfied with picking grapes. Those children have applied themselves at school, done fairly well despite the school system, and have started to enter industry, enlarging the supply of workers just as the demand declines.
Aggravating this situation is the presence of over 700,000 H type visas that allow foreign labor to supply critical high tech jobs that the corporations claim they are not able to supply from the US labor force. This is just a big lie. There are hundreds of thousands of laid off high tech workers, mostly under or unemployed who can fill those needs with little or no training. Once employed, that money and those skills stay in the US. Remember that point - it is crucial.
Businesses look at this through a narrow economic lens. Why hire a $40,000 American when you can get a $20,000 immigrant who can do the same job and be fired without risk. Most business see that as a smart move, because they too see a benefit now. Just as credit cards give instant satisfaction with bigger consequences later, hiring cheap labor will too.
The situation is, in essence, a tragedy of the commons. The people in our government, Representatives and Senators, who should be looking out for the US's long term interests, are busy helping business meet their short term needs in order to get reelected. The worst part of this is that the government rarely responds to any situation until it has become a crisis. So the economic situation will get some quick fixes that probably won't help, rather than fixes that recognize the longer term problems. It may be that the Federal Reserve Chairman, Allen Greenspan, sees the problem but his options are limited by law and constrained by circumstances.
The reasons for this acceleration in Globalization and its consequences are many, but these two are crucial:
The costs of long distance communications has dropped by more than an order of magnitude in the last decade. This is a result of fiber optics (FO) technology. There is so much bandwidth in FO that the build out of fiber in the 1990s has created a huge surplus of capacity. That capacity has resulted in serious competition between the major long distance suppliers, which has caused LD prices to plummet.
In 1993, I was paying more than 20 cents per minute for LD, now I pay 3.5 cents per minute. This is for an individual - the costs for a large business can be much lower. This also translates into very low costs for Internet communications, which has also fueled great expansion of digital communications. Today I pay $45 per month for bandwidth that would have cost me about $750 per month in 1993.
English as the common language has passed critical mass, except in France of course. This has diminished the last barrier to using workers in non English speaking countries to an acceptable level for the companies. How acceptable it is for the customers remains to be seen.
Most of the jobs that are being outsourced overseas are those that require only cheap infrastructure and easily trained skills. In high tech, these are support and applications programming. In a few places, the more difficult programming jobs can also be sent overseas, but this is still a limited process. In five years, operating systems, realtime and embedded programming will join the parade outside the US.
The list of financial problems is extensive, but only the major ones qualify as disasters. Those are the ones that pull the economy down. You'll recognize most of them.
If the dot com crash hasn't affected you one way or another, you are a very lucky minority. To quote a classic definition:
When your neighbor loses his job, that's a recession, but when you lose your job, it's a depression
Financial chicanery is best demonstrated by two names known to all - Enron and Worldcom. Both of these firms were directed by their chief executives to perform creative accounting to maintain the fiction that their companies were still profitable. I'll only comment that this represents a high in short term thinking, if it can be called thinking at all. It isn't difficult to understand that if you spend more than you earn, at some point you will run out of sources that will lend you money. Then the troubles come. Why these executives and their accomplices thought they could get away with this is beyond my comprehension.
The most serious government goof in recent times belongs to California. Their energy bill deregulated the suppliers of electricity while delaying the deregulation of consumers for six years. The energy producers, not to take a back seat to Enron and Worldcom, worked out net zero swaps of energy that enabled them to raise prices based on their 'increased' costs. Of course those costs increases were self inflicted and did not actually cost anything but the paperwork involved. To prove they were still on the (wrong) job, the eventual settlement with the energy providers has burdened California with approximately one billion dollars a year in excess costs.
So now we're past the problems right? Now things will start to get better, right? Wrong - very wrong. There are more problems to be uncovered and none of this information is based solely on my thinking. It comes from a serious source, and makes more sense every day.
About a year ago, I was watching a financial program about the problems described above. At the end of the presentation, the person reporting quoted a Morgan Stanley (experienced financial firm) executive vice president as saying (in meaning, not exact words):
The dot com crash is just the first. We will have to weather the coming housing crash and the credit crash before the recovery.
The housing bubble has been sustained by two main factors. The first is the abnormally low interest rates that were set to minimize the effect of the dot com crash. The second has been the flight of capital from the stock and bond market to something presumably more stable.
Now that the recovery has not appeared, companies are still laying off people and banks are getting nervous about people being able to pay off the mortgages. Just as at the end of every unsustainable advance, there is a period of price increases that exceed inflation. These housing price rises are coming to an end, presaging some real price declines.
The housing market is now showing some froth at the top of the price range. This froth is indicated by prices that are discounted or reduced, options added at 'no cost', extended payment plans, zero down, extremely low rates and all sort of other financial incentives. All these action signal that the market demand has softened. These financial games played by sellers are a response to prolong the good times just a bit more.
The longer the good times continue, the harder the crash because each new sale is one sale taken from the future and another chance to bankrupt the buyer and drop him or her out of home buying for a long time.
How hard and fast the housing market will decline is unpredictable, but decline it will and probably hard enough to be called a crash.
Credit. There is a lot of credit sloshing around in our economy, and a huge interest charge about to come due. Here are some causes of excess credit:
As people become less able to pay their bills, trouble starts. This is already apparent in the foreclosure and bankruptcy statistics, but most people don't pay any attention to this until it is almost too late. The US rate of bankruptcies is currently at an all time high, yet it gets no mention in the news. Bad news doesn't sell well.
As should be apparent by now, we've got Trouble right here in River City (from the Music Man). That's spelled with a capital T, which rhymes with P, which stands for:
I'll leave you with this thought and a few more Ps. If you aren't Perturbed by now, you've missed the Point. Stay tuned for Part II, in the works.