Over the past year it has become evident that deflation is a driving force of the US economy. Margins are being squeezed in virtually all businesses. Even areas of the market where you might think there is pricing pressure don’t always have it. For example I queried a friend about how his low-income rental units were doing thinking that the subprime mess would definitely drive more business to him. The opposite is true. Not only is the phone ringing less often from prospective tenants, existing tenants are being laid off in bunches meaning in order to avoid massive vacancies he has to drop rental prices.
There is even pressure on real estate appraisers – many of whom are doing wonderfully due to the refinancing boom. I queried some realtors who obviously have more free time than ever and they tell me they are using it to appraise houses for free as they look to build stronger relationships with the banks that have foreclosed inventory to unload.
Recently, Paul Krugman had an opinion piece in the New York Times on falling wages and how they lead to less spending which presents an ongoing danger for the economy.
Krugman explains that according to John Maynard Keynes an expectation of a 2% wage reduction will be the rough equivalent of a 2% tax increase on an economy. A world-famous economist, Keynes advocated government interventions in recessions and depressions to reduce their ill-effects on economies.
While I agree with many of the principles Keynes espouses, I just can’t help but wonder if a deflationary spiral won’t do the US some good for the short term. Over the past years I have been a proponent of keeping US jobs from moving overseas and over time my research has shown me this is an ill-advised policy. The reason is that if an American company is precluded from hiring workers in let’s say Bangladesh, it will be at a disadvantage when it tries to compete with the company which does employ people from this country. By forcing jobs to stay in the US in fact you would eventually drive companies out of the US or into bankruptcy as they lose marketshare to lower cost suppliers.
My research and common sense has shown that the solution to losing jobs to other countries is to allow the standard of living in these areas to improve so the competitive advantage of offshoring jobs decreases dramatically. And this is happening slowly but surely. I remember in the eighties how the US feared the Japanese would take all its jobs. Soon the Japanese standard of living improved to the point where this just didn’t happen to a great extent.
But if we are to assume deflation continues to be the norm in the US and it happens faster here than elsewhere, we run into a situation where offshoring becomes a less-effective way to save money for corporate America. When you add in time zone, location and cultural differences, at a certain point it begins to make sense to bring jobs back to America. And I am seeing this happening in the contact center and tech spaces where thousands of jobs have come back from India and other countries.
Do we really think manufacturing will ever come back to the US? We can only expect this to happen if the standard of living and wages increase dramatically in China and elsewhere or average wages in the US decrease dramatically.
The irony is that real estate prices would have to fall far further to bring manufacturing jobs and others back to the US. Interestingly the US government is in a quagmire which forces it to try to put a floor under housing to save the economy and the banking sector. But how does the US get jobs back if it forces home prices higher or even stabilizes them? After all, how can factory workers competing in a global economy afford prices at current levels?
One counter to this argument is that for many, their home is a major part of their assets and the farther home values drop, the poorer consumers feel. And when consumers see their net worth fall in, they will naturally spend less. Obviously this is a complicated problem with no simple solution.
Is green energy the answer to creating much-needed American jobs? Perhaps, but it seems early to proclaim this market as the creator of the 10 million plus jobs the US needs.
So while most economists agree deflation is bad in the long-term, I submit it presents some benefits to the US economy today. In addition I credit deflation for starting to bring offshored jobs back to the US. It is rarely a smart move question someone like Keynes who was named by Time Magazine as one of the most influential people of the 20th century, but one wonders how his theories may have changed in an age where the internet and IP communications can shift millions of jobs from a country with a high standard of living to one with a low standard of living almost overnight.
While the US government seems to be doing everything to generate inflation by printing money as fast as it can and keeping interest rates low, for now the country is going to experience deflation. While this can be very painful if you are a worker who had wages cut, it could also be responsible for adding or keeping millions of jobs in the US over the long-run.