The financial turmoil that started in 2008 seems to be going nowhere. After the troubles with private sector financial institutions, now the focus has shifted to sovereigns. Debt that got piled up on most of the first world economies is dragging the global economy. Either the economists and policymakers have failed to realize the problem or they are shying away from stating the obvious.
First and foremost, US and EU face different issues with their economies. To understand, let us take example of someone who earns $100,000 a year and his income is on a decline each year (negative growth) and there are no options in sight that he could improve on his earnings. Now will a bank be willing to give him $200,000 in debt, most likely no. This is Europe. A continent which actually has become a lot poorer than how it is living and so sane lenders will cut lending to it to finance the new rich in town, East Asia. The Europe will have to actually start living poorer than it does and the decline of Europe is the inevitable outcome of this financial crisis.
US on the other hand has a strong growth base. It is leading the world in cutting edge technologies like ICT, bio-tech, pharmaceutical, medical equipment, fuel cells etc. More importantly, all major brands that emerged in past three decades have, almost all, been American. From IBM to Microsoft to Google to Apple to Facebook, US has led the corporate charts all those decades. So for US, 100% debt/GDP ratio itself is not a problem. Problem is that industries where US has competitive advantage and growth, do not have enough skilled workers and most of US’s work force is trained around industries where US has lost the competitive advantage and has become either non-competitive or is competing through subsidies and protectionism. These sectors have no room for growth. So US, in the words of President Obama, has entered an economic phase where the corporate earnings, in general, will remain strong but the economy will have to bear with a high unemployment rate. This unemployment rate is a direct result of structural creep that we have talked about. So for US to achieve its full growth potential, it needs to solve this employment issue. If unsolved, the economy will keep growing but it will not attain the full potential. Also, the social and political implications of this unemployment could lead US into a destructive spiral. Most important of all, the growing social security and medicare liabilities as a result of aging of baby boomers requires an economy growing at its full potential and having bulk of the population productive to provide for committed social welfare for baby boomers.
President Obama is pushing for a jobs plan that commits massive spending in infrastructure to employee some of the unemployed. This will solve the problem to an extent. However, the bigger issue of employing the workforce or training it to fit in the competitive sectors will remain the real challenge. Training and transformation will not happen short-term. So US labor force will undergo transformations in more than one ways.
It is highly likely that many US workers will migrate to Canada and even Australia. Both countries offer opportunities in sectors for which US’s manufacturing/construction workforce is trained and offer least cultural shock in migration. Nations, too, follow a variant of Product Life Cycle theory and move up the ladder of value chain and become noncompetitive for lower-end economic activity. US workforce is feeling the pinch of this move up. The bulk of its manufacturing workforce trained for activity suitable for previous phase of competitiveness will fit well with the economic phase which Canada and Australia are going through. The demand for workers in manufacturing, mining and construction is high in Canada and Australia and the supply for now is not meeting the demand. Even for Canada and Australia having American workers will make sense for the reason of ease of integration.
Also, to absorb many of baby boomers into work force post-retirement, US Govt. will likely penalize outsourcing of low-end services jobs abroad in short-term. However, reliance of high-end US technology on international markets will limit the hand of US Govt. in this regard.
One employment sector that has the potential to thrive in US is the low-end services sector like retail, civic services etc. For these sectors to pick up, it is important that US works at its full potential in its competitive high-end areas. To achieve this, and to achieve high growth, US will have to make her immigration policies more relaxed for high-skilled workers from abroad. It will not only have to attract the high-skilled workers in the fields of technology, management, energy and biotech but will also have to make sure that it retains the talent that is heading back Asia and South America after graduating from top US schools. This is the only way US can remain productive at full potential and can sustain its competitive advantage in high-end industries.
Perhaps the most important thing US needs to do is to realize that its problems are separate from European problems. Just when the Europe offers the biggest market for US goods outside North America, the shifting patterns of wealth require exploring potential in South America and Asia and to lower reliance on Europe slowly but gradually. US will have to choose between policies that are driven by cultural ties with the continent and the policies that are needed to survive and thrive in emerging economic reality.
The competitive environment US has entered is an extremely productive one. On this road, fewer and fewer workers are required to produce the same amount of output as the time goes by. More so, the environment is suitable for only the especially trained/educated workforce. The bulk of activity of this high-tech economic environment, for now, is centered in West Coast and East Coast. Expanding it to the heartland or fusing it with heartland economies will be the challenge US needs to overcome if it wants to survive as a Union in quarter to half a century from now. Also, though immigration offers a good short-term solution to expand and consolidate the competitive advantage, with emerging Asia and aging Europe, it might not be the long-term solution. So focusing on education and training of indigenous population will be the key to sustainable advantage in high-end production sector.
The route to global economic recovery will be much smoother if US focuses on attaining its full growth potential and lead the world into a transition at the end of which the balance of wealth will shift from Europe to East Asia. Viewing problems and opportunities from prism of past will not only increase economic pain of the world but will also pose serious social, economic and political threats to US. Will the nation of Ameri-cans act in time is the question in whose answer we all have stakes in.
