August 6 , 2003
In the past month, probably the two economic issues about
which people have written me most are: the impact of plunging interest rates
upon those dependent upon fixed incomes and the increasing out-sourcing (meaning
out of the country) of jobs that previously were done at the corporate
Both questions reflect pain in the economy.
While the elderly no longer are working, many have depended upon that
interest income they received from their certificates of deposit.
As interest rates have plunged from more than two percentage points above
inflation to more than a percentage point below inflation, that income has
become increasingly inadequate.
Those worried about jobs being exported probably have
suffered some loss of their own, They
are discovering that finding a job in their area of expertise has become
impossible because those activities are now being done in Ireland, India,
Malaysia or some other part of the world where tasks can be performed at much
lower cost than here. When the
recovery comes, those jobs will remain off-shore.
There is little doubt that the latest, weakest of
recessions has been followed by the least robust of recoveries. To increase economic activity, tax rates have been cut and
interest rates have been driven lower. The
medicine has been strong, but the response, so far, has been weak.
Some people are believing that the medicine will not work this time,
because too much purchasing power is being lost by the coupon clipping elderly
or the jobs never will be ours again.
First, I believe the medicine will work, especially as we
have improved the dosage on the tax cuts. Those
long delayed tax cuts in 2001 were not strong policy.
Delayed tax changes delay favorable response and may even lead to
undesirable delayed economic activity while taxpayers wait for the lower tax
rates to arrive. By eliminating the
delay on some tax changes, the latest tax cut will generate more immediate
response than those earlier attempts.
Unfortunately, politics prevented the removal of all
uncertainty from the tax cut. In
the absence of additional legislation, dividend and capital gains reductions
will be reversed after four years. This
is not very troubling, but a more certain outcome would get more certain
economic responses, even if the certainty was to definitely restore the old
rates after four years.
Second, by trying to preserve principle, some elderly have
discovered that they must cash in some of that principle in order to live.
A better investment strategy would be more diversity of investments with
offsetting outcomes. For example, if the retirees held some CDs but also purchased
some longer term bonds, they would not be suffering the same pain.
Instead, the CDs would lose earning power, but the bonds would rise in
price. Zero risk of principle is
rarely an appropriate investment strategy, as many retirees are currently
While I understand the pain of those trying to maintain
their principle and still live off the interest, I cannot agree that the
solution is to keep interest rates high. We
must get people back to work. Lower
interest rates have increased the value of housing, lowered monthly mortgage
payments, stimulated stock values, and lowered the finance charges paid by
corporations (and even governments).
Rates will not remain below
the rate of inflation indefinitely.
In the meantime, enough homebuyers, stock investors, and
even corporate financial officers will
learn that these low interest rates offer unique opportunities that they cannot
ignore. When they act,
economic activity will increase, jobs will develop, and interest rates will
Third, those worried that jobs going off-shore will remain
there are probably correct. Prior
to the information revolution, India had educated people in an economy that did
not need them. Now, that education
can provide princely returns, for Indians, at a fraction of the cost of getting
average returns in the United States. This
is how emerging countries rise up.
The fault, if one was made, was in trying to make a
profession out of the mastering of a task.
Computer programming, or even computer system design, can be done
wherever the programmer or designer lives.
The "product" can be delivered over the internet.
As always, the solution is to learn how to learn in school
and be adaptable to changing opportunities.
Those high priced computer programmer jobs will not return. Those
who learned those skills will need to adapt.
That is not easy, just as the welder or the machine operator did not find
adaptation easy in earlier years.
However, new skills will be needed.
There is not a finite number of work solutions to meet human needs, at
least not yet. And that growing purchasing power abroad will want some of
the diverse goods and services we produce here.
Look at medicine, finance, corporate management, entertainment. Also, construction and lodging jobs are not easily exportable (except the back office work). America will find plenty to do. But it will not be the same plenty that it was before the recession arrived.