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 headquarters. 

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 discovering. 

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 rise.   

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. 


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