The Hindu Business Line : US economy: Contradictory signals

TWO contradictory signals are emanating from the US economy presently. While on the one hand, ten lakh jobs have been created since August 2003, on the other, it is estimated that two lakh jobs are being lost to the developing countries through outsourcing every year. The question is which of the two tendencies will prevail in the long run. This is important for us because our condition will be opposite to that of the US.

A small plant does not grow beneath a banyan tree but if the banyan tree is dying then it may grow. The US economy has been going through a slowdown in the last three years, which had led to a loss of 18 lakh jobs. There was no demand in the market. Companies were slowing down their production lines and handing pink slips to their employees. It was necessary to generate demand in the market to break the slowdown. This was accomplished, in part, by the Iraq war.

The US army required missiles, radars, combat vehicles, and so on, which generated demand in the economy. But the crucial element was the granting of tax breaks by the US President, Mr George Bush, and repeated lowering of interest rates by the US Federal Reserve Board.

The taxpayers had more purchasing power in their hands. They bought cars and houses. This has led to increase in demand since August 2003 and the economy is looking upwards. Will this rebound sustain? If it were possible to break a slowdown by giving tax breaks, then no country would ever have had a slowdown.

The problem with this policy is that tax breaks led to greater budget deficit and the government has to print notes to meet its expenditure which soon have to lead to the devaluation of its currency.

It is noteworthy that the dollar has been falling during the last one year — coinciding with the upswing in the US economy. A cheaper dollar means that the real purchasing power of the US citizen is less.

Previously, the US consumer had to pay a dollar to buy goods worth Rs 49 from India. Now he has to pay $1.14 to buy the same goods. The purchasing power of the US citizen has increased due to the tax cuts but declined to fall of the dollar. The net impact in the long run is questionable. Of course, there is some gain in the short run.

The impact of tax breaks occurs immediately while the fall in the purchasing power takes some time to manifest. The growth of the US economy and the creation of new jobs after August 2003 appear to be because of this short-term effect. The true state of affairs will unfold as the value of the dollar declines.

The export of jobs by outsourcing, on the other hand, is stable. The US Chamber of Commerce has issued a report recently showing that 3-5 lakh jobs have been exported to countries such as India in the last three years. It has quoted Forrester Research to the effect that about two lakh jobs are likely to be outsourced every year. True, this loss is small in comparison to the 18 lakh jobs created since August last year but the long term trends will be more important. The export of jobs is stable and likely to increase while the creation of jobs may be short-lived.

One line of thinking making the rounds in the US to deal with this problem is to discourage or restrict outsourcing. But this will not lead to a solution. The US Chamber of Commerce has said that restrictions on outsourcing will lead to heavier tax burden on the taxpayer.

In Indiana, the US Chamber of Commerce report says, a bid lower by $8.1 million by Tata was rejected because the company would have outsourced some of the work. Taxpayers spent an estimated $162,000 per local job saved. Similarly North Carolina lawmakers agreed to spend $1.2 million to hire 34 call-centre workers in state to replace contracted workers in India to answer questions about the food stamp programme.

The second problem is that US companies will lose out on global competitiveness. The technology writer, Declan McCullagh states: "Consider what would happen if Congress restricted companies from shifting overseas. Because rivals in Europe, Japan, and Korea could employ cheaper workers in developing nations, they would have a leg up on US firms. Foreign investors would recognise that rising US protectionism makes US companies less competitive and would choose to take their yens and euros elsewhere... " The conclusion is that the US has no option but to allow outsourcing.

The US citizen will loose in both situations — whether outsourcing is allowed or not — but the US corporations will be saved if outsourcing is permitted. Then, the US worker will lose jobs to cheaper workers in India. But the US companies could remain competitive by employing the cheap Indian workers. If outsourcing is prevented, the US Corporation will lose their competitiveness and sink along with the US worker. The US worker has to loose either way. The US Chamber of Commerce is correct, therefore, in saying that restrictions on outsourcing will be counterproductive for the US corporations and economy, in general. But it is wrong in asserting that outsourcing will be beneficial for the US worker. He will loose anyway except that taxes paid by the US corporations may make it possible to pay him some nominal social welfare benefits.

This is what the US citizens should have expected in the first place. Globalisation also means globalisation of wage rates — to their lowest levels. Technological advances in transport and communication have reduced the sustainable wage differentials to the barest minimum. It will not be surprising if the US becomes the strongest votary of protectionism in the times to come.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)