The following is in response our article, The “V” Points Downward, which appeared two weeks ago.
I just finished reading this article and, while I agree with the theme, I think a number of causes for the problem are being overlooked.
First, as the author mentioned, the US consumer market is saturated with goods and overburdened with debt. Any CEO considering entering a US consumer product market should be fired immediately, especially when you consider the growth available in India and China (either one has a population of at least three times the US population). I don't see any real growth in US consumer spending within my children's lifetime; we simply have too much "stuff," and current debt levels prevent replacement purchasing.
Second, given the growth opportunities in India and China, all investment is going to occur there. As these markets top out in the next 20 years, the focus will move to Africa unless China and India beat us to it (and they probably will by using our capital to invest in Africa now).
As a result of this capital drain and the abundance of debt, the US economy will be lucky to achieve any growth, and I'm expecting a slow, steady decline of up to -0.5% per year.
How can the US overcome this? Given that US corporations cannot justify investing in the US economy, the federal government will have to become a venture capitalist. As it did in World War II, the defense budget will need to be the vehicle to create new US businesses. Currently, nearly 40% of this budget goes directly to foreign corporations, and I suspect another 40% goes to India and China indirectly as US companies outsource technology development. This will have to stop if the US wants to stabilize the economy. There are several choices:
- Maintain current defense spending, but require greater small business or new business involvement through onshore subcontracting.
- Reduce defense spending and reallocate the money to stay onshore through other purchasing programs that buy from local small businesses.
- Reduce defense spending and reduce taxes as a result (can you see the Devil wearing cold-weather gear any time soon?)
The President can implement #1 directly and immediately. Purchasing departments can start demanding "cost-of-personnel" discounts when contracts include any offshore subcontracting and by rejecting bids with offshore components. Foreign policy would have to be brought into line to make sure that India and China understand that winning US contracts means keeping the work in the US (Japan learned this as car sales tanked when too many auto jobs went to Japan). These actions will slow the impending decline by creating companies that are not large enough to send work offshore, but which are large enough to sustain local economies (think of 1920s small-towns).
We are in for trying times. The best model for our near-term future is Great Britain in the 1970s. We need to avoid the mistakes of Argentina and Mexico (although either is likely as foreign investment is removed from the US economy). In the long term, look at what happened to China and India from the 1500s to now as foreign powers manipulated their economies.
Overall, the future US economy will have only three significant components: education, healthcare and government, as we return to a "pre-Revolutionary War" economy. Those not lucky enough to land a government job will have to return to subsistence farming to get by.
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