It's a Global Economy and We are in Adjustment

Thomas Friedman presented today in his NYT column two contesting intellectual views of where the world is.

I did not spend the time to be able to critique them from my vantage point which I will present here.  I believe that we are in a period of economic adjustment and there is only so much that the government can do to help people and there has been much that the government could do to harm people.  Unfortunately, the latter has happened and we are in this current state.

My number one (and only) son will recognize that I have held this view for some time and have urged him to be sure his career is in the global economy so he can be on the more fortunate side of things that are yet to come.

40 years ago when I graduated from high school, the U.S. economic activity was primarily focused on US domestic activity with some exports.  Multinationals were the dominant firms but in each country they primarily manufactured for that country and export only within that continent.

Since then we have had a great transition to the point where companies manufacture with fewer people in larger plants in the place where the combination of labor cost and transportation cost are lowest to the greatest point of sales.  Global trade volumes as a result have exploded and those people who have the skills to work in this global economy are in the highest demand and garner the highest wages.

The domestic economy is proportionately smaller, but unfortunately, that is where the largest number of people work and therefore wages there are depressed by the basic laws of supply and demand.  There is little the government can do to help people transition from the domestic economy to the global economy as they must do this themselves through education and networking.  Or find a skill that is in demand in the domestic economy.

The downsizing of manufacturing has been the primary location of decline in domestic incomes.  Over time, foreign incomes will rise and some of these jobs will transition back to the US to overcome unfavorable costs of transportation.  However, this will take many years to happen in size.

This is where the government did a lot of harm.  It was not apparent at the time, but cutting taxes and borrowing the war on terror, combined with an insufficiently regulated banking system, created a housing bubble that when it burst crushed the domestic economy and those who work in it.  Now the government has little flexibility to improve the domestic economy.  In fact, the only policy that would have any impact beyond marginal impact on growth is massive repair of infrastructure over a 5 to 10 year period so projects can be planned and worked on.

Where does this leave people in the domestic economy?  Well angry as shown by the Tea Party, the 99%'ers demonstrating in the major cities, and the 53%'ers on Facebook who are angry at the 99%'ers.  Republicans are mad at the Obama Administration and Democrats are mad at the Republicans for not compromising and allowing policies to improve.  Almost everybody is angry with somebody and I am not excepted from this as my regular readers know.

But I digress.  My point is to make a good living you need to be in the global economy or in a part of the domestic economy where there is demand for your skills.  The private sector has gone through an enormous contraction and no longer provides enough revenue for the public sector to continue without reducing costs.  People will need to migrate from the public sector to the private sector in the aggregate.

And lastly on this point, the cost of health care is burying the economy hurting employment in both the private and public sector.  Not implementing the Affordable Health Care Act, Not working to control Medicare and Medicaid expenditures through compromise on various issues is the biggest obstacle, after housing, to improving the domestic economy.