Frequent readers of the authors' Commentaries will recall our quarterly discussions of economic and geopolitical factors that we believe have been causing high-anxiety in high technology industries in the United States and elsewhere around the world. We have often noted that, after eight years of an improving technology environment, the last five years have moved the country in the wrong direction.
These last five years have resulted in far more than a baker's dozen enervating political and economic factors here in the US: (1) unremitting extravagance and unwarranted tax cuts in the face of the shift from US federal budget surplus to deep deficit, (2) the definite long-term trend of a rich-get-richer, poor-get-poorer US income distribution, (3) sluggish net job growth below the requirements of US population increases, (4) a net US disadvantage in globalization, (5) weakened US environmental stewardship and deteriorating US infrastructure, (6) the ballooning real and psychic costs of war, in lives and treasure, (7) reduced worldwide and domestic admiration for US leadership, with an astonishing lack of accountability, (8) the weaker US dollar, (9) elevated energy, oil & gas prices, (10) a deteriorated domestic NASDAQ market that has never returned to 2001 levels, (11) ongoing corporate fraud, (12) indictments and criminal investigations in both the White House and Congress, (13) double-digit rises in the cost of US health care and ongoing increases in the number of US uninsured, (14) stunning US federal incompetence (cronyism, disaster relief, Medicare drug plan, nation building, ), (15) reduced US civil liberties and personal privacy, (16) unrelenting illegal immigration, and (17) record US trade deficits growing each year, requiring the US to borrow billions of dollars every week from abroad.
Alas, recent developments have not improved the situation.
Let's just consider Items (1) and (2) above. Worsening inflation in the US continues to steal US consumers' purchasing power and mocks the stagnant multi-year flatness of US workers' compensation. The Fed is so worried about inflation in the US, that for the 16th time in two years it raised interest rates, this time to 5% on May 10, 2006. Yet average Americans must react to their own paychecks and benefits, weighed against highly-volatile costs, like housing (higher mortgage rates), health care (Item (13) above) and gasoline (Item (9) above). For all but the wealthiest Americans, the latter volatile costs have outpaced paychecks since 2001.
Then inflation news got worse a few days later. On May 16, the government reported that wholesale prices jumped 0.9% in April, the most in seven months. Then the Labor Department reported on May 17 that the consumer price index swelled 0.6% in April, topping all forecasts. More importantly, the "core CPI" without food and energy also gained 0.3%.
Although the "recovery" from the 2001 recession is now nearly four and a half years old, the average wage in the US has nevertheless lost ground to inflation since 2001. So despite big statistics such as, "The US Gross Domestic Product advanced at a 4.8% pace in the January-to-March 2006 quarter, marking a rebound from the feeble 1.7% rate in the final quarter of 2005", we simultaneously realize that people's wages are not keeping up with inflation. No wonder the president's polls (see Item (7) above) are now at their lowest level of his tenure (31% approval = to his Daddy's lowest number, with some other fresh polls now at 29%). Some 69% of the people polled now say the nation is off track. Op-Ed columnist Thomas L. Friedman made this comment in the May 17 New York Times, "Those polls can't possibly be accurate. I mean, really, ask yourself: How could there still be 29% percent of the people who approve of this presidency?"
Well, at least the government is acting to get that ballooning federal deficit under control! (Item (1) again!). What's that you say? Congress agreed on May 12 to a five-year, $70 billion tax package that would extend deep cuts to US tax rates on dividends and capital gains, effectively locking in all the president's first-term tax cuts through the end of the decade? And Bush said he signed it enthusiastically once it reached his desk on May 17, 2006?
"We have a train wreck waiting to happen," said C. Clint Stretch, director of tax policy at the accounting giant Deloitte & Touche. "You cannot grow your way out of these (federal) deficits," said Senate Budget Committee Chairman Judd Gregg (R- NH).
Oh well, everyone benefits from tax cuts, what the heck! What's that you say? Most Americans will not benefit? Most of the cuts go to a tiny minority of wealthy Americans? Yep, the Center on Budget and Policy Priorities says the average middle- income household will get a $20 cut, while those making more than $1 million a year will get nearly $42,000. (See the red bars of the graph below to learn who benefits).
As Molly Ivins of the Creator's Syndicate said on May 18, "The $70 billion tax cut is part of a continuing right-wing fantasy going back to the Laffer Curve (circa 1981). Of course, clinging to demonstrably false economic precepts is understandable when you (stand to) benefit from them, but at some point reality does intervene."
Oh by the way, the latest tax cut bill also commits an estimated $53 billion through the middle of the 21st century to help those same high earners shift their existing savings into tax shelters. This foreshadows big federal deficits far into the future.
Let's turn to enervating Item (3) above. Alas, the pace of adding new US jobs continues lukewarm at best (see graph below). California's economy posted a net loss of 2,600 payroll jobs in April. Even after the recession of 2001 ended, with the millions of jobs lost in the US in 2001, 2002, and 2003, it took till part-way into 2005 before a single net new job was added in the US, the slowest post-recession jobs' recovery by far since WW II. Over the last year, the monthly job additions are still tepid, compared to the eight-year period of 1993-2000, when 230,000 jobs were added on average every month for 96 months! That's like an NBA star averaging a "triple-double" every year for 8 straight years!
Outsourcing of US jobs continues unabated (Item (4) above). While outsourcing to Asia still tops the list (India, China, Philippines, Singapore and Malaysia), lately Eastern European countries such as Bulgaria, Romania, Slovakia and the Czech Republic are getting into the act, shifting work from both the US and Western Europe. A low-cost, highly educated workforce, combined with solid infrastructure, economic and political stability, geographic proximity and fewer security concerns are just some of the factors helping Eastern Europe. For example, Bulgaria's educational system ranks fifth in the world and 11th in mathematics, with one of the highest numbers of information technology-certified professionals per capita. General Motors, Capital One, Ford Motor Co. and Lockheed Martin, have already outsourced information technology work to Bulgaria. In early 2006, Hewlett-Packard announced plans to open a global delivery service center in the Bulgarian capital to provide remote infrastructure management assistance to HP clientele in Europe, the Middle East and Africa. Expected to be fully operational next year, the center will employ about 1,000 Bulgarians, primarily multilingual engineers and programmers. Outsourced jobs in Bulgaria provide average base salaries of about $373 per month, well above the Bulgarian average monthly salary of $190.
Another sure sign of worsening US economic trouble is the recent surge in gold prices and other precious metals. The price of gold rose to a fresh 25-year high on May 10, 2006 as investors sought a safe haven amid a weakening US dollar (item (8) above) and worries over the administration's most-recent sword-rattling confrontation this time with Iran. Historically, gold is considered a truly desperate refuge against serious currency weakness, inflation and financial instability. Gold is trading now at levels not seen since the Reagan era. Many investors are now turning to gold; they don't think US inflation is under control, because the US economy is now much more leveraged (i.e. debt-ridden) than it has been in the past (items (1) and (17) above).