Posts Tagged ‘World War II’

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Re-shoring. If the last decade or so has been characterised by off-shoring, then maybe we are set to enter a new era in which manufacturing returns to home markets, or, failing that, to countries much closer to home. Re-shoring: if it proves to be real, it may provide real, underlying strength to economic recovery. If it proves to be real, then real hope can be added to economic commentary; hope that this time recovery can last. And now we have evidence that it may indeed be happening, right now.

Sometimes predictions can become descriptions. You can forecast what the weather is going to be like. It is much easier and more credible, although perhaps less interesting, to describe what the weather is like. But Boston Consulting has moved from forecaster to describer in one very crucial area. A couple of years ago it made headlines for forecasting a new trend in manufacturing, as companies opt to make their products nearer to their home markets. Now it reckons it has evidence that this is actually happening.

Being one of the world’s largest consultancies, Boston Consulting’s surveys tend to be pretty meaningful. It asked executives at US companies with sales greater than $1 billion about their manufacturing plans. A year ago, 37 per cent said they “are planning to bring back production to the US from China or are actively considering it.” In its latest survey, the results of which were published this week, that ratio rose to 54 per cent.

So why, oh why? 43 per cent of respondents cited labour costs; 35 per cent proximity to customers; and 34 per cent product gave quality as their reason for considering re-shoring.

Michael Zinser, from the consultancy, said: “Companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture…When you look at the total cost of production for many goods, the US appears increasingly attractive.”

The Boston Consulting survey probably provides the most compelling evidence to date that re-shoring is occurring, but it is far from being the only evidence.

Back in July a survey from YouGov on behalf of Business Birmingham revealed that one in three companies that currently use overseas suppliers are planning to source more products in the UK. John Lewis recently said that it plans to increase the volume of made in the UK products by 15 per cent between now and 2015.

This development is good news in more ways than one; it may even be very good news in quite a profound way, but more of that in a moment.

But what about China? This is surely not such an encouraging development for the economy behind the Great Wall. Well maybe it isn’t, but maybe it actually is. What China needs is for wages to rise, and for it to see more growth on the back of rising demand. Its economy is simply out of balance. No one is predicting the end of Chinese manufacturing, merely that it may lose some of its dominance. If this loss occurs because wages in China have risen, creating more demand, this is good news for China, its suppliers and the companies that sell to its consumers. Okay, changes are never smooth. There will be short-term headaches caused by re-shoring, but the overall impact will be positive rather than negative.

But there is another perhaps more important implication.

Over the last few decades we have seen growing inequality, and company profits taking up a higher proportion of GDP, while wages take up a lower proportion. Some think this is good thing, and accuse those who criticise of being guilty of the politics of envy. They miss the point. You may or may not think inequality is morally justified, but it is clear that from an economic point of view it is inefficient. For an economy to grow it needs demand to rise, and in the long run this can only occur if the fruits of growth trickle down into wage packets. It is perhaps no coincidence that the golden age of economic growth occurred in the 25 years after the end of World War II, an era which saw much more equality than we see today.

It is possible that re-shoring is symptomatic of changes in the balance of power across the markets. For years we have seen what the IMF calls the globalisation of labour: the reward to capital rose, the reward to labour fell. The underlying cause of this may have been the one-off effect of millions of Chinese workers joining the globalised economy. As this one-off effect begins to ebb, we may see the globalisation of labour work in reverse.

See also: Wages set to rise – in emerging markets

© Investment & Business News 2013

Question: how it is possible for real disposable incomes to fall by 5.3 per cent, yet personal consumption to rise by 3.2 per cent? (That’s on an annualised basis, by the way). It smells of debt, doesn’t it? Or consumers finding new confidence, or – dare one utter the words – of a bubble in the making. Yet this is what happened in the US during the first quarter of this year.

Here is another question. How is it possible, under the current economic conditions for government spending to be cut by 4.2 per cent in Q1 (again that’s annualised), while the economy expanded at an annualised rate of 2.5 per cent? Yet this is what has happened in the US.

It’s an odd thing. We keep hearing about how US government debt is unsustainable, and how Obama is leading the US economy over the steepest and most terrifying of fiscal cliffs.

The truth, if anything, is that the fiscal cliff is more like one of these things that count for hills in East Anglia. The US stares from the top of the dizzying heights of a molehill.

Capital Economics explained it thus: “The 7 per cent decline in real government expenditure over the past couple of years is very unusual. Expenditure did decline by 11 per cent in the 1950s after the Korean war ended, by 7 per cent in the early 1970s after the Vietnam war ended…Nevertheless, that makes the current decline already the joint second biggest since the end of World War II, with the sequestration cuts still to take effect.”

Republicans and Democrats are busily staring at each other like gun fighters at dawn, unwilling to even hint at compromise, which has meant the expiry of George Dubya’s tax credit, and forced budget cuts. Troop withdrawals from Iraq and Afghanistan have also helped to lead to a sharp fall in defence spending.

Even so, the figures are surprising. Capital Economics said: “After accounting for measures to raise revenue, such as allowing the payroll tax cut to expire, as well as spending cuts, the decline in the structural Federal budget deficit has been dramatic. From 7.0 per cent of GDP in fiscal year 2009, that deficit narrowed to 2.5 per cent in 2013 and, according to the CBO’s projections, will be only 1.0 per cent in 2014. By next year, most of the remaining Federal budget deficit will be explained by the lingering cyclical weakness.”

So the US is experiencing what we in Europe call austerity.

The large fall in disposable income was mainly down to expiry of the tax credit.

So why, oh why, or indeed how, oh how, did the US manage to grow at 2.5 per cent in the first quarter?

Answer: well it can surely be no coincidence that the quarter also saw the Dow Jones and S&P 500 hit new all-time highs. US house prices are on the mend too, and that did no harm.

It seems that Americans would rather see equity and house values rise, than earn more money – at least that is the story of Q1.

It is a triumph of QE. Quantitative easing, which is having the effect of pushing up on asset values.

Look at the global economy and it is hard to see why equities have performed so well this year. Look at QE, and the explanation becomes clearer.

Does this mean what they call monetary policy – that is to say central banks playing with interest rates and bond buying – can make up for the effects of austerity? The experience of the US in Q1 says it does.

But then again, it is just a quarter. This week alone may see data that tell another story. See: Data week in the US. In the battle between austerity/stimulus/monetary policy, snapshots are not very reliable.

The real cliff hanger in the story of the US economy relates to what effect austerity will have during the rest of this year.

© Investment & Business News 2013

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Different times call for different remedies. Depending on your own interpretation of Mrs Thatcher, she either saved or destroyed Britain. She may have put the ‘great’ back in Britain, or put the ‘greed’ back in Britain. But whatever your conclusion, it does not mean the UK needs Thatcherism today and here is why.

The period 1868 to 1914, was a golden age for the UK economy. See: The Age of Symmetry. It was a golden age because it saw more innovation than any other period in history. It was not that golden for economic growth, however.

That’s the thing about innovation. It can sometimes have the effect of destroying jobs. An economy that has seen a burst of innovation has to learn how to ensure demand is there to meet all the potential supply. After World War I the global economy struggled to learn how to adjust. In the US a boom followed, but this was built on leverage to a large extent. World War II changed things. After the war, the UK became a more equal society partly because those who had fought for King and country demanded something in return. In part it was because of ideas of Keynes had become widely adopted.

In a more equal Britain, and an economy dominated by Keynesian demand creation, the UK finally learnt how to make use of that legacy of innovation, and the UK boomed as it caught up with potential. The UK was not alone; the post war period lasting around 25 years saw the highest levels of growth ever recorded. Germany learnt a different lesson from Britain, however. To a large extent it found a way to catch up with potential by selling its products overseas. Germany still relied on growing demand but the growth in demand came from outside its borders.

By the mid-1970s, all the potential growth coming from previous innovations had pretty much been used up. The UK went from high growth to playing with recession and stagnation. Something had to change, and change came in the shape of Mrs Thatcher. In many ways Thatcherism seemed to sound the death knell of Keynesian economics. Under her the UK learned to see the economy in much the same way that a savvy housewife managed the finances of her household.

The UK switched from being a country dominated by economic policies designed to increase demand, to one that emphasised supply-side. As part of this adjustment, taxes were cut, and especially for those on higher salaries. The UK became less equal. But this may have been what the UK needed for that era.

It is not like that today. Innovation is all around us. Jobs are being lost to automation. Corporate profits to GDP are at a new record. See: US corporate profits to GDP at all-time high 

Many of the larger companies do not know what to do with their mountains of cash. Money being generated by the corporate world is not being spent. The UK has become a far more unequal place, and that lack of equality has meant lack of demand to buy the products that business is capable of producing.

Keynesian economics may have lost its relevance in the 1980s, but that does not mean it is not relevant today.

And things are different in another way. The UK is now more reliant on the rest of the world than ever before. Globalisation has changed the shape of the global economy. The UK is virtually impotent. The UK government can implement measure to stimulate demand, but needs other countries to adopt similar policies or the result will be a rise in imports and the UK government may run up even bigger debts.

Mrs Thatcher became Prime Minister at a time when the global economy was changing in quite a profound way. She was more than the UK’s leader; she influenced world opinion. Thatcherism and Reaganomics were adopted internationally. Maybe Thatcherism and Reaganomics were responsible for ending the Cold War.

In one sense we need another Mrs Thatcher. We need a Prime Minister who can galvanise world leaders. It is just that we need our new Mrs Thatcher to hold quite different views from the first version. We need someone who supports measures to stimulate global demand, more equality, but as a global mantra, and indeed someone who supports minimum international taxes, such as a minimum corporation tax, so that governments can tax company profits without running the risk that companies will set-up shop elsewhere.

We need a system for addressing global imbalances as was proposed by Keynes in 1944 at Bretton Woods. And we need charismatic leaders who can light the way. Yes we need another Mrs T, but just not her ideas.

©2013 Investment and Business News.

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