Recently read Fareed Zakaria’s piece in Time Magazine. He makes some compelling points about the current American recession and whether it’s just a cycle or emblematic of far deeper trouble. He argues the latter:
And yet something feels different this time. Technology and globalization are working together at warp speed, creating a powerful new reality. Many more goods and services can now be produced anywhere on the globe. China and India have added literally hundreds of millions of new workers to the global labor pool, producing the same goods and services as Western workers at a fraction of the price. Far from being basket-case economies and banana republics, many developing economies are now stable and well managed, and companies can do business in them with ease. At some point, all these differences add up to mean that global competition is having quite a new impact on life in the U.S.
Two weeks ago, for example, I sat in a Nano, the revolutionary car being produced by Tata Motors in India. It’s a nice, comfortable midgetmobile, much like Mercedes-Benz’s Smart car, except that rather than costing $22,000, it costs about $2,400. Tata plans to bring it to the U.S. in two to three years. Properly equipped with air bags and other safety features, it will retail at $7,000. Leave aside the car itself, whose price will surely put a downward pressure on U.S. carmakers. Just think about car parts. Every part in the Nano is made to global standards but manufactured in India at about a tenth of what it would cost in America. When Ford orders its next set of car parts, will they be made in Michigan or Mumbai?
In short, Zakaria argues that America will continue to lose manufacturing jobs and we must simply accept it, rather than trying to create artificial solutions (such as increasing consumption or erecting trade barriers) to counter this trend.
He suggests some pretty radical solutions — unappealing to both conservatives and liberals — such as dramatic government spending on infrastructure and technology but also scrapping the current tax code that favors so many special interests. Zakaria also advocates a return to fiscal sanity by reducing spending on entitlement programs and pensions.
As someone who emigrated to the U.S. from India, Zakaria offers a unique perspective about America. Sadly, it’s lost a bit of its luster:
When I left India, the marginal tax rate was 97.5%, corporate taxation was punitive, and business was stifled or went underground. Were I to move from New York City to Mumbai today, my personal tax rate would drop, as would every other rate, from corporate to capital-gains taxes. (The long-term capital-tax rate in India is zero.) Singapore now ranks as the No. 1 country for ease of doing business, with a top tax rate of 20%. I know permanent residents working in the U.S. who are thinking of giving up their green cards to move to Singapore. To an Indian of my generation, this would have been unthinkable. The green card was a passport to the American Dream. But for young Indians, there are many new dreams out there, and new passports.
He’s right. Hell’s bells — look where I’m living right now. After 15 years of U.S. consumerism, I’ve wracked up a ton of debt — no wonder the bright lights of Abu Dhabi looked so appealing. The zero percent tax rate doesn’t hurt.
I think Zakaria’s ideas are great, but I won’t hold any hopes that they’ll gain traction any time soon. Still, I love America and I’ll end with a positive note from the author:
But there are reasons for optimism. The U.S. faces huge challenges, but it also has enormous advantages. “I’ve always been bullish on America,” says Coke’s Kent. “It’s the largest, richest market in the world. Look at the demographics alone. North America is the only part of the industrialized world that will be growing in people. It now has a higher birthrate than Mexico, for the first time in history.” Or listen to Alcoa’s German-born Klaus Kleinfeld, previously the head of Siemens: “I know the things that America has that are unique. The openness, the diversity, the dynamism — you don’t have it anywhere else. If you keep all these things, build on them, I still believe in the American Dream.”