11/28/2012 6:45 PM ET|
Bitter pill: Lower pay, higher prices
For America to get its economic act together again, we need to accept a weaker dollar. This strengthens our exports and will help cut our debt. But this prescription will be painful.
America is a patriotic place. We're proud of our heritage. We like to win.
So it's not surprising that we view the strength of the U.S. dollar as a proxy for our national standing. When it's up, the world is elevating us. When it's down, something's not right.
But that's not how the financial markets view it. Since the dollar is the global reserve currency, the dollar acts as an inverse for confidence. When people feel good about the global economy, the dollar tends to drop.
But if the United States is ever going address the global imbalances that got us into this economic mess (an overly large trade deficit, over-reliance on debt and excessive dollar reserves in China and elsewhere), the dollar will need to weaken substantially.
Yes, that means pain: rising prices and lower wages, which will be hard pills to swallow. But here's why we need to take our medicine -- and how to ease the pain.
Benefits of a falling dollar
Put simply, a dollar that's worth fewer euros or yuan would make the goods we make more attractive around the world and attract foreign investment in new factories here.
And there's more. A weaker dollar would discourage, as it has recently, the Chinese from buying dollars to artificially hold down the value of their currency. Up till now, the positives from this have benefited both sides. We gorged ourselves on cheap imported goods and cheap imported credit, while the Chinese put millions to work and accumulated trillions in stockpiled dollars.
Now, the negatives are being felt. Economists, including Federal Reserve Chairman Ben Bernanke, have warned that the flood of cheap money from China and elsewhere has overwhelmed the ability of our financial system to allocate savings to good investments that will grow the economy. Instead, as we saw during the housing bubble, it shoved cash into bad investments in inflated assets that blew up in our faces.
For their part, the Chinese have been battling with excessive inflation and their own bad investment, an over-reliance on exports and overbuilding of factories and other infrastructure. That, along with some negative attention during the presidential election, courtesy of Mitt Romney, has encouraged Beijing to push the Chinese yuan to new highs against the dollar.
So we're moving in the right direction.
The dollar is getting cheaper, especially relative to the Chinese currency, and the negatives from this are starting to emerge. Americans will find imported goods, including crude oil, becoming more expensive while their take-home pay remains stagnant. Travelers will find less-favorable exchange rates. And cheap credit will be a little less pervasive.
Yet, if we're going to turn this thing around -- and address structural deficiencies like an employment-to-population ratio that hasn't been seen since the early 1980s, lost manufacturing jobs (shown above) or an annual trade deficit of nearly $600 billion (shown below) -- more must be done.
That's because, as new research by the Boston Consulting Group shows, with rich world economies struggling under aging populations, fiscal deficits and excessive debts, the driver of economic growth globally is going to be in the emerging middle class in countries like China and India.
My recent columns have focused on "supply side" solutions for our economic malaise. These include encouraging businesses to hire and invest and boosting two critical metrics of prosperity that have slowed: labor productivity and gross domestic product per capita. (Read, for example, "Is this economy a lost cause?") This discussion, along with my recent comments on catering to the rich here at home, is the demand side of the equation.
It boils down to this: The government needs to find ways to encourage businesses to cater to wealthy consumers at home and the newly wealthy overseas. And by boosting the price competitiveness of exports, a weaker dollar will contribute to this.
Consider how our trade deficit started to stabilize in the mid-2000s after a large, sustained drop in the greenback.
The prize awaits
Some Boston Consulting Group researchers, led by Michael Silverstein, have elaborated on this strategy in a new book, "The $10 Trillion Prize," (find it on Bing) which refers to their projection that by 2020 the combined consumer market of China and India will total that amount -- which is nearly equivalent to current levels of annual spending by American consumers. By then, there will be nearly 1 billion middle-class consumers in those two countries.
The BCG team believes that lower U.S. labor costs and cheap domestic energy could create up to 5 million jobs by 2020 via rising exports.
BCG survey data show a confident, positive, and aspiring group of people. Some 36% of Chinese and 19% of Indians expect to increase their discretionary spending over the next 12 months, compared with only 11% of Americans, 8% of Europeans and 5% of Japanese. They are also looking to "trade up" to better-quality goods.
This is where we fit in. According to the surveys "Made in USA" is associated with quality and luxury and is an aspirational label for the newly affluent and brand-conscious in Asia. Chinese and Indian shoppers care quite a bit about image and brand. This is a great opportunity for marketing-intensive U.S. companies selling premium products.
Already, more than 60% of Chinese consumers say they are willing to pay more for "Made in USA," and more than half had chosen a U.S.-made product over a less-expensive Chinese good at least once in the month before the survey.
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