Thursday, October 16, 2014
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An interconnected world changes the economic playbook

A Boeing airplane part bears a "made in China" stamp. China may not be the manufacturing go-to place anymore as wages there rise.
A Boeing airplane part bears a "made in China" stamp. China may not be the manufacturing go-to place anymore as wages there rise. Bloomberg News
A Boeing airplane part bears a "made in China" stamp. China may not be the manufacturing go-to place anymore as wages there rise. Gallery: An interconnected world changes the economic playbook

Economic thinking, whether we recognize it or not, is an essential part of household, business, government, and Federal Reserve decision-making. The issue is, how do we use economic information to make intelligent decisions so we can make our lives, businesses, and even government better?

The answer is not as complex as most think. It does, however, require a certain logic - and uncertainty - that is too often missing in public discourse, whether those comments come from politicians, talking heads, or columnists.

To address this lack of a logical basis for so much of the current economic dialogue, I, along with former business writer Ron Scherer, have written a just-published book: Big Picture Economics: How to Navigate the New Global Economy.

This column represents the thinking and beliefs presented in the book. The philosophy is straightforward: When it comes to using economics to help make decisions, it all depends upon context.

 

Think Yogi

Economists like to argue that theory is the truth, but the truth is theory gets you only so far. Economic policies don't operate independent of the way people think and react. Economics is about taking human reactions and creating a way to understand how those decisions are made under a variety of circumstances. To make a correct decision about how to go forward, you need to know where you have been and where you are.

Critically, we must consider where we are in the business cycle and how outside factors such as world economic activity and human perceptions combine to create the current and future economy in which we operate. Conditions change and decisions must be made in the context that what exists might not be the case even in the relatively near future.

Maybe the most important example of the idea that context is key comes from a look into the future of global economic activity. In the immortal words of Yankee hall of famer Yogi Berra, "The future ain't what it used to be."

Consider the idea that manufacturing is a dying industry. It used to be a no-brainer to pack up a plant and move it to China. Now, the decision to outsource is a lot riskier.

The global economy is changing rapidly. Instead of a flat world, we have what I call "The Mobius World Economy," where there are no barriers and no ends. If you start in one place and continue on, you ultimately end up where you began. This inter-relatedness of world production and sales is what is driving firms in the global economy.

Consider the Chinese economy. The low labor costs of the past are disappearing. Manufacturing wages have quadrupled over the last decade and are expected to rise by double digits for possibly the next decade. Incomes of managers and directors are beginning to match U.S. salaries for similar positions, according to a Hays Asia Salary Guide.

That surge in income is having huge implications for Chinese, U.S., and world economic activity. In China, the middle class is burgeoning. Business activity is shifting toward domestic consumption, not just exporting. But there is a downside to rising wages: As manufacturing costs rise, the drive to put industrial plants in China is waning.

The outsourcing of manufacturing activities to China by U.S. firms for importation back to the United States may be nearing its end. Over the next decade, it could become more expensive to produce in China and ship to the United States than to produce those same products here.

Though outsourcing or offshoring, or whatever people call it, may be waning, that does not mean manufacturing will return to the U.S. en masse. Deciding where to put production facilities depends not just on wages in the U.S. or China but the costs of doing business in other countries. We may see our imports from China slow, and other even lower-wage nations, such as Vietnam, could become the location of choice for manufacturers.

Fifteen years ago, the decision to build a plant in China and ship the output to the U.S. was easy. But if a company made that same choice two years ago, the rapidly changing cost structure may be making that determination questionable. The no-brainer is no longer a no-brainer.

 

Summary

That the world is changing is nothing new. But the context in which we make decisions is different. Assuming trends to continue unabated worked reasonably well in the past. But now, decisions must consider a variety of potentially dramatically different contexts. Thus, when it comes to economic issues, the best answer is: It depends.

 


Joel L. Naroff is president and chief economist of Naroff Economic Advisors Inc. in Holland, Bucks County.

jnaroff@phillynews.com

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