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September 1, 2010

Author: Venugopal Chepur

It’s global imbalance, stupid, not Obama!

When NEWSWEEK asked 1,000 U.S. citizens in 2011 to take America’s official citizenship test, 29 percent couldn’t name the vice president. Seventy-three percent couldn’t correctly say why we fought the Cold War. Forty-four percent were unable to define the Bill of Rights. And 6 percent couldn’t even circle Independence Day on a calendar.

Please don’t get me wrong: civic ignorance is more widespread than we could ever imagine. This exists in varying degrees in almost every country. But such ignorance is having a greater affect today than ever before. Few seem to understand how global imbalance is affecting what the US is going through today and how it will in the future, and how Obama (or any President) can do little to handle this no matter how hard he attempts to correct it.

We Americans until now have somehow gotten away without knowing much about the world around us. But this ignorance is beginning to make us more vulnerable than ever. The USA is the largest economy in the world. But the structural advantages within other emerging economies have shown significant gains over the United States in the past decade. This can be seen within the employment rate, manufacturing, lifestyle, and overall well-being.

But to understand this we must go beyond thinking of our economy in terms of outputs such as cars, packaged goods, appliances, and a long list of services that are being asked for every day. Watching unemployment rates and complaining that our government isn’t doing enough can be an act in futility. The world has changed dramatically in the last half-century which has limited our ability as a country to control our own destiny.

Today, Global forces have a greater impact on the world we know and the world we will become. That said, we must understand how to use this new world to our advantage. The three factors that integrate all global economies are commodities, capital, and labor. The main story in the US (and in other advanced economies) is the role of cross-border arbitrage that determines the value of tradable instruments in various currencies.

Labor: More than the capital, currency, or commodities, one factor that digs deeper into our cost of living while having a direct effect on discretionary income is the cost of labor. There is enormous room for arbitrage in labor rates: the cost of performing the same job in different countries can vary significantly. An underlying function for such arbitrage is to capture differences in the cost of production across geographies. To date, labor can’t be freely traded on a single global market, yet capital and commodities have that advantage. Such is the cause for manufacturing an automobile in China being almost one-third the cost of producing the same automobile in the United States.

: The impact of higher oil prices on the global economy is hugely dependent on how oil suppliers reinvest their petrodollars. But over the past decade, oil-producing gulf companies have been encouraged to import goods from emerging economies given the cost and structural advantages. So the US petrodollars aren’t necessarily being recycled to the US again – which was common until the nineties.

Capital: Imagine where you will invest your money – in a fast-growing or a slow (and prone to financial downturns) economy? Most of the world’s capital – (FDI Foreign Direct Investments) has also naturally been diverted to emerging countries fueling job growth there.

Also, consider this: The US has invested heavily in new technologies, rising demand for skilled workers faster than our schools have been able to meet those demands. At the same time, millions of low-skilled workers have competed for lower-wage opportunities in an effort to remain employed. Due to the shortage of high skilled labor, companies in the United States have contracted millions of skilled and highly qualified individuals from other counties. And have been able to do so at lower labor costs. 
This has strengthened the hand of labor relative to capital in the US more than anywhere in the world. As a result, US businesses will continue to source their production in emerging markets to enjoy large labor cost advantages over their emerging market competitors.

A combination of these above strategies has weakened the US economy with little end in sight. As Americans, we look to our government to protect us from this slippery slope. Unfortunately, neither Obama nor any other leader can eliminate the pain we suffer. However, if we become a nation that recognizes our problems and collectively can agree on reasonable solutions, the severity will lessen.
However, given the past record and current signs of economic recovery, it is prudent for Americans to vote for the incumbent rather than bringing in a new face to become familiar with the challenges, and in the process eat 4 more years of the effective presidency!

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