Living in the Real World

As we head into 2014, the U.S. economy continues to limp along toward recovery. Job growth is positive but sluggish. With the complete lack of leadership in Washington, the resilient American people are driving the economy forward in spite of our government. If Congress were to meet once every two years, our country would be much stronger.

Why is our economy behaving the way it is? Why is job growth tepid? Here are my observations. As you may know, I’m an economist and that means that my comments could be as wrong as the National Hurricane Center has been for the past three years.

From my point of view, here is the real world that we live in.

We live in a global economy, where there are billions of people who would like to have every job that we have in America

We live in a global economy, where almost everyone else on Earth would do the same jobs that we do for a lot less money.

We live in America where many of our companies are corporations owned by shareholders and managed by a chief executive officer (CEO). Ask any CEO what their primary job is, and they will gladly tell you that it is to maximize the price of their common stock. If there are higher profits to be made by moving some (or all) of the company out of America for cheaper wages or taxes, they will do it. Their job is to maximize the profits of the firm.

For a CEO to keep jobs in America, we must have wage rates that are competitive with other countries, we must have a tax structure that is attractive and competitive with other countries, and we must have a regulatory environment that allows American companies to compete.

If workers decide to go on strike for higher wages, it gives a company another reason to move out of the country. If Amazon delivery people decide to go on strike like they are talking about in Germany, then we will soon see thousands of drones and no more delivery trucks.

If the federal government decides to raise the minimum wage substantially, it will be yet another reason to move to another country. As the minimum wage continues to increase, the demand for teenage labor at the movie theater, the grocery store and the ice cream store will get even smaller. It’s very easy these days to automate almost any job that we did as teenagers to buy some gasoline to go on a date. Next time you see a kiosk checkout at the grocery store, think of the youngster that used to do that.

We live in a country where your savings don’t earn interest

The Federal Reserve has kept short-term interest rates near zero since January 2009. They suggest this rate could remain at zero until 2016. This means that retirees will have gone seven years without interest on their CDs.

Low interest rates also impact rates on many kinds of insurance. Your insurance company makes money two ways: 1) on the premiums you pay every year, and 2) on the return on their investment portfolio. Low portfolio returns in recent years have put intense pressure on companies to raise premiums.

Low returns on savings are causing Americans to delay retirement and work parttime after retirement. Retired Americans are now competing for jobs with teenagers to supplement their lower incomes.

Low interest rates have forced all Americans to choose between receiving no return on savings or taking additional risk by moving into the stock market. This has driven stocks to record levels for now. For many older people who are uncomfortable with stocks, their retirement income has been crushed for the past five years. Conventional wisdom on Wall Street is that when the “retail investor” finally gets back into the market, it is time to sell because they usually buy at the top.

America Can Still Be Competitive

American firms can still compete in a global market if their labor costs are not too high, their taxes are not too high, and the legal/regulatory environment isn’t excessively harsh.

See how Boeing is trying to remain competitive by moving to South Carolina. See how auto manufacturers all over the world have built manufacturing plants in places like Louisiana, Kentucky, Texas and Alabama.

America has a strong future if we recognize reality. Global competition has been referred to as a “vortex of creative destruction.” The global consumer doesn’t care about your pension, or your house payment, or your college degree. The global consumer wants high-quality products and services at the cheapest possible price.

If cities, states and the federal government create a business environment that recognizes these realities, then American workers can thrive in today’s economy.

If we choose to ignore these realities, we will continue to lose jobs. We have 30 years of history to see the pattern. In the 1980s, we lost our electronics industry to Japan. In the 1990s, we lost many of our automotive, sewing and furniture jobs to Mexico. In early 2000s, we lost a lot of our information technology jobs to India. In the past ten years, China has taken jobs from almost all producers of consumer goods.

These are jobs that matter! There are lots of people in America who don’t have a college degree. In every classroom in America there is a top half of the class and a bottom half of the class. Not everyone can be a computer programmer or a high-tech designer. There are millions of people in America who may not be in the top half of their class, but they want to work and raise a family. We can’t afford to just let all of these jobs slip away year after year.

American consumers have been voting with their pocketbook for three decades now. When it comes to the choice of having a cheap TV made overseas or paying more for a TV made by Americans, the vote has been loud and clear. Remember the days when WalMart made it a virtue to buy things made in America? Ah, the good old days.

There are myriad ways in which these realities have impacted real estate decisions in the past 30 years and will continue to impact them in 2014. I’m looking forward to exploring them with you on this blog. Best wishes for a meaningful and prosperous new year ahead.

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