The inflation/unemployment trade-off presumes that this is classical, post-WW2 wage-push inflation. Yet there's no evidence that earnings are rising significantly, though they've just bumped slightly this last quarter. Over the course of the last several years real weekly wages have shown negative growth. On the other hand the vaiours PPI components (Commodities,Intermediates, Final Goods) have all increased faster than CPI, significantly. And Commod > Intermed > Final so inflation has built up from inputs and hasn't been passed along the supply chain, thereby impacting profits.
So while the economy is clearly slowing, with the risks of recesision, rising, traditional policies will have trouble with the structure. On the other hand commodity prices appear to have made, after three years, a new steady-state and don't appear to be continuing to increase.
All-in-all at best we're looking at 2.5% growth and decling with inflation rising toward 4-4.5% before tapering off. If housing really drops 2.5% becomes nearly 0% and if inflation expecatations setin the Fed will have to raise rates or face building in the kind of problems we saw in the 70s and 80s.
It is important to keep in mind that such aggregate and nationwide metrics (i.e. job losses) can be translated to specific regions, industries, and individuals only in a limited way.
There are those end-customer serving jobs that will be simply scaled back as customers stay away, but offshoring and "global" computerization of management/administration create worker demand in certain segments, at least for the time the respective software systems and outsourcing services have to be implemented.
So certain regions/industries can still experience job growth without contrdicting general trends.
Companies have unprecedented ability to out-source high cost operations offshore then sell the resultant low wage produced products back into the original high wage market... the classic wage arbitrage we've all heard so much about.
The result of this practice in an environment of rising raw material cost (increasing bottom level supply chain inputs) would be muted final product cost inflation (say exhibited by a moderately high CPI inflation) and greatly INCREASED unemployment.
In effect it would still be wage 'push' effects but wouldn't result in rising CPI as much as increasing UE. What the market would be saying is domestic wages need to come down a lot balance offshore options & reduce domestic UE without inflation.
Now thats what I call grim... declining real wages AND increasing unemployment. Yikes!
And what's worse yet is the Fed probably can't back off if the dollar is weakening a lot because that would effect imported raw material & component cost base even more.
In short the Prof from NU could be right in direction of the effects but due to the increased global integration & wage arbitrage available to multi-nationals might be underestimating the magnitude. It could be far worse than he imagines.
dryfly: I'm hearing that for some companies Bangalore office rental costs (per sqft and thus per employee) are a multiple of their US costs, and compensate for a large part of the salary difference. I think I heard it right that the "fully loaded" cost per employee in Bangalore is actually higher than in the US in one case. I presume that includes travel expenses which are substantial with people frequently visiting headquarters. And this is a case where Bangalore salaries are supposedly 30%+ of the US (keeping experienced people, and particularly those who have experience with US salary structures).
I wonder if it is possible to impose something similar to a tarriff on a US companay that hires foreign workers to provide services to US customers.
You could call it the "Unifying Payroll Bill of 2006"and encact it to "save US jobs". lol. Count each employee on the company's payroll and impose a triple payroll tax on their "equivalent" US wages, then triple the corp tax rate on their profits. That offshoring of employment would end pretty damn quick.
hmmm, I should have run for office; that idea has an almost equal blend of hubris and idiocy to qualify me for the senate, if not the presidency.lol
kirk: I don't think punitive measures have merit here. It could be a start to not encourage offshorers with tax breaks on repatriated profits and foreign expenses and lax enforcement of transfer price shenanigans.
For example, many tech companies get R&D tax credits. Aside from significant wiggle room in claiming what is R&D, I imagine it is not too difficult to arrange matters in such a way that foreign R&D gets claimed for US taxes.
The "balance effect" of offshoring is to an extent artificial. If you account for costs fairly, many a scheme may become unprofitable. Of course the US government can probably do little about forex manipulation and lax foreign environmental standards. After all major offenders are the ones supporting US debt issuance.
CM, Bangalore is not all of India. In Kolkutta (aka Calcutta) very good office space can be had for 100 rps per foot, or just a bit over $2. Class B space goes for as low as 55 rps/ft. I know since we have been looking to relocate, expand and consolidate the office space of our operations there. (apx 175 people and growing)
The inflation/unemployment trade-off presumes that this is classical, post-WW2 wage-push inflation. Yet there's no evidence that earnings are rising significantly, though they've just bumped slightly this last quarter. Over the course of the last several years real weekly wages have shown negative growth. On the other hand the vaiours PPI components (Commodities,Intermediates, Final Goods) have all increased faster than CPI, significantly. And Commod > Intermed > Final so inflation has built up from inputs and hasn't been passed along the supply chain, thereby impacting profits.
So while the economy is clearly slowing, with the risks of recesision, rising, traditional policies will have trouble with the structure. On the other hand commodity prices appear to have made, after three years, a new steady-state and don't appear to be continuing to increase.
All-in-all at best we're looking at 2.5% growth and decling with inflation rising toward 4-4.5% before tapering off. If housing really drops 2.5% becomes nearly 0% and if inflation expecatations setin the Fed will have to raise rates or face building in the kind of problems we saw in the 70s and 80s.
The worst of both worlds, it seems ?
It is important to keep in mind that such aggregate and nationwide metrics (i.e. job losses) can be translated to specific regions, industries, and individuals only in a limited way.
There are those end-customer serving jobs that will be simply scaled back as customers stay away, but offshoring and "global" computerization of management/administration create worker demand in certain segments, at least for the time the respective software systems and outsourcing services have to be implemented.
So certain regions/industries can still experience job growth without contrdicting general trends.
Also don't forget the offshore effects.
Companies have unprecedented ability to out-source high cost operations offshore then sell the resultant low wage produced products back into the original high wage market... the classic wage arbitrage we've all heard so much about.
The result of this practice in an environment of rising raw material cost (increasing bottom level supply chain inputs) would be muted final product cost inflation (say exhibited by a moderately high CPI inflation) and greatly INCREASED unemployment.
In effect it would still be wage 'push' effects but wouldn't result in rising CPI as much as increasing UE. What the market would be saying is domestic wages need to come down a lot balance offshore options & reduce domestic UE without inflation.
Now thats what I call grim... declining real wages AND increasing unemployment. Yikes!
And what's worse yet is the Fed probably can't back off if the dollar is weakening a lot because that would effect imported raw material & component cost base even more.
In short the Prof from NU could be right in direction of the effects but due to the increased global integration & wage arbitrage available to multi-nationals might be underestimating the magnitude. It could be far worse than he imagines.
I don't think hyperinflation is a possiblity any longer now that the housing market euphoria has been extinguished and the media backlash has begun.
I would expect a largely deflationary recession with the exception of the rising cost of foreign goods and services.
dryfly: I'm hearing that for some companies Bangalore office rental costs (per sqft and thus per employee) are a multiple of their US costs, and compensate for a large part of the salary difference. I think I heard it right that the "fully loaded" cost per employee in Bangalore is actually higher than in the US in one case. I presume that includes travel expenses which are substantial with people frequently visiting headquarters. And this is a case where Bangalore salaries are supposedly 30%+ of the US (keeping experienced people, and particularly those who have experience with US salary structures).
I wonder if it is possible to impose something similar to a tarriff on a US companay that hires foreign workers to provide services to US customers.
You could call it the "Unifying Payroll Bill of 2006"and encact it to "save US jobs". lol. Count each employee on the company's payroll and impose a triple payroll tax on their "equivalent" US wages, then triple the corp tax rate on their profits. That offshoring of employment would end pretty damn quick.
hmmm, I should have run for office; that idea has an almost equal blend of hubris and idiocy to qualify me for the senate, if not the presidency.lol
kirk: I don't think punitive measures have merit here. It could be a start to not encourage offshorers with tax breaks on repatriated profits and foreign expenses and lax enforcement of transfer price shenanigans.
For example, many tech companies get R&D tax credits. Aside from significant wiggle room in claiming what is R&D, I imagine it is not too difficult to arrange matters in such a way that foreign R&D gets claimed for US taxes.
The "balance effect" of offshoring is to an extent artificial. If you account for costs fairly, many a scheme may become unprofitable. Of course the US government can probably do little about forex manipulation and lax foreign environmental standards. After all major offenders are the ones supporting US debt issuance.
CM, Bangalore is not all of India. In Kolkutta (aka Calcutta) very good office space can be had for 100 rps per foot, or just a bit over $2. Class B space goes for as low as 55 rps/ft. I know since we have been looking to relocate, expand and consolidate the office space of our operations there. (apx 175 people and growing)
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