Opinion: Carolina Beat

No. 918: Speedy Economics

People are constantly on the move today and they want things fast. Information is available with lightning speed over the Internet, deliveries are whisked around the globe on jets, and there is speed reading and even speed dating. No one wants to wait. We want things now and we want them fast.

So this column introduces “speedy economics” — short and quick answers to some current economic issues. Read fast — here we go…

Inflation: With energy prices jumping and health-care costs seemingly spiraling out of control, is more rapid inflation inevitable? No. The degree of inflation, or the percentage increase in prices, ultimately is determined by how fast the supply of money grows compared to the supply of products and services money buys. Since the central bank of the United States, better known as the Federal Reserve, controls the supply of money, the Federal Reserve can control inflation.

Jobs: With manufacturing jobs declining and service jobs increasing, there’s a worry that good-paying jobs are being replaced by low-paying jobs. But reality is more complicated. All manufacturing jobs aren’t high-paying, and all service jobs aren’t low-paying — think of doctors and engineers. There are plenty of high-paying jobs being created in the professions, health care, and education, to name a few. The key to getting a good-paying job in today’s economy is to get a good education, usually beyond high school.

Foreign Competition: With many foreign workers being paid pennies to the dollar compared to U.S. workers, is it just a matter of time before all manufacturing production, and many service firms, move overseas? No, and the reason is productivity. U.S. companies can compete with lower-cost foreign companies as long as U.S. productivity (output produced per period of time) is sufficiently higher. In the last decade U.S. productivity gains have been on a roll, but they haven’t applied equally to all industries. U.S. companies lagging in technology and modern equipment are the most vulnerable to foreign competitors.

Outsourcing: Outsourcing is the human side of foreign competition, since it results in U.S. jobs being physically moved to foreign countries. While outsourcing has occurred, and has occurred for a long time, it must be kept in perspective. Total outsourced jobs number about 10 million, out of a U.S. job base of 140 million. Also, outsourcing is partially balanced by “insourcing,” which occurs when foreign companies put jobs in the United States. Today, “insourced” jobs number about 6 million.

Trade Deficit: Americans are buying more foreign-made products than we are selling to overseas buyers. This has led to a continuing trade deficit, and many wonder whether it is a sign of economic weakness. It could, however, just be a sign of smart buying. If a product can be purchased from a foreign seller for a better price, then the buyer saves money, and the saving can be used to purchase other things. Foreigners have used their earnings to purchase U.S. investments, which has helped keep interest rates low and created jobs in the United States.

Saving: The headlines say Americans aren’t saving money, but a big problem with this conclusion is that all forms of savings aren’t included. Commonly omitted is the saving that occurs when stock values rise and housing equity increases. When these are included, U.S. saving has been in a historical average range.

Housing Market: Speaking of home equity, some financial analysts are predicting a big plunge in housing prices, that is, a housing crash, potentially destroying billions of dollars of value that homeowners have amassed in their homes. But while housing values may be susceptible to dropping in areas where rapid price escalations have occurred in the past—such as resort areas, river and ocean side regions, and large cities with little room to grow—in the great mass of America, including most of North Carolina, major drops in housing prices don’t appear to be in the cards.

Dr. Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.