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Something Wicked This Way Comes, Part II

"Bush isn't so smart, showing off his economic program in Ohio. He should go to places where his plan really created employment. India, Thailand or China..." - Jay Leno

This week, we continued our research into the world's next big thing: we had dinner in an Indian restaurant, on Charlotte Street in London.

The friendly waitress explained that she was from the Kerala province...in South India.

"And I am going back there," she said. "India is booming...."

She served us many spicy dishes; they were edible, but unspeakably piquant...and left us in a restless state for the entire night. Tossing and turning, we had visions of millions and millions of dark-haired, dark-skinned workers...toiling night and day...studying calculus and memorizing the periodic tables...taking apart computers and reassembling them...writing code and answering phones...

Alan "Bubbles" Greenspan, George W. Bush and all the great nabobs of positivism assure us that there is nothing to fear. Our favorite columnist, Thomas L. Friedman of the NYTimes, explained that "the next big thing almost always comes out of America....[because]...America allows you to explore your own mind." Friedman's oeuvre rests on a few key illusions. He believes the world would be a better place if America were more aggressive about "empowering women" and "building democracies." He also thinks that technical innovations give America a permanent advantage. Americans are always innovating...always figuring thing out. Heck, we even invented outsourcing, says Friedman:

"This is America's real edge. Sure Bangalore has a lot of engineering schools, but the local government is rife with corruption; half the city has no sidewalks; there are constant electricity blackouts; the rivers are choked with pollution; the public school system is dysfunctional; beggars dart in and out of the traffic..." and so forth.

We would probably like the place - except for the engineering schools, Bangalore must be just like Baltimore.

Innovation is supposed to create new businesses, new technology, new industry...and new jobs. Last we heard, a busload of unemployed whiners was making its way across the U.S. to try to get a little media attention to the outsourcing issue - as if there were not already enough. "We would be happy to be retrained for new jobs," said one of the complainers, "but what new jobs?"

By this stage of a 'recovery,' say economists who keep an eye on this sort of thing, the U.S. economy should have created 2-3 million more jobs than we have today. In the month of February, for example, American innovators created barely one-tenth as many jobs as 'normal' - that is, only 21,000 rather than 200,000. But as Jay Leno tells his viewers, the missing jobs didn't disappear. They just turned up in Bangalore, rather than Boston where they were supposed to be.

This does not worry Republican economists. Like used clothing and old school buses, yesterday's jobs get exported to poor countries...while shiny new ones are created in America. What new ones? We don't know, but they assure us that America is so innovative, it will think of something. Always has, explained Greenspan in his recent Congressional testimony.

"This time may be different..." said colleague Dan Denning last week. "Never before, since the beginning of the industrial revolution 300 years ago, have there been so many people outside the Western world ready, willing, and able to compete with us. Never before have they had so much money. While Americans spend all their money - and then some...the average Chinese worker saves more than 20% of everything he earns."

There are more engineers in Bangalore, India, than there are in California, U.S.A. They work well...and cheaply, taking home an average annual pay of about $6,000. And they seem to be just as innovative as their American counterparts. The software for DVDs was developed in Bangalore, not in Silicon Valley, says the French newspaper, Libération. In the 7 short years of its existence, the Philips research center in Bangalore alone has come up with 1500 new inventions.

Foreign workers have been cutting into American salaries for many years. Assembly line workers in Taiwan, Mexico and other labor hellholes have undermined factory wage growth in the U.S. Over the last 30 years, real hourly earnings on the shop floor have actually gone down.

No one particularly cared - because America's economy was shifting to service and consumption anyway. Factory workers were out of fashion and out of luck.

But the consumption binge has run its course. Americans have little left to spend. And now the foreigners are lending them money...and taking the service jobs that were once thought immune from overseas assault. And now, in today's news, we read in the Houston Chronicle that the lawyers are worried; even law firms are outsourcing routine legal work to India.

These trends may not worry Democrat economists any more than they trouble the Republicans...but it's an election year, so they can't pass up an opportunity to swindle the voters and get their names in the paper. Pandering to the lumpenmasses, the Democrats offer to "do something" to "protect American jobs." What they would do would be either futile or destructive, but that is to be expected.

John Kerry's "Jobs for America Bill," for example, does a little of both. It would require employers to give notice before they outsourced anything. Other proposals limit the ability of U.S. companies to take advantage of less expensive foreign labor...or limit the ease with which consumers could benefit from lower prices. No serious economist would suggest such things, without at least having his fingers crossed behind his back.

There are a lot of dopey things said to voters with the cameras running. But no one is going to look the American worker in the face and tell him that he earns too much money for what he does. A politician might as well pour gasoline over his head and light a match; the media would scorch him in a matter of minutes...his career in politics would be in cinders...and he'd have to go out and get an honest job.

We do not like to disappoint readers. But we are not running for anything. And if by some misfortune we were elected to public office...we would immediately confess that we had spent a drug-crazed night with a Russian prostitute...and demand a recount. So, we offer this little reflection on outsourcing with nothing at risk but our reputation...which is to say, we have little to lose.

For many, many years Americans have had the easy ground in the international labor market. The playing field was tilted in their favor by the skills, capital, infrastructure, institutions and habits built up over many generations. They will still have an advantage for many years...but the playing field gets leveler every day.

P.S. "What's different this time," continued Dan Denning, "is that these huge economies - principally India and China - are on the rise, whether we like it or not."

"By the middle of this century," begins a letter from our friend Martin Spring, "Russia's living standards will be some 40 percent higher than America's are today, China's will have reached the same level as Japan's today, Brazil's will be about the same as Britain's today. Indians will have about the same incomes as Italians have today.

"That's the forecast of a research study by the investment bank Goldman Sachs based on the assumption that the emerging economies maintain 'growth-supportive' policies.

Here are some of its other conclusions:

* The four largest emerging economies, which the bank calls the BRICs - Brazil, Russia, China and India - could within 40 years become larger in combination than the world's six biggest economies today, the "G6" - America, Japan, Germany, Britain, France and Italy.

Currently they are less than 15 percent of the size of the G6. In U.S. dollar terms, China could overtake Germany in the next four years, Japan by 2015 and the U.S. by 2039. India's economy could be larger than all but the U.S. and China in 30 years.

* Over the next five years China's GDP per head is expected to grow at an average of 11.2 percent a year, Russia's by 10.3 percent, India's by 7.5 percent and Brazil's by 6.3 percent. The equivalent projections for today's giants are just 1.7 per cent for the U.S., 0.9 per cent for Japan, 2 percent for Germany, 1.9 percent for Britain and 1.5 percent for France.

* However, because today's developed economies will continue to grow, their living standards will be very much higher by mid-century. Americans' GDP per head is expected to rise from $38,700 to $83,700, Britain's from $26,000 to $59,000, Germany's from $23,100 to $49,000 and Japan's from $34,300 to $66,800.

* India's economy has the potential to show the fastest growth over the next 30 and 50 years because its population is expected to continue growing. It "has the potential to raise its U.S. dollar income per capita in 2050 to 35 times current levels".

* However Russia's GDP per head is expected to grow faster because its population is expected to shrink.

* South Africa, although it won't qualify as a giant, is likely to see its economy grow from $83 billion in 2000 to nearly $1.2 trillion by the middle of the century.

* About two-thirds of the BRICs' increase in dollar GDP will come from high real growth, driven by productivity and population increases, and the rest from currency appreciation. Their real exchange rates are expected to grow at an average rate of 2.5 per cent a year."

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