American economy caught between devil and deep sea

Presidentelect Donald Trump has won on the platform of antiglobalisation. He has attacked American companies for shipping jobs abroad. Many US companies have established call centres, research outfits or manufacturing facilities abroad, including in India.

Trump wants to bring those facilities back to America. He also wants to make the H1B visa regime stricter. Large numbers of skilled personnel from India migrate to the United States under this visa and work for American companies.

They often displace Americans. Trump wants to reduce the numbers of H1B visas issued so that more jobs are available for American workers. Trump has also attacked China for undervaluing its currency and thereby exporting large amounts of goods to America.

He wants to restrict these imports so that more manufacturing is undertaken in America leading to the creation of more jobs in that country. The picture painted by Trump is that globalisation does not work. It is necessary to look inwards again.

The central bank of the United States, the Fed, believes otherwise. It has raised the interest rates by a small 0.25 per cent earlier this month. It has said that it expects to make three further increases in 2017. The Fed has taken this step on the back of good employment data.

The present unemployment rate at 4.6 per cent is lowest in the last 10 years. The Fed has taken the view that this creation of jobs indicates a ‘heating up’ of the economy. The Fed believes that US corporations have borrowed and invested leading to the generation of jobs.

There is a need to slow down the economy otherwise it may get overheated. It has thus raised the interest rates. This assessment of the Fed is suspect. Other reports indicate that large numbers of American workers are so depressed that they have stopped looking for jobs.

These persons are not counted among the unemployed because that figure is based only on those who are actively looking for jobs. The high rates of unemployment, therefore, are not due to the creation of jobs by businesses; rather they are due to less numbers of workers seeking jobs.

This prognosis is supported by the decline in average wages of the American worker. If there indeed was a huge generation of jobs then the wages would have shown an upward tendency. The second factor underlying the low rates of unemployment is Obamacare.

President Obama has legislated universal health care which is subsidised by the US government. He has also provided more funds for education. Large numbers of jobs have been created in these areas.

The low rates of unemployment are due to these government expenditures. These jobs are like those created under MNREGA in our country. These do not indicate a robust health of the economy.

On the contrary, the fact that the government has had to step in to create these jobs indicates a weakness in the economy. I think the Fed has misread the true state of the US economy. The American economy is caught between two opposing assessments.

Trump believes that the US economy is down. There is a need to encourage American companies to invest more in the US. He wants to increase investments in infrastructure to remove the potholes, so to say.

On the other hand, the Fed believes the US economy is overheating. There is need to slow it down. Implicitly, the Fed does not see any urgency in increasing investments in infrastructure or taking special steps to bring American companies back to the US.

The American economy is caught between the devil and the deep blue sea. An increase in government expenditures on infrastructure, as advocated by Trump, will lead to less expenditure on health and education and a reduction in jobs.

A continuation of the present high levels of expenditures on health and education means less expenditure on infrastructure and will hit at economic growth. The US has to face a difficult trade-off between growth and jobs. Only time will tell which of the two perspectives are proven true.

Be that as it may, both the situations will cause trouble for us. The Trump perspective will lead to restrictions on overseas investments by American companies. They will exit from India and take their operations back to America. Trump will impose restrictions on H1B visas.

Fewer Indians will go to the United States to work. The remittances coming into India will be less. Trump will impose higher import duties on good imported into the US. That will make things difficult for our exporters. The Fed will be no better for us.

The increase in interest rates will have a negative impact on India. Foreign investors will pull out monies from India and reinvest in bonds issued by the US government which will now provide higher rates of return and are also considered safe.

The decline in our share markets in the recent period is substantially due to this outflow from India. This same outflow is responsible for the decline of the rupee. Foreign investors are selling rupees to buy dollars so that they can take their monies out of India.

This has led to an increase in the supply of rupees and to a decline in its value against the dollar. It is clear that a US-driven growth model will not work for India. We will not succeed by integrating deeper into the global economy in these circumstances.

The government is still focussed on attracting foreign investments such as under the ‘Make in India’ programme. This will not work because there will be an increasing tendency among American companies to go back to America.

Indeed, many indices indicate an improvement of India as a destination of foreign investment. The domestic environment has become cleaner and more conducive for big business in the country. But this will not translate into big ticket investments because the withdrawal of America from the global economy. An increase in import duties will not help our exports either.

Note that America is not alone in this withdrawal. Britain has taken a major step in that same direction by voting for Brexit that is for coming out of the European Union. The direction taken by America is part of a larger withdrawal of many developed countries from the global economy. In these circumstances, we must look inwards and improve domestic investment instead of running after MNCs.

By Dr Bharat Jhunjhunwala