BBA Economic Digest: Our Original Sin?

April 19, 2020

It took only four weeks for the U.S. economy to wipe out nearly all the job gains in the last 11 years. The new jobless filings last week bring the crisis total to just over 22 million, nearly wiping out all the job gains since the Great Recession.

 

Our Original Sin?

 

Certain economic relationships are plain to see: the stores we buy from, our employer that pays our salary, the bank that makes us a home or car loan.

 

"But once you get two or three levels out, it’s really impossible to know with any confidence how those connections work," writes Neil Irwin, economics correspondent for The NYT.

 

It may be a good long while before we truly understand how the current economic crisis has upended and damaged the complicated web of interconnections comprising the world economy.

 

But a crisis often will shine a light on frailties that are ignored during good times. Namely, our dependence on China for manufactured goods, some of a critical nature.

 

“There will be a rethink of how much any country wants to be reliant on any other country,” said Elizabeth Economy, a senior fellow at the Council on Foreign Relations.

 

Even before the pandemic, companies were talking about resilience and rejiggering their supply chains. In short, the very underpinnings of globalization has taken a big hit and maybe for the best.

 

While a full abandonment of China is unlikely, China’s days as the go-to manufacturing hub for the U.S. are all but over. I call it the Great Rethink and Decoupling.

 

In its seventh annual Reshoring Index, consulting firm Kearney speaks to a “dramatic reversal” of long-term trend, specifically to a 17 percent decline in US imports of manufactured goods from China last year.

 

"Three decades ago, U.S. producers began manufacturing and sourcing in China for one reason: costs. The trade war brought a second dimension more fully into the equation―risk―as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs.

 

COVID-19 brings into the mix­ the issue of resilience― "the ability to foresee and adapt to unforeseen systemic shocks," said Patrick Van den Bossche, co-author of the 19-page report.

 

While U.S. manufacturing imports from China declined in 2019, imports from the other Asian LCC countries increased by $31 billion in 2019. Similarly, manufacturing imports from Mexico rose $13 billion.

 

Peter Navarro, whom President Trump picked to coordinate domestic supply policy, went on the CBS News program “60 Minutes’’ on Easter Sunday and blamed America’s dependency on globalization for its shortages: “If we made it here, we wouldn't be faced with this. That was, that was the original sin.”

 

Training and Reskilling: Now More than Ever

 

For years now, IBM’s Ginni Rometty has talked about how technological change is creating an urgent need for alternative education programs that prepare people for tech-enabled jobs and reskill workers whose jobs may be eliminated.

 

The pandemic and its aftermath will intensify that need. I cannot emphasize how important training and reskilling are to economic development. When I visit communities, I want to see the presence and the curriculum of any nearby community college/trade school.

 

These institutions can have more lasting effects on a local workforce than a university, which typically do not teach the skills needed by employers and whose students leave the area upon graduation.

 

Before coronavirus, the talent quotient, the human resources of a place, was the single most driving factor to growing a local economy. After coronavirus, it will be even more so.

 

Lots of predictions out there on how commerce and how the world of work will change post pandemic. Business will be forever changed.

 

The coronavirus crisis will accelerate the digitization of business in terms of products and services offered. Automation and artificial intelligence will become even more the norm as the Fourth Industrial Revolution goes into overdrive.

 

 

Pulling a Page from the Past

 

The gap between those who have reliable, affordable internet and those who don’t has never been so clear as during this pandemic. No one really knows how big the problem is.

 

Microsoft estimates 157 million Americans aren’t using relatively fast internet connections. The government puts the number at 21 million, mostly in rural areas. Either way, that's a lot of people being left behind.

 

“I don’t think anything else could have brought the issue more to light than this one," said Alabama State Sen. Clay Scofield, a long-time advocate for broadband improvements in rural Alabama. “[W]e have got to treat broadband like we do power and water in the 21st century,” Scofield said in a recent radio interview.

 

Susan Crawford, a Harvard Law School professor, tells the NYT that the federal government should step in to ensure essential services reach everyone at reasonable prices.

 

Before the Great Depression, companies divided up the electrical grid from place to place, and mostly only businesses and the wealthy had access to it. The government started providing loans and other help to municipal and rural power organizations. Electricity became ubiquitous.

 

“We solved these problems in the past, but we keep forgetting,” Crawford said. “We can do better as a country.”

 

By 1953, more than 90 percent of U.S. farms had electricity. Most of the electric co-ops still exist today, providing power to 56 percent of the U.S. landmass and their importance is becoming clearer every day.

 

Nearly 100 of the 900 or so rural electric co-ops across the United States offer some form of broadband. Another 200 or so co-ops are studying whether to move in the same direction.

 

The Push and Pull

 

There are two big opposing forces at play right now that economic developers should be aware of as a result of the coronavirus crisis.

 

One is a decoupling from China and a rejiggering of supply chains to make them more resilient and less risky. It is a trend that started before the coronavirus crisis and certainly will continue afterward.

 

What it will likely mean in the long run is more near-shoring, with Mexico being the biggest benefactor, and re-shoring manufacturing production back to the United States. That's the good news.

 

But, but, but, the third release of PwC’s survey of American CFOs shows that 67 percent now say they are considering deferring or canceling planned investments. PwC also found 82 percent of CFOs are now focused on reducing costs, compared to 62 percent on March 11 (most company's No. 1 cost is employees).

 

Twenty six percent anticipate layoffs at their companies, a marked increase from two weeks ago when the survey found only 16 percent expected layoffs. Eight one percent of those surveyed expect COVID-19 to decrease their company’s revenue and/or profits this year, up from 58 percent in PwC's first survey on March 11.

 

How long America's top financial officers will hold off on spending is anybody's guess at this point.

 

Two Experienced Pros Join BBA Team

 

Here at BBA, we’re always on the lookout for talented people who can bring true value to our customers. We recently struck paydirt with two such people who will be joining our family of consultants. 

 

As with all of our team members, each of these individuals bring a wealth of experience with specialized areas of expertise that expand our knowledge base in serving  economic development organizations and companies. 

 

When I first met David Gaines some years ago, his can do spirit came to the forefront. Missing a power cord for my laptop computer when I was visiting a rural Missouri community, David somehow found a replacement and he wouldn’t take any money for it. Needless to say, I was impressed. Since then, I have learned that he gets it done in so many ways.

 

Everyone on the BBA team is a guru at something and David’s special area of expertise is rural economic development and housing. You can learn more about David here.

 

Whenever I talk to Susan Munroe, it is clear to me that she has a calling. That calling is renewable energy. Susan believes, and she has certainly convinced me with the hard data, that there are big and lasting economic benefits for communities when they take on wind and/or solar energy projects.

 

These are capital investment projects that create jobs and a tax base. She’s certainly made a convert out of me. You can learn more about Susan here.

 

You need answers before you can take action. Providing answers and solutions are what we are about at BBA. We are here to help.

 

 

Quotable Quotes

 

“When I think about war, your life can be so easily shortened. But I find this virus equally if not more alarming, because when you think of Pearl Harbor or Iwo Jima, there was a possibility of defense. Not with Mother Nature, though. You can’t outrun Mother Nature. I have this feeling of helplessness.” -- Albert Bryant, Sr., 94, World War II veteran and one of the nation's first black marines.

 

“We built an economy with no shock absorbers. We made a system that looked like it was maximizing profits but had higher risks and lower resiliency.” -- Joseph Stiglitz, a Nobel-winning economist.

 

“What some of the market optimists seem to have in their head is that we’re going to go from broken legs to sprinters again. I think we’re going to go from broken legs to people in casts, walking around with canes and crutches.” -- Tom Friedman, NYT columnist

 

"The silver lining of this crisis is that it's laying bare the fissures in American society and is providing a wealth of teachable moments." -- Yuliya Panfil and Tim Robustelli, New America's Future

 

"But there will be no lasting recovery if the largest economies, especially the US and China, cannot find a workable strategic framework. The global economic order is not perfect. But it truly is too big, and too essential, to fail." -- Henry Paulson, former US Treasury secretary and chair of the Paulson Institute

 

“Life without school is much more boring than I thought it would be.” -- 14-year-old Una Hoppe of Beacon, N.Y.

 

“Companies are cutting costs and putting planned investments in technology, workforce and capital expenditures on hold while they try to weather an unprecedented economic storm.” -- Amity Millhiser, PwC chief clients officer

 

 

Non-Pandemic Stories We're Reading (And watching)

 

The Abandoned Amusement Park Great American Road Trip

Atlas Obscura Lists

 

A Love Letter to My Curmudgeonly Big Brother  Outside Magazine

 

Uncovering Operation NEPTUN, the Cold War’s Most Daring Disinformation Campaign  Wired

 

How Hard Will the Robots Make Us Work  The Verge

 

PBS is re-airing the John Prine episode of "Austin City Limits" this weekend. (Check local listings.) It is also available here in full.

 

Season 6 of "Bosch" is now streaming on Amazon.

 

 

 

 

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