Wednesday, August 29, 2007

Inflation Omens

Once again The Instapundit links to an interesting article. This time it is Megan McArdle's post on America: Exporting High Wages.
I'm always bemused by globalisation doomsday scenarios in which all of our jobs move to China (or India) in order to take advantage of low-wage workers. If we really do lose all of our high-productivity jobs, and no longer make anything worth having, why would the Indians and Chinese continue to ship us software programs and flat screen televisions?
The other reason this doesn't work, of course, is that as these economies expand, demand for workers pushes up their wages.
Ms. McArdle links to this NYTimes article on this very subject. Wages Up in China AS Young Workers Grow Scarce

I spent a significant part of the last three years working in India training derivative traders and I saw the same phenomenon ocurring as described in the Times article. Wages rising fast but, more importantly a shortage of truly qualified workers. India has an enormous population of uneducated lower class workers. Those workers however need a great deal of education before they can step in and work in the call centers or programming shops. The cheap cheap labor era is over in India. The same appears to be ocurring in China. The impact will be higher inflation in the developed world than we have seen in the past decade.
I am in my fifties and I think my clothing expenses have been about the same for 20 years. granted I wear khakis and golf shirts all the time but still they don't seem any more costly now. Certainly electronic equipment such as computers have gotten far better and at less cost. All of this is due to low cost labor at the manufacturing countries and has partilly offset the soaring cost of services provided locally.
Absent a deflationary debt contraction ( no certainty ) wage pressures in China and India are going to diminish the deflationary contribution we have gotten used to from those countries products. i feel quite certain that my golf shirts will cost a lot more in ten years.

7 comments:

Anonymous said...

Well, there's always Myanmar and Africa...

Anonymous said...

The great majority, and maybe on a compounded basis almost all, of the drop in cost of electronic goods was due to technological advances. The cheaper wages in other countries were a big factor in shifting production away from the united states but electronics prices were dropping rapidly before that shift and regardless of that shift.

As you point out there is still an enormous supply of unemployed uneducated workers. Anything that can be produced by such workers is likely to remain relatively cheap.

BBL Jr said...

I agree with the points made in both comments but reiterate my point that inflation wil bear watching. changes happen at the margin and I am not predicting an explosion of inflation merely the chance of a more defined trend higher. All of this could be swamped by a debt contraction or some kind of central bank policy mistake.

Anonymous said...

The real deflationary pressures come not from cheap labor costs, but from the cummulative impact of information technology driving up productivity. As the recent Economist article points out, productivity gains in China have outpaced the rise in wages. Moreover, the deflationary effect of information technology will not go away any time soon, if ever, because it is based in relentless Moore's Law type curves. Things are going to get cheaper, and cheaper, and cheaper. And if you're still paying the same amount of your budget out for clothes in twenty years, then your clothes will be of very high quality compared to today--incorporating advances in materials and infotech right into the average shirt. Thus is the cumulative impact of computing on productivity.

BBL Jr said...

First of all I want to thank the those who have left comments of such thoughtfulness.
I absolutely agree with anonymous' point about the deflationary impact of information technology and computing power bwhen applied to production of all manner of goods. Where I quibble is that the cheap labor component of labor intensive manufacture has also been a real deflationary input. We have needed these inputs to offset the global expansion of money supply by governments world wide who only increase spending and do not want strong currencies. I fully expect the forces of technology to continue to improve quality of goods and lower their costs as anonymous suggests. In fact biotechnology and eventually nano-technology will likely increase the reach of technology's deflationary effect. But losing any input on the deflationary side shifts the balance.

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