March 7, 2006 9:35 PM PST

Reich: U.S. headed for 'day of reckoning'

SAN JOSE, Calif.--The United States is headed for a "day of reckoning" as oil prices and the budget deficit remain high, consumers keep spending and not saving, wages remain stagnant, housing prices rise and the working population ages, warned Robert Reich, former Department of Labor secretary in the Clinton administration.

"The American economy is going to have to inevitably make a structural adjustment (with regard to lack of consumer savings and the budget deficit), or the entire world is going to suffer," Reich, an economist who is currently a professor at the Goldman School of Public Policy at the University of California at Berkeley, said during a keynote at the IDC Directions conference here.

While the country is recovering from a recession in 2001 with decent overall economic growth and a return of information technology business, there are three storm clouds on the horizon in the next year or two, he said. They are high oil prices, a $400 billion U.S. budget deficit, and record high levels of consumer spending and record low levels of consumer savings.

Oil prices will not drop, Reich predicted, because India and China "are growing so fast that energy demands are exceeding the world's ability to supply enough oil to meet demand." Oil prices "will stay high--it's like a tax on the whole economy."

Meanwhile, Americans are living beyond their means. "We're going into hock to the rest of the world," at the rate of about $2 billion a day, mostly to Asia, he said.

Interest rates will go up and the value of the dollar, relative to other currencies, "is heading south," Reich said. "Imbalances in the global economy and borrowing from abroad, that can't go on forever. There will be a day of reckoning."

On an individual consumer level, which accounts for 70 percent of all economic transactions in the U.S., spending is high and saving is low, he said. "That giant sucking sound" that has been heard for years is made by "American consumers continuing to buy."

Social Security isn't the problem. Medicare is a huge problem.
--Robert Reich, former secretary of labor

"American consumers are the Energizer bunnies of the global economy, but that's coming to an end," he predicted. The median wage is dropping and people have been borrowing on the equity of their homes but with housing prices starting to flatten or decline, the spending will have to stop.

"I'm moderately bullish on the economy," but people should "keep an eye on storm clouds," Reich warned.

Asked during a question-and-answer session afterward if he had found a home in Berkeley to buy, Reich said he had not but that when he did decide to purchase he would get an adjustable-rate mortgage. "It makes more sense to rent than to buy" in the Bay Area now, he said.

Reich also discussed three trends that are shaping the future of information technology opportunities: globalization, technology change and a shifting demographic in which the baby boomer generation is reaching retirement age with limited savings.

Concerns about the threat from globalization are overblown, he said. The key to countering outsourcing is to create jobs in which workers add value to products that make them more competitive. "Globalization works to our advantage if we see the opportunities," he said.

For example, Reich noted that the devices that replaced his hips during surgery several years ago were designed in France and made in Germany. "I have French designer hips," he joked.

"It's not as if there is a fixed number of IT jobs around the world so that if India gets them we won't," he said. "There are actually more IT jobs now than ever before in the United States."

Technology, not necessarily outsourcing, is displacing American workers, replacing factory and office workers with software, Reich said. Even China is losing manufacturing jobs because the number of people required to make goods is decreasing as a result of technologies that make factories more efficient, he said.

Medicare meltdown?
Meanwhile, the 76 million baby boomers--people born between 1946 and 1964, who are "united by their common inability to save for retirement"--are requiring more financial and medical attention, he said.

Baby boomers were unable to save as much for retirement as they had hoped because their earnings did not rise as significantly over the span of their careers as did the wages of their parents, according to Reich.

"Social Security is in relatively good shape over the next 75 years," he said. "Social Security isn't the problem. Medicare is a huge problem."

Employers will face a talent crunch as the baby boomers leave the workforce, he predicted. Companies should offer family-friendly environments to attract and keep employees, he suggested.

Information technology is particularly needed to improve efficiencies in the areas of biotech, energy and health care, which is one of the most unproductive sectors, he said.

Reich recommended that companies offer opt-out retirement 401(k) plans to encourage saving and that the government roll back the Bush administration tax cuts. The country also needs to improve its education system and teach children critical-thinking skills to ensure productivity gains and add value to products to make them competitive on an international market, he said.

"The opportunities for IT over the next decade are huge, (but) the challenges of business strategy and being whole people and staying whole people are going to be enormous."

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53 comments

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Facts
"Technology, not necessarily outsourcing, is displacing American
workers...Even China is losing manufacturing jobs because the
number of people required to make goods is decreasing as a
result of technologies that make factories more efficient, he
said."

I just wanted to repeat these facts 'cos they're worth repeating.

The media often portrays the decline of U.S. manufacturing
employment as a simple case of "jobs lost to China/India". It's
simply not the case from a big-picture perspective.
Posted by stanshih (28 comments )
Reply Link Flag
Where would the Shock Value be if you use facts?
Facts don't give a has-been economist 15 minutes of fame.

Facts would tell people not to listen to an "economist" who too stupid to be a Fed board member and is instead a "labor" secretary.

Facts would make for a boring political statement from the dumbacrats.
Posted by kamwmail-cnet1 (292 comments )
Link Flag
Technology replacing labor - Thankfully!
Yep, technology sure has replaced a lot of labor. While I believe 'high technology' has replaced a lot of labor recently I don't think it holds a candle to the amount of labor technology that we no longer consider 'high' has replaced. Imagine how much labor we'd need without the wheel, light bulbs, electricity, combustion engines, etc... All things which were at one point considered 'high technology'. Even the most stunted moron can see that these inventions have enriched the world tremendously.

Only an anti-life destroyer would put much credence into what Robert Reich has to say. He's a scare monger. If this guy had as clear a crystal ball as he feigns to imply, then he wouldn't have to rely on clever arguments because the outcomes of his prior actions would've all been such huge successes. In the real world, of course, he's just another failed policy wonk.
Posted by scdecade (329 comments )
Link Flag
A Tech scenario...
I recommend more saving. That is the only solution... Businesses would continue to outsource, but what we earn atleast we can save.. Why should we spend to pay for Chinese technology or other countries products? Even otherwise does the product I buy suit my requirements? And is technology that much essential? Why can't we wait till it gets cheaper anyways? And tech toys and gadgets do not last forever while amounting to a huge bill..Why pay so much? The world is now moving towards opensource software wise.. Hopefully it should be the same for the American companies..

If you save, you are not paying for other countries tax or profits.. When the Chinese can artificially depreciate the Yuan, why shouldn't we do so making imports costlier and making local products cheaper.. That would be a wiser option if the Chinese do not peg the Yuan to market values..

At today's currency quotes pegged against the Yuan, 1.00 USD = 8.04202 CNY China Yuan Renminbi The Chinese currency is artificially pegged. According to actual market rates, it would be around 6 Yuan for every USD. If the Chinese do not appreciate the Yuan, then the US Fed should do some thinking and do the same.. To around 4 Yuan per dollar (Atleast for two years). The budget deficit would be wiped away with one stroke.. It would also make the American products so cheap that can in turn be exported to the Chinese or other world markets.. All the outsourcing ************ would see a reverse influx back to the US markets.. Besides jobs would naturally flow back to the US.

But remember, save your dollars and pennies.. Let other countries feel the pinch..
Posted by thedevilbegone (139 comments )
Reply Link Flag
Not that easy
It's not that easy to just say "4 Yuan for every USD". Money exchange is a supply and demand issue and anytime the rate is artificially changed by a country, it costs.

This a a market where the amount of foriegn currency a country can sell is based on imports and exports. The more a country exports, the more foreign currency exists. If the USA buys products from China, then there will be an abundance of USD in China. China is going to sell these USD on international markets. If China doesn't import goods from other countries, then other countries will not have many Yuan to sell on international markets. This makes the Yuan scarce and the USD abundant. The result? The USD is depreciated against the Yuan. You will be able to sell lots of USD for a less amount of Yuan, meaning a singe Yuan is now worth more against the USD.

So where does the equalibrium exist? With the USD now worth less, USA goods will cost less overseas and with the Yuan worth more, China's goods will cost more overseas. This has an effect on trade. With a weak USD, USA will now export more goods internationally and China will export less goods internationally. Now there will be less USD available to sell and more Yuan to sell on international markets...equalizing the values against each other.

If a country tries to artifically inflate or deflate the value of its currency, it has to be willing to "overpay" international markets in order to override the ballancing effects of trade. A country my try to do this, but can not sustain such practices as the market will and does compensate.

You stated that you want to make imports costly and exports cheap. If you want to make imports costlier, all you have to do is buy lots and lots of imports and export nothing. You'll drive the value of the local currency so low that your money will be basically worthless. Or...

You find a way to make a USA product more valuable at less cost to buy. Can the USA compete against the manufacturing costs of a country that is basically using slave labor at a fraction of the cost? That is neither fair or ethically correct. The USA needs to do away with the free trade it affords other countries that practice this type of behavior. Other countries do not give USA products a fair chance to compete due to high tarriffs and other unethical practices. Enough is enough. The USA has too long allowed this to happen; now is the time to place tarriffs on goods imported into the USA. The consumer will be the ones paying the higher prices as "cheap" foriegn products will no longer exist, but the trade deficit would evaporate.
Posted by Seaspray0 (9714 comments )
Link Flag
Savings? Why?
Who wants to increase savings? Not me. I want investments that are assets. Saving too much can make a person poor.
Posted by scdecade (329 comments )
Link Flag
H1B Visas and Outsourcing a Bigger Problem
Companies who wish to do business in the US should hire in the US.
Posted by Too Old For IT (351 comments )
Reply Link Flag
productivity gains and added value ...
are overrated. what we need is more smoke and mirrors, with less accountability and self reliance. a pinch of pixie dust might also add a nice touch :)
Posted by Lolo Gecko (131 comments )
Reply Link Flag
So american companies cant
do business in other countries since they dont employ in them?

or does this rule only apply to america?
Posted by volterwd (466 comments )
Reply Link Flag
American companies do employ overseas...
in fact we probably hire and create more foreign jobs than domestic. Have you ever been out of this country?
Posted by jesdog (66 comments )
Link Flag
Right on Reich
I've been following Robert Reich for over a decade and he has a great track record of predicting and advising. Not everyone is willing to listen to bad news but would prefer to deny reality and hope for magic to happen. Meanwhile, the U.S. keeps going deeper into debt, savings continue to be dismal and we keep partying on the deck of the Titanic.

It would help if the interest on savings was not taxed for those making less than $200k per year. It's hard to encourage people to save when there is a dis-incentive such as tax on interest.

And there will be a labor shortage as baby boomers start retiring. There are several solutions such as importing workers, keeping the boomers in the work force and exporting work. If we can elimiate our need for imported oil by innovative technology that can be sold to the rest of the world, it would go a long way on several fronts.
Posted by corporate_radical (4 comments )
Reply Link Flag
A several straw men, but some good points too
Reich admits that hes slightly bullish on the economy... I love how thats burried in the story. He needs an escape hatch in case his gloomy prediction is nothing more than election-year posturing.

RE: Median Wage Decline - When your country is subject to 10,000,000 non-citizens entering a black market workforce with invisible wages, it tends to drag down the averages. Most American families I know are doing better than they ever have, financially, from all walks of life.

RE: Over Spending is our Kryptonite - Reich does not understand that spending habbits (unlike government beauracracy) can pivot on a dime. If Americans get over extended, they can and will immediately change thier wasteful ways. Americans aren't drones driving towards a brick wall, we are dynamic. We spend when borrowing money is cheap.

RE: Outsourcing and the Trade Deficit - He's mainly right about these... outsourcing is not that big of a deal,... I would say that the deficit is unnecessary and should be reduced, but I wouldn't not raise taxes to reduce it, rather, just make our politicians spend less. The department of education simply takes in money and shuffles it around and redistributes a percentage of it. It is a poster child for waste.
Posted by gerhard_schroeder (311 comments )
Reply Link Flag
The department of education
>"The department of education simply takes in money and shuffles it around and redistributes a percentage of it. It is a poster child for waste."

Yes them and the Mitlitary! Hey let's pony up another 100 mil for the war on terror. What has been the return on investment. Increased terror...wow that's great!
Posted by tryoneon (26 comments )
Link Flag
?
<The department of education simply takes in money and shuffles it around and redistributes a percentage of it. It is a poster child for waste.

Actually education creates economic wealth by allowing people to get higher paying jobs, paying more taxes, and buying more goods.

That and the social benefits... btw... do you think everything that doesnt return is a waste? Because thats some lame thinking.
Posted by volterwd (466 comments )
Link Flag
Reich is not an Economist
Robert Reich is not an economist, real or academic. He never has been one. He doesn't even have a bachelor's degree in economcs, much less a graduate degree. (In case you didn't know).

Reich is about as well-qualified to pontificate on economic issues as any other non-credentialed, unqualified non-economist, such as your average truck driver, metal grinder, or prostitute.

So, always strikes me as odd that the press treats him as if he were one, as if he possessed any actual knowledge or insight into these areas, when in fact he does not. They may as well quote him on quantum physics or neurosurgery, as he is also not a physicist or neurosurgeon.
Posted by MikeDson (50 comments )
Reply Link Flag
He Makes Some Good Points
He made some good points. It would appear that you didn't care to disagree with that since you attacked the man rather than the message.

mark d.
Posted by markdoiron (1138 comments )
Link Flag
if only
If only, but then again who is spending who's money, for I was watching this recent documentary on how madison avenue deliberately manipulates childrens spending habits to the nth degree.

The marketing man quoted the following large impressive numbers, children directly spend 200 billion dollars, indirectly spend 300 billion dollars, and have a strong influence over the spending of 500 billion dollars.

As with all children, they believe there is no tomorrow or day of reckoning, one example is the fast junk food industry would not exist if they did not brainwash children, into an I want/demand mode!

Further, two very corrupt Miami shrinks formerly in the employ of janet reno(not one oher better moments or choices of judgement), have shown children are very susceptable to the simplest brainwashing techniques(if you repeat it often enough they will parrot all information as the the truth given without really understanding why, but merely to appease to gain favourable attention!).

The current government run by junior bush with his crazy insane economic policies is accelerating us towards financial market collapse, like insane tax cuts and doubling government for every term that he serves!

Think forward , to the point in time when all pension funds need to pay out more money then they receive to the retiring baby boomers, ie they cease to be purchasers of the very goverment bonds that junior relies on to fund his ever increasing government operating deficit!

The feedback from this event will cascade through the entire market system, initiating a sequence of collapses and major reductions spending, this in turn will be the start of an irreversable economic chain failure from the top down, thus leading to the absolute collapse in all financial markets, as companies go down like ninepins in a bowling alley!

Oh well, wall street '29 here we come, for all this is preordained, the mathematics for this are well understood, such is life.

But who listens to doomsayers, while we can spend like there is no tomorrow!
Posted by heystoopid (691 comments )
Reply Link Flag
if only
If only, but then again who is spending who's money, for I was watching this recent documentary on how madison avenue deliberately manipulates childrens spending habits to the nth degree.

The marketing man quoted the following large impressive numbers, children directly spend 200 billion dollars, indirectly spend 300 billion dollars, and have a strong influence over the spending of 500 billion dollars.

As with all children, they believe there is no tomorrow or day of reckoning, one example is the fast junk food industry would not exist if they did not brainwash children, into an I want/demand mode!

Further, two very corrupt Miami shrinks formerly in the employ of janet reno(not one oher better moments or choices of judgement), have shown children are very susceptable to the simplest brainwashing techniques(if you repeat it often enough they will parrot all information as the the truth given without really understanding why, but merely to appease to gain favourable attention!).

The current government run by junior bush with his crazy insane economic policies is accelerating us towards financial market collapse, like insane tax cuts and doubling government for every term that he serves!

Think forward , to the point in time when all pension funds need to pay out more money then they receive to the retiring baby boomers, ie they cease to be purchasers of the very goverment bonds that junior relies on to fund his ever increasing government operating deficit!

The feedback from this event will cascade through the entire market system, initiating a sequence of collapses and major reductions spending, this in turn will be the start of an irreversable economic chain failure from the top down, thus leading to the absolute collapse in all financial markets, as companies go down like ninepins in a bowling alley!

Oh well, wall street '29 here we come, for all this is preordained, the mathematics for this are well understood, such is life.

But who listens to doomsayers, while we can spend like there is no tomorrow!
Posted by heystoopid (691 comments )
Reply Link Flag
scrap medicare ...
and replace it with national health care; but, don't inhale.
Posted by Lolo Gecko (131 comments )
Reply Link Flag
Reading all your comments..
Reading all your comments, let me try and explain my line of reasoning on the comments made earlier..

By savings, I do not mean " Do not N-joi your life" N-joi it to the fullest.. but try to cut a few dollars here and there. For example, if you are planning to purchase a new tech gadget, wait.. We already have enough, just keep it pending till the last.. By that time you may come across an even better one.. That would be better value for money. Cut down on unwanted stuff like those cheap Chinese toys, key chains (I didnt beliee it till I saw the statistics..), porcelain or textiles. (In fact Pakistan is more famous for Levi's T-shirts) Ditto for the others, When you get a bargain offer, think if you really require it. How functional is it in your life?

If you must go purchase it then opt for the cheapest in the category..

Secondly, I said that the Chinese have artificially pegged the Yuan, not other countries. They now have over 200 billion of our money as surplus and growing. And they do not use "slave labor" as someone stated. They work under the same conditions as us. (Both in India, China and other countries)

If we (Depreciated) did the same vis-à-vis the Yuan, then the other currencies would still remain stable, and the currency situation would remain the same with other countries as it would not be effected. There would not be any loss for other countries except for countries dealing in the USD. They would gain significantly when selling their dollars against the Chinese currency. Any loss made in terms of currency valuation would be China. (Both directly and indirectly)
By setting up trade barriers or market tariffs, (Which is quite reasonable currently) we would be in a cloistered shell which would not be feasible. However by depreciating the dollar, the advantages are
This would make Chinese Imports costlier, forcing them to either raise prices or stop exporting if the product is not feasible for export.
Manufacturers would see more sense in producing locally as the cost benefits are not much when imported implying more jobs. (Remember that it is not the call center, textiles I am referring to. I am referring to Automobiles, (Components of which half of them are made in India and China, except probably for Toyota) chip manufacturing plants and other such as the steel industry.(The prime movers of any nation) Remember that Automobiles have always been a budgetary influence on the US. When GM made profits, the US which had a surplus..
Right now GM is concentrating on manufacturing cars for the Asia Pacific region where the growth is the largest. (A good move) But what about Delphi? It's biggest loss making unit? Last heard, buyers from China and India were eyeing it..
Lastly other countries would have options instead of the Chinese. They would also be forced to rethink trading against the Yuan as it would gather actual market value or less. Besides it would also be possible to export more services and gain more tech related jobs in the automotive components and core chip sectors.
The health plans are necessary, not evil.

What I meant by saving was if each one of us, saved at least 3-10k $ (in addition) annually, that would make a huge difference.. Once you are in the habit, it catches on..

Our society based more on what has he got that I dont have& (The haves and have nots mentality) (More due to the marketing stuff such as Madison avenue as someone stated) But when you travel abroad youll realize its value. Most other societies save and even their governments encourage them to save. I think Bush should offer more in terms for saving or raise the interest rates (By atleast 2- 3 percent). That would have a stimulating effect.. It would encourage lesser loans and more savings.

Does that make sense?
Posted by thedevilbegone (139 comments )
Reply Link Flag
Say What???
>And they do not use "slave labor" as someone
>stated. They work under the same conditions as
>us. (Both in India, China and other countries)

Have you ever been over there????

India is very into "debt bondage", and about 20-30%
of the H1-Bs in Silicon Valley owe money for the
snakeheads and lawyers who got them over here.
Don't tell me any fairy tales about how those debts
are not enforcable under American law: The snakeheads have the H1-B's family back in India
as collateral.

As for China, their standard of living is WAY below
that of the US: Most of them do not have their own
bathroom. Most apartment buildings in China have
a common bathroom, down the hall.

Absolutely no way is it true that "They work under
the same conditions as us."

No way.
Posted by (139 comments )
Link Flag
yea, but here's a laugh
I would give exception to your "What I meant by saving was if each one of us, saved at least 3-10k $ (in addition) annually....."

I beleive anyone who gets much more than their fair share, such as certain CEO's and executives of well known companies, should be forced to spend their entire yearly earnings if they have personally saved over $10 billion (much more than what all the rest of us would see in a lifetime).

Can you see the visions' of "Brewster's Millions" dancing through their heads? Perhaps they would agree to work for a more reasonable salary instead of continuing to fuel their greed.

A wild concept, but it would be funny to see.
Posted by Seaspray0 (9714 comments )
Link Flag
Reich is a Big Part of the Problem
When he was Secretary of Labor, Robert Reich was
one of the big advocates of H1-B expansion.
He has done more to harm the US technology
work force than any other person, with the possible
exceptions of Karl Rove and George W. Bush.

For him to come around bleating about problems that
HE HIMSELF CAUSED is beyond disingenuous:
It is nauseating.

Practically all of the per-capita US economic growth
in the last 30 years has come as a result of
increasing high-tech activity, but Reich and his buddies
have already reduced US college enrollment in
Engineering by 50%.

Robert Reich is one of America's economic problems.
No way is he part of the solution.
Posted by (139 comments )
Reply Link Flag
But what he is stating is old hat...
If you go through the link Adam has provided pertaining to Greenspan's speech in 2003, we barely have another 5 years.. After which it would be all the more difficult for us without external help. All through our history we have relied on outsiders for assistance. First it was the African community, then jewish, the Mexican and Canadian, and now the Asian. It makes more sense for the goverment to issue more H1B visas becuase they earn from them. Besides they would be bringing in much wanted money once they are mainstram Americans. Right now by raising the H1B visacap, they are only trying to stave off the boomer generation....
Posted by thedevilbegone (139 comments )
Link Flag
Snooze
No matter what the year - be it 1000 BC or 2006 AD - there'll always be someone proclaiming doom and gloom is just around the corner. And nowadays there's usually a messenger (*cough*, CNET) happy to latch on to the predictions to garner a cheap headline.
Posted by (402 comments )
Reply Link Flag
 

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