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Deflation And Offshoring

 
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I found this Yahoo Group that deals with the related topic of Deflation at:
http://groups.yahoo.com/group/deflation/
I think there is a correlation between deflation and offshoring.
The offshoring of the US industries and the resulting decimation of the tax base will lead to deflation. Price drops as a result of products/services being manufactured/provided in offshoring destination countries. As more people become unemployed, less people consume, and prices drop. The government must lower interest rates. Unfortunately, more even more people become unemployed, even less people consume, and price drop further. This will lead the US, Europe, and other formerly industrialized countries into a deflated economy. The deflated economy may eventually lead to a disinflated economy (Great Depression).
 
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It's a sticky situation and there are few straight lines in it. Not so much a IF-this-THEN-that as a problem in linear programming.
The eroding tax base is one thing. We've demonstrated an ability to run a country while massively in the red, and grabbed at a tax cut even when it helped tip us more in the red. I don't recommend it, but it's been done.
More serious is that if we see deflation in wages due to unemployment or severe downward movement to stay competitive with offshoring, we see a corresponding erosion in personal purchasing power. And, to repeat an often-told tale, it's been personal purchasing that's the only thing that's kept the US ecomomy as well off over these last 2-3 years as it has been.
If you drop a $75K J2EE programmer's salary down to $25K, one of the first things to go will be the house, since the general rule in this country is that you should spend about 1/3 your income on the mortgage. Now if that was just me, that;s no big deal. But multiply it by the half-million other unemployed IT people (last I heard), it begins to add up. Augment it by the other medium-to-well-paying jobs such drafters, X-Ray interpreters, stock market analysts, all of which are increasingly being shipped offshore.
Result: an imploded housing market. And the housing market was the one thing that held us up during the (allegedly now-ended) recession. There are signs that that may happen. Despite low interest rates and refinancing all over, the default rate for mortgages jumped this year. Like the old joke goes "I can't afford to save that much money!".
It's worth noting, too, that much of the wage advantages that 3d-world countries have come from the fact that $300/mo. will get you a nice 4-bedroom house in many places. You'd have to quadruple that - or more - in many parts of the US.
Nothing is certain. It was originally expected that the housing market was going to take a hit anyway as baby boomers retired and moved to smaller, lower-maintenance houses. So far, they've elected not to. There's no telling what the future may bring to aid or hinder deflationary forces.
On the other hand, I'm not comfortable with the idea of just sitting and hoping that "market forces" will save my sorry little behind. Market forces are like rain. A little can be refreshing. More can cure a drought. Too much can flash-flood, blow out the dam and wipe away the town you live in. The rain doesn't care - it's an impersonal force. "The Market" is nearly as impersonal, subject only to the fact that "The Market" is composed of persons. Which may or may not help.
The human race isn't noted for sitting back idly and letting the gods jerk it around. We find ways to make rain. If enough people see the gravy sliding off their plates, they'll demand "rain", one way or another.
The market isn't all-powerful. We have laws to protect working conditions and the environment because pure market forces would (short-term) indicate that it's more efficient to let workers be maimed and killed and to let neighboring communities pay for the health hazards . Sometimes short-term efficiency is long-term disaster, but American business is predicated on a 3-month myopia and a "take-the-money-and-run" attitude, so we've resorted to using a blunt object (e.g. the federal government) to eliminate that sort of competitive advantage.
Bottom line, though. If you expect "Lower Prices Everyday [SM]", don't be surprised if one day someone lowers your price.
 
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More serious is that if we see deflation in wages due to unemployment or severe downward movement to stay competitive with offshoring, we see a corresponding erosion in personal purchasing power. And, to repeat an often-told tale, it's been personal purchasing that's the only thing that's kept the US ecomomy as well off over these last 2-3 years as it has been.


We've been through one 'offshoring trend' in the early to mid 90's and I think learned a couple of lessons from it.
One lesson is that offshoring works best during recessions. Some IT work will always need to be done, but offshoring works best for work which isn't under a great deal of time pressure, or work which can be offshored completely (shipped to India for the full life-cycle).
Another lesson is that offshoring raises the risk of project failure substantially. This is ok if you are in the kind of country which botches projects routinely, whether at home or abroad. A botched outsource project is cheaper, but in this case the rational strategy is either to begin no new projects or to fire your management team and begin anew.....
A third lesson is that high demand for offshore labor raises the cost of that labor. In the early 90's you could hire a decent programmer in India for $4000 a year. Today it's at least 5 times that and heading upwards.
I cannot speak intelligently about the housing market in the US, except that it seems high. It's incredibly high in London (where I now live). It's due for a fall, perhaps a major fall, after which things should become more affordable for a time. There are many places in the US where house prices are pretty reasonable. I lived in the RTP area of North Carolina, where one could erect a double-wide or a modular home on a lot for as little as $100,000 and have a decent quality of life on a decent mortgage. And there are lot's of places a lot cheaper than that. You could base yourself in one of those places and go into contracting, for example.
 
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