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Outsourcing backlash

Outsourcing backlash
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First Published: Fri, Dec 14 2007. 12 13 AM IST
Updated: Fri, Dec 14 2007. 12 13 AM IST
With goods, it’s possible to have (protectionist) barriers, even though it would be really unwise to have them. In contrast, with services, I think it is not even possible for a state to come in the way without seriously interfering with personal freedoms and open telecom systems. Even if the worst politicians get their act together and whip up a lynch mob, I don’t see how they can block outsourcing of services jobs.
US importing trouble
The Fed dropped interest rates, as expected.
Yes, there’s the problem of credit crunching and a slowing economy. By that standard, the central bank is doing its job of easing the pain. But then there’s the issue of the Fed’s other mandate: price stability.
The subject promises to be topical today and in the days ahead after investors digest the fact that import prices last month rose 2.7%—the largest monthly increase since 1990, the Bureau of Labor Statistics reported. That elevates the 12-month gain in the import index to an extraordinary 11.4% through the end of November. Such levels haven’t been seen since the 1980s.
Of course, we can almost hear the optimists countering that the rise was due largely to the surge in energy prices in November. Quite true, and if you exclude petroleum from the figures, import prices rose by a substantially lesser pace of 0.7% last month. Yet, the fact remains that prices paid for imports are on the rise generally, and in more than a few cases the pace is in the upper range for recent if not distant history.
The US, in short, runs the risk of importing inflation at a higher dosage than we’ve seen in quite a few years. It’s not a huge problem today, next week or next month. But over time, left untended, the disease will take its toll.
A weaker dollar brings higher import prices, and so to the extent that the buck continues to suffer in the forex market, import prices will stay high and/or rise.
In the short term, the great hope for temporary relief comes from oil. Although imports of crude have a large and growing impact on the overall import price level, it’s not beyond the pale to think that energy prices could fall in the short term, all the more so if the US economy weakens. For a time. But in the long run, the US will continue to import more oil, which will put pressure on the dollar, which supports higher import prices. And as far as we can tell, no economist is predicting (if) US imports in non-petroleum items will decline or stay flat as a long-term proposition.
But what of the Fed? Can the central bank ride to the rescue? Perhaps, although that would require a hawkish stance for monetary policy. Alas, just the opposite is in play at the moment, and the odds of that changing any time soon look dim. And so, as the Fed drops interest rates, the bearish pressure on the greenback looks set to rise.
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First Published: Fri, Dec 14 2007. 12 13 AM IST