MaoXian.com -- Archive > May 15, 2003

The 10-year Treasury note rallied again yesterday to yet another high. Long-term interest rates haven't been this low since 1958 and mortgage rates were last at current levels back in 1965.

Can the Fed ease deflationary pressures by aggressively lowering interest rates? They have been trying of course, but in a competitive global economy deflation is a structural problem, not a monetary problem. Milton Friedman was right several decades ago when he taught that deflation could be overcome by easy money, but that's dead wrong in today's world.

Here are some good examples of deflationary forces: The $1 menu at McDonald's. The fact that 97% of the installed fiber-optic network in the U.S. remains "unlit." (Always remember John Allen Paulos' joke that "62.381527% of all statistics are made up on the spot.") Every time I deal with a call center or help desk I ask where they are based, and India and Ireland are the most common answers.

The average wage of a Chinese laborer in manufacturing is under a dollar an hour. Skilled labor is also remarkably cheap. When we were in Texas last year we met up with some guys from Dell. They told us that for every one engineer who gets laid off in Austin they are able to hire three engineers in Shanghai and still save money.

In a worst case scenario what happens? If companies can't improve profitability through further productivity gains then they're going to have to cut costs (which usually means cutting jobs) to restore their margins. When the jobless rate rises, consumers spend less which further worsens the employment situation, and the economy contracts. Ugly.

"...service firms are now shifting jobs to cheaper locales like India and the Philippines. It's not just call centers anymore. Indian radiologists now analyze CT scans and chest X-rays for American patients in an office park in Bangalore, not far from where Ernst & Young has 200 accountants processing U.S. tax returns. E&Y's tax prep center in India is only 18 months old, but the company already has plans to double its size. Corporate America is quickly learning that a cubicle can be replicated overseas as easily as a shop floor can.

In the case of giants like Ernst & Young, a more accurate term for this trend is 'offshoring'--the workers are E&Y employees; they're just located overseas.

This phenomenon is still in its infancy, but it's already sending ripples through the service economy. E&Y's Bangalore tax-preparation center has been operating full-time for only 18 months. Yet already it's paying off. 'There's no question [the office] has allowed us to lower prices in the U.S. and capture market share,' says Alan Kline, E&Y's Americas director of tax operations. 'We're not H&R Block. Each return we do is a custom job. But this has allowed us to lower prices and be much more competitive. We're getting new jobs because of India.' E&Y's Bangalore office is the mirror image of a similar center in Indianapolis, says Kline, and the firm uses the same metrics to evaluate the performance of the 200 chartered accountants (the local equivalent of a CPA) in Bangalore as it does with the 200 CPAs in Indiana. 'The work product is almost identical,' raves Kline. 'You cannot underestimate the quality of the people. It's amazing how good they are.'

And how cheap. Starting pay for an American accountant, says Kline, typically ranges from $40,000 to $50,000. In Bangalore the accountants are paid less than half that. Those kinds of savings make outsourcing and offshoring irresistible for Fortune 500 giants desperate to cut costs."