The Washington Post prominently reported today (http://www.washingtonpost.com/wp-dyn/content/gallery/2008/05/30/GA2008053002534.html?hpid=artslot) on the opening of a furniture factory by the price-conscious retailing giant Ikea. Ikea supplies itself from plants all over the world, so one more wouldn’t be worthy of the page one coverage plus two photos that the Post gave to it. But this one is located in Danville, Virginia, and is the first that Ikea operates in the United States – and that is big news. Bookshelves and coffee tables made in Virginia – bravo!
The article cites a number of factors, including the will power of Virginians, as helping to reverse two decades of job losses. “The weakening dollar,” says the report, “has made the United States more attractive to foreign investors. Companies from England, Canada and India have recently opened operations or expanded in Danville.”
True, Danville has lost tens of thousands of manufacturing, mostly textile, jobs in recent years, and the Ikea plant will eventually employ only 740. True, unemployment in the Danville area still exceeds 7 percent. And true, for many of the new hires, wages are substantially lower than they used to earn.
For several years, I’ve been speechifying that there is only "good" news and better news. The "good" news is that, if we do nothing, market forces will wring the excesses out of the American economy. That will entail a lower dollar, higher inflation, and a lot of belt-tightening by many Americans. That process has now begun in earnest but is far from complete. If allowed to run its course, America will eventually be a highly attractive place for folks with money to invest and produce and a cheap export platform. There will be plenty of jobs, especially for workers with skills. The downside is that our standard of living will be reduced, painfully. What’s happening in Danville illustrates this point very well.
The better news, as I try to argue at every opportunity in this space, is that we can avoid a lot of that pain with smart, globally competitive public policies. Rather than relying on the cheaper dollar (which also contributes to higher energy prices and interest rates), America could achieve a lot of the same gains by making intelligent changes in our tax, energy, infrastructure, and health care policies. Better still, those gains are more likely to endure than market-driven corrections, leaving us better equipped to compete successfully in the global market.
Already there are signs that the US and some of its major trading partners want to reverse the depreciation of the dollar in order to reduce energy costs and ease inflation. That’s understandable, of course. The other side of that coin, however, is that the market incentive for more investments like Ikea’s in Danville will be commensurately lower.
As I tried to argue in “Receding Recession?” relying on market forces to solve structural problems is foolish and subjects us unnecessarily to the whip-sawing discipline of market forces. The Invisible Hand leaves visible scars on individuals, families, communities and nations. We can do better with smart policies.