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."

"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 compebreastive. "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.

Meanwhile, the 76 million baby boomers born between 1946 and 1964--"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."

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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 compebreastive 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."