As you read the letter, think about how this could affect you. Are you a production worker or a service worker in an industry that could outsource your job overseas? Are you currently enrolled in a government entitlement program that could disappear in the next 10 years? How will these changes affect your standard of living? How will you prepare for these changes?
Dear George,
As always, I enjoy reading your thoughts on all manner of things economic. This week is no exception. Being away from my desk for a couple of days, I had to go back and catch up. Of interest was the GAO report to congress discussing the issues surrounding global outsourcing. I would direct your attention to a recent book "Our Brave New World" by Charles and Louis-Vincent Gave, and Anatole Koletsky.
While I do not agree with everything they say about how the trend in global outsourcing will affect our economy, they make some interesting observations. First, they see a rise in "platform companies." These are companies which design and market products and services while farming out production to low-cost manufacturers, usually overseas in low-cost labor countries.
They have significantly lower capital costs, no factories to build and maintain, no expensive equipment to buy, and no workers to pay or lay off when the economy slows down. In fact, the authors believe that these "platform companies" are the new growth companies based on how they are organized.
The second and what seems to me, a more important point is their observation that as more companies switch to the "platform company" model, many will begin to realize that they should domicile their research and marketing activities in countries with low marginal tax rates. This benefits the employees as well as the shareholders, but it sounds a death knell for a government that has an ever-increasing appetite for tax revenue to fund operations and pay interest.
In fact this migration has already started. On any given day, the biggest foreign net buyer or seller of US Treasuries is the Caribbean Islands. This is due to some of the largest hedge funds operating in the Caribbean Islands. And it doesn't stop with financial companies. Electronic Arts is incorporated in the Caymans, Hong Kong Land is incorporated in Bermuda. If this trend continues, it will lead to a collapse in tax receipts in countries that do not adjust to this new model. And as you pointed out in your comments following the GAO report, the paradigm shifts ever so slowly.
They conclude that the rise of "platform companies" could lead to the end of the Welfare State. I wonder if the GAO or anyone in government has managed to reach these conclusions?
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