I am often asked how the American economy differs today from the years of the Reagan administration when I was a high Treasury official in charge of US economic policy. Those were pre-offshoring and pre-deregulation times, and the differences are immense. A far higher percentage of Americans were employed. The dollar was strong, not weak. Home ownership was expanding, not contracting. Commercial banks were separate from investment banks, and debt leverage was restricted. In other words, the financial system was not a casino, and corporate profits were not obtained by replacing American labor with foreign labor.
The assault on common sense rules, which governed American capitalism and made it humane, resulted from the hubris created by the triumph of capitalism over Soviet communism. The neoconservative “end of history” nonsense proclaimed the United States to be the only viable political-socio-economic system. (See, for example, Francis Fukuyama, The End of History.)
This hubris caused America to over-reach and led to America’s demise as a prosperous and free country. The beacon of light during the Cold War has been put out.
Offshoring Displaced First World Americans
For decades the Democratic Party seemed to have a monopoly on class war with demagogy of "the rich." In the 21st century, the rich instigated class war with attacks on labor unions and middle class jobs. The ladders of upward mobility are being dismantled. America, once the land of opportunity, is now polarized between rich and poor.
The lives and careers that are being lost to the carnage of America’s gratuitous wars are paralleled by the economic destruction of careers, families and communities in the U.S. Since the days of President Franklin D. Roosevelt in the 1930s, the U.S. government has sought to protect employment of its citizens. Presidents George H. W. Bush, William J. Clinton, George W. Bush and Barack Obama have turned their backs on this responsibility.
"Free trade" and "globalization" are the guises behind which class war is being conducted against the middle class by both political parties. In the 1992 US presidential campaign, billionaire Ross Perot, a political outsider and third party candidate, was the first to call national attention to the “giant sucking sound” of American jobs being offshored to foreign lands. The political establishment eliminated the threat from Perot by having the media characterize Perot as “an untested wild man.” Despite the media campaign against him, Perot won 20 million votes or 19% of the popular vote.
Fourteen years later Patrick J. Buchanan, a three-time contender for the presidential nomination, wrote (March 10, 2006, World Net Daily column ) that NAFTA and the various so-called trade agreements are not trade agreements. They are enabling acts that empower U.S. corporations to dump their American workers, avoid Social Security taxes, health care and pension costs, and move their factories offshore to locations where labor is cheap and environmental restrictions virtually nonexistent.
Perot and Buchanan were correct, and the economists were wrong. On September 20, 2011, Manufacturing and Technology news, citing the latest Quarterly Census of Employment and Wages, reported that during the previous ten years, the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent.
These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures.
US politicians, such as Buddy Roemer, blame the collapse of US manufacturing on Chinese competition and “unfair trade practices.” However, it is US corporations that move their factories abroad, thus replacing domestic production with imports. Half of US imports from China consist of the offshored production of US corporations.
The wage differential is substantial. According to the Bureau of Labor Statistics, as of 2009, average hourly take-home pay for US workers was $23.03. Social insurance expenditures add $7.90 to hourly compensation and benefits paid by employers add $2.60 per hour for a total labor compensation cost of $33.53.
In China as of 2008, total hourly labor cost was $1.36, and India’s is within a few cents of this amount. Thus, a corporation that moves 1,000 jobs to China saves saves $32,000 every hour in labor cost. These savings translate into higher stock prices and executive compensation, not in lower prices for consumers who are left unemployed by the labor arbitrage.
Republican economists blame “high” US wages for the current high rate of unemployment. However, US wages are about the lowest in the developed world. They are far below hourly labor cost in Norway ($53.89), Denmark ($49.56), Belgium ($49.40), Austria ($48.04), and Germany ($46.52). The US might have the world’s largest economy, but its hourly workers rank 14th on the list of the best paid.
Jobs offshoring neutralized the productivity advantages that American labor enjoyed. Working with superior capital, technology, and business organization, US workers had nothing to fear from cheap labor abroad. Americans were far more productive than Indians and Chinese, and their high productivity was reflected in high wages. American jobs and living standards were not threatened by low wages abroad or by the products that these low wages produced.
The advent of offshoring has destroyed the productivity advantage of First World labor. Offshoring makes it possible for firms using First World capital and technology to produce goods and services for the U.S. market with low wage foreign labor. The result is to separate Americans’ incomes from the production of the goods and services that they consume. This new development, often called "globalization," allows cheap foreign labor to work with the same capital, technology and business know-how as U.S. workers. The foreign workers are now as productive as Americans, with the difference being that the large excess supply of labor that overhangs labor markets in China and India keeps wages low. Labor that is equally productive but paid a fraction of First World wages is a magnet for Western capital and technology.
Although a new development, offshoring is destroying entire industries, occupations and communities in the United States. The devastation of U.S. manufacturing employment was waved away and dismissed with promises that a "new economy" based on high tech knowledge jobs would take its place. Education and retraining were touted as the answer.
In testimony before the US-China Commission (September 25, 2003:[ PDF]), I explained that offshoring is the replacement of U.S. labor with foreign labor in U.S. production functions over a wide range of tradable goods and services. As the production of most tradable goods and services can be moved offshore, there are no replacement occupations for which to train except in domestic "hands on" services such as barbers, manicurists, and hospital orderlies. No country benefits from trading its professional jobs, such as engineering, for nontradable domestic service jobs.
At a Brookings Institution conference in Washington, D.C., in January 2004, I predicted that if the pace of jobs offshoring and occupational destruction continued, the U.S. would be a Third World country in 20 years. Despite my regular updates on the poor performance of U.S. job growth in the 21st century, economists have insisted that offshoring is a manifestation of free trade and can only have positive benefits overall for Americans.
Reality has contradicted the glib economists. The new high-tech knowledge jobs are being outsourced abroad even faster than the old manufacturing jobs. Only a few establishment economists are beginning to see the light. Writing in Foreign Affairs (March/April 2006) Princeton University economist and former Federal Reserve vice-chairman Alan Blinder concludes that economists who insist that offshore outsourcing is merely a routine extension of international trade are overlooking a major transformation with significant consequences. Blinder estimates that 42-56 million American service sector jobs are susceptible to offshore outsourcing. Whether all these jobs leave, U.S. salaries will be forced down by the willingness of foreigners to do the work f
or less.
Software engineers and information technology workers have been especially hard hit. Jobs offshoring, which began with call centers and back-office operations, is rapidly moving up the value chain. Business Week’s Michael Mandel (September 15, 2005: ) compared starting salaries in 2005 with those in 2001. He found a 12.7% decline in computer science pay, a 12% decline in computer engineering pay, and a 10.2% decline in electrical engineering pay.
Using the same sources as Mandel’s Business Week article (salary data from the National Association of Colleges and Employers and Bureau of Labor Statistics data for inflation adjustment), Professor Norm Matloff at the University of California, Davis, made the same comparison for master degree graduates. He found that between 2001 and 2005 starting pay for master degrees in computer science, computer engineering and electrical engineering fell 6.6%, 13.7%, and 9.4% respectively.
Obviously, if these skills were in short supply, as corporations allege, the shortage would result in rising salaries as employers bid for scarce human resources.
On February 22, 2006, CNNMoney.com staff writer Shaheen Pasha reported that America’s large financial institutions are moving "large portions of their investment banking operations abroad." Offshoring is now killing American jobs in research and analytic operations, foreign exchange trades and highly complicated credit derivatives contracts. Deal-making responsibility itself may eventually move abroad. The accounting firm Deloitte Touche reported that the financial services industry will move 20 percent of its total costs base offshore by the end of 2010. As the costs are lower in India, the move will represent more than 20 percent of the business. A job on Wall St is a declining option for bright young persons with high stress tolerance as America’s last remaining advantage is outsourced abroad.
According to Norm Augustine, former CEO of Lockheed Martin, even jobs at the fast food chain, McDonald’s, are on the way offshore. Augustine reports that McDonald’s is experimenting with replacing error-prone order takers with a system that transmits orders via satellite to a central location and from there to the person preparing the order. The technology lets the orders be taken in India or China at costs below the US minimum wage and without the liabilities of US employees. Whether or not this works out for McDonald’s, it shows that not even minimum wage domestic service jobs are safe for Americans.
American economists, some from incompetence and some from being bought-and-paid-for, describe globalization as a "win-win" development. It was supposed to work like this: The U.S. would lose market share in tradable manufactured goods and make up the job and economic loss with highly-educated knowledge workers. The win for America would be lower-priced imported manufactured goods and a white collar work force. The win for China would be manufacturing jobs that would bring economic development to that country.
It did not work out this way, as Stephen Roach, formerly a cheerleader for globalization, concluded. Roach writes that it has become apparent that job creation and real wages in the developed economies are seriously lagging their historical norms. Offshore outsourcing displaces not only manufacturing jobs, but also the "new economy" jobs in "software programming, engineering, design, and the medical profession, as well as a broad array of professionals in the legal, accounting, actuarial, consulting, and financial services industries.” The real state of the U.S. job market is revealed by a Chicago Sun-Times report on January 26, 2006, that 25,000 people applied for 325 jobs at a new Chicago Wal-Mart.
The Evidence From The Bureau Of Labor Statistics
According to the Bureau of Labor Statistics (BLS) payroll jobs data , over the half-decade (January 2001—January 2006) prior to the onset of the December 2007 Great Recession, the US economy created 1,613,000 seasonally adjusted (or 1,554,000 not seasonally adjusted) net new private sector jobs and 1,012,000 seasonally adjusted (or 974,000 not seasonally adjusted) net new government jobs for a total five-year seasonally adjusted figure of 2,625,000. That is five to six million jobs short of keeping up with population growth, definitely a serious job shortfall.
The BLS payroll jobs data contradict the hype from business organizations, such as the U.S. Chamber of Commerce, that claims that offshore outsourcing is good for America. Large corporations, which have individually dismissed thousands of their U.S. employees and replaced them with foreigners, claim that jobs offshoring allows them to save money that can be used to hire more Americans. The corporations and the business organizations are very successful in placing this disinformation in the media. The lie is repeated everywhere and has become a mantra among no-think economists and politicians. However, no sign of these jobs can be found in the payroll jobs data. But there is abundant evidence of the lost American jobs.
During the first years (January 2001—January 2006) of the 21st century prior to the downturn associated with the 2008 financial crisis, the information sector of the U.S. economy lost 656,000 jobs or 17.7% of its work force. Computer systems design and related fields lost 83,500 jobs or 6.2% of its work force. Clearly, jobs offshoring is not creating jobs in computers and information technology. Indeed, jobs offshoring is not even creating jobs in related fields. http://www.bls.gov/webapps/legacy/cesbtab1.htm
In the five years between 2001 and 2006, U.S. manufacturing lost 2.9 million jobs, 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.
The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is "the envy of the world." Between 2001 and 2006, communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computer and electronic products declined 30%. Electrical equipment and appliances lost 26% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 16% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 14%.
During the first half-decade of the 21st century, U.S. job growth was limited to four areas: education and health services, state and local government, leisure and hospitality, and financial services.
Engineering jobs in general are in decline, because the manufacturing sectors that employ engineers are in decline. During the five year period that we are examining, 2001-2006, the U.S. work force lost 1.2 million jobs in the manufacture of machinery, computers, electronics, semiconductors, communication equipment, electrical equipment, motor vehicles and transportation equipment. The BLS payroll job numbers show a total of 75,900 jobs created in all fields of architecture and engineering, including clerical personnel, over the January 2001-January 2006 period. That comes to a mere 15,180 jobs per year (including clerical workers). The fate of new university graduates cannot be very pleasant, with declining employment in the manufacturing sectors that employ engineers and a minimum of 65,000 H-1B work visas annually for foreigners plus an indeterminate number of L-1 work visas.
Not only the Bush and Obama regimes, with their claims of Iraqi “weapons of mass destruction” and “Iranian nukes,” base their policies on lies, but also corporations lie about “skill shortages.” Not content with moving Americans’ jobs abroad, corporations want to fill the jobs remaining in America with foreigners on work visas. Business organizations allege shortages of engineers, scientists and even nurses. Business organizations have successfully used pubic relations firms and bought-and-paid-for "economic studies" to convince policymakers that American business cannot function without the subsidy provided by H-1B visas. The evidence is conclusive that the visas do not fill a “skills gap.” The visas allow corporations to replace higher paid Americans with lower paid foreigners. Prior to being discharged, the American employees are first required to train their replacements. If the skills were in short supply, Americans would not be disch
arged when the H-1B visa holders are hired.
Keep in mind this H-1B subsidy to U.S. corporations for employing foreign workers in place of Americans as we examine the US Department of Labor’s job projections over the 2004-2014 decade.
All of the occupations with the largest projected employment growth (in terms of the number of jobs) over the 2004-2014 decade are in nontradable domestic services. The top ten sources of the most jobs in "superpower" America are: retail salespersons, registered nurses, postsecondary teachers, customer service representatives, janitors and cleaners, waiters and waitresses, food preparation (includes fast food), home health aides, nursing aides, orderlies and attendants, general and operations managers. Note than none of this projected employment growth will contribute one nickel toward producing goods and services that could be exported to help close the massive U.S. trade deficit. Note, also, that few of these job classifications require a college education. The knowledge jobs that Americans have been promised for 20 years have not materialized.
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