How the Economy Was Lost: The War of the Worlds (Counterpunch)

by Roberts, Paul Craig

  As long as the dollar retains its reserve currency role, Americans can continue to hand over paper for real goods and services. But how long can the United States retain the reserve currency role when its economy does not make things to export, when its work force is employed in domestic services, and when its foreign creditors own its assets?

  Blinder, like Porter and almost every other economist, warns against trying to prevent America’s descent into a Third World existence. Blinder says protection would block trade and “probably do a great deal of harm.” But both Blinder and the competitiveness report show a great deal of harm being done to Americans by offshoring the production of goods and services for American markets. As more and more high value-added U.S. occupations in tradable services are undercut by offshoring, the ladders of upward mobility that made America a land of opportunity are taken down. As the bulk of domestic service jobs do not require a university education, the United States will find itself over-invested in educational institutions and decline will set in.

  For developed economies, offshoring is a reversal of the development process. As offshoring progresses, the domestic economy will become less developed and have less demand for university education.

  Economists cannot speak the obvious truth, because they mistake the operation of absolute advantage for comparative advantage. The case for free trade rests on the comparative advantage argument that countries that specialize in what they do best and trade for goods that other countries do best share in the gains from trade and experience higher standards of living.

  In 2000, the case for free trade came under powerful attack when MIT Press published Global Trade and Conflicting National Interests by Ralph Gomory and William Baumol. This work shows that the case for free trade has been incorrect since the day David Ricardo made it. Economists have not come to terms with this important work, and they will resist doing so for as long as they can as it demolishes their human capital.

  The challenging work by Gomory and Baumol aside, I have shown, as has Herman Daly, that the two conditions on which comparative advantage depends no longer hold in the present-day world. One condition is that capital must be immobile internationally and seek its comparative advantage in the domestic economy, not move across international borders in search of lowest factor cost. The other condition is that countries have different relative cost ratios of producing tradable goods.

  Today, capital is as mobile internationally as tradable goods, and knowledge-based production functions operate identically regardless of location. Neither of the conditions upon which the case for free trade rests exists in the present-day world.

  As the necessary conditions for the free-trade case no longer exist, and if the case for free trade has been wrong from the beginning as Gomory and Baumol indicate, then America’s free trade policy rests in fantastic error.

  Economists long ago ceased to think objectively about free trade. Free trade has become an unexamined article of faith. As far as I can ascertain, economists no longer are even aware of the necessary conditions specified by Ricardo that are the basis for the free trade case.

  Economists have made a number of blunders in their arguments seeking to protect offshoring from criticism. For example, Matthew Slaughter, a member of President Bush’s Council of Economic Advisors, penned a study that concluded: “For every one job that U.S. multinationals created abroad in their foreign affiliates, they created nearly two U.S. jobs in their parent operations.” How did Slaughter arrive at this conclusion—a conclusion that can find no support in the BLS jobs data? Slaughter reached his incorrect conclusion by failing to take into account the two reasons for the increase in multinational employment. One is that multinationals acquired many existing smaller firms, thus raising multinational employment but not overall employment. The other is that many U.S. firms established foreign operations for the first time and thereby became multinationals, thus adding their existing employment to Slaughter’s number for multinational employees.

  Another problem is that the corruption of the outside world has found its way into universities. Today, universities look upon “name” professors as rainmakers who bring in funds from well-heeled interest groups. Increasingly, research and reports serve the interests that finance them and not the truth. Money rules, and professors who bring money to universities find it increasingly difficult to avoid serving the agendas of donors.

  When a country gives up producing tradable goods, it gives up the occupations associated with manufacturing. Engineering and R&D move away with the manufacturing. It is impossible to innovate independently of the manufacturing and R&D base. Innovation is based on state-of-the-art knowledge of what is being done, and if the doing is done elsewhere, the would-be innovator will find himself at a disadvantage.

  Offshoring is causing dire problems for the United States. I have suggested that one necessary reform will be to break the connection between CEO pay and short-run profit performance. As long as CEOs can get filthy rich in a few years by dumping their U.S. workforce, the trade deficit will continue to rise, and more college graduates will be employed as waitresses and bartenders.

  The short-run time horizon of U.S. management endangers the long-term viability of U.S. firms. This short-run time horizon is the result of a “reform” that sought to give investors the most up-to-date financial information. The reformers did not consider the unintended consequences of quarterly reporting.

  To level the playing field for American labor, Ralph Gomory suggests that U.S. corporations be taxed not on income but on the percentage of the value added to their output that occurs in the U.S. Companies that produce in the U.S. would have low tax rates; companies that produce abroad would have high tax rates.

  Economists need to inject some realism into their dogmas. The U.S. economy did not develop on the basis of free trade. Whatever the costs of protection, the costs did not prevent America’s economic rise.

  Much American economic thinking is grounded in the fact of America’s past success. Many economists take it for granted that as long as the U.S. has free markets, it will continue to be successful. However, much of America’s success is due to World War I and World War II, which bankrupted rivals and destroyed their industrial capacity. It was easy for the United States to dominate world trade after World War II as America was the only country with an intact economy.

  Many economists dismiss the problems with which offshoring confronts developed economies with the argument that it is just a question of wage equilibration. As wages rise in China and India, the labor cost differential will disappear and wages will be the same everywhere. This argument overlooks the lengthy period required for the hundreds of millions of workers, who overhang labor markets in India and China to be absorbed into the workforce. During this time, hardships in currently high-wage countries will be severe. Moreover, once the wage adjustment is complete, the new developed countries will have the upper hand. Will they give up their competitive and strategic advantages?

  In the July 2006 issue of CounterPunch, I wrote that jobs offshoring was the new form of class warfare and that it was bringing political instability and social strife to the United States. There is nothing in the Council on Competitiveness’ latest report to cause me to alter my view.

  February 19, 2007

  Chapter 16: How the Economic News is Spun

  Readers ask me to reconcile the jobs and debt data that I report to them with the positive economic outlook and good news that comes to them from regular news sources. Some readers are being snide, but most are sincere.

  I am pleased to provide the explanation. First, let me give my reassurances that the numbers I report to you come straight from official U.S. government statistics. I do not massage the numbers or rework them in any way. I cannot assure you that the numbers are perfectly reported to, and collected by, the government, but they are the only numbers we have.

  Here is how to rec
oncile my reports with the good news you get from the mainstream media:

  (1) When the U.S. Department of Labor, for example, releases the monthly payroll jobs data, the press release will put the best spin on the data. The focus is on the aggregate number of new jobs created the previous month, for example, 150,000 new jobs. That sounds good. News reporters report the press release. They do not look into the data to see what kinds of jobs have been created and what kinds are being lost. They do not look back in time and provide a net job creation number over a longer period of time.

  This is why the American public is unaware that higher paid jobs in export and import-competitive industries are being phased out along with engineering and other professional “knowledge jobs” and replaced with lower-paid jobs in domestic services. The replacement of higher- paid jobs with lower-paid jobs is one reason for the decline in median household income over the past five years. It is not a large decline, but it is a decline. How can it be possible for the economy to be doing well when median household income is not growing and when economic growth is based on increased consumer indebtedness?

  Economists, comfortable with their free trade ideology, are simply careless with data. Remember Matthew Slaughter’s error. He concluded that “for every one job that U.S. multinationals created abroad in their foreign affiliates they created nearly two U.S. jobs in the parent operations.” Slaughter arrived at this erroneous conclusion by counting the growth in multinational jobs in the U.S. without adjusting the data to reflect the acquisition of existing firms by multinationals and for existing firms turning themselves into multinationals by establishing foreign operations for the first time. There was no new employment in the U.S. Existing employment simply moved into the multinational category from a change in the status of firms to multinational.

  (2) Wall Street economists are salesmen. The companies that employ them want to sell stocks and bonds. They don’t want bad news. A bear market is not good for business. Similarly, business associations have the agenda of their members. Offshore outsourcing reduces their labor costs and boosts their profits and performance-based bonuses. Therefore, it is natural that their association reports put a positive spin on outsourcing. The same organizations benefit from work visas that allow them to bring foreign workers in as indentured servants to replace their more fractious and higher paid American employees. Thus, the myth of a U.S. shortage of engineers and scientists. This myth is used to wheedle more subsidies in the form of more H-1B visas out of Congress.

  (3) Official U.S. government reports are written to obfuscate serious problems for which the government has no solution. For example, “The Economic Report of the President,” written by the Council of Economic Advisers, blames the huge U.S. trade deficit on the low rate of domestic savings. The report claims that if only Americans would save more of their incomes, they would not spend so much on imports, and the $726 billion trade gap would close.

  This analysis is nonsensical on its face. Offshore outsourcing has turned U.S. production into imports. Americans are now dependent on offshore production for their clothes, manufactured goods, and advanced technology products. There are simply no longer domestic producers of many of the products on which Americans depend.

  Moreover, many Americans are struggling to make ends meet, having lost their jobs to offshore outsourcing. They are living on credit cards and struggling to make minimum payments. Median household real incomes are falling as higher paid jobs are outsourced while Americans are relegated to lower-paying jobs in domestic services.

  They haven’t a dollar to save. As Charles McMillion points out, the February 28, 2006, report from the Bureau of Economic Analysis shows that all GDP growth in the fourth quarter of 2005 was due to the accumulation of unsold inventory and that consumers continued to outspend their incomes.

  Matthew Spiegleman, a Conference Board economist, claims that manufacturing jobs are only slightly higher paid than domestic service jobs. He reaches this conclusion by comparing only hourly pay and by leaving out the longer manufacturing work week and the associated benefits, such as health care and pensions.

  (4) Policy reports from think tanks reflect what the donors want to hear. Truth can be “negative” and taken as a reflection on the favored administration in power. Consider, for example, the conservative, Bruce Bartlett, who was recently fired by the National Center for Policy Analysis for writing a truthful book about George W. Bush’s economic policies. Donors to NCPA saw Bartlett’s truthful book as an attack on George Bush, their hero, and withheld $165,000 in donations. There were not enough Bartlett supporters to step in and fill the gap, so he was fired in order to save donations.

  When I held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies, I saw internal memos describing the grants CSIS could receive from the George H.W. Bush administration in exchange for removing me from the Simon chair.

  In America “truth” has long been for sale. We see it in expert witness testimony, in the corrupt reports from forensic labs that send innocent people to prison, and even in policy disputes among scientists themselves. In scholarship, ideas that are too challenging to prevailing opinion have a rough row to hoe and often cannot get a hearing.

  The few reporters and columnists who are brave or naive enough to speak out are constrained by editors who are constrained by owners and advertisers.

  All of these reasons and others make truth a scarce commodity. Censorship exists everywhere and is especially heavy in the U.S. mainstream media.

  March 3, 2006

  Chapter 17: The Science & Technology Jobs Shortage Myth

  In June, 2007, a revealing marketing video from the law firm Cohen & Grigsby appeared on the Internet. The video demonstrated the law firm’s techniques for getting around U.S. law governing work visas in order to enable corporate clients to replace their American employees with foreigners who work for less. The law firm’s marketing manager, Lawrence Lebowitz, is upfront with interested clients: “our goal is clearly not to find a qualified and interested U.S. worker.”

  If an American somehow survives the weeding out process, “have the manager of that specific position step in and go through the whole process to find a legal basis to disqualify them for this position—in most cases there doesn’t seem to be a problem.”

  No problem for the employer he means, only for the expensively educated American university graduate who is displaced by a foreigner imported on a work visa justified by a nonexistent shortage of trained and qualified Americans.

  University of California computer science professor Norm Matloff, who watches this issue closely, said that Cohen & Grigsby’s practices are the standard ones used by hordes of attorneys, who are cleaning up by putting Americans out of work.

  The Cohen & Grigsby video was a short-term sensation as it undermined the business propaganda that no American employee was being displaced by foreigners on H-1B or L-1 work visas. Soon, however, business organizations and their shills were back in gear lying to Congress and the public about the amazing shortage of qualified Americans for literally every technical and professional occupation, especially IT and software engineering.

  Everywhere we hear the same droning lie from business interests that there are not enough American engineers and scientists. For mysterious reasons Americans with university degrees prefer to be waitresses and bartenders, hospital orderlies, and retail clerks.

  As one of the few who writes about this short-sighted policy of American managers endeavoring to maximize their “performance bonuses,” I receive much feedback from affected Americans. Many responses come from recent university graduates such as the one who “graduated nearly at the top of my class in 2002” with degrees in both electrical and computer engineering and who “hasn’t been able to find a job.”

  A college roommate of a family member graduated from a good engineering school last year with a degree in
software engineering. He had one job interview. Jobless, he is back at home living with his parents and burdened with student loans that bought an education that offshoring and work visas have made useless to Americans.

  The hundreds of individual cases that have been brought to my attention are dismissed as “anecdotal” by my fellow economists. So little do they know. I also receive numerous responses from American engineers and IT workers who have managed to hold on to jobs or to find new ones after long intervals when they have been displaced by foreign hires. Their descriptions of their work environments are fascinating.

  For example, Dayton, Ohio was once home to numerous American engineers. Today, writes one surviving American, “I feel like an alien in my own country—as if Dayton had been colonized by India. NCR and other local employers have either offshored most of their IT work or rely heavily on Indian guest workers. The IT department of National City Bank across the street from LexisNexis is entirely Indian. The nearby apartment complexes house large numbers of Indian guest workers filling the engineering needs of many area businesses.”

  I have learned that Reed Elsevier, which owns LexisNexis, has hired a new Indian vice president for offshoring and that now the jobs of the Indian guest workers may be on the verge of being offshored to another country. The relentless drive for cheap labor now threatens the foreign guest workers who displaced America’s own engineers.

  One software engineer wrote to me protesting the ignorance of Thomas Friedman for creating a false picture of American engineers being outdated and for “denouncing American engineers and other workers as ‘xenophobes’ for opposing their displacement by foreign guest workers.” The engineer also took exception to the “willful ignorance or cynicism” of pundits who he described as “bootlicks for pro-outsourcing lobbies.”