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

by Roberts, Paul Craig

  On November 6, 2006, Michael S. Teitelbaum, vice president of the Alfred P. Sloan Foundation, explained to a subcommittee of the House Committee on Science and Technology the difference between the conventional or false portrait that there is a shortage of U.S. scientists and engineers and the reality on the ground. The reality is that offshoring, foreign guest workers, and educational subsidies have produced a surplus of U.S. engineers and scientists that leaves many facing unstable and failed careers.

  As two examples of the false portrait, Teitelbaum cited the 2005 report, Tapping America’s Potential, led by the Business Roundtable and signed onto by 14 other business associations, and the 2006 National Academies of Science report, Rising Above the Gathering Storm, “which was the basis for substantial parts of what eventually evolved into the American COMPETES Act.”

  Teitelbaum posed the question to the U.S. Representatives: “Why do you continue to hear energetic reassertions of the conventional portrait of ‘shortages,’ shortfalls, failures of K–12 science and math teaching, declining interest among U.S. students, and the necessity of importing more foreign scientists and engineers?”

  Teitelbaum’s answer: “In my judgment, what you are hearing is simply the expressions of interests by interest groups and their lobbyists. This phenomenon is, of course, very familiar to everyone on the Hill. Interest groups that are well organized and funded have the capacity to make their claims heard by you, either directly or via echoes in the mass press. Meanwhile those who are not well-organized and funded can express their views, but only as individuals.”

  Among the interest groups that benefit from the false portrait are universities, which gain graduate student enrollments and inexpensive postdocs to conduct funded lab research. Employers gain larger profits from lower paid scientists and engineers, and immigration lawyers gain fees by leading employers around the work visa rules.

  Using the biomedical research sector as an example, Teitelbaum explained to the congressmen how research funding creates an oversupply of scientists that requires ever larger funding to keep employed. Teitelbaum made it clear that it is nonsensical to simultaneously increase the supply of American scientists while forestalling their employment with a shortage myth that is used to import foreigners on work visas.

  Teitelbaum recommends that American students considering majors in science and engineering first investigate the career prospects of recent graduates.

  Integrity is so lacking in America that the shortage myth serves the interests of universities, funding agencies, employers, and immigration attorneys at the expense of American students who naively pursue professions in which their prospects are dim. Initially it was blue-collar factory workers who were abandoned by U.S. corporations and politicians. Now it is white-collar employees and Americans trained in science and technology. Princeton University economist Alan Blinder estimates that there are tens of millions of American high end service jobs that ultimately face offshoring.

  As I predict, and as BLS payroll jobs data indicate, in 20 years the U.S. will have a Third World work force engaged in domestic nontradable services.

  December 4, 2007

  Chapter 18: Shrinking the U.S. Dollar From the Inside-Out

  On December 8, 2007, Chinese and French news services reported that Iran had stopped billing its oil exports in dollars.

  Americans might never hear this news as the independence of the U.S. media was destroyed in the 1990s when Rupert Murdoch persuaded the Clinton administration and the quislings in Congress to allow the U.S. media to be monopolized by a few mega-corporations.

  Iran’s oil minister, Gholam Hossein Nozari, declared: “The dollar is an unreliable currency in regards to its devaluation and the loss oil exporters have endured from this trend.” Iran has proposed to OPEC that the U.S. dollar no longer be used by any oil exporting countries. As the oil emirates and the Saudis have already decided to reduce their holdings of U.S. dollars, the U.S. might actually find itself having to pay for its energy imports in euros or yen.

  Venezuela’s Chavez, survivor of a U.S.-led coup against him and a likely target of a U.S. assassination attempt, might follow the Iranian lead. Also, Russia’s Putin, who is fed up with the U.S. government’s efforts to encircle Russia militarily, will be tempted to add Russia’s oil exports to the symbolic assault on the dollar.

  The assault is symbolic, because the dollar is not the reserve currency due to oil exports being billed in dollars. It’s the other way around. Oil exports are billed in dollars, because the dollar is the reserve currency.

  What is important to the dollar’s value and its role as reserve currency is whether foreigners continue to consider dollar-denominated assets sufficiently attractive to absorb the constant flow of red ink from U.S. trade and budget deficits. If Iran and other countries do not want dollars, they can exchange them for other currencies regardless of the currency in which oil is billed.

  Indeed, the evidence is that foreigners are not finding dollar-denominated assets sufficiently attractive. The dollar has declined dramatically during the Bush regime regardless of the fact that oil is billed in dollars. Iran’s remarks about the dollar is a market response to a depreciating currency, not a punitive action by Iran to sink the dollar.

  Oil bills are only a small part of the problem. Oil minister Nozari’s statement about the loss suffered by oil exporters applies to all exporters of all products.

  A quarter century ago U.S. oil imports accounted for the U.S. trade deficit. The concerns expressed over the years about “energy dependence” accustomed Americans to think of trade problems only in terms of oil. The desire to gain “energy independence” has led to such foolish policies as subsidies for ethanol, the main effect of which is to drive up food prices and further ravage the poor.

  Today oil imports comprise a small part of the U.S. trade deficit. During the decades when Americans were fixated on “the energy deficit,” the U.S. became three times more dependent on foreign made manufactures. America’s trade deficit in manufactured goods, including advanced technology products, dwarfs the U.S. energy deficit.

  For example, the U.S. trade deficit with China is more than twice the size of the U.S. trade deficit with OPEC. The U.S. deficit with Japan is about the size of the U.S. deficit with OPEC. With an overall U.S. trade deficit of more than $800 billion, the deficit with OPEC only comprises one-eighth.

  If abandonment of the dollar by oil exporters is not the cause of the dollar’s woes, what is?

  There are two reasons for the dollar’s demise. One is the practice of American corporations offshoring their production for U.S. consumers. When U.S. corporations move to foreign countries their production of goods and services for American consumers, they convert U.S. Gross Domestic Product (GDP) into imports. U.S. production declines, U.S. jobs and skill pools are destroyed, and the trade deficit increases. Foreign GDP, employment, and exports rise.

  U.S. corporations that offshore their production for U.S. markets account for a larger share of the U.S. trade deficit than does the OPEC energy deficit. Half or more of the U.S. trade deficit with China consists of the offshored production of U.S. firms. In 2006, the U.S. trade deficit with China was $233 billion, half of which is $116.5 billion or $10 billion more than the U.S. deficit with OPEC.

  The other reason for the dollar’s demise is the ignorance and nonchalance of “libertarian free market free trade economists” about offshoring and the trade deficit.

  There is a great deal to be said on behalf of free markets and free trade. However, for many economists free trade has become an ideology, and they have ceased to think.

  Such economists have become insouciant shills for the offshoring interests that fund their research and institutes. Their interests are tied together with those of the offshoring corporations.

  Free trade economists have made three massive errors: (1) they confuse labor arbitrage across internation
al borders with free trade when nothing in fact is being traded, (2) they have forgot the two necessary conditions in order for the classic theory of free trade, which rests on the principle of comparative advantage, to be valid, and (3) they are ignorant of the latest work in trade theory, which shows that free trade theory was never correct even when the conditions on which it is based were prevalent.

  When a U.S. firm moves its output abroad, the firm is arbitraging labor (and taxes, regulation, etc.) across international borders in pursuit of absolute advantage, not in pursuit of comparative advantage at home. When the U.S. firm brings its offshored goods and services to the U.S. to be marketed, those goods and services count as imports.

  David Ricardo based comparative advantage on two necessary conditions: One is that a country’s capital seek comparative advantage at home and not seek absolute advantage abroad. The other is that countries have different relative cost ratios of producing tradable goods. Under the Ricardian conditions, offshoring is prohibited.

  Today capital is as internationally mobile as traded goods, and knowledge-based production functions have the same relative cost ratios regardless of the country of location. The famous Ricardian conditions for free trade are not present in today’s world.

  In the most important development in trade theory in 200 years, the distinguished mathematician Ralph Gomory and the distinguished economist and former president of the American Economics Association, William Baumol, have shown that the case for free trade was invalid even when the Ricardian conditions were present in the world. Their book, Global Trade and Conflicting National Interests, first presented as lectures at the London School of Economics, was published in 2000 by MIT Press.

  While free trade economists hold on to their doctrine-turned-ideology, the U.S. dollar and the American economy are dying.

  One of the great lies of the offshoring interests is that U.S. manufacturing is in trouble because of poor U.S. education and a shortage of U.S. scientists and engineers. Pundits such as Thomas Friedman have helped to spread this ignorance until it has become a dogma. Recently, General Electric CEO Jeffrey Immelt lent his weight to this falsehood. (See “The U.S. No Longer Drives Global Economic Growth,” Manufacturing & Technology News, Nov. 30, 2007.)

  The fact of the matter is that the offshoring of U.S. engineering and R&D jobs and the importation of foreign engineers and scientists on work visas have combined with educational subsidies to produce a surplus of American scientists and engineers, many of whom are unable to find jobs when they graduate from university or become casualties of offshoring and H-1B visas.

  Corporate interests continue to lobby Congress for more foreign workers, claiming a non-existent shortage of trained Americans, even as the Commission on Professionals in Science and Technology concludes that real salary growth for American scientists and engineers has been flat or declining for the past ten years. The “long trend of strong U.S. demand for scientific and technical specialists” has come to an end with no signs of revival. (See “Job and Income Growth for Scientists and Engineers Comes to an End,” Manufacturing & Technology News, November 30, 2007.)

  What economist has ever heard of a labor shortage resulting in flat or declining pay?

  There is no more of a shortage of U.S. scientists and engineers than there were weapons of mass destruction in Iraq. The U.S. media has no investigative capability and serves up the lies that serve short-term corporate and political interests. If it were not for the Internet that provides Americans with access to foreign news sources, Americans would live in a world of perfect disinformation.

  Offshoring interests and economic dogmas have combined to create a false picture of America’s economic position. While the ladders of upward mobility are being dismantled, Americans are being told that they have never had it better.

  December 13, 2007

  Chapter 19: The Truth About High Oil Prices

  How to explain the oil price? Why is it so high? Are we running out? Are supplies disrupted, or is the high price a reflection of oil company greed or OPEC greed? Are Hugo Chavez and the Saudis conspiring against us? In my opinion, the two biggest factors in oil’s high price are the weakness in the U.S. dollar’s exchange value and the liquidity that the Federal Reserve is pumping out.

  The dollar is weak because of large trade and budget deficits, the closing of which is beyond American political will. As abuse wears out the U.S. dollar’s reserve currency role, sellers demand more dollars as a hedge against its declining exchange value and ultimate loss of reserve currency status.

  In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts. Hedge funds and investment banks are restoring their impaired capital structures with profits made by speculating in highly leveraged oil future contracts, just as real estate speculators flipping contracts pushed up home prices. The oil futures bubble, too, will pop, hopefully before new derivatives are created on the basis of high oil prices.

  There are other factors affecting the price of oil. The prospect of an Israeli/U.S. attack on Iran has increased current demand in order to build stocks against disruption. No one knows the consequence of such an ill-conceived act of aggression, and the uncertainty pushes up the price of oil as the entire Middle East could be engulfed in conflagration. However, storage facilities are limited, and the impact on price of larger inventories has a limit.

  Saudi Oil Minister Ali al-Naimi recently stated, “There is no justification for the current rise in prices.” What the minister means is that there are no shortages or supply disruptions. He means no real reasons as distinct from speculative or psychological reasons.

  The run up in oil price coincides with a period of heightened U.S. and Israeli military aggression in the Middle East. However, the biggest jump has been in the last 18 months.

  When Bush invaded Iraq in 2003, the average price of oil that year was about $27 per barrel, or about $31 in inflation adjusted 2007 dollars. The price rose another $10 in 2004 to an average annual price of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006, and $4 in 2007 to $65. But in the last few months the price has more than doubled to about $135. It is difficult to explain a $70 jump in price in terms other than speculation.

  Oil prices have been high in the past. Until 2008, the record monthly oil price was $104 in December 1979 (measured in December 2007 dollars). As recently as 1998 the real price of oil was lower than in 1946 when the nominal price of oil was $1.63 per barrel. During the Bush regime, the price of oil in 2007 dollars has risen from $27 to approximately $135.

  Possibly, the rise in the oil price was held down, prior to the recent jump, by expectations that Democrats would eventually end the conflict and restrain Israel in the interest of Middle East peace and justice for the Palestinians.

  Now that Obama has pledged allegiance to AIPAC and adopted Bush’s position toward Iran, the high oil price could be a forecast that U.S./Israeli policy is likely to result in substantial supply disruptions. Still, the recent Israeli statements that an attack on Iran was “inevitable” only jumped the oil price about $8.

  Perhaps more difficult to understand than the high price of oil are the low U.S. long-term interest rates. U.S. interest rates are actually below the rate of inflation, to say nothing of the imperiled exchange value of the dollar. Economists who assume rational participants in rational markets cannot explain why lenders would indefinitely accept interest rates below the rate of inflation.

  Of course, Americans don’t get real inflation numbers from their government and have not since the Consumer Price Index was rigged during the Clinton administration to hold down Social Security payments by denying retirees their full cost of living adjustments.

  Understating inflation makes real GDP growth appear higher. If inflation were properly measured, the U.S. has probably experienced
no real GDP growth in the 21st century.

  Statistician John Williams reports that for decades political administrations have fiddled with the inflation and employment numbers to make themselves look slightly better. The cumulative effect has been to deprive these measurements of veracity.

  By pumping out money in an effort to forestall recession and paper over balance sheet problems, the Federal Reserve is driving up commodity and food prices in general. Yet American real incomes are not growing. Even without jobs offshoring, U.S. economic policy has put the bulk of the population on a path to lower living standards.

  The crisis that looms for the U.S. is the loss of world currency role. Once the dollar loses that role, the U.S. government will not be able to finance its operations by borrowing abroad, and foreigners will cease to finance the massive U.S. trade deficit. This crisis will eliminate the U.S. as a world power.

  June 11, 2008

  Chapter 20 : What Uncle Sam has to Tell His Creditors

  According to all accounts the U.S. faces its worse economic crisis since the Great Depression with $2 trillion in near-term financing needs for bailouts and economic stimulus. This is an enormous sum for any country, especially for one that is so heavily indebted that it is close to bankruptcy. If the money can’t be borrowed abroad, it will have to be printed—a policy that carries the implication of hyper-inflation.

  In normal life a borrower who must appeal to creditors makes every effort to bring order to his financial affairs. But not the Bush regime.

  The out-of-pocket costs of Bush’s Iraq war are about $600 billion at the present moment, a figure that increases by millions of dollars every hour.

  In addition, there are the much larger future costs that have already been incurred, such as long-term care for the wounded and disabled U.S. soldiers, the replacement costs of the used up equipment, interest payments on the war debt, and the lost economic use of the resources and manpower squandered in war. Experts estimate that the already incurred out-of-pocket and future costs of Bush’s Iraq war to be $3 trillion and rising.