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

  If the dollar loses its reserve currency status, the U.S. would magically have to move from an $800 billion trade deficit to a trade surplus so that the U.S. could earn enough Euros to pay for its imports of oil and manufactured goods and settle its current account deficit.

  Bush’s wars are about American hegemony, not oil. The oil companies did not write the neoconservatives’ “Project for a New American Century,” which calls for U.S./Israeli hegemony over the entire Middle East, a hegemony that would conveniently remove obstacles to Israeli territorial expansion.

  The oil industry asserted its influence after the invasion. In his book, Armed Madhouse, BBC investigative reporter Greg Palast documents that the U.S. oil industry’s interest in Middle Eastern oil is very different from grabbing the oil. Palast shows that the American oil companies’ interests coincide with OPEC’s. The oil companies want a controlled flow of oil that results in steady and high prices. Consequently, the U.S. oil industry blocked the neoconservative plan, hatched at the Heritage Foundation and aimed at Saudi Arabia, to use Iraqi oil to bust up OPEC.

  Saddam Hussein got in trouble because one moment he would cut production to support the Palestinians and the next moment he would pump the maximum allowed. Up and down movements in prices are destabilizing events for the oil industry. Palast reports that a Council on Foreign Relations report concludes: Saddam is a “destabilizing influence . . . to the flow of oil to international markets from the Middle East.”

  The most notable aspect of Greenspan’s memoir is his unconcern with America’s loss of manufacturing. Instead of a problem, Greenspan simply sees a beneficial shift in jobs from “old” manufacturing (steel, cars, and textiles) to “new” manufacturing such as computers and telecommunications. This shows a remarkable ignorance of statistical data on the part of a Federal Reserve Chairman renowned for his command over numbers and a complete lack of grasp of offshoring.

  The incentive to offshore U.S. jobs has nothing to do with “old” and “new” economy. Corporations offshore their production, because they can more cheaply produce abroad what they sell to Americans. When corporations bring their offshored production to the U.S. to sell, the goods count as imports.

  Had Greenspan bothered to look at U.S. balance of trade data, he would have discovered that in 2006, the last full year of data (at time of writing), the U.S. exported $47,580,000,000 in computers and imported $101,347,000,000 in computers for a trade deficit in computers of $53,767,000,000. In telecommunications equipment the U.S. exported $28,322,000,000 and imported $40,250,000,000 for a trade deficit in telecommunications equipment of $11,883,000,000.

  Greenspan probably has given offshoring no serious thought, because like most economists he mistakenly believes that offshoring is free trade and learned in economic courses decades ago before the advent of offshoring that free trade can do no harm.

  For most of the 21st century I have been pointing out that offshoring is not trade, free or otherwise. It is labor arbitrage. By replacing U.S. labor with foreign labor in the production of goods and services for U.S. markets, U.S. firms are destroying the ladders of upward mobility in the U.S. So far economists have preferred their delusions to the facts.

  It is becoming more difficult for economists to clutch to their bosoms the delusion that offshoring is free trade. Ralph Gomory, the distinguished mathematician and co-author with William Baumol (past president of the American Economics Association) of Global Trade and Conflicting National Interests, the most important work in trade theory in 200 years, has entered the public debate.

  In an interview with Manufacturing & Technology News (September 17), Gomory confirms that there is no basis in economic theory for claiming that it is good to tear down our own productive capability and to rebuild it in a foreign country. It is not free trade when a company relocates its manufacturing abroad.

  Gomory says that economists and policymakers “still are treating companies as if they represent the country, and they do not.” Companies are no longer bound to the interests of their home countries, because the link has been decoupled between the profit motive and a country’s welfare. Economists, Gomory points out, are not acknowledging the implications of this decoupling for economic theory.

  A country that offshores its own production is unable to balance its trade. Americans are able to consume more than they produce only because the dollar is the world reserve currency. However, the dollar’s reserve currency status is eroded by the debts associated with continual trade and budget deficits.

  The U.S. is on a path to economic Armageddon. Shorn of industry, dependent on offshored manufactured goods and services, and deprived of the dollar as reserve currency, the U.S. will become a Third World country. Gomery notes that it would be very difficult—perhaps impossible—for the U.S. to re-acquire the manufacturing capability that it gave away to other countries.

  It is a mystery how a people, whose economic policy is turning them into a Third World country with its university graduates working as waitresses, bartenders, and driving cabs, can regard themselves as a hegemonic power even as they build up war debts that are further undermining their ability to pay their import bills.

  September 20, 2007

  Chapter 3: Outsourcing the American Economy: A Greater Threat Than Terrorism

  Is offshore outsourcing good or harmful for America?To convince Americans of outsourcing’s benefits, corporate outsourcers sponsor misleading one-sided “studies.”

  Only a small handful of people have looked objectively at the issue. These few and the large number of Americans whose careers have been destroyed by outsourcing have a different view of outsourcing’s impact than the corporate-sponsored studies. But so far there has been no debate, just a shouting down of skeptics as “protectionists.”

  Now comes an important new book, Outsourcing America, published by the American Management Association. The authors, two brothers, Ron and Anil Hira, are experts on the subject. One is a professor at the Rochester Institute of Technology, and the other is a professor at Simon Fraser University.

  The authors note that despite the enormity of the stakes for all Americans, a state of denial exists among policymakers, economists and outsourcing’s corporate champions about the adverse effects on the U.S. The Hira brothers succeed in their task of interjecting harsh reality where delusion has ruled.

  In what might be an underestimate, a University of California study concludes that 14 million white-collar jobs are vulnerable to being outsourced offshore. These are not only call-center operators, customer service and back-office jobs, but also information technology, accounting, architecture, advanced engineering design, news reporting, stock analysis, and medical and legal services. The authors note that these are the jobs of the American Dream, the jobs of upward mobility that generate the bulk of the tax revenues that fund our education, health, infrastructure, and social security systems.

  The loss of these jobs “is fool’s gold for companies.” Corporate America’s short-term mentality, stemming from bonuses tied to quarterly results, is causing U.S. companies to lose not only their best employees—their human capital—but also the consumers who buy their products. Employees displaced by foreigners and left unemployed or in lower paid work have a reduced presence in the consumer market. They provide fewer retirement savings for new investment.

  No-think economists assume that new, better jobs are on the way for displaced Americans, but no economists can identify these jobs. The authors point out that “the track record for the re-employment of displaced U.S. workers is abysmal: the Department of Labor reports that more than one in three workers who are displaced remain unemployed, and many of those who are lucky enough to find jobs take major pay cuts. Many former manufacturing workers who were displaced a decade ago because of manufacturing that went offshore took training courses and found jobs in the information technology sector. They are now facing the unenviable situation of
having their second career disappear overseas.”

  American economists are so inattentive to outsourcing’s perils that they fail to realize that the same incentive that leads to the outsourcing of one tradable good or service holds for all tradable goods and services. In the 21st century the U.S. economy has only been able to create jobs in nontradable domestic services—the hallmark of a Third World labor force.

  Prior to the advent of offshore outsourcing, U.S. employees were shielded against low wage foreign labor. Americans worked with more capital and better technology, and their higher productivity protected their higher wages.

  Outsourcing forces Americans to “compete head-to-head with foreign workers” by “undermining U.S. workers’ primary competitive advantage over foreign workers: their physical presence in the U.S.” and “by providing those overseas workers with the same technologies.”

  The result is a lose-lose situation for American employees, and eventually for American businesses and the American government. Outsourcing has brought about record unemployment in engineering fields and a major drop in university enrollments in technical and scientific disciplines. Even many of the remaining jobs are being filled by lower paid foreigners brought in on H-1B and L-1 visas. American employees are discharged after being forced to train their foreign replacements.

  U.S. corporations justify their offshore operations as essential to gain a foothold in emerging Asian markets. The Hira brothers believe this is self-delusion. “There is no evidence that they will be able to out-compete local Chinese and Indian companies, who are very rapidly assimilating the technology and know-how from the local U.S. plants. In fact, studies show that Indian IT companies have been consistently out-competing their U.S. counterparts, even in U.S. markets. Thus, it is time for CEOs to start thinking about whether they are fine with their own jobs being outsourced as well.”

  The authors note that the national security implications of outsourcing “have been largely ignored.”

  Outsourcing is rapidly eroding America’s superpower status. Beginning in 2002 the U.S. began running trade deficits in advanced technology products with Asia, Mexico, and Ireland. As these countries are not leaders in advanced technology, the deficits obviously stem from U.S. offshore manufacturing. In effect, the U.S. is giving away its technology, which is rapidly being captured, while U.S. firms reduce themselves to a brand name with a sales force.

  In an appendix, the authors provide a devastating exposé of the three “studies” that have been used to silence doubts about offshore outsourcing—the Global Insight study (March 2004) for the Information Technology Association of America (ITAA), the Catherine Mann study (December 2003) for the Institute for International Economics, and the McKinsey Global Institute study (August 2003).

  The ITAA is a lobbying group for outsourcing. The ITAA spun the results of the study by releasing only the executive summary to reporters who agreed not to seek outside opinion prior to writing their stories.

  Mann’s study is “an unreasonably optimistic forecast based on faulty logic and a poor understanding of technology and strategy.”

  The McKinsey report “should be viewed as a self-interested lobbying document that presents an unrealistically optimistic estimate of the impact of offshore outsourcing and an undeveloped and politically unviable solution to the problems they identify.”

  Outsourcing America is a powerful work. Only fools will continue clinging to the premise that outsourcing is good for America.

  April 19, 2005

  Chapter 4: The New Face of Class War

  The attacks on middle-class jobs are lending new meaning to the phrase “class war.” The ladders of upward mobility are being dismantled. America, the land of opportunity, is giving way to ever deepening polarization between rich and poor.

  The assault on jobs predates the Bush regime. However, the loss of middle-class jobs has become particularly intense in the 21st century, and, like other pressing problems, has been ignored by President Bush, who is focused on waging war in the Middle East and building a police state at home. The lives and careers that are being lost to the carnage of a gratuitous war in Iraq are paralleled by the economic destruction of careers, families, and communities in the U.S.A. Since the days of President Franklin D. Roosevelt in the 1930s, the U.S. government has sought to protect employment of its citizens. Bush has turned his back on this responsibility. He has given his support to the offshoring of American jobs that is eroding the living standards of Americans. It is another example of his betrayal of the public trust.

  “Free trade” and “globalization” are the guises behind which class war is being conducted against the middle class by both political parties. Patrick J. Buchanan, a three-time contender for the presidential nomination, put it well when he wrote that NAFTA and the various so-called trade agreements were never trade deals. The agreements were enabling acts that enabled U.S. corporations to dump their American workers, avoid Social Security taxes, health care, and pensions, and move their factories offshore to locations where labor is cheap.

  The offshore outsourcing of American jobs has nothing to do with free trade based on comparative advantage. Offshoring is labor arbitrage. First world capital and technology are not seeking comparative advantage at home in order to compete abroad. They are seeking absolute advantage abroad in cheap labor.

  Two recent developments made possible the supremacy of absolute over comparative advantage: the high speed Internet and the collapse of world socialism, which opened China’s and India’s vast under-utilized labor resources to First World capital.

  In times past, First World workers had nothing to fear from cheap labor abroad. Americans worked with superior capital, technology, and business organization. This made Americans far more productive than Indians and Chinese, and, as it was not possible for U.S. firms to substitute cheaper foreign labor for U.S. labor, 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 made it possible for U.S. firms using First World capital and technology to produce goods and services for the U.S. market with 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 in these countries low. Labor that is equally productive but paid a fraction of the wage 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 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 U.S.-China Commission, 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. (Tradable goods and services are those that can be exported or that are competitive with imports. Nontradable goods and services are those that only have domestic markets and no import competition. For example, barbers and dentists offer nontradable services. Examples of nontradable goods are perishable, locally produced fruits and vegetables and specially fabricated parts of local machine shops.) 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 domestic service jobs.

  At a Brookings Institution conference in Washington, D.C., in
January 2004, I predicted that if the pace of jobs outsourcing 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. Establishment economists are beginning to see the light. Writing in Foreign Affairs (March/April 2006), Princeton economist and former Federal Reserve vice chairman Alan Blinder concluded 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 for 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 compared starting salaries in 2005 with those in 2001. He found a 12.7 percent decline in computer science pay, a 12 percent decline in computer engineering pay, and a 10.2 percent decline in electrical engineering pay. Marketing salaries experienced a 6.5 percent decline, and business administration salaries fell 5.7 percent. Despite a make-work law for accountants known by the names of its congressional sponsors, Sarbanes-Oxley, even accounting majors were offered 2.3 percent less.

  Using the same sources as the 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’s degree graduates. He found that between 2001 and 2005 starting pay for master’s degrees in computer science, computer engineering, and electrical engineering fell 6.6 percent, 13.7 percent, and 9.4 percent respectively.