How the Economy Was Lost: The War of the Worlds (Counterpunch) (2 page)

Chapter 2: Greenspan and the Economy of Greed

F
ormer Fed Chairman Alan Greenspan’s memoir has put him in the news these last few days. He has upset Republicans with his comments on various presidents, with George W. Bush getting the brickbats and Clinton the praise, and by saying that Bush’s invasion of Iraq was about oil, not weapons of mass destruction.

Opponents of Bush’s wars welcomed Greenspan’s statement, as it strips the moral pretext away from Bush’s aggression, leaving naked greed unmasked.

It is certainly the case that Iraq was not invaded because of WMD, which the Bush administration knew did not exist. But the oil pretext is also phony. The U.S. could have purchased a lot of oil for the trillion dollars that the Iraq invasion has already cost in out-of-pocket expenses and already incurred future expenses.

Moreover, Bush’s invasion of Iraq, by worsening the U.S. deficit and causing additional U.S. reliance on foreign loans, has undermined the U.S. dollar’s role as reserve currency, thus threatening America’s ability to pay for its imports. Greenspan himself said that the U.S. dollar “doesn’t have all that much of an advantage” and could be replaced by the Euro as the reserve currency. By the end of last year, Greenspan said, foreign central banks already held 25 percent of their reserves in Euros and 9 percent in other foreign currencies. The dollar’s role has shrunk to 66 percent.

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

I
s 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

T
he 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.

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. Deloitte & Touche says 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 Street is a declining option for bright young persons with high stress tolerance as America’s last remaining advantage is outsourced.

According to Norm Augustine, former CEO of Lockheed Martin, even McDonald’s jobs 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 U.S. minimum wage and without the liabilities of U.S. employees.

American economists, some from incompetence and some from being bought and paid for, described 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 workers. The win for America would be lower-priced 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 Morgan Stanley’s Stephen Roach, formerly a cheerleader for globalization, recently admitted. It has become apparent that job creation and real wages in the developed economies are seriously lagging behind their historical norms as offshore outsourcing displaces 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.

According to the BLS payroll jobs data, over the past half-decade (January 2001–January 2006, the data series available at time of writing) the U.S. economy created 1,050,000 net new private sector jobs and 1,009,000 net new government jobs for a total five-year figure of 2,059,000. That is 7 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 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 outsourcing 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 past five years (January 01–January 06), the information sector of the U.S. economy lost 644,000 jobs, or 17.4 percent of its work force. Computer systems design and related work lost 105,000 jobs, or 8.5 percent 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.

U.S. manufacturing lost 2.9 million jobs, almost 17 percent 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.” In five years, communications equipment lost 42 percent of its work force. Semiconductors and electronic components lost 37 percent of its work force. The work force in computers and electronic products declined 30 percent. Electrical equipment and appliances lost 25 percent of its employees. The work force in motor vehicles and parts declined 12 percent. Furniture and related products lost 17 percent of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43 percent. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15 percent.

For the five-year period, U.S. job growth was limited to four areas: education and health services, state and local government, leisure and hospitality, and financial services. There was no U.S. job growth outside these four areas.

Oracle, for example, which has been handing out thousands of pink slips, has recently announced 2,000 more jobs being moved to India. How is Oracle’s move of U.S. jobs to India creating American jobs in nontradable services such as waitresses and bartenders, hospital orderlies, state and local government, and credit agencies? Oracle is creating more unemployed Americans to compete for lower paid jobs.

Engineering jobs in general are in decline, because the manufacturing sectors that employ engineers are in decline. During the last five years, 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 jobs numbers show a total of 69,000 jobs created in all fields of architecture and engineering, including clerical personnel, over the past five years. That comes to a mere 14,000 jobs per year (including clerical workers). What is the annual graduating class in engineering and architecture? How is there a shortage of engineers when more graduate than can be employed?

Of course, many new graduates take jobs opened by retirements. We would have to know the retirement rates to get a solid handle on the fate of new graduates. But this fate 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.

It is not only the Bush regime that bases its policies on lies. 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 H-1B visas that permit the importation of indentured employees from abroad who are paid less than the going U.S. salaries. The so-called shortage is, in fact, a replacement of American employees with foreign employees, with the soon-to-be-discharged American employee first required to train his replacement.