America’s Has-Been Economy

Chronicles ^ | Friday, March 18, 2005 | Paul Craig Roberts

[A. Pole]

A country cannot be a superpower without a high-tech economy, and America’s high-tech economy is eroding as I write.

The erosion began when U.S. corporations outsourced manufacturing. Today, many U.S. companies are little more than a brand name selling goods made in Asia.

Corporate outsourcers and their apologists presented the loss of manufacturing capability as a positive development. Manufacturing, they said, was the "old economy," whose loss to Asia ensured Americans lower consumer prices and greater shareholder returns. The American future was in the "new economy" of high-tech knowledge jobs.

This assertion became an article of faith. Few considered how a country could maintain a technological lead when it did not manufacture.

So far in the 21st century, there is scant sign of the American "new economy." The promised knowledge-based jobs have not appeared. To the contrary, the Bureau of Labor Statistics reports a net loss of 221,000 jobs in six major engineering job classifications.

Today, many computer, electrical and electronics engineers, who were well paid at the end of the 20th century, are unemployed and cannot find work. A country that doesn’t manufacture doesn’t need as many engineers, and much of the work that remains is being outsourced or filled with cheaper foreigners brought into the country on H-lb and L-1 work visas.

Confronted with inconvenient facts, outsourcing’s apologists moved to the next level of fantasy. Many technical and engineering jobs, they said, have become "commodity jobs," routine work that can be performed cheaper offshore. America will stay in the lead, they promised, because it will keep the research and development work, and be responsible for design and innovation.

Alas, now it is design and innovation that are being outsourced. Business Week reports ("Outsourcing Innovation," March 21) that the pledge of First World corporations to keep research and development in-house "is now passe."

Corporations such as Dell, Motorola and Philips, which are regarded as manufacturers based in proprietary design and core intellectual property originating in R&D departments, now put their brand names on complete products that are designed, engineered and manufactured in Asia by "original-design manufacturers" (ODM).

Business Week reports that practically overnight large percentages of cell phones, notebook PCs, digital cameras, MP3 players and personal digital assistants are produced by original-design manufacturers. Business Week quotes an executive of a Taiwanese ODM: "Customers used to participate in design two or three years back. But starting last year, many just take our product."

Another offshore ODM executive says: "What has changed is that more customers need us to design the whole product. It’s now difficult to get good ideas from our customers. We have to innovate ourselves." Another says: "We know this kind of product category a lot better than our customers do. We have the capability to integrate all the latest technologies." The customers are America’s premier high-tech names.

The design and engineering teams of Asian ODMs are expanding rapidly, while those of major U.S. corporations are shrinking. Business Week reports that R&D budgets at such technology companies as Hewlett Packard, Cisco, Motorola, Lucent Technologies, Ericsson and Nokia are being scaled back.

Outsourcing is rapidly converting U.S. corporations into a brand name with a sales force selling foreign designed, engineered and manufactured goods. Whether or not they realize it, U.S. corporations have written off the U.S. consumer market. People who do not participate in the innovation, design, engineering and manufacture of the products that they consume lack the incomes to support the sales infrastructure of the job diverse "old economy."

"Free market" economists and U.S. politicians are blind to the rapid transformation of America into a third world economy, but college-bound American students and heads of engineering schools are acutely aware of declining career opportunities and enrollments. While "free trade" economists and corporate publicists prattle on about America’s glorious future, heads of prestigious engineering schools ponder the future of engineering education in America.

Once U.S. firms complete their loss of proprietary architecture, how much intrinsic value resides in a brand name? What is to keep the all-powerful ODMs from undercutting the American brand names?

The outsourcing of manufacturing, design and innovation has dire consequences for U.S. higher education. The advantages of a college degree are erased when the only source of employment is domestic nontradable services.

According to the March 11 Los Angeles Times, the percentage of college graduates among the long-term chronically unemployed has risen sharply in the 21st century. The U.S. Department of Labor reported in March that 373,000 discouraged college graduates dropped out of the labor force in February—a far higher number than the number of new jobs created.

The disappearing U.S. economy can also be seen in the exploding trade deficit. As more employment is shifted offshore, goods and services formerly produced domestically become imports. No-think economists and Bush administration officials claim that America’s increasing dependence on imported goods and services is evidence of the strength of the U.S. economy and its role as engine of global growth.

This claim ignores that the United States is paying for its outsourced goods and services by transferring its wealth and future income streams to foreigners. Foreigners have acquired $3.6 trillion of U.S. assets since 1990 as a result of U.S. trade deficits.

Foreigners have a surfeit of dollar assets. For the past three years, their increasing unwillingness to acquire more dollars has resulted in a marked decline in the dollar’s value in relation to gold and tradable currencies.

Recently, the Japanese, Chinese and Koreans have expressed their concerns. According to a March 10 Bloomberg report, Japan’s unrealized losses on its dollar reserve holdings have reached $109.6 billion.

The Asia Times reported on March 12 that Asian central banks have been reducing their dollar holdings in favor of regional currencies for the past three years. A study by the Bank of International Settlements concluded that the ratio of dollar reserves held in Asia declined from 81 percent in the third quarter of 2001 to 67 percent in September 2004. India reduced its dollar holdings from 68 percent of total reserves to 43 percent. China reduced its dollar holdings from 83 percent to 68 percent.

The U.S. dollar will not be able to maintain its role as world reserve currency when it is being abandoned by that area of the world that is rapidly becoming the manufacturing, engineering and innovation powerhouse.

Misled by propagandistic "free trade" claims, Americans will be at a loss to understand the increasing career frustrations of the college educated. Falling pay and rising prices of foreign made goods will squeeze U.S. living standards as the declining dollar heralds America’s descent into a has-been economy.

Meanwhile, the Grand Old Party has passed a bankruptcy "reform" that is certain to turn unemployed Americans living on debt and beset with unpayable medical bills into the indentured servants of credit card companies. The steely-faced Bush administration is making certain that Americans will experience to the full their country’s fall.

To find out more about Paul Craig Roberts, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2005 CREATORS SYNDICATE, INC.

[William Terrell]

*Sigh*. Who is Honda? When money is paid to Honda for one of their cars, where does it go, besides the income and FICA taxed employee's wages? Does Honda own the American land the 13 plants sit on?

Great auto presence! Now, how about (a partial list) American owned operated and supplied auto industries, fabric and leather industries, shoe and clothing industries, military component fabrication for military equipment, fabricators for aircraft components, manufactures for the fabricating equipment itself, computers and peripherals, components for computers and peripherals, furniture manufacturers still able to compete?

Give me one good reason for world trade, to the extent we are involved in it, over making what people need domestically and selling to each other in this country. Justify your reason as a greater boon to American (only American, I could care less about others) economic health against the already experienced economic health of the 20th century decades where we practiced the latter.

[FreedomPoster]

I think we're on the same sheet of music on this.

[A. Pole]

I was remiss in not making my question less specific to competition among autos. In general, how can foreigners outsource to us and make it here by manufacturing and selling here?

Under Reagan they were threatened with quotas. So they moved part of their manufacturing here.

[FreedomPoster]

So, when definitively shown to be wrong on one subject, ignore it and change the subject to something related but completely different. And do it with lots of verbage to complete the attempted snow job.

Gotcha. Ta-ta.

[A. Pole]

Maybe so but do you seriously think we are mired in another Great Depression today?

Did you understand what I wrote?

[William Terrell]

The most disturbing part of this to me is these facts. The president is a smart man, so are (most of) the members of Congress, so are the people running the various agencies and bureaucratic entities that run this show.

It is commonsense that if you move your manufacturing capability offshore, the economy and security of your nation is diminished, and forced into a service economy. Not mentioned is the commonsense fact that any "service" is totally dependent on material goods, manufactured somewhere.

They must see what's going on, yet they not only don't remedy it but give cleaned, cooked and misleading reports to the American people, some of whom lap it up wholesale without running it through their native intelligence and regurgitate it on FreeRepublic.

For each that believes and posts this bilge on FR, how many in the general population who believe it must there be?

I personally suspect that this is being done in preparation for a world government, controlling trade being the first priority of a multicultural government, who needs to suborn all cultural nations under one baby blue flag.

Tinfoil hat stuff? Only to ostriches.

[phelanw]

Yes, the phony numbers are a real problem. They make it difficult for investors to make real-world decisions based on macroeconomic trends. When you can't trust the government's numbers anymore it is difficult to make investments rationally. When commodities are rising in price so rapidly there is an inherent economic impetus to spend those dollars now instead of save.

I trenched a new electric service to my property last summer. Thank God I did it one step ahead of runaway copper prices. I bought a 1000 foot roll of 12-2 with ground. I'm so happy now that I have the wire at last summers' prices, and that I spent those dollars. Again, there is a large push to spend, not to save for the future.

The Fed has kept interest rates at a 30 year low to keep consumer spending growing, to keep the economy primed. The consumer is now tapped out. Americans have taken their home equity and spent it. They have spent up their credit card debt. Now we have a new bankruptcy law that I understand makes personal residences subject to seizure for debt.

I heard on one of the Financial Sense broadcasts that over 20% of new home purchases/refis in the past two years have been with variable rate mortgages. When home loans were going at 30 year low rates, Greenspan gave testimony to Congress urging buyers to use variable rate loans, which are cheaper initially, at least. That kept the refi market humming for a couple more months . Now, as the Fed raises rates, those mortgages will be paid back with higher and higher monthly payments. There are so many trends that look ominous for our economy.

[B-Chan]

You my friend, are absolutely right. Capitalism and communism are not rivals; they are twins. Both proceed from atheistic materialism, and both end up degrading human life through their dependence on the existence of a working class that has nothing to sell but commodified labor..

Alternatives exist. One alternative is Distributism, the economic state where the possession of land and capital, instead of being concentrated in the hands of a few, are maximally distributed among all men throughout society -- a system of communitarian free-enterprise economics based upon the medieval Christian social order that relies on widely-distributed capital and guild regulation of commerce as the basis of economy. Distributism was championed by G.K. Chesterton, Hilaire Belloc, and many others, and its principles were affirmed by His Holiness Pope Leo XIII in his famous 1891 encyclical Rerum novarum.

Unfettered capitalism leads to the same place unfettered communism leads: a condition of widespread misery, tyranny, and injury to the dignity of human life. Those seeking an economic alternative with a human and Christian character should explore Distributism.

[Dave S]

Wooo-Hooo ! Yes - just let them die...

Hey how about they pay for their own insurance like the rest of us? Why should I pay higher prices now because someone 30 years ago worked for GM?

[phil_will1]

"How come foreigners can outsource to us and do well selling here at the same time that many American corporations say that they must move production off shore and import the goods to remain competitive?"

A big part of the answer is our tax system. Because of the way corporate income and payroll taxes (not to mention the associated high compliance costs)get rolled up into our production costs at multiple levels, our manufactured goods carry a substantial hidden tax burden that must be recaptured via the pricing mechanism. That is true whether the goods are sold domestically or internationally. If sold domestically, they compete against imports which in many cases have had VAT taxes removed at the border. If sold into a VAT country, our goods have that country's VAT levied when brought across the border in many cases.

IOW, US goods sold here have 1 country's taxes included in their final price and they compete against imports having relatively negligible tax burden. US goods sold in many other countries have 2 countries' tax burdens included and they are competing against goods with only 1 country's tax included. In both cases, the advantage goes to the US competitor.

That is why it is so important to pass the FairTax so that we can put US goods on a level playing field with foreign competition as much as possible, at least with respect to the tax system. With globalization sweeping across the planet, it is absolutely essential.

[1rudeboy]

When money is paid to Honda for one of their cars, where does it go, besides the income and FICA taxed employee's wages? Does Honda own the American land the 13 plants sit on?

Corporate income tax, capital investment, land acquisition, marketing, advertising, subsidiaries, other suppliers/vendors, charity, state and local taxes, etc.

[Dave S]

So your first day on Free Republic and you believe that America is going bankrupt. Why not crawl back to DU you member since 3-20-05.

[1rudeboy]

Besides bags of wheat and soybeans, what are we insourcing?

LOL

[1rudeboy]

Those cars are manufactured here using exclusively foreign made parts, except maybe for the bodies.

Shop for a car recently? Ever see a thing called the 'domestic content label?' They're required by law.

[RightWhale]

A country cannot be a superpower without a high-tech economy, and America’s high-tech economy is eroding as I write.

A decent hypothesis for an essay. The essay should disprove the assertion on two grounds in this case.

[Dave S]

I personally suspect that this is being done in preparation for a world government, controlling trade being the first priority of a multicultural government, who needs to suborn all cultural nations under one baby blue flag. Tinfoil hat stuff? Only to ostriches.

Okay now I understand you and APole. You are schizzoid Nutzo's left over from Pat Buchannans pitchfork brigades worrying about black helicopters and blue UN helmets. How about it being the unionists and the environmentalists that have made it economically non viable to manufacturer most goods here in the US.

[Ciexyz]

btt

[A. Pole]

If sold domestically, they compete against imports which in many cases have had VAT taxes removed at the border. If sold into a VAT country, our goods have that country's VAT levied when brought across the border in many cases.

That is why USA needs to change tax system into VAT.

Second is to introduce national single payer system to relieve employers from the crippling burden and help workers to be more mobile and secure.

The third is to provide free full (tuition/room/board, no means test)scholarships for better 50% of students based on competition exams. This will enable American graduates to compete on the job market without burden of debt to pay.

[WilliamofCarmichael]

RE: I think we're on the same sheet of music on this.

Apparently so. Neither of us know the answer to my original question to you. To wit,

"How come foreigners can outsource to us and do well selling here at the same time that many American corporations say that they must move production off shore and import the goods to remain competitive?"

I take it that you too are puzzled by the claim of some that outsourcing production offshore and importing the goods is the only way a company can be competitive -- despite the fact that foreigners and others producing and selling here prove day in and day out that that is a lie.

I'm going to keep looking for a "free trader" who can answer that question. Fat chance, huh?

Thanks.