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.

[Archangelsk]

We insource more than outsource. End of story, you whiner. It took you less than 30 seconds to the read the article. You are fast!

Nah, when the truth hits the average Amway distributor, it hurts, it hurts so bad.

[Archangelsk]

As the Master Card commercial says: get a job. (Looks like the only jobs available are in sports, entertainment and music).

[Archangelsk]

I never realized that an economy can be run on BS (the only successful corporation ever to do this is Southwest Airlines, but I trust Herb Kelleher more than our current crop of economic idiot savants), but if sycophant Greenspan says so, I guess it's true.

[William Terrell]

Wrong? Where do the parts for all these Honda automobiles come from, as per my original statement? Where does the lion's share of the amounts paid by consumers for their cars go, as per my original statement?

Likewise any other foreign auto plant?

I noticed you isolated one statement from my original post and attempted to answer that by posting a Honda ad. Do you work for Honda?

You're obviously a "free trade" nut, so answer my question, if you can. Here it is again to save you the trouble of backtracking:

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.

[William Terrell]

Corporate income tax to the federal government for welfare disbursements. Capital investment in American stocks. Land acquisition of American land. Marketing, advertising to "service" organizations who use foreign made equipment. Subsidiaries? Other suppliers/vendors of foreign made items. Charity, here or Japan? State and local taxes to governments for welfare disbursement.

Etc. Ah yes, ETC. This would be the significant chunk of profit consumers paid for their cars that could have gone to the American economy, but goes offshore.

You're a "free trade" nut. Answer this question:

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.

[William Terrell]

Ok, what percentage of a new car is made from American made components, made in America?

[dennisw]

all true. fine essay by mr. roberts

[William Terrell]

Blah, blah, blah.
Response wording courtesy of Jim Robinson, All Rights Reserved.

[oceanview]

As I have posted time and again - US tech is dead. The erosion is constant - headcount reduction, offshoring, zero or negative wage growth for those that do have jobs, the engineering college programs would be closing up if not for enrollment of foreign nationals.

All you neeed to do was look at last week's corporate earnings reports to see it - General Motors, once the backbone of US technology in manufacturing - a company that does complex things - engineering, manufacturing, taking nothing and making something out of it - is dying. Who is doing well? The brokerage houses are cleaning up. You can see the dichotomy - companies that push paper, that borrow money from the Fed and split bonds into a dozen pieces and resell the paper, are cleaning up. While GM is dying. Can we build an economic base on paper, on debt and arbitrage and hedge plays? Is that economy going to be able to serve the economic needs or the broad american middle class, or are just the wall street and corporate elites going to make millions?

[oceanview]

Law, hedge funds and finance, real estate. Explain to the students that to make $$$s in America, they have to push paper, that's where the money is in the US - in paper and debt.

[TexasKamaAina]

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

Lots of cars, for one example. Toyota, Nissan, Honda, BMW, and Mercedes-Benz all come to mind as manufacturers with significant American operations.

Those are products being built in the USA for consumption in the USA. The jobs we've outsourced were for products sold worldwide.

[chimera]

...the engineering college programs would be closing up if not for enrollment of foreign nationals.

We had a group of undergraduates come through our lab for a tour the other week and I was curious as to how many of them were considering going into R&D as a career. Of the group of about 15, no one raised their hands. Since these were kids who had indicated an interest in engineering, I asked how many were considering going into the profession in some capacity. Two raised their hands. I then asked about law school, and about half raised their hands. I asked about business school, and the other half raised their hands. So of this group of pre-engineering students (freshman and sophomores with undeclared majors), about 13 of 15 were looking at law school or business school.

So I guess the "new economy" I keep hearing free traders talk about will be stock brokers and bankers selling certificates of American debt to foreign holders, while the rest of the workers in the economy sue them for doing so.

[oceanview]

you got it.

many of us keep explaining that to people here, only to be told by the "free traders" that we don't know what we are talking about. Unless something turns around soon, the trend for the engineering profession in the US is being put in place - its over.

the big trend is that the college bound children of current engineers, are being steered away from the profession by their parents, who see what is going on at their places of work, and they don't want to see their kids get into the field. it simply does not make economic sense to spend $100K+ on an engineering degree, to enter into a field and compete for salary with offshore engineers that make $30K per year. and its not just the college aged kids, middle aged engineers who lose their jobs now are deciding its better to retrain for an entirely new field - they are leaving the profession. In a strange way, this is contributing to some anecdotal stories I hear about "shortages" of engineers with experience, its because many have simply thrown in the towel and are becoming math and science teachers in public schools, or taking government jobs. that's the one last good area to be in - jobs that require security clearances cannot be offshored or held by foreign nationals.

[1rudeboy]

Unless something turns around soon, the trend for the engineering profession in the US is being put in place - its over.

Engineering graduates are the most highly paid graduates in the U.S. Sorry you're not satisfied.

[1rudeboy]

Those are products being built in the USA for consumption in the USA.

And the problem is?

[1rudeboy]

Only a protectionist "nut" (your term) fails to see the economic benefits of a manufacturing plant in their own backyard. As if the money I spend on a Honda built (with domestically-produced components, thank you) in Marysville, Ohio simply evaporates. LOL

Defining an American Car

[oceanview]

NBA stars are highly paid too - but there are so few of them employed. why doesn't everyone try to be an NBA star?

[Nachoman]

Should we abolish American health care system in order to compete with China or India?

There's no need. Market forces will cause it to implode.

[KevinDavis]

So you want government to "protect" jobs, buy stopping progess? So no new technological progess then?

[WilliamofCarmichael]

RE: "The jobs we've outsourced were for products sold worldwide."

RE: "And the problem is?"

Glad you asked. No problem outsourcing offshore to sell "over there." We've outsourced jobs and sold the output from those jobs in foreign markets for decades. That is free trade. That is good.

I've been trying to get the answer to why -- on the other hand -- we outsource the production only -- not the selling -- and then import the goods for sale here. Outsourcing to China and India for examples. That is "free trade." Not good IMO. Double especially when both countries steal intellectual property.

We become more and more dependent upon imports and foreign labor for goods sold here. How does that make sense -- unless those countries buy from us. They are virtual closed markets.

Here's what Morgan-Stanley chief economist Stephen Roach has to say about that kind of outsourcing and imports.

"In the case of the United States, rising import propensities and the concomitant offshore outsourcing of jobs are the functional equivalent of imported productivity, as global labour arbitrage substitutes foreign labour content for domestic labour input."

http://www.globalagendamagazine.com/2004/stephenroach.asp#top

The good thing about citing Morgan-Stanley chief economist Stephen Roach is that few can offer substantive rebuttals to what he says. I've learned a lot of new epithets, though.