U.S. Labor Force: One Foot in the Third World

In May, the Bush economy eked out a paltry 73,000 private sector jobs: 20,000 jobs in construction (primarily for Mexican immigrants), 21,000 jobs in wholesale and retail trade, and 32,500 jobs in health care and social assistance. Local government added 5,000 for a grand total of 78,000.

Not a single one of these jobs produces an exportable good or service. With Americans increasingly divorced from the production of the goods and services that they consume, Americans have no way to pay for their consumption except by handing over to foreigners more of their accumulated stock of wealth. The country continues to eat its seed corn.

Only 10 million Americans are classified as “production workers” in the Bureau of Labor Statistics non-farm payroll tables. Think about that. The United States, with a population approaching 300 million, has only 10 million production workers. That means Americans are consuming the products of other countries’ labor.

In the 21st century, the U.S. economy has been unable to create jobs in export and import-competitive industries. U.S. job growth is confined to nontradable domestic services.

This movement of the American labor force toward Third World occupations in domestic services has dire implications both for U.S. living standards and for America’s status as a superpower.

Economists and policymakers are in denial, while the U.S. economy implodes in front of their noses. The U.S.-China Commission is making a great effort to bring reality to policymakers by holding a series of hearings to explore the depths of American decline.

The commissioners got an earful at the May 19 hearings in New York at the Council on Foreign Relations. Ralph Gomory explained that America’s naive belief that offshore outsourcing and globalism are working for America is based on a 200-year-old trade theory, the premises of which do not reflect the modern world.

Clyde Prestowitz, author of the just published “Three Billion New Capitalists: The Great Shift of Wealth and Power to the East,” explained that America’s prosperity is an illusion. Americans feel prosperous because they are consuming $700 billion annually more than they are producing. Foreigners, principally Asians, are financing U.S. over-consumption, because we are paying them by handing over our markets, our jobs and our wealth.

My former Business Week colleague Bill Wolman explained the consequences for U.S. workers of suddenly facing direct labor market competition from hundreds of millions of Chinese and Indian workers.

Toward the end of the 20th century, three developments came together that are rapidly moving high productivity, high value-added jobs that pay well away from the United States to Asia: the collapse of world socialism, which vastly increased the supply of labor available to U.S. capital; the rise of the high speed Internet; and the extraordinary international mobility of U.S. capital and technology.

First World capital is rapidly deserting First World labor in favor of Third World labor, which is much cheaper because of its abundance and low cost of living. Formerly, America’s high real incomes were protected from cheap foreign labor, because U.S. labor worked with more capital and better technology, which made it more productive. Today, however, U.S. capital and technology move to cheap labor, or cheap labor moves via the Internet to U.S. employment.

The reason economic development in China and some Indian cities is so rapid is because it is fueled by the offshore location of First World corporations. Prestowitz is correct that the form that globalism has taken is shifting income and wealth from the First World to the Third World. The rise of Asia is coming at the expense of the American worker.

Global competition could have developed differently. U.S. capital and technology could have remained at home, protecting U.S. incomes with high productivity. Asia would have had to raise itself up without the inside track of First World offshore producers.

Asia’s economic development would have been slow and laborious and would have been characterized by a gradual rise of Asian incomes toward U.S. incomes, not by a jarring loss of American jobs and incomes to Asians.

Instead, U.S. corporations, driven by the shortsighted and ultimately destructive focus on quarterly profits, chose to drive earnings and managerial bonuses by substituting cheap Asian labor for American labor.

American businesses’ short-run profit maximization plays directly into the hands of thoughtful Asian governments with long-run strategies. As Prestowitz informed the commissioners, China now has more semiconductor plants than the United States. Short-run goals are reducing U.S. corporations to brand names with sales forces marketing foreign made goods and services.

By substituting foreign for American workers, U.S. corporations are destroying their American markets. As American jobs in the higher-paying manufacturing and professional services are given to Asians, and as American schoolteachers and nurses lose their occupations to foreigners imported under work visa programs, American purchasing power dries up, especially once all the home equity is spent, credit cards are maxed out and the dollar loses value to the Asian currencies.

The dollar is receiving a short-term respite as a result of the rejection of the European Union by France and Holland. The fate of the Euro, which rose so rapidly in value against the dollar in recent years, is uncertain, thus possibly cutting off one avenue of escape from the over-produced U.S. dollar.

However, nothing is in the works to halt America’s decline and to put the economy on a path of true prosperity. In January 2004, I told a televised conference of the Brookings Institution in Washington, D.C., that the United States would be a Third World economy in 20 years. I was projecting the economic outcome of the U.S. labor force being denied First World employment and forced into the low productivity occupations of domestic services.

Considering the vast excess supplies of labor in India and China, Asian wages are unlikely to rapidly approach existing U.S. levels. Therefore, the substitution of Asian for U.S. labor in tradable goods and services is likely to continue.

As U.S. students seek employments immune from outsourcing, engineering enrollments are declining. The exit of so much manufacturing is destroying the supply chains that make manufacturing possible. The Asians will not give us back our economy once we have lost it. They will not play the “free trade” game and let their labor force be displaced by cheap American labor.

Offshore outsourcing is dismantling the ladders of America’s fabled upward mobility. The U.S. labor force already has one foot in the Third World. By 2024, the United States will be a has-been country.

Guess what else we have apparently lost...the huge electric transformers our civilization depends on. This discussion of the loss of industrial foundations...and the implications for national security... is not esoteric. I highlighted the point in Kyl's statement below:

Unready For This Attack
By Jon Kyl
Saturday, April 16, 2005; Page A19

Recently a Senate Judiciary subcommittee of which I am chairman held a hearing on a major threat to the American people, one that could come not only from terrorist organizations such as al Qaeda but from rogue nations such as Iran and North Korea.

An electromagnetic pulse (EMP) attack on the American homeland, said one of the distinguished scientists who testified at the hearing, is one of only a few ways that the United States could be defeated by its enemies -- terrorist or otherwise. And it is probably the easiest. A single Scud missile, carrying a single nuclear weapon, detonated at the appropriate altitude, would interact with the Earth's atmosphere, producing an electromagnetic pulse radiating down to the surface at the speed of light. Depending on the location and size of the blast, the effect would be to knock out already stressed power grids and other electrical systems across much or even all of the continental United States, for months if not years.

Few if any people would die right away. But the loss of power would have a cascading effect on all aspects of U.S. society. Communication would be largely impossible. Lack of refrigeration would leave food rotting in warehouses, exacerbated by a lack of transportation as those vehicles still working simply ran out of gas (which is pumped with electricity). The inability to sanitize and distribute water would quickly threaten public health, not to mention the safety of anyone in the path of the inevitable fires, which would rage unchecked. And as we have seen in areas of natural and other disasters, such circumstances often result in a fairly rapid breakdown of social order.

American society has grown so dependent on computer and other electrical systems that we have created our own Achilles' heel of vulnerability, ironically much greater than those of other, less developed nations. When deprived of power, we are in many ways helpless, as the New York City blackout made clear. In that case, power was restored quickly because adjacent areas could provide help. But a large-scale burnout caused by a broad EMP attack would create a much more difficult situation. Not only would there be nobody nearby to help, it could take years to replace destroyed equipment.

Transformers for regional substations, for example, are massive pieces of equipment that are no longer manufactured in the United States and typically take more than a year to build. In the words of another witness at the hearing, "The longer the basic outage, the more problematic and uncertain the recovery of any [infrastructure system] will be. It is possible -- indeed, seemingly likely -- for sufficiently severe functional outages to become mutually reinforcing, until a point at which the degradation . . . could have irreversible effects on the country's ability to support any large fraction of its present human population." Those who survived, he said, would find themselves transported back to the United States of the 1880s.

This threat may sound straight out of Hollywood, but it is very real. CIA Director Porter Goss recently testified before Congress about nuclear material missing from storage sites in Russia that may have found its way into terrorist hands, and FBI Director Robert Mueller has confirmed new intelligence that suggests al Qaeda is trying to acquire and use weapons of mass destruction. Iran has surprised intelligence analysts by describing the mid-flight detonations of missiles fired from ships on the Caspian Sea as "successful" tests. North Korea exports missile technology around the world; Scuds can easily be purchased on the open market for about $100,000 apiece.

A terrorist organization might have trouble putting a nuclear warhead "on target" with a Scud, but it would be much easier to simply launch and detonate in the atmosphere. No need for the risk and difficulty of trying to smuggle a nuclear weapon over the border or hit a particular city. Just launch a cheap missile from a freighter in international waters -- al Qaeda is believed to own about 80 such vessels -- and make sure to get it a few miles in the air.

Fortunately, hardening key infrastructure systems and procuring vital backup equipment such as transformers is both feasible and -- compared with the threat -- relatively inexpensive, according to a comprehensive report on the EMP threat by a commission of prominent experts. But it will take leadership by the Department of Homeland Security, the Defense Department, and other federal agencies, along with support from Congress, all of which have yet to materialize.

The Sept. 11 commission report stated that our biggest failure was one of "imagination." No one imagined that terrorists would do what they did on Sept. 11. Today few Americans can conceive of the possibility that terrorists could bring our society to its knees by destroying everything we rely on that runs on electricity. But this time we've been warned, and we'd better be prepared to respond.

The writer is a Republican senator from Arizona and chairman of the Senate Judiciary subcommittee on terrorism, technology and homeland security.

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