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

Chronicles Magazine ^ | Tuesday, June 07, 2005 | Paul Craig Roberts

[A. Pole]

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.

[Brilliant]

You can't expect to make everyone rich. If you protect one guy's job, you do so at the expense of someone else. As long as the economy is growing in general, it's absurd to compare the US to a third world nation.

[streetpreacher]

Heh... One third of our workforce are FROM the third-world.

[Paul Ross]

Yeah, if we lived in Europe and had dollars to spend you'd be right. Otherwise, it's irrelevant

Untrue. E.g., Traveling in "EUrope", recreationally or for business. Buying things from EUrope. And buying things from countries that denominate or tie their currencies to EUrope, etc.

Suddenly, you, who are so enamored of the view that it is "onerous" and "unfair" and "oppression" of the taxpayers to have to pay an import tariff to protect our trade balance and industry...now deny that the dollar's collapse against ANYONE is serious busines. Yup, it's only Europe after all! LOL!

Euro v. U.S. Dollar

Or "It's only Japan."

U.S. Dollar v. Japanese Yen.

Or, It's only.... the Dollar v. Switzerland's Franc

Or Great Britain's Pound v. Dollar

Or any of the other majors listed here.

T'sk, t'sk, t'sk. So now you try to wriggle off the hook like a worm.

Sorry Todd, you aren't getting off this one so easily. It is curtains for your side. The evidence is in. You lose. If you were an honest debater you would rethink your whole position vis-a-vis trade.

BTW: The over-simplified PPP hypothetical you posit holds if both economies entire production is the posited "one Big Mac" (PPP properly calculated, would, as with the CPI, strive for a much broader, more complete basket of representative goods), and the average "wage" represent the nation's entire purchasing power and trading activity... In point of fact it's broader than just employee wages.

[Paul Ross]

From 1984-1994, hourly wages for all workers rose 33.5%, while the CPI rose 42.2%, indicating a fall in real wages.

First, you need to be aware that Reagan's economy had to generate a huge number of jobs for a much larger influx of first-time job market entrants than we have had to do for some time since. These new entrants, if afforded jobs, would naturally have skewed the curve downwards in terms of "average" wages. The fact that they found jobs was the real story, and an unqualified success. The subsequent history, as the labor demographic bulge of new-entrants aged, and then their share declined proportionally, meant that Clinton's wage numbers would be benefitted by that phenomenon. But he didn't leave it at that. Clinton administratively "adjusted" the CPI in 1993 to avoid disclosure during his administration of the real economic fundamentals and the effects of his own tinkering. See the below-noted historical article:

Let Them Eat Hamburger
By Walter John Williams, September 22, 2004.

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.

Although the ensuing political furor killed consideration of Congressionally mandated changes in the CPI, the BLS quietly stepped forward and began changing the system, anyway, early in the Clinton administration.

Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.

Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by a total of 30%.

There now are three CPI measures, CPI for All Urban Consumers (CPI-U), CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the Chained CPI-U (C-CPI-U). The CPI-U is the popularly followed inflation measure reported in the financial media. It was introduced in 1978 as a more-broadly-based version of the then existing CPI, which was renamed CPI-W. The CPI-W is used in calculating Social Security benefits. These two series tend to move together and are based on frequent price sampling, which is supposed to yield something close to an average monthly price measure by component.

The C-CPI-U was introduced during the second Bush administration as an alternate CPI measure. Unlike the theoretical approximation of geometric weighting to a variable, substitution- prone market basket, the C-CPI-U is a direct measure of the substitution effect. The difference in reporting is that August 2004 year-to-year inflation rates for the CPI-U and the C-CPI-U were 2.7% and 2.1%, respectively. Hence current inflation still has a 0.6% notch to be taken out of it through methodological manipulation. The C-CPI-U would not have been introduced unless there were plans to replace the current series, eventually.

Traditional inflation rates can be estimated by adding 2.7% to the CPI-U annual growth rate (2.7% +2.7% = 5.4% as of August 2004) or by adding 3.3% to the C-CPI-U rate (2.1% + 3.3% = 5.4% as of August 2004).

Hedonic Thrills of Using Federally Mandated Gasoline Additives

Aside from the changed weighting, the average person also tends to sense higher inflation than is reported by the BLS, because of hedonics, as in hedonism. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.

Then there is "intervention analysis" in the seasonal adjustment process, when a commodity, like gasoline, goes through violent price swings. Intervention analysis is done to tone down the volatility. As a result, somehow, rising gasoline prices never seem to get fully reflected in the CPI, but the declining prices sure do.

How Can So Many Financial Pundits Live Without Consuming Food and Energy?

The Pollyannas on Wall Street like to play games with the CPI, too. The concept of looking at the "core" rate of inflation-net of food and energy-was developed as a way of removing short-term (as in a month or two) volatility from inflation when energy and/or food prices turned volatile. Since food and energy account for about 23% of consumer spending (as weighted in the CPI), however, related inflation cannot be ignored for long. Nonetheless, it is common to hear financial pundits cite annual "core" inflation as a way of showing how contained inflation is. Such comments are moronic and such commentators are due the appropriate respect.

Too-Low Inflation Reporting Yields Too-High GDP Growth

As will be discussed in the final installment on GDP, part of the problem with GDP reporting is the way inflation is handled. Although the CPI is not used in the GDP calculation, there are relationships with the price deflators used in converting GDP data and growth to inflation-adjusted numbers. The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported.

Recent charts from that same source (Gillespie Research):

[Logophile]

These are the best of time and the worst of times. Tell that to the tens of thousands of people who lost manufacturing jobs in my state of ohio.

People lose their jobs all the time. From personal experience I know that it can be hard on a family. But it is not the end of the world.

The other side of the coin is that companies lose productive employees all the time. Often a worker leaves for a better situation elsewhere. It certainly would be easier and cheaper for the employer not to have to replace those people. But businesses learn to cope.

That is the nature of a free market. Do you really want to change it? If so, how do you devise a system that protects existing jobs and still allows workers the freedom to change jobs and careers? How do you protect jobs without also propping up companies that are outdated, inefficient, or mismanaged (but politically well connected)? How do you motivate companies and workers to innovate and to increase their productivity without the threat of competition? And how do you do any of this without handing enormous power to the government?

[Logophile]

I have read a lot of doom and gloom on this thread, starting with the article by Paul Craig Roberts. The assumption is that Americans cannot compete with workers in the Third World who are willing to work harder for less. The "inevitable" result is that the United States is on a one-way track to the Third World. That is nonsense.

What worries me is that we might become like France. The French disdain what they call the "Anglo-Saxon" version of capitalism, which they consider inhumane. In France, the government essentially runs the economy, with the protection of jobs a high priority. Once hired, a worker is virtually guaranteed employment. Hence, French companies tend to avoid hiring new workers. One result is that a younger worker may wait years to get a "real" job, in the meantime working a series of temporary jobs or internships—or not working at all. France has an unemployment rate double that of the United States.

Personally, I prefer the Anglo-Saxon model, which is built on such principles as limited government, freedom of contract, and property rights. In short, I prefer liberty over job security.

As I see it, the United States can do five things to improve our competitive position:

(1) Limit government to those functions set forth in the Constitution.

(2) Reduce taxes.

(3) Reduce the burden of government regulations.

(4) Improve education.

(5) Reform the legal system.

These are things that conservatives have been clamoring for as long as I can remember, without much success. The current concern about outsourcing provides us a perfect opportunity to argue for these perennial conservative issues.

Or we can decide to imitate the French.

[Toddsterpatriot]

From your PPP link: Purchasing power parity exchange rates are useful for comparing living standards between countries.
The PPP method involves the use of standardized international dollar price weights, which are applied to the quantities of final goods and services produced in a given economy.

Let's try again. So, if the hourly wage in China is 20 cents and a Big Mac(broad based basket of goods) in China is 10 cents and the hourly wage in the US is $9.00 and a Big Mac (broad based basket of goods)is $4.50 PPP would say our economies standards of living are equal?

[Paul Ross]

People lose their jobs all the time.

But free countries don't have to lose vast and critically important, and foundational industries to predatory mercantilist communist empires.

From among the nation's Founders, our Greatest American, as he has been called, Alexander Hamilton (i.e., pen name Publius, among others), pointed the way to our success.

Why not follow him now?

[Paul Ross]

From [the same] PPP link...actually that is the omnibus research site, with a number of definitions. From the one you picked, you are confusing "living" standards with comparative income standards.

This also is from that same link:

"Purchasing power parity (PPP) is a valuation-based theory that states that currency rates should be determined relative to the prices of goods in each country. Under PPP, an exchange rate is determined by comparing the prices of the same product in two different countries. PPP equilibrium values can be viewed as values toward which exchange rates should converge to over the very long term."

[Toddsterpatriot]

I just want to say again what a cute chart this is.

Now, see where it says (Mar73=100)? Now look at the period between 2000 and 2003. The dollar is above 100. Was the 2000-2003 deficit less than the 1973 deficit? Why not, if the relationship is as you claim?

Stop the presses. Oh Paul, this is even funnier than when you quote EPI and other left wing sources.

The larger lesson is that the dollar has no obvious relationship with the trade deficit. The exchange rate rose and fell from 1990 to 2005 on a trade-weighted basis, while the trade balance simply fell and fell further. By calling for the yuan to float, some voices are actually calling for the dollar to fall further, but there is scant evidence this will bring balance to the trade accounts.

That's rich, the chart you've been citing proves the opposite of what you've been saying. I'm just sorry it took me until now to really look at the numbers and then find the source.

The Biggest Paul Ross Error Yet (and that's saying a lot)

[hedgetrimmer]

Now why would anyone believe the globalists at the heritage foundation, unless they are globalizaniacs themselves?

[Southack]

"That asserted 60-cent wage increase is easily overwhelmed by the drop in the dollar against the major currencies of the last 4 years."

No, that's paying for the same ground twice to think that way. Inflation is *already* factored in from *all* sources, and corrected, when someone says "CPI adjusted."

Propping up the Dollar to absurd levels, by the way, is HOW foreign nations get away with stealth industrial subsidies.

The *reason* that the Chinese are hoarding far more than $600 Billion in U.S. Dollars, that India is hoarding more than $80 Billion, that Japan is hoarding hundreds of Billion$ more, the EU even more, yes the key reason for that hoarding is to prop up the Dollar so that the American consumer can buy more foreign goods at cheaper prices.

The higher the Dollar, the less foreign goods cost.

In 2004, China blew $180 Billion propping up the U.S. Dollar on foreign exchanges. They did this so that we'd buy so many Chinese products...to the tune of some $110 Billion.

Clearly they can't keep up this game forever, but as long as they continue this charade, they get to build their industry.

In contrast, American manufacturers are hamstrung because the over-valued U.S. Dollar makes our exports more pricey than they would be in a free market.

Thus, we get cut in two ways (cheap imports, expensive exports) by the Asian and European hoarding of Dollars.

Interestingly, to invest those Dollars without impacting the currency markets, many nations are buying U.S. Treasury investments...driving down interest rates below what the free market would fairly set here.

Thus, the strategy being pursued by export nations (i.e. the tactic of propping up the U.S. Dollar via direct government intervention) has one enormous negative impact on us: our domestic industrial base is getting hammered...and three positive impacts: cheaper goods, currency trading profits, and lower interest rates.

NOTE: this is NOT to say that the Dollar has or hasn't fallen, or that interest rates are below some previous level. This *does* mean, however, that the Dollar is above its Free Market value and that our interest rates are lower than their natural Free Market level.

[Toddsterpatriot]

Check out #390.
After he said to you: Four years of clear correlation.
Posted by Paul Ross to Asclepius
On News/Activism 06/08/2005 10:10:13 AM CDT · 103 of 391

The author of the article the chart was in says "The larger lesson is that the dollar has no obvious relationship with the trade deficit."

[Paul Ross]

Why not, if the relationship is as you claim?

Stop the presses again. You misread what I said. LOL!

I never claimed a "predictive" relationship. I am pointing out the actual HISTORY of the last four years! A history which you guys had denied for years previous. I had always felt that the dollar's previous upward float was inspite of the fundamentals...and eventually the the trade imbalance deepening would eventually override the factors driving it up. I.e., a "tipping point." I have asked you previously if that "tipping point" had been reached. And you blew it off. And now it can be seen that the dollar has been declining as the trade deficit deepened. In tandem. The last 4 years. Totally debunking you and all your fellows you just pinged, as you flared your distress signal...hahahahahahaha!!!!!

And it is your free trade side, not me, that has been calling for the yuan to float. Yes, that will definitely be felt. As China's dollar-peg has been the U.S.'s CPI-moderating lifeline.

As for your quibble, Was the 2000-2003 deficit less than the 1973 deficit? take it up with the U.S. Commerce Dept.

[Toddsterpatriot]

And now it can be seen that the dollar has been declining as the trade deficit deepened.

As your chart shows, the dollar goes steadily up from 1997 until 2002. If your correlation was there, the deficit would have been steadily decreasing. In tandem.

In tandem. The last 4 years. Totally debunking you and all your fellows you just pinged, as you flared your distress signal...hahahahahahaha!!!!!

What's the saying? Correlation is not causation. How about lack of correlation is really not causation?

As the author of the article stated "The larger lesson is that the dollar has no obvious relationship with the trade deficit. The exchange rate rose and fell from 1990 to 2005 on a trade-weighted basis, while the trade balance simply fell and fell further."

More from the article:
There is no doomsday today. None of the sug­gested links between the federal budget, trade deficit, and dollar exchange rate withstand scrutiny. The basic measures of economic vital­ity are GDP growth and employment, and America’s continuing strength, according to these measures, is due largely to its superior institutions and freer markets.

More:Alan Greenspan famously quipped, “There may be more forecasting of exchange rates, with less suc­cess, than almost any other economic variable.”[5] Indeed, economists agree that no variable has proven effective at predicting exchange rates in the real world, despite what various theories suggest. As Federal Reserve economist Greg Hopper wrote in 1997, “What is not so well known outside academia is that exchange rates don’t seem to be affected by economic fundamentals in the short run.”[6]

More:Turning back to America’s trade figures, the real problem is that there is no real problem. The Amer­ican current account deficit looks like a canyon as it surpasses 6 percent of GDP only until placed in the context of total exports and total imports. (See Chart 2) The real lesson of Chart 2 is that America is going global, not that it is sinking into debt. The trade deficit will likely persist as long as the U.S. technology-driven growth surge outpaces that of other advanced nations.

More:In sum, the public bias against imports is wrong­headed. Trade is the foundation of economics, and an “excess” of imports from Tokyo to a small American town is not fundamentally different from an excess of imports from Detroit. Free peo­ple engage in mutually beneficial trade, and it is wrong to “fix” that freedom.

Finally:As for the third link, the notion that the exchange value of the dollar is related to the cur­rent account does not seem to exist in empirical data. The logical breakdown between deficits and dollar prices is that trade alone does not drive the global flow of monies. Investment is the other half of the equation, and one should think of it as the dominant half. In a recent speech, Federal Reserve Governor Ben Bernanke made this same case, characterizing the U.S. trade balance as “the tail of the dog.”[9

[1rudeboy]

The rest of the world defined as anything outside SwankyC's trailer park. Sorry, again.

[1rudeboy]

Now why would anyone believe the globalists at the heritage foundation, unless they are globalizaniacs themselves?

Got to watch out for those globalists at Heritage. Anyone at the Economic Policy Institute, or Public Citizen, must be accepted without question. /sarc

[Logophile]

From among the nation's Founders, our Greatest American, as he has been called, Alexander Hamilton (i.e., pen name Publius, among others), pointed the way to our success. . . . Why not follow him now?

Which of the items on my list (Post 386) would Hamilton object to?

[jackbill]

But the highly touted unemployment rate decrease to 5.1% comes from the Household Survey, which said that something like 376,000 jobs were added in May.

Who's right?

[SwankyC]

ahh. witty you aren't. sellout.