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.

That article strained mightily trying to deny a "relationship"...but ultimately could not disprove its own data. A demon of its own devise.

But that was not my point. I don't have to make it. All economics theory concur in the fundamentals. A nation which imports more goods and services than it exports will have balance of trade pressures against its currency value. Other things, countervailing policies of the exporting countries (such as securities purchases in the impacted currency by those who export to the U.S.) may hold that value up for a time. See below, in the body of the article about Alan Greenspan's concerns. But that exporter behavior is not economically required conduct. Nor is it necessarily able to stay ahead of the drag on the negatively impacted currency.

So I ask you again, could we have hit a tipping point? Just look at the history. The history was shown fairly clearly there...the decline starts out at the end of 2001 and keeps going. Alan Greenspan's comments from February were hopeful. I recommend them. You might find them interesting. At least you will benefit educationally from reading him, as you are so bereft of knowledge and understanding in these issues. I will warn you in adavnce, that recently, however, Mr. Greenspan has struck a markedly less optimistic note...which I will save for your edification at a later time if you are foolish enough to assume this is his and "the" last word on the subject.

Greenspan: Trade Deficit 'Poised to Stabilize'

By Paul Blustein
Washington Post Staff Writer
Friday, February 4, 2005; 4:58 PM

Federal Reserve Board Chairman Alan Greenspan predicted today that the U.S. trade deficit will level off and possibly shrink in months and years to come, in a speech that took a less alarmist view of the trade gap than the Fed chief has offered in the past.

Greenspan cited the decline in the U.S. dollar as the main factor that is "poised to stabilize and over the longer run possibly to decrease" the trade deficit. A cheaper dollar makes U.S. products more competitive against goods produced abroad.

Up to now, trade figures have defied expectations that a weakening dollar would cause the gap to narrow. Even though the greenback has fallen steadily against most major currencies since early 2002, U.S. imports have continued to surge, and exports have failed to keep pace. The result is a trade gap that was running at an annual rate of more than $600 billion in the first 11 months of 2004, far above the previous year's record of $497 billion.

That trend should change, Greenspan contended in a speech delivered at a conference in London, a text of which was published on the Fed's Web site. Foreign firms, which have been restraining their prices in the U.S. market to stay competitive, will soon be forced to raise the prices of the goods they ship to the United States, the Fed chief said.

"We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," Greenspan said.

As for American firms, he added, "U.S. exporters' profit margins appear to be increasing, which bodes well for future U.S. exports."

Greenspan's forecast of a declining trade gap contrasts with predictions by many other economists and experts. Indeed, according to widely publicized projections by Catherine L. Mann of Institute for International Economics and others, the current account deficit -- the widest measure of the trade gap -- could widen from the 2004 level of about 6 percent of gross domestic product, to 8 percent of GDP by 2008 and even higher levels by 2010, unless current policies and other factors change.

In an apparent reference to such forecasts, former treasury secretary Robert E. Rubin, appearing at the same conference as Greenspan, said that the U.S. budget and current account deficits "may have a tendency to get worse rather than better."

But Greenspan, more than any other figure, commands the attention of financial markets, and his comments helped buoy the dollar, which was trading late today at $1.2877 per euro, the highest exchange rate in three months against the common European currency.

Greenspan himself has previously issued much gloomier pronouncements on the trade deficit, focusing on the growing dependency of the United States on inflows of foreign capital. The trade gap essentially requires the United States to borrow hundreds of billions of dollars annually from abroad, because foreigners take the dollars that Americans pay for imported goods and invest them in U.S. securities such as Treasury bonds.

In late November, Greenspan sent stock prices and the dollar reeling when he suggested that the trade deficit, and the attendant accumulation of U.S. securities by foreigners, would almost certainly cause a further decline of the greenback. "Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said in that speech.

The Fed chief did not repeat that admonition Friday, although he did not repudiate it either, acknowledging that the immense amount of money and goods traversing national borders makes forecasting difficult.

"I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity," he said, in a passage that footnoted the November speech. "That argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever-more complex international economic and financial structure."

Greenspan was speaking in advance of a meeting among finance ministers and central bank governors of the Group of Seven major industrial countries, for whom the U.S. trade deficit has been a major source of concern.

Reflecting those worries, Mervyn King, governor of the Bank of England, told the conference: "There is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay." King's comments were posted on the Bank of England's Web site.

But Greenspan said that in addition to the dollar's fall, other factors should cause the trade deficit to narrow, including a reduction in the U.S. budget deficit, which would cause demand for imports to decline.

Apparently referring to President Bush's promise to shrink the budget gap in half by 2009, Greenspan said, "The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume."

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