AMERICAN ECONOMY : RIP

The U.S. economy continues its slow death before our eyes, but economists, policymakers and most of the public are blind to the tottering fabled land of opportunity.

In August, jobs in goods-producing industries declined by 64,000. The U.S. economy lost 4,000 jobs overall. The private sector created a mere 24,000 jobs, all of which could be attributed to the 24,100 new jobs for waitresses and bartenders, and the government sector lost 28,000 jobs.

In the 21st century, the U.S. economy has ceased to create jobs in export industries and in industries that compete with imports. U.S. job growth has been confined to domestic services, principally to food services and drinking places (waitresses and bartenders), private education and health services (ambulatory health care and hospital orderlies) and construction (which now has tanked). The lack of job growth in higher-productivity, higher-paid occupations associated with the American middle and upper-middle classes will eventually kill the U.S. consumer market.

The unemployment rate held steady, but that is because 340,000 Americans unable to find jobs dropped out of the labor force in August. The United States measures unemployment only among the active workforce, which includes those seeking jobs. Those who are discouraged and have given up are not counted as unemployed.

With goods-producing industries in long-term decline as more and more production of U.S. firms is moved offshore, the engineering professions are in decline. Managerial jobs are primarily confined to retail trade and financial services.

Franchises and chains have curtailed opportunities for independent family businesses, and the U.S. government’s open borders policy denies unskilled jobs to the displaced members of the middle class.

When U.S. companies offshore their production for U.S. markets, the consequences for the U.S. economy are highly detrimental. One consequence is that foreign labor is substituted for U.S. labor, resulting in a shriveling of career opportunities and income growth in the United States. Another is that U.S. Gross Domestic Product is turned into imports. By converting U.S. brand names into imports, offshoring has a double whammy on the U.S. trade deficit. Simultaneously, imports rise by the amount of offshored production, and the supply of exportable manufactured goods declines by the same amount.

The United States now has a trade deficit with every part of the world. In 2006 (the latest annual data), the United States had a trade deficit totaling $838,271,000,000. The U.S. trade deficit with Europe was $142,538,000,000. With Canada, the deficit was $75,085,000,000. With Latin America, it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The deficit with Asia and the Pacific was $409,765,000,000 (of which $233,087,000,000 was with China and $90,966,000,000 was with Japan). With the Middle East, the deficit was $36,112,000,000. With Africa, the it was $62,192,000,000.

Public worry for three decades about the U.S. oil deficit has created a false impression among Americans that a self-sufficient America is impaired only by dependence on Middle East oil. The fact of the matter is that the total U.S. deficit with OPEC, an organization that includes as many countries outside the Middle East as within it, is $106,260,000,000, or about one-eighth of the annual U.S. trade deficit.

Moreover, the United States gets most of its oil from outside the Middle East, and the U.S. trade deficit reflects this fact. The U.S. deficit with Nigeria, Mexico and Venezuela is 3.3 times larger than the U.S. trade deficit with the Middle East, despite the fact that the United States sells more to Venezuela and 18 times more to Mexico than it does to Saudi Arabia.

What is striking about U.S. dependency on imports is that it is practically across the board. Americans are dependent on imports of foreign foods, feeds and beverages in the amount of $8,975,000,000.

Americans are dependent on imports of foreign industrial supplies and materials in the amount of $326,459,000,000—more than three times U.S. dependency on OPEC.

Americans can no longer provide their own transportation. They are dependent on imports of automotive vehicles, parts and engines in the amount of $149,499,000,000, or 1.5 times greater than the U.S. dependency on OPEC.

In addition to the automobile dependency, Americans are 3.4 times more dependent on imports of manufactured consumer durable and nondurable goods than they are on OPEC. Americans no longer can produce their own clothes, shoes or household appliances and have a trade deficit in consumer manufactured goods in the amount of $336,118,000,000.

The U.S. “superpower” even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers and telecommunications equipment.

It means that Americans are consuming $800 billion more than they are producing.

They pay for it by giving up ownership of existing assets—stocks, bonds, companies, real estate and commodities. America used to be a creditor nation. Now, America is a debtor nation. Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets. When foreigners acquire ownership of U.S. assets, they also acquire ownership of the future income streams that the assets produce. More income shifts away from Americans.

American over-consumption can continue for as long as Americans can find ways to go deeper in personal debt in order to finance their consumption and for as long as the U.S. dollar can remain the world’s reserve currency.

The 21st century has brought Americans ( with the exception of CEOs, hedge fund managers and investment bankers ) no growth in real median household income. Americans have increased their consumption by dropping their saving rate to the depression level of 1933, when there was massive unemployment, and by spending their home equity and running up credit card bills. The ability of a population, severely impacted by the loss of good jobs to foreigners as a result of offshoring and H-1B work visas and by the bursting of the housing bubble, to continue to accumulate more personal debt is limited, to say the least.

Foreigners accept U.S. dollars in exchange for their real goods and services because dollars can be used to settle every country’s international accounts. By running a trade deficit, the United States ensures the financing of its government budget deficit as the surplus dollars in foreign hands are invested in U.S. Treasuries and other dollar-denominated assets.

The ability of the U.S. dollar to retain its reserve currency status is eroding due to the continuous increases in U.S. budget and trade deficits. Today, the world is literally flooded with dollars. In attempts to reduce the rate at which they are accumulating dollars, foreign governments and investors are diversifying into other traded currencies. As a result, the dollar prices of the Euro, British pound, Canadian dollar, Thai baht and other currencies have been bid up. In the 21st century, the U.S. dollar has declined about 33 percent against other currencies. The U.S. dollar remains the reserve currency primarily due to habit and the lack of a clear alternative.

The jobs data and the absence of growth in real income for most of the population are inconsistent with reports of U.S. GDP and productivity growth. Economists take for granted that the workforce is paid in keeping with its productivity. A rise in productivity thus translates into a rise in real incomes of workers. Yet, we have had years of reported strong productivity growth but stagnant or declining household incomes. And somehow the GDP is rising, but not the incomes of the workforce.

Something is wrong here. Either the data indicating productivity and GDP growth are wrong, or Karl Marx was right that capitalism works to concentrate income in the hands of the few capitalists. A case can be made for both explanations.

Recently, an economist, Susan Houseman, discovered that the reliability of some U.S. economics statistics has been impaired by offshoring. Houseman found that cost reductions achieved by U.S. firms shifting production offshore are being miscounted as GDP growth in the United States and that productivity gains achieved by U.S. firms when they move design, research and development offshore are showing up as increases in U.S. productivity. Obviously, production and productivity that occur abroad are not part of the U.S. domestic economy.

Houseman’s discovery rated a BusinessWeek cover story last June 18, but her important findings seem already to have gone down the memory hole. The economics profession has overcommitted itself to the “benefits” of offshoring, globalism and the nonexistent “New Economy.” Houseman’s discovery is too much of a threat to economists’ human capital, corporate research grants and free market ideology.

The media have likewise let the story go, because in the 1990s the Clinton administration and Congress overturned U.S. policy in favor of a diverse and independent media and permitted a few mega-corporations to concentrate in their hands the ownership of the U.S. media, which reports in keeping with corporate and government interests.

The case for Marx is that offshoring has boosted corporate earnings by lowering labor costs, thereby concentrating income growth in the hands of the owners and managers of capital. According to Forbes magazine, the top 20 earners among private equity and hedge fund managers are earning average yearly compensation of $657,500,000, with four actually earning more than $1 billion annually. The otherwise excessive $36,400,000 average annual pay of the 20 top earners among CEOs of publicly held companies looks paltry by comparison. The careers and financial prospects of many Americans were destroyed to achieve these lofty earnings for the few.

Hubris prevents the realization that Americans are losing their economic future along with their civil liberties and are on the verge of enserfment.

"In the 21st century, the U.S. economy has ceased to create jobs in export industries and in industries that compete with imports. U.S. job growth has been confined to domestic services, principally to food services and drinking places (waitresses and bartenders), private education and health services (ambulatory health care and hospital orderlies) and construction (which now has tanked). The lack of job growth in higher-productivity, higher-paid occupations associated with the American middle and upper-middle classes will eventually kill the U.S. consumer market."

Its called technology. For instance, China has lost 30 million "manufacturing" jobs in the last decade, in spite of its growth in "manufacturing" exports. Meanwhile China herself has not created allot of that growth; 80% of its manufacturing exports are for foreign-owned companies - which means much of the profits for those exports is repatriated to the home-countries of those exports. Now, which automotive workers in the U.S. would be complaining if the U.S.-Toyota plant where they were working (like Tennessee) was doing so well it was exporting 1/3 of its production to France? Answer: none.

"With goods-producing industries in long-term decline as more and more production of U.S. firms is moved offshore, the engineering professions are in decline. Managerial jobs are primarily confined to retail trade and financial services."

Outright lie. Engineering professions are not in decline, in fact American industry in America cannot find enough American engineers for the American engineering jobs they would like to fill. What has changed is which engineering specialties are in decline and which are growing - which is what any truly dynamic economy would experience - engineers in operations are needed less now and engineers in design are needed more.

"The United States now has a trade deficit with every part of the world."

More than offset by the capital surplus that the US has with the rest of the world (foreign investors cannot get their money invested here fast enough).

"Americans can no longer provide their own transportation."

What's this guy smoking???? Our "choice", the consumers "choice" Toyotas, Hondas, Nissan's ect (increasingly made here), is not a reflection of "dependence", its choice and GM, Ford and Chrysler, in spite of their problems are still long-term-viable car manufacturers. This guy is a nut.

"What does it mean that the United States has an $800 billion trade deficit?....It means that Americans are consuming $800 billion more than they are producing."

No. It means foreigners deposited $800 billion more of their capital here than we deposited over there, and we turned around and bought $800 billion more in imports than we sold in exports. The actual "balance" in our foreign economic dealings is not just "trade" (exchange of exports/imports) but capital. Our capital account on a strictly capital basis is in surplus and that surplus funds imports above our exports. The "trade" side is not the entire story.

"Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets.

Statistics are great, but independent of the activities that make them up (finance), they can be misleading. Does that statistic mean, in very simple terms that foreigners (investors) came here and "spent" $2.5 trillion more than we (US investors) spent in foreign countries? No. An increasing portion of that number, growing since the 1980s comes from two sources unrelated to direct capital flows. One is the market value of assets, which, on the U.S. side have been growing faster (long term) than some of the assets that U.S. investors have purchased abroad - because the U.S. economy is doing so well. [Not a trend that is discouraging to foreign investors] Another is exchange rate adjustments, and when a foreign investment is made here with the foreign currency (instead of dollars the investor earned from sales here), like British pounds for instance, and the current exchange value implies more pounds per dollar, then the initial investment is presumed to be worth more dollars than it was originally. Does this mean that (1) the trade deficit does not need to go down, or (2) that the value of US investments abroad vs the value of foreign investments here does NOT need to come into greater balance. No, they do, and it will happen over time. But a "hard landing" is not likely. For the United States, unlike almost every other country in the world, a hard-landing process is inherently self-limiting. U.S. assets owned by international investors are predominantly denominated in dollars and a large fraction of U.S. assets held abroad are denominated in foreign currencies. Dollar depreciation, as it occurs will be gradual and self-limiting because the dollar value of U.S. assets abroad will rise, thus improving the U.S. net international investment position. Market participants, knowing this fact, are therefore not going to drive down the foreign currency value of the dollar in a rapid and disruptive fashion (self defeating) and in the end it will not be as steep as alarmists predict because it will gradually hurt their exports, gradually reduce the trade deficit and gradually bring the dollar beyond balance to a slowing rising value again. Most of these factors are truly relative and reflect a growing trend to less income and wealth disparities around the world. Most of these factors reflect a world trend not of US overall decline, but of how much of the rest of the world is rising to levels like ours, not that we do not continue to grow as well.

"By running a trade deficit, the United States ensures the financing of its government budget deficit as the surplus dollars in foreign hands are invested in U.S. Treasuries and other dollar-denominated assets. . ....The ability of the U.S. dollar to retain its reserve currency status is eroding due to the continuous increases in U.S. budget and trade deficits."

Apples and oranges. The U.S. treasury bond sales are not a significant part of either total US - public and private - exchange of assets and liabilities, or total U.S. borrowing and do not greatly impact U.S. interest rates or the U.S. economic gains on foreigners assets here, which are far greater factors - and not even then the only factors in why the dollar is still the "reserve currency". And, not in the long run significant. Were dollars needed less for foreigners reserves, the Fed would lower its M1 and M2 targets for how money dollars needed to be in circulation, keeping the final adjusted exchange and interest rates pretty near where they were.

Had to quit there, but the guy is not an economist.

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