US On Road To Third World â€” Paul Craig Roberts

On January 6, 2004, Senator Charles Schumer and I challenged the erroneous idea that jobs offshoring was free trade in a New York Times op-ed. Our article so astounded economists that within a few days Schumer and I were summoned to a Brookings Institution conference in Washington, DC, to explain our heresy. In the nationally televised conference, I declared that the consequence of jobs offshoring would be that the US would be a Third World country in 20 years.

That was 11 years ago, and the US is on course to descend to Third World status before the remaining nine years of my prediction have expired.

The evidence is everywhere. In September the US Bureau of the Census released its report on US household income by quintile. Every quintile, as well as the top 5%, has experienced a decline in real household income since their peaks. The bottom quintile (lower 20 percent) has had a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.

The Census Bureau uses official measures of inflation to arrive at real income. These measures are understated. If more accurate measures of inflation are used (such as those available from shadowstats.com), the declines in real household income are larger and have been declining for a longer period. Some measures show real median annual household income below levels of the late 1960s and early 1970s.

Note that these declines have occurred during an alleged six-year economic recovery from 2009 to the current time, and during a period when the labor force was shrinking due to a sustained decline in the labor force participation rate. On April 3, 2015 the US Bureau of Labor Statistics announced that 93,175,000 Americans of working age are not in the work force, a historical record. Normally, an economic recovery is marked by a rise in the labor force participation rate. John Williams reports that when discouraged workers are included among the measure of the unemployed, the US unemployment rate is currently 23%, not the 5.2% reported figure.

In a recently released report, the Social Security Administration provides annual income data on an individual basis. Are you ready for this?

In 2014 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.

The scarcity of jobs and the low pay are direct consequences of jobs offshoring. Under pressure from "shareholder advocates" (Wall Street) and large retailers, US manufacturing companies moved their manufacturing abroad to countries where the rock bottom price of labor results in a rise in corporate profits, executive "performance bonuses", and stock prices.

The departure of well-paid US manufacturing jobs was soon followed by the departure of software engineering, IT, and other professional service jobs.

Incompetent economic studies by careless economists, such as Michael Porter at Harvard and Matthew Slaughter at Dartmouth, concluded that the gift of vast numbers of US high productivity, high value-added jobs to foreign countries was a great benefit to the US economy.

In articles and books I challenged this absurd conclusion, and all of the economic evidence proves that I am correct. The promised better jobs that the "New Economy" would create to replace the jobs gifted to foreigners have never appeared. Instead, the economy creates lowly-paid part-time jobs, such as waitresses, bartenders, retail clerks, and ambulatory health care services, while full-time jobs with benefits continue to shrink as a percentage of total jobs.

These part-time jobs do not provide enough income to form a household. Consequently, as a Federal Reserve study reports, "Nationally, nearly half of 25-year-olds lived with their parents in 2012-2013, up from just over 25% in 1999."

When half of 25-year olds cannot form households, the market for houses and home furnishings collapses.

Finance is the only sector of the US economy that is growing. The financial industry's share of GDP has risen from less than 4% in 1960 to about 8% today. As Michael Hudson has shown, finance is not a productive activity. It is a looting activity (Killing The Host).

Moreover, extraordinary financial concentration and reckless risk and debt leverage have made the financial sector a grave threat to the economy.

The absence of growth in real consumer income means that there is no growth in aggregate demand to drive the economy. Consumer indebtedness limits the ability of consumers to expand their spending with credit. These spending limits on consumers mean that new investment has limited appeal to businesses. The economy simply cannot go anywhere, except down as businesses continue to lower their costs by substituting part-time jobs for full-time jobs and by substituting foreign for domestic workers. Government at every level is over-indebted, and quantitative easing has over-supplied the US currency.

This is not the end of the story. When manufacturing jobs depart, research, development, design, and innovation follow. An economy that doesn't make things does not innovate. The entire economy is lost, not merely the supply chains.

The economic and social infrastructure is collapsing, including the family itself, the rule of law, and the accountability of government.

When college graduates can't find employment because their jobs have been offshored or given to foreigners on work visas, the demand for college education declines. To become indebted only to find employment that cannot service student loans becomes a bad economic decision.

We already have the situation where college and university administrations spend 75% of the university's budget on themselves, hiring adjuncts to teach the classes for a few thousand dollars. The demand for full time faculty with a career before them has collapsed. When the consequences of putting short-term corporate profits before jobs for Americans fully hit, the demand for university education will collapse and with it American science and technology.

The collapse of the Soviet Union was the worst thing that ever happened to the United States. The two main consequences of the Soviet collapse have been devastating. One consequence was the rise of the neoconservative hubris of US world hegemony, which has resulted in 14 years of wars that have cost $6 trillion. The other consequence was a change of mind in socialist India and communist China, large countries that responded to "the end of history" by opening their vast under-utilized labor forces to Western capital, which resulted in the American economic decline that this article describes, leaving a struggling economy to bear the enormous war debt.

It is a reasonable conclusion that a social-political-economic system so incompetently run already is a Third World country.

I did. He's not wrong, but he's delusional if he thinks this country is ever going to return to the days when the manufacturing was a dominant source of employment in the U.S.

The peak of manufacturing employment (measured in comparison to the overall employment base) in the U.S. occurred in 1977, when 22% of employed Americans worked in the manufacturing sector. Today we're somewhere down around 8% to 9%, and "outsourcing" is only one of many factors that have driven this decline. Here are some others:

1. Comparative currency valuations. In global trade, the U.S. became less competitive compared to other countries when our dollar strengthened in the 1980s.

2. Deregulation in multiple industries. The growth of the telecommunications and transportation sectors, for example, which made it easier to transport products over long distances and conduct business globally, has played a much bigger role in "outsourcing" than most Americans realize.

3. Automation. It simply takes fewer workers to produce something today then it did 50 years ago, which explains why manufacturing employment has declined in the U.S. even in industries where the U.S. is still the leading global producer (automobiles, farm machinery and aircraft, for example).

4. Changes in workforce gender composition. Women comprised about 30% of the civilian U.S. workforce in 1950, compared to about 45% today. Very few women have ever had any interest in working in a factory.

It's worth noting that the peak in U.S. manufacturing employment as I've described it here occurred during the Carter administration, despite the general myth that the peak in U.S. manufacturing dates back to the 1950s. I don't think this is a coincidence, and I don't think there are too many folks here on FreeRepublic who would ever look back and see 1977 as the economic heyday of the United States.

FYI: This PCR article was published in 2004. George Reisman published a withering critique of it back then.

A Reply to Schumer and Roberts

Charles Schumer, the senior senator from New York, and Paul Craig Roberts, an assistant secretary of the Treasury in the Reagan administration, have written an article in The New York Times of January 6, 2004, in which they question the benefits of free trade in conditions in which there is mobility of capital and thus effective mobility of labor, as well as mobility of goods.
They cite the case of a New York Securities firm that plans to replace its American software engineers who earn $150,000 per year with equally competent Indian software engineers who earn only $20,000 per year and who modern telecommunications equipment will enable to work as effectively as if they were physically present in the United States rather than in India. The also cite the fact that the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.
Exactly the same alleged problem, of course, is present, at least implicitly, in the construction of modern factories and other modern facilities of production in China and elsewhere in what has up to now been the "third world." Such developments radically increase the productivity of workers who earn very low wages by American standards and thereby enable those foreign workers to outcompete far-more highly-paid American workers in the production of more and more goods.
The question is, are such developments to be feared as an assault on the American standard of living and thus serve to justify government intervention designed to thwart them?
The means of answering this question has been supplied by none other than David Ricardo, the discoverer of the law of comparative advantage.
The additional principle of Ricardo that is relevant here is his distinction between "value" and "riches," which, he showed, are capable of moving in opposite directions.1 Although Ricardo, was a proponent of the labor theory of value, his doctrine does not depend on it, any more than does the law of comparative advantage. Indeed, it can be applied to the very examples cited by Messrs. Schumer and Roberts. All we have to do is understand "value" as money income and "riches" as the goods and services that money income can buy.
Thus, here we are with American software engineers and American radiologists being replaced by much lower-paid Asian software engineers and radiologists. What causes them to be replaced is that they are unwilling to accept wages as low as their Asian competitors. The fact that they are replaced rather than accept the wage cuts needed to be competitive implies that they choose to move to alternative lines of work, which, while offering less money than the jobs they have lost, do not require reductions as severe as those needed to be competitive in the jobs now filled by Asians. The former software engineers take jobs that offer $100,000 or perhaps just $50,000 instead of the $150,000 that they had been earning. The former radiologists leave radiology and enter other branches of medicine at lower, but still considerable pay, in the process increasing the supply of physicians and reducing their rates in those other linesâ€”a path to more affordable medical care, it would seem.
To understand what is present, all one need do is to generalize the situation. Imagine that in case after case Americans are confronted with lower-cost competitors, which causes a decline in their money incomes. But the decline in their money incomes is always less than the reduction in costs achieved by the competitors. Now all one need do is realize that the cost reductions achieved by the competitors show up as price reductions in the things Americans buy. And those price reductions, founded on cost reductions greater than the decline in American incomes, will also be greater than the decline in American incomes. In other words, American real incomes, as opposed to their nominal incomes, rise. Ricardo's principles both of comparative advantage and the distinction between value and riches are at work.
Of course, if one looks only at the situation of an isolated group, such as software engineers or radiologists, the decline in income is far more pronounced than any decline in the prices the members of these groups must pay. But by the same token, in every such isolated case the immense majority of Americans gets the benefit of some reduction in costs and prices with no reduction in incomeâ€”for example, all the patients who earn their livings other than as software engineers or radiologists and who can now get their MRIs less expensively.
Despite everything I have said about falling wages and prices, it should be realized that under a system of fiat money, such as we have today, it is practically impossible that the general level of money wages will actually fall in the United States. For one thing, practically all of the dollars that go abroad to purchase imports or, now, to pay wages, come back to the United States, to buy goods and services here. Indeed, in this process, China and Japan are actually significant suppliers of capital funds to the United States, albeit largely in the form of the purchase of U.S. government securities. (So much for fears of capital export. The overwhelming bulk of the capital invested in Asia is made possible by the rapid increases in production there, not by the export of capital from the United States or other advanced countries. The capital formed there is of such magnitude as to make possible, as I say, the actual import of capital into the United States rather than its export from the United States.)
This return of funds from abroad serves to increase the demand for labor in various lines, thereby working against a general fall in wage rates. Of course, of much greater influence on money wages is the endless rapid increase in the quantity of money in the United States. When this factor is taken into account, the effect of free trade should be understood merely as retarding the rise in domestic prices in comparison with what it would otherwise beâ€”of helping to prevent prices from rising as rapidly as inflation of the money supply serves to raise wage rates and would otherwise serve to raise prices
The economic development of China, India, and all other areas of the present-day third world, their full integration into a system of global division of labor and their attainment of "first-world" status, is earnestly to be desired not only by the populations of those countries, whose standards of living would obviously be enormously increased, but no less by the populations of today's first-world countries, whose standards of living would also be very greatly increased. What would be achieved, along with the benefits of comparative advantage, is the maximum possible economies of scale in every branch of production, given the world's population. Above all, every branch of science, technology, invention, and business innovation would be pursued by a far larger number of highly intelligent and motivated individuals than is now the case. The result must be far more rapid economic progress across the entire globe, raising the living standards of all far above the living standards of today's most advanced countries.
The fear of other people's intelligence and ability applied to the production of goods we consume is not only profoundly wrong but also extremely dangerous. If we follow the line of Schumer and Roberts, and their avowed mentor, Keynes, and instead of allowing ourselves to benefit from the competition of the rest of the world, seek to impede others' progress, we should not be surprised if we end up finding much of that intelligence and ability turned against us, in producing the weapons of future wars rather than the better and more economical consumers' goods it can and wants to produce and which we want to consume.
Let Schumer, Roberts, and all other advocates of state intervention restrain their desire to unleash the Polizei and the troops to stop people from doing what benefits them. They need to read more of Ricardo, and Mises and Bastiat, before urging such policies.

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