Are the good times over?

Town Hall ^ | April 30, 2003 | Paul Craig Roberts

[A. Pole]

During the first 27 months of the Bush administration, the U.S. economy has lost 2.6 million private sector jobs. Much of this loss is from the fall in profits and subsequent downsizing after the high-tech bust. Some lost jobs, however, are from a new development: America's export of high-wage jobs to low-wage countries.

The collapse of the Soviet Union, China's "capitalist road" and privatizations in formerly socialist economies made it reasonably safe for U.S. firms to locate capital and technology abroad to employ foreign labor to produce for the U.S. market. The main incentive to take production offshore is the availability of labor at wages far below the U.S. rate.

Foreign labor can be hired at a fraction of U.S. cost because the standard of living is much lower in China, India and other Asian countries. These countries have a labor supply that is large relative to demand, making it possible to employ people at wages considerably less than the value of their contribution to output. The labor savings allow U.S. firms to be more price-competitive, or the savings flow directly into profits, thereby raising stock prices and managerial bonuses.

When U.S. firms move production for U.S. markets offshore, not only is American labor displaced by foreign labor, but also U.S. GDP is reduced by the production that is shifted abroad, while the foreign country's GDP increases. What was formerly U.S. domestic production becomes imports. Imports have to be paid for with export earnings or by giving up ownership of U.S. assets, such as real estate, equity in U.S. companies or government debt.

Persistent large trade deficits, such as ours, can put pressure on a country's currency. Fortunately for us, the U.S. dollar is the world's reserve currency. This means that the United States can run large trade deficits for a long time before the deficits force dollar devaluation. If alternatives to the dollar develop, such as the European Euro or, perhaps, the Chinese currency at a future date, the devaluation in the dollar could be sharp.

As long as the dollar is strong, the United States cannot close the trade deficit by exporting more and importing less. The problem is exacerbated by the growth in offshore production. Every time a company closes a plant in the United States and moves the production to China or India, our domestic production goes down and our imports go up.

Thus, the very process that helps U.S. firms become more profitable and price competitive worsens the U.S. trade deficit, lowers U.S. employment and GDP growth, and puts pressure on the value of the dollar.

The growing ability of U.S. employers to substitute cheaper foreign labor for U.S. labor is putting pressure on U.S. wages and salaries. On April 26, The New York Times reported that the real earnings of those in the top 10 percent fell 1.4 percent over the last year. The real weekly pay for the median worker fell 1.5 percent.

Another indication of the pressure on U.S. employment is the growing number of discouraged jobseekers who have dropped out of the labor force. The 5.8 percent unemployment rate does not include those too discouraged to seek jobs.

According to U.S. Labor Department figures reported in The New York Times on April 27, 4 million Americans have dropped out of the labor force since March 2001. Some of these dropouts are 30-year olds formerly making $150,000 per year.

Pay cuts and a growing number of discouraged jobseekers are the inevitable consequences of U.S. firms substituting lower-cost foreign labor for American employees. In the past, American workers were protected from cheap foreign labor by American capital, technology, business know-how and education, which made Americans more productive than foreign labor.

Today, capital, technology and business know-how are internationally mobile. These factors of production move to where labor is cheap. High-wage Americans have to compete with low wage Chinese and Indians, who have the same capital and technology.

This competitive pressure will force U.S. wages and salaries down and unemployment up. America's high standard of living makes it difficult for U.S. pay to adjust downward quickly. Consequently, many Americans are losing occupations and careers.

Manufacturing workers were the first to be hard hit. Now engineers, designers, IT workers, architects, accountants, stock analysts and radiologists are experiencing disappearing jobs. Economists, who gave assurances not to worry about the loss of manufacturing jobs because we are becoming a service economy, overlooked the ability of U.S. firms to hire foreign professional services via the Internet and to import foreign workers on H-1B, L-1 and other work visas.

As long as cheaper and equally productive foreign labor can be hired, a growing number of Americans will find their hopes and expectations frustrated. Considering the enormous oversupply of Asian labor on the global labor market, this process will continue.

A dollar collapse would shorten the adjustment period by raising the cost of both foreign labor and imported goods and services, thereby reducing the cost advantage of offshore production. But there appears to be no way to avoid the pressure on American real incomes from the competition of foreign labor, as both our currency and our labor become less valuable.

[A. Pole]

America's high standard of living makes it difficult for U.S. pay to adjust downward quickly.

Free market bump.

[JmyBryan]

Or ... if everyone switches to the Euro as the reserve currency, the US dollar could actually gain in value.

But then that wouldn't be worth worrying about, would it?

[snopercod]

Not to worry. America still has plenty of lawyers.

[michigander]

Darn, that mammon worship can be a beach.

[alisasny]

America's export of high-wage jobs to low-wage countries.

Wow, this just started 27 months ago, I am shocked I tell you.

Much of this loss is from the fall in profits

YOu mean the new sheriff in town didn't do an nod and wink to wall street??

Totally shocking... Perhaps if the former administration would have took the computer industry serious they would not have allowed bootlegged software..but what do I know.

[Poohbah]

As long as cheaper and equally productive foreign labor can be hired, a growing number of Americans will find their hopes and expectations frustrated.

And there's the problem, in a nutshell.

Of course, you COULD agitate for a nice, destructive war overseas, and wipe out the oversupply of labor and capital assets THAT way.

BTW, a lot of Indian software companies are starting to complain--apparently, contracts that were heading to the subcontinent are being cancelled for nonperformance.

But if American coders produce bloated, buggy crapware at $80/hr loaded, and equally bloated, equally buggy crapware can be obtained for $40/hr loaded...the cheaper crapware will be the winner.

[Balto_Boy]

The labor savings allow U.S. firms to be more price-competitive, or the savings flow directly into profits, thereby raising stock prices and managerial bonuses.

So why are profits dropping? Could it be that the companies can't sell their products because their consumer base happens to be the Americans they are laying off?

[mlocher]

this guy doesn't get it. we are occupying iraq so we can get cheap oil to keep our standard of living high. (smile).

[Feldkurat_Katz]

So why are profits dropping? Could it be that the companies can't sell their products because their consumer base happens to be the Americans they are laying off?

Well, just because our executives have MBA degrees, that doesn't mean they know basic economics, does it?

[Nick Danger]

A stupid person could be forgiven for wondering why a guy who says...

• Persistent large trade deficits, such as ours, can put pressure on a country's currency.
• As long as the dollar is strong, the United States cannot close the trade deficit by exporting more and importing less.
• A dollar collapse would shorten the adjustment period by raising the cost of both foreign labor and imported goods and services, thereby reducing the cost advantage of offshore production.

... also says this: "Fortunately for us, the U.S. dollar is the world's reserve currency. This means that the United States can run large trade deficits for a long time before the deficits force dollar devaluation."

It seems to me the solution is staring him right in the face, and it the normal thing that a market would do all by itself to redress the imbalance. But instead of thinking that having the market "do its thing" and fix the problem is a Good Thing, the author joins in this baffling blizzard of BS we get from all over the place about how there is something just wonderful about having a "strong" dollar. Hello? The "strong dollar" is what makes US products appear overpriced in foreign markets; it's why our export sales aren't what they could be. The "strong dollar" is what makes imported goods (amd services) seem cheap here. That's nice, but not if it puts everybody here out of work. What is so hot about a "strong" dollar? My feet have a "strong" smell, too... but that doesn't mean it's good.

[Feldkurat_Katz]

we are occupying iraq so we can get cheap oil to keep our standard of living high. (smile).

I am shocked - Shocked! to find that we are occupying Iraq for reasons other than bringing democracy to the people of Iraq.

[Chancellor Palpatine]

Is crapware the successor term for bloatware? You know, where a $400 program does 4837 separate functions, 3593 of which no sane customer ever asked for, wanted, or can find any use for in the first place.

[BibChr]

Dang!

There were good times?

Where was I???

How come NO ONE TOLD ME????!

Grr-r-r-r!

Dan

[Poohbah]

Crapware = buggy and tempermental. Of the 4,837 separate functions, only 3 work in the manner they are described to in the operator's manual.

Bloatware:

1. 4,837 functions, 3,593 of which no one wants.

2. 10 million lines of code for a program that prints out "Hello World!"

[NoControllingLegalAuthority]

Exactly. Wal-Mart will be full of cheap merchandise no American can afford because he/she will be unemployed.

[templar]

Could it be that the companies can't sell their products because their consumer base happens to be the Americans they are laying off?

Nah, couldn't be. That's too simple an explanation.

[RightWhale]

What is so hot about a "strong" dollar?

Means you can retire abroad and live like a king on pennies a day, and foreign cars and wine are cheap, too. Based on these criteria, one might not consider the dollar to be particularly strong.

[Dr. Frank fan]

There were good times? Where was I??? How come NO ONE TOLD ME????!

The good times were precisely between 1993-2001. And you are mistaken that no one told you.

Bill Clinton was on TV telling you, every day, how great the times were because of him. He even personally "created" a hundred thousand (or some other nice, round number) new jobs. He also personally "oversaw" the longest, sustained expansion in peacetime history.

Starting to ring a bell yet? ;-)

[RightWhale]

He even personally "created" a hundred thousand (or some other nice, round number) new jobs.

Clinton-Algore promised 30 million new jobs. We should start seeing some of those new jobs any day.