These are discouraging times, but
once in a blue moon a bit of hope appears. I am pleased to report on the
bit of hope delivered in March of 2011 by Michael Spence, a Nobel
prize-winning economist, assisted by Sandile Hlatshwayo, a researcher at New York University. The two economists have taken a careful
empirical look at jobs off-shoring and concluded that it has ruined the
income and employment prospects for most Americans.
To add to the amazement, their
research report, "The Evolving Structure of the American Economy and the Employment Challenge," was published by the very establishment Council on Foreign Relations.
For a decade I have warned that US
corporations, pressed by Wall Street and large retailers such as
Wal-Mart, to move offshore their production for US consumer markets,
were simultaneously moving offshore US GDP, US tax base, US consumer
income, and irreplaceable career opportunities for American citizens.
Among the serious consequences of off-shoring are the dismantling of the ladders of upward mobility that
made the US an "opportunity society," an extraordinary worsening of the
income distribution, and large trade and federal budget deficits that
cannot be closed by normal means. These deficits now threaten the US
dollar's role as world reserve currency.
I was not alone in making these
warnings. Dr. Herman Daly, a former World Bank economist and professor
at the University of Maryland, Dr. Charles McMillion, a Washington, DC,
economic consultant, and Dr. Ralph Gomory, a distinguished mathematician
and the world's best trade theorist, understand that it is strictly
impossible for an economy to be moved offshore and for the country with
the off-shored economy to remain prosperous.
Even before this handful of
economists capable of independent thought saw the ruinous implications
of off-shoring, two billionaires first recognized the danger and issued
warnings, to no avail. One of the billionaires was Roger Milliken, the
late South Carolina textile magnate, who spent his time on Capital
Hill, not on yachts with Playboy centerfolds, trying to make our
representatives aware that we were losing our economy. The other
billionaire was the late Sir James Goldsmith, who made his fortune by
correcting the mistakes of America's incompetent corporate CEOs by
taking over their companies and putting them to better use. Sir James
spent his last years warning of the perils both of globalism and of
merging the sovereignties of European countries and the UK into the EU.
Sir James book, The Trap
, was published as long ago as 1993. His book, The Response
in which he replied to the "free trade" ideologues in the financial
press and academia who denigrated his warning, was published in 1995. (For readers who wish to hear a speech given by Sir James to the US
Senate in 1994 warning of the perils of globalism, see here
and also here
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Sir James called it correct, as did
Roger Milliken. They predicted that the working and middle classes in
the US and Europe would be ruined by the greed of Wall Street and
corporations, who would boost corporate earnings by replacing their
domestic work forces with foreign labor, which could be paid a fraction
of labor's productivity as a result of the foreign country's low living
standard and large excess supply of labor. Anytime there is an excess
supply of labor, or the ability of corporations to pay labor less than
its productivity, the corporations bank the difference, Share prices
rise, and Wall Street and shareholders are happy.
All of this was over the heads of
"free trade" ideologues, who threw accusations such as "protectionist"
at Sir James, Roger Milliken, Herman Daly, Ralph Gomory, Charles
McMillion, and myself. These "free trade" ideologues are economically
incompetent. They do not know that the justification for free trade is
based on the principle of comparative advantage, which means that a
country specializes in those economic activities in which it performs
best and trades for those goods that other countries do best. Instead,
the ideologues think that free trade means the freedom of capital to
seek absolute advantage abroad in lowest factor cost. In other words,
the free trade incompetents have never read David Ricardo, who
formalized the case for free trade.
Other economists, especially those high profile ones in high profile academic institutions, were bought and paid for.
In exchange for grants from off-shoring corporations these hirelings invented "the New Economy," in which everyone would prosper as a result of getting rid of "dirty fingernail jobs." The New Economy wouldn't make anything, but it would lead the world in innovation and in financing what others did make. The "new economists" were not sufficiently bright to realize that if a country didn't make anything, it couldn't innovate.
Let's go now to Michael Spence and
Sandile Hlatshwayo, who have provided an honest report for which we
should give thanks. Professor Spence could have made many millions using
the prestige of his Nobel Prize to lie for the Establishment, but he
chose to tell the truth.
Here is what Spence and Hlatshwayo report:
"This paper examines the evolving structure of the American economy, specifically, the trends in employment, value added, and value added per employee from 1990 to 2008. These trends are closely connected with complementary trends in the size and structure of the global economy, particularly in the major emerging economies. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, U.S. industries are separated into internationally tradable and non-tradable components, allowing for employment and value-added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the
non-tradable side. On the non-tradable side, government and health care
are the largest employers and provided the largest increments (an
additional 10.4 million jobs) over the past two decades. There are
obvious questions about whether those trends can continue; without fast
job creation in the non-tradable sector, the United States would already
have faced a major employment challenge.
"The trends in value added per employee are consistent with the adverse movements in the distribution of U.S. income over the past twenty years, particularly the subdued income growth in the middle of the income range. The tradable side of
the economy is shifting up the value-added chain with lower and middle components of these chains moving abroad, especially to the rapidly growing emerging markets. The latter themselves are moving rapidly up the value-added chains, and higher-paying jobs may therefore leave the
United States, following the migration pattern of lower-paying ones. The
evolution of the U.S. economy supports the notion of there being a
long-term structural challenge with respect to the quantity and quality
of employment opportunities in the United States. A related set of
challenges concerns the income distribution; almost all incremental
employment has occurred in the non-tradable sector, which has
experienced much slower growth in value added per employee. Because that
number is highly correlated with income, it goes a long way to explain
the stagnation of wages across large segments of the workforce."
What is Spence telling us? Spence
is careful not to say that globalism is the intentional result of
enhancing capital's profits at the expense of labor's wages, but he does
acknowledge that that is its effect and that globalism or jobs off-shoring has the costs that Daly, Gomory, McMillion, Milliken,
Goldsmith, and I have pointed out. Spence uses the same data that we
have provided that proves that during the era of globalism the US
economy has created new jobs only in non-tradeable services that cannot be off-shored or be produced in locations distant from their market. For
example, the services of barbers, waitresses, bar tenders, and hospital
workers, unlike those of software engineers, cannot be exported. They
can only be sold locally in the location where they are provided.
Tradeable jobs are jobs that produce
goods and services that can be exported and thus can be produced in
locations distant from their market. Tradeable jobs result in higher
value-added and, thereby, higher pay than most non-tradable jobs.
When a country's tradeable goods and
services are converted by off-shoring into its imports, it is thrown
back on low productivity domestic service jobs for its employment. These
domestic service jobs, except for dentists, lawyers, teachers, and
medical doctors, do not require a university education. Yet, America has
thousands of universities and colleges, and the government endlessly
repeats the mantra that "education is the answer."
But with engineering, design, and
research jobs off-shored, and with many of the jobs that remain within
the US filled by foreigners on HB-1 and L-1 visas, we now have the
phenomenon of American university and college graduates, heavily
indebted with student loans, jobless, and living with their parents, who
Spence also acknowledges that the
change in the structure of American employment from higher productivity
to lower productivity jobs is the reason both for the stagnation in US
consumer income and for the rising inequality of income. Sending middle
class jobs abroad raised the earnings of capital. Spence understands
that the lack of growth in consumer income has resulted in a shortfall
in domestic demand, resulting in high unemployment. He could have added
that jobs off-shoring also gave us the Federal Reserve's policy of
pumping up consumer debt as a substitute for the missing growth in
consumer income. There is an obvious limit to the ability to maintain
the growth of consumer demand via the growth of indebtedness.
The off-shored economy is the "New
Economy," which the "free trade" hirelings of Wall Street and the global
corporations invented in order to pay, with grants from the off-shoring
corporations, for their summer homes in the Hamptons.
As a graduate student in economics, I
was fortunate to study with a number of professors who had or were
subsequently awarded Nobel Prizes. Among these creative people there
are two economists whom I did not study under, but whose work I have
read, and whose work is of great importance to our economic prospects.
The two most important economists of our time, who, without any doubt,
deserve the Nobel Prize are Ralph Gomory and Herman Daly.
Ralph Gomory's book, "Global Trade
and Conflicting National Interests," coauthored with William J. Baumol, a
past president of the American Economics Association, is the most
important work in trade theory ever produced. This book, and subsequent
papers by Gomory, prove beyond all doubt that the free trade theory set
out by David Ricardo at the beginning of the 19th century is merely a
special case, not a general theory.
Economists learn in their graduate
courses that free trade is an unchallengeable doctrine and that only
ignorant protectionists dispute the theory. This mindset was sufficient
for Gomory's book to be largely ignored, even though Paul Samuelson, the
dean of American economics, acknowledged the critical point that there
are situations in which free trade is not mutually beneficial.
The other deserving recipient of the
Nobel prize is Herman Daly. On the trade issue, Daly's point is
different from and less revolutionary than Gomory's. Daly makes the
same point that I make, which is that the classic theory of free trade
is based on comparative advantage, not on absolute advantage, and that off-shoring is based on absolute advantage. Thus, off-shoring is not free
Daly's revolutionary contribution to
economics comes from his realization that the production function that
is the basis of economic science is wrong. This production function is known as
the Solow-Stiglitz production function. This production function
assumes that man-made capital is a substitute for nature's capital. It
follows from this assumption that whatever humans do to use up and
destroy the natural environment can be overcome by the resourcefulness
of science and technology.
Daly shows that this reasoning is
incorrect. If the Gulf of Mexico is destroyed by fertilizer run-offs
from agri-business and by oil spills, only nature can correct the
problem after many years measured in decades or centuries. In the
meantime, humans are without the resource.
Daly's argument is brilliant in its
simplicity. In former times, nature's capital was enormous, and man's
reproducible capital was small. For example, fish in the oceans were
plentiful, but fishing boats were not. Today fishing boats are in excess
supply, but ocean fishing stocks are depleted. Thus, the limiting
factor is not man-made capital, but nature's capital. Daly stresses that
by leaving ecological and social costs out of the computation of GDP,
economists do not have a reliable measure of the effect of economic
activity on human welfare.
All of economics is predicated on
the notion that resources are inexhaustible, and that the only challenge
is to use them most efficiently. But if resources are not inexhaustible
and cannot be replicated by human capital, the world economy is being
ruthlessly exploited to its detriment and to the detriment of life on
Thanks to Bush/Cheney/Obama and the
wars for military/security profits, we might not last long enough to
test Daly's hypothesis. As American hegemony confronts both China and
Russia, hubris can rid the planet of humans before nature does.
To find a Nobel prize-winner
documenting the high cost of globalism to developed economies is
extraordinary. For the Council on Foreign Relations to publish it
suggests that the Establishment, or some part of it, suspects that its
hubris has run away with its fortunes, and that different thinking is
needed to restore the US economy.
We must hope that Spence's paper
will encourage thought. On the other hand, the
bought-and-paid-for-economists will confront Spence with their fantasies
that the US would be enjoying full employment if only government did
not discourage employment with unemployment compensation, food stamps,
income support programs, unions, minimum wages, and regulation.
Recently, yet another high-level
warning came from the International Monetary Fund. The IMF report said
that the US economy has been seriously eroded and that the age of
America is over.
Will the US business and economic
establishments heed these warnings, or will the US become a third world
country as I predicted at the beginning of this century?