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The Vicious Downward Cycle of the American Economy

By Paul Craig Roberts  Posted by Rob Kall (about the submitter)     Permalink
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Libertarians and free trade economists don't realize it, but they are pulling Marx out of his grave.

Free traders are resurrecting class war, not because they are Marxists but because they confuse free trade with global labor arbitrage. Free traders turn cold shoulders to US job losses from offshore outsourcing, because they mistake the losses for the beneficial workings of comparative advantage. Committed to a 200 year old theory that they no longer understand, free traders are cheering on the destruction of middle class jobs and the dismantling of the ladders of upward mobility that make large income disparities politically acceptable.

The destruction of the stabilizing middle class is occurring simultaneously with an extraordinary increase in income inequalities. Not so long ago CEOs were paid 20 times more than the average employee; now some are paid hundreds of times more. The "gilded age" is returning while the value of a college degree is declining.

According to the Bureau of Labor Statistics' 10-year jobs forecast, the majority of US jobs that will be created in the coming decade will be in domestic services that do not require a college education. This is a strange job outlook for a high tech economy allegedly benefiting from free trade. Domestic services are nontradable. The US economy has not created a net new job in tradable goods and services in the 21st century.

Free trade economists have forgotten that not all trade reflects the beneficial workings of comparative advantage. For comparative advantage to function, a country's capital must stay at home and be allocated to activities in which the country has comparative advantage. The other necessary condition is that countries have different internal cost ratios of producing different goods.

When the principle of comparative advantage was discovered, capital was mainly kept at home under the watchful eye of the owners and protected by the country's laws. Tradable commodities were primarily products influenced by climate and geography, guaranteeing that the cost of a yard of wool in terms of a bottle of wine would vary among countries.

Today capital is more mobile than tradable goods. Modern production functions are based on acquired knowledge and produce identical results regardless of location. When a US corporation closes a factory in Ohio and relocates its production for US markets to China, the loss of US jobs is not the result of a Chinese firm gaining a comparative advantage over the Ohio one. It is the result of US capital seeking absolute advantage in lower cost Chinese labor.

Free trade economists have completely forgotten that the flow of resources to where they have absolute advantage does not result in mutual benefit. The country that receives the resources gains and the other country loses.

When capital and technology flow from the US to China and India, the productivity of labor in China and India rises. In the US it falls.

Outsourcing is eliminating entire American occupations in engineering and information technology. As there are fewer jobs for graduates, engineering enrollments in the US are declining. Libertarians and free traders are so emotionally enamored of the market that they have forgotten that markets can as easily work against a country as for it. In the US, markets are working to reduce the supply of American engineers as US corporations lay off their American employees and replace them with cheaper Chinese and Indians.

Product development, or research and development, follows manufacturing. As US manufacturing moves offshore, so does R&D.
Innovation follows R&D, with the consequence that US science is also in relative decline. In brief, the US is developing the labor force characteristics of a third world country in which jobs are available only in lower productivity, lower paid "hands on" domestic services.

For engineering and IT jobs that remain in the US, fewer are filled by Americans. US firms have learned that they can pay foreigners on H-1B and L-1 work visas lower salaries, force their American employees to train their foreign replacements, and then discharge their American workers. Consequently, there is double-digit unemployment among American software engineers, IT professionals and computer programmers.

As Lou Dobbs exposed recently on CNN, the US Department of Labor is currently reserving some 52,000 high tech job openings in US firms for H-1B visa holders. "Bodyshops" use the visas to bring in foreigners who take Americans' jobs by undercutting their pay.

American firms advertise openings for H-1B visa holders only. No Americans need apply. Gene Koprowski in TechNewsWorld (August 20) reports that "in excess of 600,000 new visas have been granted during the last five years. Thirty-nine percent of H-1B visas were for workers in computer-related occupations."

In other words, 600,000 Americans lost the occupations in which they have invested their human capital. You can be assured that these 600,000 did not move up to better jobs.

As bad as it is for the individuals, it is even more costly for the country. The outsourcing of jobs and the importation of foreigners on work visas are emptying the pipeline of qualified Americans and destroying US technical occupations. It is paradoxical to hear the very executives who replaced their US employees with foreigners now complain about the declining interest of Americans in science and engineering. Last July Bill Gates expressed his worries about the precipitous decline in the number of students entering computer science. Why is Bill surprised when he helped to lead the offshore outsourcing movement?

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