Losing the Economy to Mythology
by Paul Craig Roberts
[Subscribe online to Chronicles: A Magazine of American Culture. Click here for details].
Economic discussion in the United States is trapped in ancient ruts. Both right and left are stuck in old habitual ways of thinking. Neither shows inclination or ability to think independently of ideology. For a country beset with economic problems, this is problematic.
The ascendancy of free market economics during the past quarter century has removed some constraints on corporate power. It is difficult to argue that this is a desirable result. For example, the concentration of media ownership permitted by the Clinton administration in the 1990s has destroyed the independence of the U.S. media, thus reducing the accountability of government. Deregulation has had unintended consequences. The growth of corporate influence has facilitated the reach of special interests into universities and think tanks, and turned some from pursuit of truth to “for-profit activities” that compromise the independence of studies and publications.
The left wing, which refuses to accept that the Great Depression was caused by the Federal Reserve’s mistaken monetary policy and still blames corporate power and greed for the 1930s decade of high unemployment, is disturbed at the loosening of the leash on corporate power. Generally speaking, the left blames President Reagan for boosting corporate power by cutting taxes and for spearheading union-busting by firing the striking air controllers.
John Kenneth Galbraith was correct that unions provided a countervailing power, one that has been removed. The left wing is correct that corporations have grown in power and that income inequality has worsened. But the left is wrong in attributing these developments to tax cuts and dismissed air controllers.
The purpose of Reagan’s reduction in marginal tax rates was to cure stagflation and worsening trade-offs between inflation and employment that had undermined Jimmy Carter’s presidency. Reagan’s tax policy brought a record economic expansion that did not require rising rates of inflation to sustain. It is impossible to argue that the decline in inflation and home mortgage rates benefited the rich more than others. The rich have a lot of margin in their budgets. The poor have none.
U.S. income inequality was worsened and the unions busted by the collapse of world socialism and the rise of the high-speed Internet. These two developments, which were not part of Reagan’s economic program, made it possible for corporations to substitute foreign labor for American labor in the production of goods and services for American markets.
Until the collapse of world socialism, corporations did not have access to the large pools of excess labor in China and India. Until the rise of the high-speed Internet, corporations could not hire professional services supplied from distant lands. These two developments meant that highly productive and highly paid American labor could be substituted out of production functions and replaced with equally productive but much cheaper foreign labor, because large excess supplies of Asian labor suppressed Asian wages below the productivity of labor.
Industrial unions were busted by the movement of plant, equipment and technology abroad.
The professional middle class was adversely impacted by the ability of corporations to contract for the delivery via the Internet of professional services from abroad and by the ability to import cheaper foreign workers on H-1B, L-1 and other work visas.
Jobs offshoring is dismantling the ladders of upward mobility in the United States, polarizing the population into rich and poor, and thereby worsening the income distribution.
Americans need to understand that it is jobs offshoring, not lower tax rates, that is worsening the income distribution. Because of the million-dollar cap on tax-deductible executive pay, executive incomes depend primarily on performance-related bonuses. The multimillion dollar CEO paychecks are not salaries. They are bonuses for making or exceeding profit expectations by such practices as offshoring jobs and lowering production costs. We have created an incentive system in which a few corporate executives are amazingly well paid for destroying jobs and career opportunities for Americans. The more they can worsen income inequality by offshoring American jobs, the higher they are paid.
The remedy to this crazy incentive system is not higher tax rates. High marginal tax rates curtail real output. The Federal Reserve then tries to force more output by pumping up the money supply to increase demand, and the economic system responds by raising prices instead of output. This is the serious economic problem that Reagan’s supply-side economic policy cured. To resurrect this problem on top of our other problems would be anything but helpful. The emotional remedy for obscene pay packages is a surtax on multimillion-dollar incomes.
Princeton economist Alan Blinder, a former vice chairman of the Federal Reserve, says that the entire range of tradable professional services can be offshored. I agree with him. He estimates the number of these jobs at approximately 50 million.
Should such displacement occur, what occupations would absorb such numbers of economically displaced Americans? As I have documented relentlessly, in the 21st century the U.S. economy, according to the nonfarm payroll data of the Bureau of Labor Statistics, has been able to create net new jobs only in nontradable domestic services — jobs such as waitresses and bartenders and health and social services. Free trade ideologues claim without evidence that the lost jobs will be replaced by better jobs. They do not explain why any such better jobs, should they materialize, would not themselves be offshored.
What to do? Some economists think that the process will produce the solution. At some time in the future, the Asian labor supply will be fully utilized. Wages will rise, and Asian labor will be paid in keeping with its productivity. In the United States, the decline in demand for labor and the movement abroad of high value-added jobs will have lowered real wages. At some point, wages at home and abroad will become equal, and the incentive to move jobs offshore will be gone. What economists leave out of the story is the drop in American real incomes and the corresponding social instability in the United States while this process works out.
A real solution as opposed to a theoretical one will have to address the powerful incentive to offshore jobs. A solution will have to address the American preoccupation with short-term results. Quarterly reporting was a “reform,” the purpose of which was to provide shareholders with up-to-date information that approximates the information of corporate insiders.
In practice, quarterly reporting drives share prices and executive pay. Management and short-term shareholders can get rich from practices that shorten a corporation’s life span, such as selling productive assets and reporting the proceeds as profit and replacing the domestic workforce with foreigners.
Another remedy would be a return to tariff protection. However, many economists believe that the decimation of unprotected American industry and professional occupations is a small price to pay for lower consumer prices. These economists ignore that the United States prospered under tariffs, as did the tax bases of cities and states.
Considering the difficulty that both left and right experience in thinking outside the box, I do not believe a policy remedy will be forthcoming. Rather, the remedy will impose itself. It will come from the loss of the dollar’s role as reserve currency.
Offshoring of manufacturing and professional services turns domestically produced goods and services into imports that worsen the U.S. trade deficit. The rest of the world is willing to finance America’s $800 billion annual trade deficit because the dollar is the reserve currency. Our trading partners add some of the dollars we pay them for our annual overconsumption to their monetary reserves and use others to purchase U.S. assets such as real estate and companies. If the dollar were not the reserve currency, foreigners would have less inclination to accept them.
The question would then become: How do we pay for our imports when the dollar is no longer the reserve currency?
Since imports include the offshored production of U.S. corporations for U.S. markets, the ability to sell in America the goods and services produced offshore would decline. Corporations would be forced to move the production of goods and services for U.S. markets back to the United States.
It is a puzzle that free traders, who are adamantly opposed to tariffs on the grounds that they result in higher prices and lower consumer real incomes, are unfazed by currency devaluation. An excess of dollars is eroding the dollar’s reserve currency role and undermining its value. As tariffs do, dollar devaluation also confronts American consumers with higher prices and lower real incomes.
The difference is that a tariff would have prevented the loss of jobs, careers and community tax base to offshoring, which then requires a collapse in the dollar to reverse. The cost of not having the tariff protection is the disrupted lives and hardships associated with jobs offshoring and the loss in purchasing power from a lower valued currency.
Economists cannot understand this straightforward analysis because economists, like neoconservatives, are not reality-based. Economists are governed by the illusion that America’s post-World War II prosperity is based on free trade. It is not. America’s postwar prosperity was based on the destruction of the economic capability of the rest of the world by World War II and communism-socialism. America was prosperous in its trade because no one else could produce anything.
COPYRIGHT 2007 CREATORS SYNDICATE INC.
[Subscribe online to Chronicles: A Magazine of American Culture. Click here for details].
1 Comment by C Bowen on 6 June 2007:
Mr. Roberts has it backwards.
A floundering fiat dollar has the effect of a tariff (imports more expensive, exports “cheaper”) and it doesn’t achieve the desired result, by the author’s admission. Pre-Federal Reserve, pre-Big Government, yes, there were tariffs and the country prospered in spite of them, but I am of the opinion that these were simply rewards to Fat Cats and I am pretty sure a root cause of the Unpleasantness.
Secondly, tariff policy tilted the power to Industry-Capital who did what Industry-Capital will almost always do, seek cheap labor. It took Boston Bluebloods, the aristocracy, to end that arrangement, thank you Cal Coolidge.
Paleocons of the “protectionist” mindset are much more convincing appealing to the uniqueness of manufacturing jobs for a male workforce, the capital investments and longterm planning needed, that in turn provide a labor stability that promotes families etc, but it will always swing back to Fiat Money and Big Government as the starting point to undoing this mess.
2 Comment by Thomas Miller on 6 June 2007:
“Pre-Federal Reserve, pre-Big Government, yes, there were tariffs and the country prospered in spite of them, but I am of the opinion that these were simply rewards to Fat Cats and I am pretty sure a root cause of the Unpleasantness.”
Sorry, Mr. Bowen, but I have to take exception with that. The half century between the Civil War and World War 1 was the period of greatest economic development in the United States. We went from being a largely agricultural economy, ruined by the Civil War, to the world’s greatest economic power in that time. And that was the era of the bad ol’ tariff. Contrast America’s economic performance with Britain’s at that time, which adopted Gladstone’s trade liberalism, and whose once world-beating manufacturing base was so decimated by protectionist rivals (including the U.S.) that consequently the U.K. was unable to muster the productive resources to adequately defend herself during the Grat War, emerging from it a second-rate economy.
“Secondly, tariff policy tilted the power to Industry-Capital who did what Industry-Capital will almost always do, seek cheap labor. It took Boston Bluebloods, the aristocracy, to end that arrangement, thank you Cal Coolidge.”
Well, we’ve had several decades of free trade now, and Industry-Capital is seeking cheap labor more aggressively than ever. Calvin Coolidge, by the way, was a staunch protectionist.
“it will always swing back to Fiat Money and Big Government as the starting point to undoing this mess.”
Reckless printing of money and government spending surely has contributed to much of our economic mess. Unfortunately, the fiat dollar is here to stay. The U.S. treasury doesn’t have enough gold left to return to a gold-backed currency (and wouldn’t even if the Clinton Administration hadn’t liquidated much of our gold reserves in the late ’90s to help reduce the budget defecit). We went off the gold standard the last time because the Treasury was running out of gold to be redeemed for dollars. Ron Paul is an honest man with alot of good economic ideas, but a return to the gold standard just ain’t gonnna happen.
3 Comment by jack bailey on 6 June 2007:
It is amazing how briliant PCR can be on this topic and so wrong in his foreign policy tirades. To add to the discussion, I think that yes weak dollar is a form of a tarriff without some of the tarriff’s fiscal properties, that could be used to target particular offenders more than others. That being a minor point a much bigger issue is the dollar as a reserve currency. While I am not up on the most recent thinking on the role of reserve currency, so I may be wrong here, it has been proposed a while ago that the reserve currency in fact bankrupts its host eventually. This has happened to Great Britain and it is happening to the dollar now. The process is seemingly irreversible and can only be resolved with a new financial order in which Euro would be the obvious but most unlikely choice to take the dollar’s role. All the overseas dollars in the meantime, have been losing its value. In other words, it’s a game ready for speculators of all stripes to try to weasel their overnight fortune in.
4 Comment by C Bowen on 7 June 2007:
Mr. Miller;
I suppose I get lost in the story-telling of the protectionist folks in exactly what sort of Republic they want. That period you speak of also saw the great importation of the unwashed Southern and Eastern Euros who brought their traditions with them, congregated in the Eastern Seaboard urban districts and served as fodder for Imperial Wars yet to come as well as voting blocks.
I have no desire for the Republic to be Great (average is fine), be a Great Power, or to be a Shining City on a Hill. None of that interests me, though if I was a hard nationalists, and I did want to be a Great Power capable of projecting power and colonial projects, a tariff policy that united industrial (and in the case of Dole, agricultural) profits to the government (as we see with the wonderful Big Oil scenario in the present) would seem like a logical program for control, but I would not be so dishonest to argue that it was in the interest of the proletariat, let alone native Old Stock Americana middle class.
Back to Great Britain, would it have been so horrible if they had leaders prior to both wars who acted in the interests of their peoples and pursued peace rather than lie to their peoples (enter Strauss) and bankrupt the nation to pursue ancient traditions and prejudices of staving off a Continental Rival (France-Germany, the Iran-Iraq of another time) and paying for an Empire?
In our own time, does it do you or me any good to be a strong national power?
Let me state, I am all for abolishing the income tax and running the country on ‘blanket’ port collected tariffs, rather than special interests tariffs. I’d even extend it to the States if that nasty Constitution hadn’t replaced my beloved Articles, so that native brewing, and native farming would have a leg-up on St.Louis swill makers using state roads, but I don’t argue from a nationalist or economic perspective, rather an aesthetic perspective.
5 Comment by Lee on 7 June 2007:
There is a reason why moden Economics is called the dismal science. We have a real problem when so much of what we (public citizens) consume (electronic distractions/entertainment), clothing, food, energy, automotive (including parts), while we (frantically) push paper around and manufacture weapons of mass destruction. We will soon be in the position of demanding that foreigners subsidize the high tech life support (our largest growth sector after homeland security) that our now-for-decades-undersnourished, but overfed, and under exercised senior citizens have been programmed to demand. And when the foreigners refuse, we will be bullying them with our oversupply of weapons of mass destruction. Truly, this thing will resolve itself, but it doesn’t have the look of paradise.
6 Comment by Thomas Miller on 7 June 2007:
Mr Bowen:
It’s true, it doesn’t pay to be a great military power. Better to concentrate on merely being a great economic power like modern Japan, which is still protectionist on trade and severely restrictionist on immigration policy, and where the hourly wages are reportedly 20% higher than in the U.S., with far less wealth concentrated at the top.
As far as special interest tariffs are concerned, I’d be satisfied with an across-the-board Value Added Tax applied to all imports, accompanied by tax rebates on all exports, as has been advocated by some of our few realistic economists and is the policy of most of our major trade rivals.
But please don’t try to imply that tariffs represented some kind of betrayal of the vision for our Republic held by the Founding Fathers. The constitution explicitly allows for the imposition of tariffs, and trade protection was what Alexander Hamilton successfuly argued should be America’s policy from the early days of our country.
7 Comment by C Bowen on 7 June 2007:
Mr. Miller;
I think my note on the Constitutional betrayal (the coup over the Articles) hints that I would find less than pure motives on behalf of the nationalist aspirations of the Constitution generation. (I have two pictures of George Washington in my house so don’t take it the wrong way.) As a rule, we should always do the opposite of Hamilton, but putting that aside, I certainly agree that trade protectionism was popular, not for the interests of the proletariat, however, but the interest of the elite’s aspirations. Though invoking Hamilton does give me a glimpse at what story (a nationalist story) you wish to tell. Why dress it up under the interests of the working man who is consuming not only the cheap imports (let alone suspect domestic products) but financing at first glance a middle class lifestyle, but in reality, masking lower class habits with material items?
8 Comment by mike on 29 June 2007:
Anti-tariff free-marketeers always trot out the line that the US, Germany and Japan, were industrially successful inspite of tariffs, while protectionists argue that they were successful because of tariffs. However, perhaps both these theories are incorrect. Maybe the US would have been quite strong in manufacturing without tariffs, but introducing tariffs made the US even stronger in manufacturing (ditto Japan after WW2).
Perhaps the secret with tariffs is using them to protect industries which are already strong, or getting strong, to ram home the advantage further.
Therefore, maybe the challange for the US is to identify export sectors where it is currently strong and aim to maximise its share of these sectors.
ie, sectors like, aircraft manufacturing, farm machinery, computer software, etc
I guess the problem for most western countries is that they now have few competitve sectors left.
9 Trackback by Andrea Bowen on 30 October 2007:
Andrea Bowen…
…