INVESTOR'S BUSINESS DAILY
Friday, August 30, 2002
The Bush administration would benefit from giving a little more thought to the economy and a little less to Iraq.
Concerns already existed over the economy having 116,000 fewer jobs as of July than eight months ago, when the recovery supposedly began. Now there might be indications that the economy softened in mid-July and has been contracting for the past four weeks.
Continuing job losses well into a recovery marked the 1991 recovery. This phenomenon suggests that profits are recovering less quickly. Globalism and the demise of socialism are part of the explanation.
For decades U.S. producers were protected from competition by world socialism. But with privatizations in the U.K. and France in the 1980s, the demise of the Soviet empire, reforms in Latin America and China's "capitalist road," globalism has brought increased pressure on U.S.-generated profits. Many U.S. multinationals owe the bulk of their profits to their foreign operations.
An economy's success is dependent on its ability to produce per capita income growth. Per capita income growth in the U.S. is under attack from two factors: The U.S. exports high-productivity jobs and imports low-productivity people.
The advent of globalism means that capital and technology are mobile. Mobile capital and management seek low-cost skilled labor, and have found it in China. A long list of American high-tech companies have relocated manufacturing, engineering, research and development jobs to China.
The export of high-productivity jobs means that foreign nationals abroad earn the incomes from producing goods sold by U.S. companies in U.S. markets. Policy-makers and trade enthusiasts assume that this is a rosy development, because it means lower prices for consumers and holds down inflation. They ignore the other side of the equation: lower growth in per capita incomes from the loss of high-productivity jobs.
Simultaneously, the U.S. imports millions of poor non-English-speaking immigrants each year. These immigrants hold down per capita income growth in the retail, construction and low-tech sectors of the economy.
Consumer Demand Lives
By encouraging the export of high-paying jobs and the import of poor people, policy-makers have eroded long-term growth in U.S. per capita incomes. The consumer sector accounts for two-thirds of the economy and is deeply in debt. How can there be a strong recovery?
Low interest rates have kept consumer demand alive through mortgage refinancing, which frees money for household spending. When this one-time boost plays out, what will drive consumer demand?
More consumer debt requires a rise in stock prices and household wealth. Business investment requires profits and consumer demand. With U.S. multinationals improving their bottom lines by chasing lowest-factor cost abroad, the incomes needed to drive the U.S. economy are not being generated in America.
The export of jobs is rationalized as "free trade." But no trade is involved in the export of U.S. jobs. Chinese firms sell the U.S. goods made with Chinese labor, and U.S. firms sell U.S. goods made with Chinese labor. The U.S. capital and technology that employ Chinese labor are relocated to China by U.S. firms, not exported to China.
Trade enthusiasts stress that every $1 billion in U.S. manufactured exports means 10,000 U.S. jobs. Last year the U.S. exported $640 billion in manufactured goods - thus the claim that the U.S. is dependent on trade for 6.4 million jobs.
Trade enthusiasts neglect the other side of their rule of thumb. Last year the U.S. imported $951 billion in manufactured goods - a loss of 9.5 million jobs. The net effect of trade in manufactured goods is a loss of 3.1 million U.S. jobs.
In 2002, the U.S. trade deficit in manufactured goods is running at a $350 billion annual rate, which translates into an increase in manufacturing job loss of 400,000.
The income growth needed to drive the U.S. economy cannot come from exporting manufacturing jobs and replacing the jobs with retail clerk jobs selling foreign-made goods.
Stock Market, Economy Split
The future could see a split of the stock market from the economy. U.S. multinationals can generate income on foreign operations, but the associated wage and salary incomes accrue to foreign nationals and do not flow through to Americans.
The U.S. has played its economic cards carelessly. The incomes to support the U.S. share of world consumption are no longer being generated in the U.S. Sooner or later this fact will reduce foreign capital flow to the U.S. and the value of the dollar. The redistribution of income that the Third World has been demanding from the First World is taking place as China gains American incomes.
• Paul Craig Roberts was assistant secretary of the Treasury for President Reagan.
August 30, 2002