Losing the Economy to Mythology
By Paul Craig Roberts
06/04/07 "ICH" -- -- - 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 ascendency 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 US 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
spear-heading union- busting by firing the striking air
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 benefitted the rich more than others. The rich
have a lot of margin in their budgets. The poor have none.
US 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
Jobs offshoring is dismantling the ladders of upward mobility in
the US, 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 multi-million dollar CEO pay checks 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 US 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 US, 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 US 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 work force 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 US prospered under tariffs, as did the tax bases of cities
Considering the difficulty that both left and right experience
in thinking outside the box, I do not think 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 US 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 over-consumption to their
monetary reserves and use others to purchase US 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 US
corporations for US 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
US markets back to the US.
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 post-war 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.
Paul Craig Roberts wrote the Kemp-Roth bill and was Assistant
Secretary of the Treasury in the Reagan administration. He was
Associate Editor of the Wall Street Journal editorial page and
Contributing Editor of National Review. He is author or coauthor
of eight books, including The Supply-Side Revolution (Harvard
University Press). He has held numerous academic appointments,
including the William E. Simon Chair in Political Economy,
Center for Strategic and International Studies, Georgetown
University and Senior Research Fellow, Hoover Institution,
Stanford University. He has contributed to numerous scholarly
journals and testified before Congress on 30 occasions. He has
been awarded the U.S. Treasury's Meritorious Service Award and
the French Legion of Honor. He was a reviewer for the Journal of
Political Economy under editor Robert Mundell.
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