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Offshoring Interests and Economic Dogmas Are Destroying the US
Dollar
By Paul Craig Roberts
12/13/07 "ICH"
-- -- On
December 8, Chinese and French news services reported that
Iran had stopped billing its oil exports in dollars.
Americans might never hear this news as the independence of the
US media was destroyed in the 1990s when Rupert Murdoch
persuaded the Clinton administration and the quislings in
Congress to allow the US media to be monopolized by a few
mega-corporations.
Iran’s oil minister, Gholam Hossein Nozari, declared: “The
dollar is an unreliable currency in regards to its devaluation
and the loss oil exporters have endured from this trend.” Iran
has proposed to OPEC that the US dollar no longer be used by any
oil exporting countries. As the oil emirates and the Saudis have
already decided to reduce their holdings of US dollars, the US
might actually find itself having to pay for its energy imports
in euros or yen.
Venezuela’s Chavez, survivor of a US-led coup against him and a
likely target of a US assassination attempt, might follow the
Iranian lead. Also, Russia’s Putin, who is fed up with the US
government’s efforts to encircle Russia militarily, will be
tempted to add Russia’s oil exports to the symbolic assault on
the dollar.
The assault is symbolic, because the dollar is not the reserve
currency due to oil exports being billed in dollars. It’s the
other way around. Oil exports are billed in dollars, because the
dollar is the reserve currency.
What is important to the dollar’s value and its role as reserve
currency is whether foreigners continue to consider
dollar-denominated assets sufficiently attractive to absorb the
constant flow of red ink from US trade and budget deficits. If
Iran and other countries do not want dollars, they can exchange
them for other currencies regardless of the currency in which
oil is billed.
Indeed, the evidence is that foreigners are not finding
dollar-denominated assets sufficiently attractive. The dollar
has declined dramatically during the Bush regime regardless of
the fact that oil is billed in dollars. Iran is dropping
dollars in response to the dollar’s loss of value. This is a
market response to a depreciating currency, not a punitive
action by Iran to sink the dollar.
Oil bills are only a small part of the problem. Oil minister
Nozari’s statement about the loss suffered by oil exporters
applies to all exporters of all products.
A quarter century ago US oil imports accounted for the US trade
deficit. The concerns expressed over the years about “energy
dependence” accustomed Americans to think of trade problems only
in terms of oil. The desire to gain “energy independence” has
led to such foolish policies as subsidies for ethanol, the main
effect of which is to drive up food prices and further ravage
the poor.
Today oil imports comprise a small part of the US trade deficit.
During the decades when Americans were fixated on “the energy
deficit,” the US became three to four times more dependent on
foreign made manufactures. America’s trade deficit in
manufactured goods, including advanced technology products,
dwarfs the US energy deficit.
For example, the US trade deficit with China is more than twice
the size of the US trade deficit with OPEC. The US deficit with
Japan is about the size of the US deficit with OPEC. With an
overall US trade deficit of more than $800 billion, the deficit
with OPEC only comprises one-eighth.
If abandonment of the dollar by oil exporters is not the cause
of the dollar’s woes, what is?
There are two reasons for the dollar’s demise. One is the
practice of American corporations offshoring their production
for US consumers. When US corporations move to foreign
countries their production of goods and services for American
consumers, they convert US Gross Domestic Product (GDP) into
imports. US production declines, US jobs and skill pools are
destroyed, and the trade deficit increases. Foreign GDP,
employment, and exports rise.
US corporations that offshore their production for US markets
account for a larger share of the US trade deficit than does the
OPEC energy deficit. Half or more of the US trade deficit with
China consists of the offshored production of US firms. In 2006,
the US trade deficit with China was $233 billion, half of which
is $116.5 billion or $10 billion more than the US deficit with
OPEC.
The other reason for the dollar’s demise is the ignorance and
nonchalance of “libertarian free market free trade economists”
about offshoring and the trade deficit.
There is a great deal to be said in behalf of free markets and
free trade. However, for many economists free trade has become
an ideology, and they have ceased to think.
Such economists have become insouciant shills for the offshoring
interests that fund their research and institutes. Their
interests are tied together with those of the offshoring
corporations.
Free trade economists have made three massive errors: (1) they
confuse labor arbitrage across international borders with free
trade when nothing in fact is being traded, (2) they have forgot
the two necessary conditions in order for the classic theory of
free trade, which rests on the principle of comparative
advantage, to be valid, and (3) they are ignorant of the latest
work in trade theory, which shows that free trade theory was
never correct even when the conditions on which it is based were
prevalent.
When a US firm moves its output abroad, the firm is arbitraging
labor (and taxes, regulation, etc.) across international borders
in pursuit of absolute advantage, not in pursuit of comparative
advantage at home. When the US firm brings its offshored goods
and services to the US to be marketed, those goods and services
count as imports.
David Ricardo based comparative advantage on two necessary
conditions: One is that a country’s capital seek comparative
advantage at home and not seek absolute advantage abroad. The
other is that countries have different relative cost ratios of
producing tradable goods. Under the Ricardian conditions,
offshoring is prohibited.
Today capital is as internationally mobile as traded goods, and
knowledge-based production functions have the same relative cost
ratios regardless of the country of location. The famous
Ricardian conditions for free trade are not present in today’s
world.
In the most important development in trade theory in 200 years,
the distinguished mathematician Ralph Gomory and the
distinguished economist and former president of the American
Economics Association, William Baumol, have shown that the case
for free trade was invalid even when the Ricardian conditions
were present in the world. Their book, Global Trade and
Conflicting National Interests, first presented as lectures
at the London School of Economics, was published in 2000 by MIT
Press.
While free trade economists hold on to their
doctrine-turned-ideology, the US dollar and the American economy
are dying.
One of the great lies of the offshoring interests is that US
manufacturing is in trouble because of poor US education and a
shortage of US scientists and engineers. Pundits such as Thomas
Friedman have helped to spread this ignorance until it has
become a dogma. Recently, General Electric CEO Jeffrey Immelt
lent his weight to this falsehood. (See “The US No Longer Drives
Global Economic Growth,” Manufacturing & Technology News,
Nov. 30, 2007.)
The fact of the matter is that the offshoring of US engineering
and R&D jobs and the importation of foreign engineers and
scientists on work visas have combined with educational
subsidies to produce a surplus of American scientists and
engineers, many of whom are unable to find jobs when they
graduate from university or become casualties of offshoring and
H-1b visas.
Corporate interests continue to lobby Congress for more foreign
workers, claiming a non-existent shortage of trained Americans,
even as the Commission on Professionals in Science and
Technology concludes that real salary growth for American
scientists and engineers has been flat or declining for the past
10 years. The “long trend of strong US demand for scientific and
technical specialists” has come to an end with no signs of
revival. (See “Job and Income Growth for Scientists and
Engineers Comes to an End,” Manufacturing & Technology News,
November 30, 2007.)
What economist has ever heard of a labor shortage resulting in
flat or declining pay?
There is no more of a shortage of US scientists and engineers
than there were weapons of mass destruction in Iraq. The US
media has no investigative capability and serves up the lies
that serve short-term corporate and political interests. If it
were not for the Internet that provides Americans with access to
foreign news sources, Americans would live in a world of perfect
disinformation.
Offshoring interests and economic dogmas have combined to create
a false picture of America’s economic position. While the
ladders of upward mobility are being dismantled, Americans are
being told that they have never had it better.
Dr. Roberts was Assistant
Secretary of the US Treasury for Economic Policy in the Reagan
administration. He is credited with curing stagflation and
eliminating “Phillips curve” trade-offs between employment and
inflation, an achievement now on the verge of being lost by the
worst economic mismanagement in US history.
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