Importing People, Exporting Jobs
Recent economic reports indicate
that the recovery is struggling to move forward. The
main barriers are high consumer indebtedness and
mediocre corporate earnings. Consequently, neither
consumer demand nor business investment is driving the
Interest rates are low, but Federal
Reserve easing has not provided the usual stimulus to
spending and equity prices. Part of the problem is the
reverse wealth effect from the drop in equity values.
The wealth effect from the long
bull market made consumers comfortable with more debt,
which they used to finance second homes and high living.
When the market dropped, much wealth disappeared, but
the debt remained.
Companies, too, made acquisitions
that they could not sustain when the boom ended.
The stock market decline made the
year 2000 a bad one for taxpayers. Managers of mutual
funds and investment partnerships, alert to a market
decline, realized capital gains early that year.
Unfair U.S. tax laws required these gains to be
apportioned to fund owners and taxed as capital gains
even though the total value of the funds declined
dramatically by the end of the year.
Taxpayers were forced to pay huge
tax bills on these phantom gains, thus depleting their
cash just as they were suffering large markdowns in
their asset values.
Federal regulators stupidly
contributed to the economy`s debt woes by
blocking mergers that were designed to provide a
national broadband network, thus frustrating the
business plans and causing the failure of many dotcom
Considering the damage that
government does to our economy, it is amazing that
people look to government for solutions.
More trouble is brewing. The dollar
is weakening and could be headed for
a long slide. Strong foreign demand for U.S. assets
kept up the dollar`s exchange value despite massive U.S.
trade deficits. Since 1994 foreign ownership of U.S.
assets increased sharply as foreigners used the dollars
we paid for their goods to purchase U.S. government and
corporate bonds, stocks, and companies.
According to Bridgewater
Associates, foreigners now own 48% of the U.S. Treasury
bond market, 24% of corporate bonds, and 22% of U.S.
corporations. Altogether foreigners own $8 trillion of
our assets, a sum almost equal to a year`s output of our
Foreigners are now “overweight the
dollar.” This means that they view their investments as
too skewed toward the U.S. If foreign willingness to
hold dollars declines relative to our trade deficit, the
dollar will fall in value.
A fall in the dollar has bad and
good effects. Import prices will rise, driving up
inflation measures and, perhaps, confusing the Federal
Reserve about policy.
Rising import prices will hurt the
consumer, already burdened with debt, stagnant wage and
salary income, and falling investment income due to low
interest rates and poor equity performance.
On the other hand, reported
earnings of U.S. multinational corporations will rise as
their foreign earnings will be worth more in dollars.
This effect could give a boost to the stock market.
The growth of American incomes is
being held down by two other factors, which are not
receiving enough attention. There are fewer well-paying
jobs as U.S. firms shift operations abroad.
Simultaneously, a massive inflow of
poor immigrants into the U.S. is holding down
Increasingly, CEO`s are compensated
according to their company`s earnings and stock price.
This bottom line pressure causes management to move as
many operations abroad as possible in order to take
advantage of low cost labor.
When this process first began, many
economists dismissed it as merely the lost of low
productivity jobs that the U.S. didn`t want anyway.
However, the U.S. taxpayer has helped to educate so many
Chinese and Indians that well-paying jobs once held by
U.S. engineers and research scientists have
left the country, taking the incomes with them.
The U.S. has become a country that
imports poor people and exports jobs that provide upward
It is a mistake to see the loss of jobs and income as the
workings of free trade. The downward pressure on incomes does
not result from an exchange of goods. Something
different is occurring. Middle class incomes are being
traded away in order to gain
larger bonuses for
top management, and politicians
are pandering to the immigrant vote at the
expense of lower income native born citizens.
The longer this process continues,
the more explosive it becomes, both socially and
Paul Craig Roberts is the author of
The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name