Losing the Economy to Mythology

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 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 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.

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 visas.

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
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 and states.

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

] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.