New Economy: Was It All Hype?

Was the "new economy" merely hype designed to sell overpriced stocks and globalism? Many Americans think so. "Do something about it," their e-mail missives urge.

That so many Americans still believe that the pen retains its power in our corrupt society governed by organized interest groups indicates a refreshing lack of cynicism. But there is frustration, too, on the part of many Americans, who believe fellow citizens are impervious to the connection between globalism and declining job opportunities and income growth in the U.S. The following paragraph, which has made its way around the Internet, sums up the frustration:

Joe Smith started the day early having set his alarm clock (made in China) for 6 a.m. While his coffeepot (made in China) was perking, he shaved with his electric razor (made in Hong Kong). He put on a shirt (made in Sri Lanka), designer jeans (made in Singapore) and tennis shoes (made in Korea). After cooking his breakfast in his electric skillet (made in India), he sat down with his calculator (made in Mexico) to check his budget for the day. After setting his watch (made in Taiwan) to the radio (made in India) he got in his car (made in Japan) and continued his search for an AMERICAN job. At the end of yet another discouraging and fruitless day, Joe decided to relax. He put on his sandals (made in Brazil), poured himself a glass of wine (made in Chile), turned on his TV (made in Indonesia) and wondered why he cannot find a job in America. 

U.S. communities are losing manufacturing jobs. Americans who used to make things for a living now have part time jobs at Wal-Mart selling things made abroad. Taught not to worry by "new economy" reassurances, Americans have maintained their consumption by taking the equity out of their homes with refinancings. In the past five years mortgage debt has risen by 55 percent. Total personal debt now stands at 100 percent of personal income. The U.S. has made the transition from the accumulation of wealth to the consumption of wealth.

What is true for the individual in this case is also true for the country. Massive U.S. trade deficits are being financed by giving foreigners our assets. Every day we hand over to foreigners another billion dollars in Treasury bonds, corporate bonds, real estate, and corporate equities.

When we hand over our assets to pay for our consumption of manufactured goods, we also hand over the incomes that these assets produce. The interest incomes from Treasury and corporate bonds, the profits, dividends and capital gains from equity ownership, and the rents and capital gains from real estate pass from American hands to Chinese, Japanese, and other hands. Thus, Americans are not only losing the incomes associated with the production of the goods they consume, but also the incomes from the assets that they no longer control.

When I attempt to discuss this issue with my fellow economists, they cite the case for free trade that Adam Smith made two and one-quarter centuries ago and accuse me of being in the pay of corporate protectionists who want to gouge consumers with high prices.

These responses tell me that free traders have ceased to think. First of all, there are no corporate protectionists. Corporations oppose protection, because tariffs and quotas would reduce or eliminate the gains to their bottom lines from their use of inexpensive foreign labor to manufacture goods for the American market. High- and low-tech U.S. firms are not moving to Asia because the U.S. government refuses to protect their American markets. They are moving their plants to Asia because they can drive up their earnings by hiring efficient Asian labor at a lower price per week than Americans demand per hour.

Second, Adam Smith directed his free trade argument against the belief that countries should be self-sufficient and produce all of their own needs. Smith said that incomes would be higher in every country if each specialized in areas where they were most capable and satisfied demands for other goods by trading.

Smith said that the British should not subsidize the production of wine and perfume with tariffs, but should concentrate where the British had advantage and trade with the French for wine and perfume. Smith did not say that British industry should relocate abroad and use cheap foreign labor to produce for their home markets.

For globalism to work, there needs to a single currency and a single tax system--a one world political system. Trade between countries is not like trade within a country. Trade between countries involves different currencies whose values change if there are persistent trade deficits or surpluses. A country that runs up a large trade imbalance due to its importation of cheap manufactured goods suddenly finds the goods are no longer cheap when the value of its currency declines. The companies that outsourced to benefit from cheap labor suddenly find their profits impacted when the currency in their home market devalues.  

For the U.S., globalism has meant outsourcing. U.S. manufacturers use Chinese labor to produce goods for the American market. American firms locate their clerical and backoffice operations in India, and so on. When these goods and services flow back into the U.S., they arrive as imports. The U.S. is not building up manufacturing sectors, agricultural sectors or service sectors capable of restoring balance between imports and exports.

There is nothing to bring the massive trade imbalance into balance except currency collapse. As fewer and fewer things are actually produced in the U.S., even dollar collapse cannot spur exports sufficiently to pay for our import dependence. The U.S. is being reduced to indebted third world status, a country that retails foreign made goods.

Recently I asked if the U.S. would be a third world country in 20 years. Many e-mails arrived from Americans saying that their communities had already been reduced to third world status by the loss of jobs and the arrival of third world refugees and immigrants. They said I was optimistic to believe that the U.S. had 20 years left as a superpower.

Who is right, the American people who are experiencing globalism and its effects or Washingtonians who hide behind theories while our country is sold?

Paul Craig Roberts is the 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 here for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

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