February 15, 2006

Their Own Economic Reality

By Paul Craig Roberts

Who can forget the neocons’ claim that under their leadership America creates its own reality?

Remember the neocons’ Iraq reality—a "cakewalk" war? After three years of combat, thousands of casualties, and cost estimated at over $1 trillion, real reality must still compete with the White House spin machine.

One might think that the Iraq experience would restore sober judgment to policymakers. Alas, neocon reality has spread everywhere. It has infected the media and the new Federal Reserve Chairman, Ben Bernanke, who just gave Congress an upbeat report on the economy. The robust economy, he declared, could soon lead to inflation and higher interest rates.

Consumers deeper in debt and fresh from their first negative savings rate since the Great Depression show high consumer confidence. It is as if the entire country is on an acid trip or a cocaine trip or whatever it is that lets people create realities for themselves that bear no relation to real reality.

How can the upbeat views be reconciled with the Bureau of Labor Statistics’ payroll jobs data, the extraordinary red ink, and exploding trade deficit?

Perhaps the answer is that every economic development, no matter how detrimental, is spun as if it were good news. For example, the worsening US trade deficit is spun as evidence of the fast growth of the US economy: the economy is growing so fast it can’t meet its needs and must rely on imports. Declining household income is spun as an inflation fighter that keeps mortgage interest rates low. Federal budget deficits are spun as letting taxpayers keep and spend more of their own money. Massive layoffs are spun as evidence that change is so rapid that the work force must constantly upgrade skills and re-educate itself.

The denial of economic reality has become an art form. Except for Lou Dobbs, no accurate economic reporting is available in the "mainstream media."

Occasionally, real information escapes the spin machine. The National Association of Manufacturers, one of outsourcing’s greatest boosters, has just released a report, "US Manufacturing Innovation at Risk,"[PDF] by economists Joel Popkin and Kathryn Kobe. The economists find that US industry’s investment in research and development is not languishing after all. It just appears to be languishing, because it is rapidly being shifted overseas: "Funds provided for foreign- performed R&D have grown by almost 73 percent between 1999 and 2003, with a 36 percent increase in the number of firms funding foreign R&D."

US industry is still investing in R&D after all; it is just not hiring Americans to do the R&D.

US manufacturers still make things, only less and less in America with American labor.

US manufacturers still hire engineers, only they are foreign ones, not American ones.

In other words, everything is fine for US manufacturers. It is just their former American work force that is in the doldrums.

As these Americans happen to be customers for US manufacturers, US brand names will gradually lose their US market. US household median income has fallen for the past five years. Consumer demand has been kept alive by consumers’ spending their savings and home equity and going deeper into debt. It is not possible for debt to forever rise faster than income.

When manufacturing moves abroad, engineering follows. R&D follows engineering, and innovation follows R&D. The entire economy drains away. This is why the "new economy" has not materialized to take the place of the lost "old economy."

The latest technologies go into the newest plants, and those plants are abroad. Innovations take place in new plants as new processes are developed to optimize the efficiency of the new technologies. The skills required to operate new processes call forth investment in education and training. As US manufacturing and R&D move abroad, Indian and Chinese engineering enrollments rise, and US enrollments decline.

The process is a unified whole. It is not possible for a country to lose parts of the process and hold on to other parts. That is why the "new economy" was a hoax from the beginning. As Popkin and Kobe note, new technologies, new manufacturing processes, and new designs take place where things are made. The notion that the US can lose everything else but hold on to innovation is absurd.

Someone needs to tell Congress before they waste yet more borrowed money. In an adjoining column to the NAM report on innovation, the February 6 Manufacturing & Technology News reports that "the US Senate is jumping on board the competitiveness issue." The Bush regime and the doormat Congress have come together in the belief that the US can keep its edge in science and technology if the federal government spends $9 billion a year to "fund innovative, big-payoff ideas that have the potential to transform the US economy."

The utter stupidity of the "Protecting America’s Competitive Edge Act" (PACE) is obvious. The tremendous labor cost advantage of doing things abroad will equally apply to any new "big-payoff ideas" as it does to the goods and services currently outsourced. Moreover, US research is open-sourced. It is available to anyone. As the Cox Commission Report made clear, there are a large number of Chinese front companies in the US for the sole purpose of collecting technology. PACE will simply be another US taxpayer subsidy to the rising Asian economies.

The assertion that we hear every day that America is falling behind because it doesn’t produce enough science, mathematics and engineering graduates is a bald-faced lie. The problem is always brought back to education failures in K-12, that is, to more education subsidies. When CEOs say they can’t find American engineers, they mean they cannot find Americans who will work for Chinese or Indian wages. That is what the so-called "shortage" is all about.

I receive a constant stream of emails from unemployed and underemployed engineers with many years of experience and advanced degrees. Many have been out of work for years. They describe the movement of their jobs offshore or their replacement by foreigners brought in on work visas. Many no longer even know American engineers who are employed in the profession. Some are now working in sawmills, others in Home Depot, and others are attempting to eke out a living as consultants. Many describe lost homes, broken marriages, even imprisonment for inability to make child support payments.

Many ask me how economists can be so blind to reality. Here is my answer: Many economists are bought and paid for by outsourcers. Most of the studies claiming to prove that Americans benefit from outsourcing are done by economic consulting firms hired by outsourcers. Or they are done by think tanks or university professors dependent on corporate donors. Or they reflect the ideology of "free market economists" who are committed to the belief that "freedom" is good and always produces good results. Since outsourcing is merely the freedom of property to act in its interest, and since this self-interest is always guided by an invisible hand to the greater welfare of everyone, outsourcing, ipso facto, is good for America. Anyone who doesn’t think so is a fascist who wants to take away the rights of property.

Seriously, this is what passes for analysis among "free market economists."

Economists’ commitment to their "reality" is destroying the ladders of upward mobility that made America the land of opportunity. It is just as destructive as the neocons’ commitment to their "reality" that is driving the US deeper into war in the Middle East.

Fact and analysis no longer play a role. The spun reality in which Americans live is insulated against intelligent perception.

American "manufacturers" are becoming merely marketers of foreign made goods. The CEOs and shareholders have too short a time horizon to understand that once foreigners control the manufacture-design- innovation process, they will bypass American brand names. US companies will simply cease to exist.

Norm Augustine, former CEO of Lockheed Martin, says that even McDonald jobs are no longer safe. Why pay an error-prone order-taker the minimum wage when McDonald can have the order transmitted via satellite to a central location and from there to the person preparing the order. McDonald’s experiment with this system to date has cut its error rate by 50% and increased its throughput by 20 percent. Technology lets the orders be taken in India or China at costs below the minimum wage and without the liabilities of US employees.

Americans are giving up their civil liberties because they fear terrorist attacks. All of the terrorists in the world cannot do America the damage it has already suffered from offshore outsourcing.

COPYRIGHT CREATORS SYNDICATE, INC.