February 23, 2008

Can He Deliver?

Obama and Global Trade

By Paul Craig Roberts 

CounterPunch, February 21, 2008

Unique among the contenders for the presidential nominations, Barack Obama has raised the issue of US job loss from US corporations moving operations abroad in order to lower their labor costs and, thereby, boost profits. As reported by the Financial Times, Obama proposed a lower tax rate for US companies that maintain or increase their US workforce relative to their overseas workforce. [Obama seeks Ohio’s blue-collar vote, By Edward Luce, February 19 2008]

Economists, who have crawled out on a limb in defense of jobs offshoring, quickly denounced Obama's plan. As the US economy continues to lose relative ground, economists hold more tightly to their misconception that a country benefits by moving high value-added, high income jobs abroad and replacing them at home with low value- added, low income jobs. This view, which places the rights of capital far above the rights of labor and the duties of citizenship, is economically nonsensical as well. Whatever the defects of Obama's plan, it shows more serious thought than can be found among Washington policymakers and the economics profession.

Obama's concern is shared by Ralph Gomory, one of America's most distinguished mathematicians and co-author with William Baumol, past president of the American Economics Association, of the most important book on trade theory in 200 years, Global Trade and Conflicting National Interests. Gomory has pointed out that corporations break the link between their interests and America's interest when they offshore their production for US markets. By producing abroad, they raise foreign GDP and lower US GDP. By producing abroad, they raise the productivity of foreign labor and lower the productivity of US labor. By producing abroad, they increase the productivity capabilities and trade position of other countries at America's expense.

What can be done? Gomory suggests that one solution would be to replace the US corporate income tax with a tax based on the value-added of a corporation's US employees. The higher the value-added of a corporation's US work force compared to its industry, the lower the tax rate. Such a tax system would encourage corporations to keep high productivity, high-value added jobs in the US and to increase them.

The aim would be to set the tax to counteract the advantage to the corporations of producing with less expensive labor abroad. Large under-utilized labor forces in China and India permit US corporations to hire abundant labor at wages substantially less than the workers' contributions to profits, resulting in a shift of high value-added jobs abroad. Gomory's scheme would provide an incentive for corporations to increase the value- added component from the US work force instead of capitalizing on cheap foreign labor.

Gomory's idea deserves thought. In the meantime, we are faced with pressures from a massive trade deficit that cannot be closed as long as US corporations are moving their production offshore. Offshored products for US markets reenter the US as imports, thus widening the trade deficit, already a world record. The continual widening of the trade deficit will eventually erode away the dollar's value and its role as world reserve currency. Currently we are covering our trade deficit by giving up the ownership of our existing assets.

Another smart man, Warren Buffett, has proposed a way to bring US trade into balance. Exporters would be awarded import certificates in the dollar value of their exports. The certificates would be sold in a market to importers, who could import goods in the dollar amount of the certificates. This way imports cannot exceed exports. Moreover, as the certificates would be profit to exporters, it encourages more exports. Free trade theory never intended for economies to be in permanent trade disequilibrium. The US experience of a worsening disequilibrium over a quarter century is outside the bounds of trade theory.

The US has serious economic problems and cannot afford to continue to pile up debts and to sell off its assets to pay its bills. David Walker, head of the US Government Accountability Office, has put the unfunded liabilities of the US government (principally Social Security and Medicare benefits) at between $50 and $60 trillion. Official statistics show no growth in real median family incomes in many years. The dollar's value has declined dramatically in relation to other traded currencies. The United States simply cannot afford to stand by blindly while its corporations shift US GDP growth to China, India, and elsewhere abroad.

The unfunded liabilities of the US government amount to $500,000 per American household. As no more than one or two percent of American households can come up with this kind of cash, the US government is essentially bankrupt. The bankruptcy will worsen as offshoring moves more US GDP abroad while simultaneously raising the trade deficit and indebtedness of the country.

American hubris produces gigantic delusion not only among the people and the politicians but also among the economists. President Obama and his Secretary of the Treasury, Ralph Gomery, are our last best hopes.