January 13, 2004

The Jobs Problem

By Paul Craig Roberts

The current economic recovery has not been good for employment. Despite 25 months of “recovery,” the economy has 2,944,000 fewer private sector jobs than in January 2001. American manufacturing has experienced the largest job loss, with 2,559,000 fewer jobs today than 35 months ago when President Bush took office.

These figures include the losses of the 2001 recession.

The really scary part of the story is that, far from recovering these job losses during the past 25 months of economic recovery, the economy has continued to lose jobs. During 25 months of recovery, the economy lost another 1,321,000 jobs in the manufacturing sector. A small gain in poorly paid areas of non-tradable services leaves a net loss of 907,000 private sector jobs during 25 months of economic recovery.

This is unprecedented poor performance, especially in the face of unprecedented expansionary monetary and fiscal policy. With interest rates near zero and 6-year interest-free auto loans, with fiscal policy expansionary, whether measured by tax cuts or the record size of the budget deficit, 25 months of economic recovery loses almost a million jobs? !!!

Much hope was attached to October’s “turnaround” job growth of 116,000 private sector jobs, even though about half were in lowly paid temporary help and retail and none were in high-value added tradable goods and services. This “turnaround” job growth number has now been revised down by 37,000 jobs. Revisions have reduced November’s paltry 50,000 gain (also in lowly paid service jobs) by 51 %.

December’s job gain is 1,000 jobs or practically speaking, zero. Obviously, US job growth is far from enough to absorb the monthly inflow of immigrants or the inflow of young people into the job market looking for their first jobs, much less to reduce the unemployment from the 2001 recession.

Some economic recovery it is.

Trying to put a good face on disaster, some claim that overtime has cut into employment growth, with businesses working existing workers longer in place of new hires. This argument is contradicted by the empirical evidence. During the past 25 months of recovery, total hours worked have declined by 1.7%, with manufacturing hours declining by 7.7%.

When pressed on the point, apologists for the recovery say that fewer people and hours are needed because of increased productivity.

There is another explanation, one much less reassuring: As a result of outsourcing, off shore production and Internet hires, the US recovery is creating jobs for foreigners, not for Americans.

Every day we read about another corporate giant replacing thousands of American jobs by moving operations to India, China or another foreign country where skills equal to those of Americans can be purchased at a fraction of US wages and salaries.

Economists, determined to keep their heads buried in the sand, dismiss report after report as “anecdotal evidence,” as if facts don’t count unless they are in an economist’s study.

Economists and policymakers continue to ignore—indeed, they are in outright denial—two fundamental changes that are disconnecting the US economy from US employment: the collapse of world socialism and the rise of the Internet.

Until the collapse of world socialism about 15 years ago, the international mobility of first world capital and technology was confined to the first world. This limit on capital mobility ensured that first world labor would have productivity advantages over much lower paid third world labor.

The new global mobility of capital and labor has stripped away the protection that high productivity gave first world wages. Indian and Chinese labor employed by first world capital and technology is just as productive as first world labor. Moreover, due to large excess supplies of labor in those labor markets, Asian labor can be hired for less than the value of labor’s contribution to output.

Capitalism works by finding the lowest cost. Thus, First World labor is being substituted out of First World production functions by outsourcing, off shore production and Internet hires.

The business press has been full of stories, example after example. When will policymakers notice?

When will economists notice? They will never notice as long as they believe they are witnessing the beneficial effects of free trade.

But are they? American economists seem to have forgot that free trade rests on a case. They have forgot the necessary conditions under which free trade produces mutual gains to the participant countries. They have not noticed that these conditions have been destroyed by the international mobility of factors of production.

The economic case for free trade rests on shared gains. Shared gains depend upon countries allocating within their borders factors of production to where they have comparative advantage. For there to be comparative advantage, factors of production cannot be as mobile as traded goods.

Today factors of production are as mobile as traded goods, indeed more mobile. Capital, technology, and ideas can move with the speed of light, as can Internet labor, whereas goods must be shipped.

What we are witnessing is not trade patterns based on the flow of First World factors of production to comparative advantage within their own countries, but the flow abroad of First World factors of production to where absolute advantage is greatest. The productivity of capital is highest where labor is most abundant.

The flow of factors of production to absolute, in place of comparative, advantage vitiates the economic case for free trade. What we are witnessing is the redistribution of First World income and wealth to developing countries blessed with excess supplies of labor.

If the US is to remain committed to free trade, we must give thought to figuring out how to recreate the conditions under which free trade produces mutual gains to the participating countries.

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