Tuesday, May 09, 2006

Life in the Bush Economy

I keep reading about the "health" of the U.S. economy and wonder if the authors are living in the same world as I am. Of course, the "economists" at the big banks and investment firms are well paid for their work, and I am not well paid for mine, so that creates a difference in perspective. However, I note that these well paid shills for the "global economy" focus almost exclusively on the GDP which, so they say, grew at 4-point-something percent during the first quarter of 2006. Or they may focus on the stock market, which is something like 150 points away from a new record high. Which raises the question: who owns and controls the stock market? Not the ordinary man in the street, who probably does not own stock. The shill-economists do not focus on the totally uninteresting economic lives of ordinary people which do not support the reigning paradigm ("onward and upward forever" into globalization). So they will report that X number of jobs were created without also reporting that the vast majority are "service sector" flunky jobs that do not pay a living salary, or come with benefits unless the benefits are extracted from one's check, and they mostly ignore the lost jobs. "Creative destruction," I suppose, that infamous Schumpeterian construction. They will also report an inflation rate that is incorrect and an unemployment rate that is incorrect, as both leave out crucial data. The former leaves out rising energy costs; the latter, discouraged workers and those whose unemployment benefits have run out.

Life in the Bush Economy: Fat, Drunk and Broke
A Nation of Waitresses and Bartenders
By Paul Craig Roberts

05/08/06 -- The Bureau of Labor Statistics payroll jobs report released May 5 says the economy created 131,000 private sector jobs in April. Construction added 10,000 jobs, natural resources, mining and logging added 8,000 jobs, and manufacturing added 19,000. Despite this unusual gain, the economy has 10,000 fewer manufacturing jobs than a year ago.

Most of the April job gain --72%-- is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

During 2001 and 2002 the U.S. economy lost 2,298,000 jobs. These lost jobs were not regained until early in February 2005. From February 2005 through April 2006, the economy has gained 2,584 jobs (mainly in domestic services).

The total job gain for the 64 month period from January 2001 through April 2006 is 7,000,000 jobs less than the 9,600,000 jobs necessary to stay even with population growth during that period. The unemployment rate is low because millions of discouraged workers have dropped out of the work force and are not counted as unemployed.

In 2005 the U.S. had a current account deficit in excess of $800 billion. That means Americans consumed $800 billion more goods and services than they produced. A significant percentage of this figure is offshore production by U.S. companies for American markets.

The U.S. current account deficit as a percent of Gross Domestic Product is unprecedented. As more jobs and manufacturing are moved offshore, Americans become more dependent on foreign made goods. This year the deficit could reach $1 trillion.

The U.S. pays its current account deficit by giving up ownership of its existing assets or wealth. Foreigners don't simply hold the $800 billion in cash. They use it to acquire US equities, real estate, bonds, and entire companies.

The federal budget is also in the red to the tune of about $400 billion. As Americans have ceased to save, the federal government is dependent on foreigners to lend it the money to operate and to wage war in the Middle East.

American consumers are heavily indebted. The growth of consumer debt is what has been fueling the economy. Social Security and Medicare are in financial trouble, as are many company pension plans. Decide for yourself--is this the economic picture of a superpower that can dictate to the world, or is it the picture of a second-rate country dependent on foreigners to finance its consumption and the operation of its government?

No-think economists make rhetorical arguments that the decline of U.S. manufacturing employment reflects higher productivity from technological improvements and not a decline in U.S. manufacturing per se. George Mason University economist Walter Williams recently ridiculed the claim that U.S. manufacturing jobs are moving to China. Williams asks how the U.S. could be losing manufacturing jobs to China when the Chinese are losing jobs faster than the U.S.: "Since, 2000, China has lost 4.5 million manufacturing jobs, compared with the loss of 3.1 million in the U.S."

The 4.5 million figure comes from a Conference Board report that is misleading. The report that counts was written by Judith Banister under contract to the U.S. Department of Labor, Bureau of Labor Statistics, and published in November 2005 (www.bls.gov/fls/chinareport.pdf). Banister's report was peer reviewed both within the BLS and externally by persons with expert knowledge of China.

Chinese manufacturing employment has been growing strongly since the 1980s except for a short period in the late 1990s when layoffs resulted from the restructuring and privatization of inefficient state owned and collective owned factories. To equate temporary layoffs from a massive restructuring within manufacturing with U.S. long-term manufacturing job loss indicates extreme carelessness or incompetence.

Banister concludes: "In recent decades, China has become a manufacturing powerhouse. The country's official data showed 83 million manufacturing employees in 2002, but that figure is likely to be understated; the actual number was probably closer to 109 million. By contrast, in 2002, the Group of Seven (G7) major industrialized countries had a total of 53 million manufacturing workers."

The G7 is the U.S. and Europe. In contrast to China's 109,000,000 manufacturing workers, the U.S. has 14,000,000.

When I was Assistant Secretary of the Treasury in the Reagan administration, the U.S. did not have a trade deficit in manufactured goods. Today the U.S. has a $500 billion annual deficit in manufactured goods. If the U.S. is doing as well in manufacturing as no-think economists claim, where did an annual trade deficit in manufactured goods of one-half trillion dollars come from?

If the U.S. is the high-tech leader of the world, why does the U.S. have a trade deficit in advanced technology products with China?

There was a time when American economists were empirical and paid attention to facts. Today American economists are merely the handmaidens of offshore producers. Apparently, they follow President Bush's lead and do not read newspapers--thus, their ignorance of countless stories of U.S. manufacturers moving entire plants and many thousands of US engineering jobs to China.

Chinese firms, including state owned firms, have numerous reasons, tax and otherwise, to understate their employment. Banister's report gives the details.

Banister points out that the excess supply of labor in China is about five to six times the size of the total U.S. work force. As a result, there is no shortage of workers in China, nor will there be in the foreseeable future.

The huge excess supply of labor means extremely low Chinese wages. The average Chinese wage is $0.57 per hour, a mere 3% of the average U.S. manufacturing worker's wage. With first world technology, capital, and business knowhow crowding into China, virtually free Chinese labor is as productive as U.S. labor. This should make it obvious to anyone who claims to be an economist that offshore production of goods and services is an example of capital seeking absolute advantage in lowest factor cost, not a case of free trade based on comparative advantage.

American economists have failed their country as badly as have the Republican and Democratic parties. The sad fact is that there is no leader in sight capable of reversing the rapid decline of the United States of America.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: paulcraigroberts@yahoo.com

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