[OPE-L] "Resurrecting Karl Marx" by economist appointed by Ronald Reagan

From: glevy@PRATT.EDU
Date: Tue Sep 06 2005 - 07:37:34 EDT


Labor Day Edition
September 5, 2005

The Vicious Downward Cycle of the American Economy

Resurrecting Karl Marx


Libertarians and free trade economists don't realize it, but they are
pulling Marx out of his grave.

Free traders are resurrecting class war, not because they are
Marxists but because they confuse free trade with global labor
arbitrage. Free traders turn cold shoulders to US job losses from
offshore outsourcing, because they mistake the losses for the
beneficial workings of comparative advantage. Committed to a 200 year
old theory that they no longer understand, free traders are cheering
on the destruction of middle class jobs and the dismantling of the
ladders of upward mobility that make large income disparities
politically acceptable.

The destruction of the stabilizing middle class is occurring
simultaneously with an extraordinary increase in income inequalities.
Not so long ago CEOs were paid 20 times more than the average
employee; now some are paid hundreds of times more. The "gilded age"
is returning while the value of a college degree is declining.

According to the Bureau of Labor Statistics' 10-year jobs forecast,
the majority of US jobs that will be created in the coming decade
will be in domestic services that do not require a college education.
This is a strange job outlook for a high tech economy allegedly
benefitting from free trade. Domestic services are nontradable. The
US economy has not created a net new job in tradable goods and
services in the 21st century.

Free trade economists have forgotten that not all trade reflects the
beneficial workings of comparative advantage. For comparative
advantage to function, a country's capital must stay at home and be
allocated to activities in which the country has comparative
advantage. The other necessary condition is that countries have
different internal cost ratios of producing different goods.

When the principle of comparative advantage was discovered, capital
was mainly kept at home under the watchful eye of the owners and
protected by the country's laws. Tradable commodities were primarily
products influenced by climate and geography, guaranteeing that the
cost of a yard of wool in terms of a bottle of wine would vary among

Today capital is more mobile than tradable goods. Modern production
functions are based on acquired knowledge and produce identical
results regardless of location. When a US corporation closes a
factory in Ohio and relocates its production for US markets to China,
the loss of US jobs is not the result of a Chinese firm gaining a
comparative advantage over the Ohio one. It is the result of US
capital seeking absolute advantage in lower cost Chinese labor.

Free trade economists have completely forgotten that the flow of
resources to where they have absolute advantage does not result in
mutual benefit. The country that receives the resources gains and the
other country loses.

When capital and technology flow from the US to China and India, the
productivity of labor in China and India rises. In the US it falls.

Outsourcing is eliminating entire American occupations in engineering
and information technology. As there are fewer jobs for graduates,
engineering enrollments in the US are declining. Libertarians and
free traders are so emotionally enamored of the market that they have
forgotten that markets can as easily work against a country as for
it. In the US, markets are working to reduce the supply of American
engineers as US corporations lay off their American employees and
replace them with cheaper Chinese and Indians.

Product development, or research and development, follows
manufacturing. As US manufacturing moves offshore, so does R&D.

Innovation follows R&D, with the consequence that US science is also
in relative decline. In brief, the US is developing the labor force
characteristics of a third world country in which jobs are available
only in lower productivity, lower paid "hands on" domestic services.

For engineering and IT jobs that remain in the US, fewer are filled
by Americans. US firms have learned that they can pay foreigners on
H-1B and L-1 work visas lower salaries, force their American
employees to train their foreign replacements, and then discharge
their American workers. Consequently, there is double-digit
unemployment among American software engineers, IT professionals and
computer programmers.

As Lou Dobbs exposed recently on CNN, the US Department of Labor is
currently reserving some 52,000 high tech job openings in US firms
for H-1B visa holders. "Bodyshops" use the visas to bring in
foreigners who take Americans' jobs by undercutting their pay.

American firms advertise openings for H-1B visa holders only. No
Americans need apply. Gene Koprowski in TechNewsWorld (August 20)
reports that "in excess of 600,000 new visas have been granted during
the last five years. Thirty-nine percent of H-1B visas were for
workers in computer-related occupations."

In other words, 600,000 Americans lost the occupations in which they
have invested their human capital. You can be assured that these
600,000 did not move up to better jobs.

As bad as it is for the individuals, it is even more costly for the
country. The outsourcing of jobs and the importation of foreigners on
work visas are emptying the pipeline of qualified Americans and
destroying US technical occupations. It is paradoxical to hear the
very executives who replaced their US employees with foreigners now
complain about the declining interest of Americans in science and
engineering. Last July Bill Gates expressed his worries about the
precipitous decline in the number of students entering computer
science. Why is Bill surprised when he helped to lead the offshore
outsourcing movement?

Obviously, it is a vicious cycle. As Americans are discouraged from
the occupations, the corporations lobby for more work visas, which
discourages more Americans.

Seeking to protect their careers from being outsourced, Americans are
turning to domestic services, such as nursing and teaching. However,
H-1B visas threaten these occupations, too. Hospitals struggling with
costs and school systems struggling with budgets are importing lower
cost foreigners to teach American kids and care for American patients.

In Nevada the Clark County School District has imported teachers from
the Philippines. Arizona has imported teachers from New Delhi, India.
The New York Department of Education has brought teachers in from
Jamaica. Cleveland, Ohio, has imported teachers from India. It goes
on and on.

Joe Guzzardi has a good article posted on vdare.com about the use of
foreign teachers in US schools. This practice raises many questions:
Does the money saved on teachers' salaries go to administrators as
bonuses for cost-cutting? How can foreigners from outside our culture
enculturate American students? What happens to enrollments in US
education and nursing curriculums as imported foreigners fill
available positions? What happens to the laid off US engineers and
technical people who are displaced again, this time from teaching
math and science in our schools?

The pressure on school budgets comes from the lost middle class jobs.
As manufacturing and now white collar work move out of US
communities, tax revenues become more scarce. Administrators seek
foreign employees who will work for less.

Eventually, all Americans will be working for less except the fat
cats at the top, who will earn large bonuses by substituting
foreigners for Americans.

What occupations will be left to native citizens? This question comes
to me from many frustrated parents who are trying to give their
children some career counseling. It is possible for Americans still
to earn good incomes from being dentists and lawyers (if they are in
the top 20% of their class). Next one thinks of skilled trades such
as electrician, plumber and auto mechanic. However, Mexican
immigrants are crowding Americans out of the construction trades and
may soon dominate other trades as well.

Opportunity for native born Americans is collapsing. The loss of
opportunity is showing up in declining median household income and
rising poverty rate. On September 1, Edwin Rubenstein reported
(vdare.com) that according to the Census Bureau's August 30 report,
"median household income declined for an unprecedented fifth straight
year in 2004." The main reason for declining household income, says
the Economic Policy Institute, is "ongoing weakness in the job

HIgher paying jobs are being lost to outsourcing and to work visas.
Lower paying jobs are being lost to Mexicans. With real income
falling for five years (despite an economic recovery), the US poverty
rate has climbed from 11.3% in 2000 to 12.7% in 2004, adding 5.4
million more persons to the poverty roll.

Yet, nothink free trade economists and libertarians--like LBJ who
promised us light at the end of the tunnel in Vietnam and Bush who
promises light at the end of the tunnel in Iraq--still promise that
outsourcing and H-1B visas mean increased wealth for Americans.

Economic science no longer exists in America. Its place has been
taken by emotional commitments to dogmas. Americans and their hopes
are daily paying the price for this great failure of economic

The August payroll jobs report from the Bureau of Labor Statistics
repeats the consistent pattern of 21st century America--no net job
creation in high productivity sectors. The only jobs created are in
nontradable lower paid domestic services.

Of the 154,000 private nonfarm jobs created in August, 25,000 are in
construction and are filled primarily by legal and illegal Mexican
immigrants; 20,000 are in wholesale and retail trade; 16,000 in
administrative and waste services; 43,000 in education and health
services; 34,000 in leisure and hospitality (primarily waitresses and
bartenders). Manufacturing lost another 14,000 jobs.

Brand name companies that once were symbols of US manufacturing are
today assemblers of foreign made parts. An industry of assemblers has
no need for engineers or scientists. The dismantling of the US
economy cannot be corrected by education and job retraining. The US
is on its way to becoming a third world country.

It is detrimental to the future of freedom that at this time, when
our civil liberties are under attack by the Bush administration and
diminishing economic opportunity is breathing new life into class
war, libertarians and market economists are demonstrating more
commitment to ideology than to the welfare of fellow citizens. By
associating freedom and market solutions with policies that are
eroding Americans' prospects, freedom's defenders are unwittingly
stabbing freedom in the back.

Paul Craig Roberts has held a number of academic appointments and has
contributed to numerous scholarly publications. He served as
Assistant Secretary of the Treasury in the Reagan administration. His
graduate economics education was at the University of Virginia, the
University of California at Berkeley, and Oxford University. He is
coauthor of The Tyranny of Good Intentions. He can be reached at:

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