By Paul Craig Roberts

Few economists have come to terms with the

meaning that offshore production of goods and

services has both for the US economy and for

the operation of US economic policy.

One of the main reasons for the rapid expansion

of the US trade imbalance is offshoring. When a

company closes a plant in the US and moves its

production for US markets offshore, domestic

production is turned into imports. Some

additional impacts of offshoring are rising

foreign ownership of the US stock of capital,

increased payments to foreigners that result

from the growth in this ownership, and pressure

on the US dollar's value and role as world

reserve currency.

There is also impact on the efficacy of US

economic policy tools. Traditional methods of

stimulating consumer demand are now less

effective. They might cause a rebound in sales,

but the follow- through to domestic employment

is diluted as the response to demand is met by

foreign labor. There is now a large new

"leakage," as increases in domestic demand are

met by offshore production.

This leakage from offshore production is in

addition to the traditional leakage from

foreign trade. Economists have long understood

that some part of rising consumer incomes

during an economic recovery will be spent on

imports and can result in leakage if the

domestic economy is expanding more rapidly than

the economies of trading partners, thus

resulting in a trade deficit. With so many

American brand name goods now produced

offshore, a pickup in domestic demand

immediately translates into jobs and wages for

offshore workers. During the current economic

recovery, three million US manufacturing jobs

have been lost, hours worked have declined, and

there has been no gain in real incomes for the

vast majority of Americans.

Moreover, as US capital and technology are

shifted to the employment of labor abroad,

there is less boost to US consumer demand from

productivity-based growth in real income. The

effect, then, of offshoring production for US

markets is to weaken the effectiveness of

traditional economic policy tools.

As official US economic reports make clear, and

as Charles McMillion at MBG Information

Services has emphasized, the current economic

expansion has been driven primarily by US

household dis-savings and by government red

ink. For the sixth consecutive quarter,

consumer spending has exceeded total disposable

income.

There are limits to a debt-based expansion. The

housing boom, which stimulated consumer

spending through refinancings, has come to an

end, and more households have reached their

limit on credit card debt.

As the high tax rates of the pre-Reagan era no

longer exist, supply-side tax rate reductions

cannot deliver the punch of a quarter century

ago. Easy money can encourage more debt, but

households have fewer assets and income streams

to mortgage. New domestic investment spending

by US business weakens as cheap foreign labor

draws US capital, technology and business

know-how abroad. The bulk of new foreign

investment in the US consists primarily of the

acquisition of existing assets rather than new

investments in plant and equipment. Therefore,

the move abroad of US capital and technology is

not offset by foreign investment in the US.

The access of US corporations to low wage

foreign labor has produced an effective

divergence of interests between US shareholders

and US labor. With stock prices and CEO

remuneration closely tied to quarterly results,

there is strong pressure to move jobs offshore

in order to lower labor costs and improve

reported earnings.

In the past unions and managements fought over

the level of wages and benefits. However, most

economists believed that wages were in keeping

with labor productivity. With offshored

production, the large excess supplies of labor

in countries such as China and India keep wages

associated with offshore production below the

productivity of labor.

Consequently, the measures used in the US to

determine the success and tenure of corporate

management and boards result in a divergence

between the interests of capital and labor that

favors capital.

As the large excess supplies of Asian labor are

unlikely to be absorbed except over the

long-run, addressing the new American economic

problem would seem to require a change in the

criteria used to measure corporate success.

Economists refuse to acknowledge the problem,

because they believe it has protectionist

implications and that nothing can be worst than

protectionism. Indeed, so many economists have

emotional commitments to free trade and

professional commitments to globalism, that

they are incapable of acknowledging that there

is a problem.

As Herman Daly and I have emphasized,

offshoring is not a manifestation of free trade

based on comparative advantage. Offshoring is

labor arbitrage or capital's pursuit of

absolute advantage in low cost labor.

Moreover, the classic case for free trade has

troubles of its own. The case depends on two

conditions that no longer exist: the relative

immobility of capital internationally, and

different relative cost ratios of producing

tradable goods in different countries. Today

capital is as internationally mobile as traded

goods, and knowledge- based production

functions are not affected by climate or

geographical location. Their operation is the

same regardless of location. New original work

in trade theory by William Baumol and Ralph

Gomory challenges the correctness of the

classic case for free trade even when its two

conditions are met.

The longer economists wait until they address

the new economic problem, the more the ladders

of upward mobility in the US will be dismantled

and the more political stability will drain

from the US. In the 21st century, US job growth

as been restricted to domestic services. The

longer the growth of new US jobs is restricted

to domestic services, the more difficult it

will be to restore job growth in export and

import-competitive sectors of the economy and

the more the US will come to resemble a third

world economy.

I call on economists to get their heads out of

the sand and to put on their thinking caps.

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