Post by unlawflcombatnt on Dec 8, 2006 22:42:54 GMT -6
www.vdare.com/roberts/061202_economic_problem.htm
December 02, 2006
America's New Economic Problem
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....
The remainder of the article can be read found at:
www.vdare.com/roberts/061202_economic_problem.htm
December 02, 2006
America's New Economic Problem
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....
The remainder of the article can be read found at:
www.vdare.com/roberts/061202_economic_problem.htm