Month: November 2013

The offshoring of the American Dream

Posted on by j.giglio

By all accounts, Americans continue to experience the worst economy since the Great Depression. Unemployment remains unacceptably high, many of the jobs that produce real income have been offshored and the middle-class earnings are stagnant. Looking ahead, it’s likely to get worse before it gets better.

Yet corporate profits are doing just fine, thank you. Today they make up about 12.5 percent of  America’s gross domestic product. Just two years ago, they reached their largest percentage of GDP since the 1950s. On the other hand, wages and salaries, which accounted for 47 percent of GDP in 1985, are currently at around 42 percent.

Among the reasons for the combination of lower wages and high corporate profits in a weak economy is that American firms have discovered the advantages of exporting manufacturing and service jobs to countries with an abundance of productive, low-wage workers. Firms substitute cheap foreign labor for American workers. All the while, those Americans are told that offshoring is part of free trade and globalization.

Early offshoring was focused on manufacturing, but in recent years, U.S. firms have taken advantage of modem communication technology to outsource service activities. This trend cuts across all industries and occupations, ranging from lower-skilled manufacturing jobs to those requiring more skill and education, including those in the information technology sector. Put bluntly, they are exporting jobs to countries where wage rates are low, causing higher unemployment and lower living standards in the U.S.

Cheerleaders for offshoring argue that the money companies save will, in the long term, create new and better domestic jobs. These jobs must be disguised in the employment statistics; very well disguised, indeed. Moreover, they argue that when firms save money, consumers benefit from lower prices. So while free trade causes some dislocation, the benefits outweigh the costs. This pitch has become a totem of belief among free-trade advocates but it’s cold comfort for those whose jobs have been exported.

It was reported last month that IBM now employs more people in India than it does in the U.S. Its Indian workforce has grown from 3,000 in 2002 to about 112,000 last year. The reason is simple: The cost of labor in India is only a fraction of what it costs to employ the equivalent workers in the U.S. The average annual salary for an IBM employee in India is $17,000 compared with $100,000 for a senior American IT specialist.

Given such wage differentials, it’s not surprising that we are now witnessing the great migration of white-collar American service jobs. While India is the largest destination, the jobs have also gone to Eastern Europe, the Philippines, China and Mexico.

The offshoring of jobs may be one of the underlying reasons why Great Recession job losses look quite different from those of past recessions. American unemployment is becoming structural rather than cyclical and may worsen over time no matter how much public stimulus is provided.

So we have finally figured out how to make income redistribution happen on a global scale: American workers have to be less rich so their overseas counterparts can be less poor. Offshoring increases income levels in developing countries and the theory is that with greater wealth, those people will be able to demand and receive better treatment. The question is whether these interests should outweigh the interests of American workers.

Maybe jobs will return when American wages are as low as those of our foreign competitors and corporations decide to come home to exploit cheap labor. But it seems they first have to impoverish domestic workers so those workers can become rich again in the future.

originally published: November 6, 2013

Middle-class America holds no influence over Congress  

Posted on by j.giglio

The rest of the world watched the latest game of chicken over the U.S. government shutdown, which stretched on for more than two weeks and threatened to result in financial default, all of which again raised the question of whether the world’s leading power has lost the capacity to govern itself. Congress has not passed a proper budget since 2009.

The first government shutdown in 17 years ended when the Senate and the House of Representatives reached another 11th hour deal to avoid a financial default and get the government running again late on the evening of Oct. 16. The president signed the legislation early the next day. The bill approved funding the government until Jan. 15, 2014 and suspended the nation’s borrowing limit of $16.7 trillion until Feb. 7.

Of course, Congress could not resist larding the legislation with pork. Senate Minority Leader Mitch McConnell, who was instrumental in ending the crisis, got $2.9 billion for a dam in his home state of Kentucky. Congress also awarded the widow of the late New Jersey Sen. Frank Lautenberg $174,000, the equivalent of one year’s salary. In 2012, the Capitol Hill publication Roll Call named Lautenberg one of the 50 richest members of Congress with a net worth of about $56.8 million.

The threat of a government default is off the table for now. But instead of resolving underlying disputes, the short-term deal only pushed the hard choices off to another day. It gives the parties some time to  cool off and negotiate a broader spending plan.

Brace yourself for another cliffhanger that resembles a bad daytime soap opera. America will continue its habit of governing by crisis after crisis after crisis. In this troubled political environment, is it any wonder that businesses are sitting on their cash rather than investing in new factories, equipment, and more workers?

As part of the recent deal, the House and Senate will appoint members to a bipartisan group tasked with hammering out an agreement by Dec. 13 on a blueprint for tax and spending policies over the next decade, that may include tax increases and structural reforms to entitlement programs such as Medicare something the two parties have not agreed on in years.

Given the recent track record, the chance that this new forum can deliver by its deadline, in time for Congress to act by Jan. 15, on funding to keep the government open, is slim to none.

Can the U.S. recover its tarnished image? Is the recent dysfunction in Washington now behind us, or is it destined to become part of the permanent bleak political landscape?

Conventional wisdom holds that the deal made in Washington guarantees another shutdown and debt ceiling fight early next year. In other words, Americans will soon be witnessing another psychodrama being played out with politicians again acting badly, more divided than ever, and pulled apart by two different conceptions of government.

If you believe the political roosters on Capitol Hill can be counted on to stop squawking, bridge the gap between competing visions of the role of government and reach agreement on critical problems ranging from employment to energy to entitlements to education, then you have every confidence in the full faith and credit of the U.S. government.

The average hard-working, middle-class family is coming to recognize that they don’t have a shred of influence and that our leaders in Washington seem to care only about those who write the checks that allow them to stay in power. Nobody wants to have to say it, but Americans need to read it to begin to understand that campaign contributions are politicians’ favorite form of catnip.

originally published: November 2, 2013