Offshoring @ MindSay

Most people have heard the expression, "killing the goose that laid the golden eggs," but many cannot recite the complete story. It goes like this:

A poor farmer one day discovers a glittering golden egg in the nest of his pet goose. At first he thinks it must be some kind of trick. But as he starts to throw the egg aside, he has second thoughts and takes it to an appraiser. The egg is pure gold. The farmer can't believe his good fortune and becomes even more incredulous the following day when he discovers another golden egg. Day after day, upon awakening, he rushes to the nest to find another golden egg. He becomes fabulously wealthy. It all seems too good to be true.

But with his increasing wealth comes greed and impatience. Unable to wait day after day for the golden eggs, the farmer decides to kill the goose and get all the eggs at once. But when he opens the goose, he finds it empty. There are no golden eggs and now there is no way to get any more. The farmer has killed the goose that laid them.

But there is another chapter to this story that goes untold.

Although the farmer rues his decision to kill the goose, he realizes that it is no grave misfortune. After all, he has become fabulously wealthy; he is no longer a poor dirt farmer. His financial future is assured. Although there will be no more golden eggs, there will also be no more poverty. Killing the goose, while unfortunate, does not entail a financial crisis. He will be okay.

This mythical fowl tail describes America's current economy perfectly. Governments, both state and federal, have become a goose that lays golden eggs for America's business community. Our governments have allowed that community to decrease the wages of workers, eliminate relatively high-paying jobs by transferring them to foreign nations where wages are considerably lower, and create an ever growing income gap between workers and corporate officers. These corporate officers have become the mythical farmer, and their greed is killing the goose.

America has become the greatest debtor nation in history. It's now relies on foreign nations for essential products and American foreign policy has denigrated many of these same nations for ages. Because of this denigration, the peoples of these nations hold no affection for the United States. Some economists, domestic and foreign, believe that America is sliding from great power to third-world status. And it is not difficult to see why.

It takes no great smarts to realize that for businesses to prosper, their products and services must be sold. But an impoverished people cannot be prolific consumers, regardless of how cheap products and services are priced. So just as governments can be likened to the goose and the business community to the farmer, the consumer becomes the golden egg, and when he becomes the victim of a flawed business model, no more golden eggs will be forthcoming.

But why should the mavens of business care? In the meantime, they have become fabulously wealthy. Why should Bill Gates or any of his ilk care if America collapses into third-world status? If any of their companies go bust tomorrow, they suffer no severe economic consequences. They can shrug their shoulders as they walk away. Fortune magazine has just published a list of America's worst performing CEOs. They are also some of the wealthiest.

Of course, this consequence is not new; it has happened before, and Americans, at least, were warned about how business practices bring this consequence about by Thomas Jefferson who wrote, "Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains."

On January 17, 1925, when President Calvin Coolidge told an audience of newspaper editors that  “The business of America is business” he made popular a legal form of treason that Americans have suffered under ever since. Our business community not only continues to prove that it can’t govern itself effectively but that a free market economy is a destructive myth.

Yves Smith  (http://www.globalstrategywatch.com/independent-insight/990e5c20df26aa346d093495f659e026/) writes, “I've been meaning to discuss how increased income disparity is bad for economic growth, because in the end you wind up with insufficient labor income to fund consumption . . . and too much capital chasing too few investment opportunities. . . . It turns out I was beaten to the punch by nearly 50 years [since]. . . former Fed chairman Marriner Eccles . . . links the consumption shortfall directly to a shift in wealth towards the top. And some of the other patterns of the Twenties, such as debt-fueled growth, are worryingly familiar.” Strange how Robert Reich and other economists should be pointing this out now, especially since the shift in wealth towards the top and debt-fueled growth have been going on for at least three decades. What good are  economists who don’t raise policy issues before their disastrous effects happen?

What Fed chairman Eccles described are simple mathematical results. An economy, regardless of the economic theory that governs it, consists of workers employed by enterprises that produce goods and services for sale either domestically or internationally. The value of the products and services sold must equal the sum of the wages paid to workers, the overhead of the enterprises, and their profits. If all the products and services are sold, the sum of the incomes of the buyers must equal or surpass the value of the products and services, for if the sum is less, the products and services could not have been bought (unless the shortfall were met by borrowing), in which case the economy would have to shrink. If the shortfall were met by borrowing, the future incomes of the buyers would have to be sufficient to both buy additional products and services and service the debt. The result is that in the absence of growing wages, buyers will eventually reach a point where they can neither continue their levels of consumption nor service their debt, and the economy ceases to function.

The American economy has been characterized over the past several decades by policies that were bound to produce this result. First American companies shifted a great deal of manufacturing offshore. Second, they created conditions designed to hold down wages. Third, they made borrowing easy but expensive.

The first of these made consumption the economy’s driving force (perhaps 70% of the economy is consumption driven.) If the borrowing had not been made easy, consumption, and the economy as a whole, would have collapsed because of the restraint on wage growth that resulted from the second policy. But given that restraint, the debt assumed by consumers had to eventually reach a level that made it unserviceable. The only possible result of these policies is an economic collapse.

That economists could not have foreseen this consequence is incredible.

George Orwell ("Politics and the English Language") claims that “the decline of a language must ultimately have political and economic causes: it is not due simply to the bad influence of this or that individual writer.” Careless  language makes it easier to have foolish thoughts. But writing in a dialect of orthodoxy corrupts thought processes just as surely as ungrammatical constructions and slovenly chosen diction. Worse still, the language used in the ordinary lives of people in professions based on an orthodox view can constrain thought processes so that thinking in an alternate dialect becomes impossible. Language is, after all, the medium of thought, and ideology is often the path to disaster since ideologues seem incapable of even considering the possibility of being wrong. The econospeach of orthodox free-market economics is an example of such a language debasing dialect.

Look at these simple examples:

We are told that Americans save too little. But the American economy makes saving impossible. The word ‘save’ in the English language has a distinct meaning: it means to protect something from danger of loss, injury, or destruction. I can save minute screws salvaged from a broken device (the kind of screws which are virtually impossible to buy) by putting them in a jar and putting the jar in a secure place. Given some unusual event, these screws will still be there a month, a year, a decade later. But I can’t do that with an American dollar. Put it under your mattress today and a year later it’s value will have diminished to perhaps fifty cents. Fiat money cannot be saved, because it has no intrinsic value. So how has the word ‘save’ come to be used? Our economy fosters language such as, “Buy a refrigerator during this week’s sale and SAVE 25%.” But that’s not saving, is it? Have you heard about the woman who returned from shopping and told her husband, “I bought a dress and saved 15%, a blouse and saved 20%, shoes and saved 50%. I would have even saved more but I ran out of money.” In this sense, Americans are the world’s greatest savers.

Since we can’t save, we’re told to invest. But investing is subject to a hoard of risks. Invest your money and lose your shirt is not an unknown event. ‘Invest’ doesn’t mean what ‘invest’ means in the English language. Look it up! When an economist tells us to invest our money, he means ‘wager.’

And what do we ‘invest’ in? Securities, of course, which are anything but secure.

What about the dialect of the market. When the market tumbles, we are told it has made a “correction.” Why aren’t we told that it has made an error when it rises? In the English language, only mistakes can be corrected. If the word ‘correction’ were used properly in relation to the market, the entire marked would have to be described as one gigantic error.

Then there are the abstractions. GNP, GDP, Core Inflation, Employment Rate, Per-capita Income—absolutely none of which have any real meaning. Ask any head of household what the rise/fall in GNP or Core Inflation has done for him/her and the response you get may be merely a blank stare. This econospeach has no real meaning; otherwise, it would have an effect that people recognized.

The upshot is no one can think clearly in econospeach. As the blogger at Econospeak has written, “. . . Feldstein . . . demonstrated how clever economists, armed with sophisticated mathematical and statistical techniques, along with the help of well-trained graduate assistants, are capable of manipulating models to get whatever results they desire. As economists like to joke, that if you torture the data long enough they will confess. So, although economists such as Feldstein can give their work the appearance of scientific precision, their work must necessarily remain suspect.”

Two economists, Massimo Guidolin and Elizabeth A. La Jeunesse, working at the St. Louis Federal Reserve, have published a paper that could only have been written by people whose thinking has been entirely constrained by the econospeach of their profession. Their paper, titled, “The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?” (http://research.stlouisfed.org/publications/review/07/11/Guidolin.pdf) claims that it is a puzzle. They write, “Although we have reviewed a number of concurring explanations that have been proposed for the declining propensity of U.S. households to save, it seems that (sometimes on logical grounds, in other occasions on an empirical level) such theories remain insufficient to explain the entire magnitude of the recent transformation of the United States into a nation of spendthrifts. (Italics mine.) In this sense, the U.S. personal saving rate remains a puzzle.” Only brain-bound economists could have written such drivel. Had they gone out and spoken to heads of households they would have found out that the failure to save is insufficient income.

All sorts of practices carried out by business, government, and the FED have created this situation. The people who can’t save had nothing to do with it. Illegal immigration, offshoring, depressed wages, poorly regulated banking policies which allowed the mass marketing of easy-to-get but impossible-to-repay credit, and real inflation (forget the meaningless core), especially for items with little elasticity such as medical care, fuel, and food have made it difficult for many heads of households to make ends meet month after month. As the comic said, “every time I think I’m going to make ends meet, they move the ends.” And unfortunately, the ends are getting further apart. The economists who have sold this system to our political and business leaders are solely responsible for not only the so-called saving rate but also all of the other economic problems our nation faces.

To call America a nation of “spendthrifts” is to reveal the bias that it’s never the system but the character of the people that’s at fault. It is the same bias that claims that homosexuality, homelessness, and countless other “vices” are the result of character flaws, and the fact that a plethora of data exists that prove that this bias is false, the attraction of the bias always overwhelms the evidence in brain-bound thinkers.

America is failing as a nation. The economy is failing once again, the government is failing to support the people, the judicial system is failing, the educational system is failing, the infrastructure is failing, the medical system is failing, the fabric of society is being torn; yet, no one questions the orthodox ideologies responsible for this situation. It is said that Einstein defined insanity as “doing the same thing over and over again and expecting different results.” Such insanity is the legacy of every orthodoxy, including free-market economics.

Alan Blinder, a Princeton University economics professor, published a piece in “Foreign Affairs” early last year, excerpts from which were published in the Dallas Morning News on January 7. Mr. Blinder argues that the defenders of offshore outsourcing “underestimated both the importance of offshoring and its disruptive effect on wealthy countries. . . . That said, we should not view the coming wave of offshoring as an impending catastrophe. . . . The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But, in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring.”

As I read this, it says that offshoring is not an “impending catastrophe” as long as the developed world faces “up to the massive, complex, and multifaceted challenges that offshoring will bring.” Yet, he writes, “National data systems, trade policies, educational systems, social welfare programs and politics all must adapt to new realities.” BUT “UNFORTUNATELY NONE OF THIS IS HAPPENING NOW.”

Well, can’t we conclude from that that if these things are not being faced now, we are indeed faced with an “impending catastrophe”? Maybe not. Not if we can goad the governments in the developed world into turning to face these challenges. But can we?

He writes, “the United States and other rich nations will have to transform their educational systems so as to prepare workers for the jobs that will actually exist. . . .” Well, heck! That won’t be hard. Or will it? We haven’t gotten all of our educational system to accept evolution as a scientific fact, so how hard will changing the system be? Furthermore, Mr. Blinder writes that the jobs of the future will involve “personal presence,” i.e., face-to-face services—divorce attorneys, internists, nurses, sales people, waiters, janitors, teachers, plumbers, mechanics, carpenters, and except for perhaps the first two, all of these are the kind of high-paying jobs that people strive for, aren’t they? So what kind of changes to the educational system do we have to make to prepare people to be waiters, janitors, and garbage collectors anyhow?

“Another important step for rich countries,” Mr. Blinder writes, ”is to rethink the currently inadequate programs for trade adjustment assistance. The United States may have to repair and thicken the tattered safety net that supports workers who fall off the labor-market trapeze. At present, the United States has one of the thinnest social safety nets in the industrial world, AND THERE SEEMS TO BE LITTLE IF ANY POLITICAL FORCE SEEKING TO IMPROVE IT.” Yes, indeed! This won’t be hard to change, either, will it?

So what is Professor Blinder’s point? Are we or are we not facing an “impending catastrophe”? He says, “we should not view the coming wave of offshoring as an impending catastrophe” but if his argument is correct, I’d say we’re in for a hell of a bad time in the United States of America.

It just dumbfounds me that an erudite economics professor could write a piece that concludes that we should not view the coming wave of offshoring as an impending catastrophe when all the other evidence in the piece supports the opposite conclusion.

©2007 John Kozy, Jr.

Offshoring—Good or Bad

Offshoring, without a doubt, when used in moderation can be a benefit to the economies of both the mother and host countries, but offshoring per se is neither a boon nor a bane.

Offshoring is a type of foreign investment. But all foreign investment is not the same. One type can be defined as a company’s investing is a foreign land to produce products and service to be sold in the foreign economy. An example of this is the building of automobile factories in the U.S. by Japanese firms that build cars for sale here in America. Such foreign investment can be a boon to both countries. The economy of the host country is grown by the wages paid for the production and the mother country’s economy is grown by the profits returned from the sale of the cars. This kind of foreign investment also generates what is known as a multiplier effect that boosts the host country’s economy too, because such factories bring into play maintenance, transportation, and retail firms, all of which also employ people and generate profits.

Another kind of foreign investment occurs, however, when the foreign companies’ investment is made to make products and services to be sold not in the host country but in the mother country. Most American business offshoring is made with this kind of foreign investment, and when carried to the extreme, is a benefit to neither the mother nor host country. It reduces labor in the mother country and only has minimal benefit to the host country, because although it provides jobs, it doesn’t generate any multiplier effects. This is why the economies of the countries in Latin America which have been producing products for sale in the American market for many decades have not been benefited greatly by the practice.

When carried to the extreme, which American business now seems to be doing, the effects are disastrous. By proliferating this kind of offshoring, the economies of many foreign nations are entirely dependent on the American economy. Since these foreign nations make products primarily for sale here, if the American economy tumbles and the products can’t be sold, the economies of these foreign countries will tumble too, and a world-wide depression could result. That is the danger the world now faces.

Broadly speaking, this is the problem: foreigners produce what Americans consume and lend us the money to buy them. As Stephen Roach, the chief global economist at Morgan Stanley, put it: "We outsource everything except consumption." But consumption can not be maintained under these circumstances.

Of course, there is also a moral argument against such offshoring. Traditional colonialism pretty much came to an end after the Second World War. But the conditions described above for offshroring are almost identical to the practices of the British East India Company which colonized the Indian subcontinent. It is a system that exploits the poor, downtrodden, and underdeveloped.

So being both immoral and counterproductive when carried to extremes, it can also be view as traitorous. For it can destroy this nation more easily then al-Qaida or foreign agents can.