U.S. Unemployment at 22% Using Methods from 1980. Modern Economic’s Dead End
World Affairs Monthly recently had some communication Paul Craig Roberts. Roberts worked for President Ronald Reagan and was Assistant Secretary of the US Treasury. I proposed an interview and he asked me to send him some questions, which I did. Paul Craig Roberts is clearly an honest man and a very impressive intellect. He can be found on the net at www.paulcraigroberts.org.
What would you describe as our real knowledge of “economic science” these days?
My latest book (2012), currently available only in the German language, is The Failure of Laissez Faire Capitalism and Economic Dissolution of the West: Towards a New Economics for a Full World. This book explains that despite the necessary modifications and additions made by supply-side economics to capital theory and to macroeconomic theory and policy, economics as it is known today is incapable of producing understanding or correct analysis on important issues. I will give two examples.
Economists mistakenly understand jobs offshoring as free trade and, thereby, assume that jobs offshoring benefits the economy. However, as I demonstrated also in my book, How The Economy Was Lost (2010), jobs offshoring is the antithesis of free trade. Free trade is based on the principle of comparative advantage, whereas jobs offshoring is the pursuit of absolute advantage.
When corporations move their production for their domestic markets offshore, it destroys domestic jobs and creates jobs for foreigners. Domestic consumers are separated from the incomes associated with the production of the goods and services that they consume. By moving jobs offshore, corporations bequeath to a foreign country the incomes associated with the production of the goods and services, the GDP and tax base associated with those incomes, and the careers associated with the jobs, and, thus, dismantle the ladders of upward mobility in their home country.
Economists who serve as shills for the offshoring corporations claim that offshoring results in more and better jobs in the US. However, as I have empirically demonstrated, there is no sign of such jobs in the BLS jobs statistics. For a decade or longer, the US economy has only been able to create jobs in lowly paid non-tradable domestic services, such as waitresses, bartenders, and hospital orderlies. These new lowly paid jobs have not kept up with population growth. Consequently, the US unemployment rate, if measured by the official methodology of 1980, is 22 percent.
When the goods and services produced offshore are brought back to the home country to sell, the trade deficit rises, which puts downward pressure on the exchange value of the domestic currency. The US has been able to tolerate this pressure, because the dollar is the world reserve currency. Nevertheless, year after year of large trade deficits in the end means a surfeit of dollars and a loss in value of the dollar.
I have also demonstrated, as have other economists such as Herman Daly, that the conditions that David Ricardo specified as the necessary conditions for free trade do not exist in the modern world. In addition, the most important work in trade theory since Ricardo, Global Trade and Conflicting National Interests by Ralph E. Gomory and William J. Baumol (MIT Press, 2000), shows that free trade theory was incorrect from the beginning. Gomory and Baumol conclude that “free trade is not always and automatically benign. . . . Roughly speaking, one country can improve its position only if the other country’s position is worsened.” Despite Paul Samuelson’s endorsement of the new theory’s main principle, economists have not yet absorbed this new work twelve years after its publication. We will return to jobs offshoring when answering a subsequent question.
The fact that America’s jobs have been moved offshore and are no longer extant in the US is the reason that the most expansionary monetary policy (zero interest rates and debt monetization) and the most expansionary fiscal policy (year after year of trillion dollar plus budget deficits) have had no effect. As statistician John Williams (www.shadowstats.com) has demonstrated, since the economy turned down 5 years ago, it has been bottom bouncing. There are no signs of economic recovery except in the GDP series which shows recovery in real GDP by understating inflation.
A more fundamental problem than economists’ ingrained misconceptions about jobs offshoring and free trade is the Solow-Stiglitz production function that is the basis of modern economics. The Solow-Stiglitz production function assumes that man-made capital is a perfect substitute for nature’s capital. This assumption means that there are no ecological limits to economic growth. When we run out of natural capital, man-made capital simply takes its place.
As Nicholas Georgescu-Roegen demonstrates conclusively, this assumption, which is the basis of modern economics, is “a conjuring trick.” Man-made capital and natural capital are complements, not substitutes. Production transforms resources into useful products and into waste products. Natural resources are what are transformed, and labor and man-made capital are agents of transformation.
What is happening in today’s world is that nature’s capital is being exhausted, both the resources and the waste sinks–the places that the waste products from production can be deposited. The air, soil, water, and oceans themselves are being polluted by the waste products of economic activities. As these “external costs” from pollution are not included in costs of producing GDP, economists have no way of knowing if an increase in GDP is worth more than its cost. This problem is intensified by the fact that the depletion of natural resources is not treated as a cost other than the cost of extraction. In other words, as nature’s resources are used up, it only counts as a gain. There is not an offsetting cost. As economists have formalized it, the exploitation of nature is only a gain, never a cost.
In an empty world, one in which the human footprint was light, this could have been true. But in a full world, where the human footprint is heavy, it most certainly is not true. There are unlimited examples of the destruction of nature’s capital by mindless greed and by the waste products of human production that are not included in the cost or price of the products. For example, there are enormous dead zones in the Gulf of Mexico from the runoff of chemical fertilizer farming in the US midwest. The profits of agribusiness are boosted, and the prices of agricultural products to consumers are lowered by externalizing the costs and creating dead zones in the Gulf.
What should the United States be doing to try to correct the problems we have and can these problems even be corrected?
History is unequivocal that the human time horizon is short-term. This is true of corporations, Wall Street, and politicians. All attention is on the short term profit, the quarterly bonus, the current political struggle. No one has an incentive to consider the future. All of my life I have heard about the problems we are making for our grandchildren, and still these burdens for the future proliferate.
Within the very limited framework defined by modern economics, we can correct the loss of US jobs, consumer income, and US GDP that are caused by offshoring by changing the way US corporations are taxed. Instead of taxing corporate income, corporations could be taxed according to the geographical location at which value is added to their product. If corporations add value abroad with foreign labor, the tax rate would be high. If corporations add value domestically with domestic labor, the tax rate would be low. The difference in the tax rate can be used to offset the lower labor and regulatory costs of producing abroad and, thereby, to bring back the corporations that have deserted America.
However, reversing jobs offshoring leaves untouched the serious problem of natural resource exhaustion. Economic life in a full world is different from life in an empty world. In a full world nature’s finite resources are a limit. This limit is beginning to bite. The best the world can achieve is a steady-state economy that preserves income but does not grow it. Doubtless, a steady-state economy would require the advanced economies to give up something in order to stabilize the faltering economies where living standards are collapsing. If Washington would stop its gratuitous wars, it would help.
The ideology of growth is so powerful that giving it up is impossible. Too many bandwagons are hooked to it. When myself and others, who are aware of the failings of the Solow-Stiglitz production function speak of ecological limits to growth, establishment economists throw the 40-year old Club of Rome’s “Limits of Growth” study at us. “We have been hearing about limits to growth for 40 years. Where are these limits? The world economy continues to grow.” The Club of Rome’s study was looking ahead. It didn’t know when the limits would be manifest. But it concluded that the limits were there. The answer to skeptics who do not believe that there are limits to growth is very simple. How does economics, except with a conjuring trick, get endless growth from finite resources?
Why is the United States now so corrupt and was it corrupt when you worked at a high level for the US government?
Economic and political corruption have always been a feature of every society. I believe corruption has worsened in the US in recent years, because (1) the supply-side economic policy of the Reagan administration succeeded in curing stagflation and in getting rid of the Phillips curve’s worsening trade-offs between employment and inflation, thus restoring capitalism; the unintended consequence was to encourage free market economists to extremes in their belief in unregulated markets; (2) the collapse of the Soviet Union gave us “the end of history” thesis that there was no alternative to “American democratic capitalism.” These two results created a rebirth of free market economics that does not believe in regulation and which believes that profit is the only measure of economic success. If profit is the only measure, how you get profit is of secondary importance.
Prior to this, corporations believed that they had obligations not only to stockholders, but also to their workers, their customers, and their communities. The free market interpretation is that corporations only have obligations to those who supply their capital–their shareholders– and this view is enforced by “shareholder advocates” and Wall Street, who organize takeovers against any corporation that does not sacrifice broader responsibilities to the bottom line.
This being said, the worst corruption in America is in law and diplomacy. The event of September 11, 2001, was used by Washington to destroy the civil liberties protected by the US Constitution, thus pushing the US centuries back in time to the Dark Ages when feudal lords could throw people into dungeons without explanation or accountability and seize their property on trumped-up claims.
President Obama added to the legal atrocities of the Bush/Cheney regime by declaring the right to execute US citizens on suspicion alone without due process of law. The world had not seen this claim since the Nazi Gestapo. How did Americans lose the protection of law and due process? They lost it because of 9/11. Americans were told, and accepted the lie, that their safety from terrorists depended on Americans giving up their legal protections and trusting the government to apply tyranny and torture only to terrorists. Americans failed to understand that they had no way of knowing, as there was no due process or evidence required, whether the persons declared by the government to be terrorists actually were terrorists.
The warnings of America’s Founding Fathers against trusting the government and accepting its word without proven evidence are numerous. Americans ignored the warnings and lost their liberty. The overriding corruption is the corruption that results when the government is no longer accountable to the people or to law. That is where the US is today. When I was Assistant Secretary of the US Treasury three decades ago, no such corruption of law existed. The US Constitution existed as the supreme constraint on law. Today the executive branch’s pronouncements are the law.
Copyright © 2012 Paul Craig Roberts
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