Tuesday, June 29, 2004

It's the Wages Stupid: Why Outsourcing Rhetoric is Wrong

The economy really is not doing well. It's pretty ill and about to take a dive. Don't take my word for it - even though the oldman has been verified as correct every time so far - take the word of J.K. Galbraith. (Salon- use the daypass option)

June 28, 2004 | Let me start by reminding you what I wrote in my Salon column just last month:

"The outlook, therefore, isn't for another noninflationary boom. It's for stagflation -- the combination of low performance and rising prices some of us dimly remember from the Vietnam War."

Let me also remind you that last March, when the United States had its first month of good job growth in a while, I labeled the ensuing media frenzy "a fit of ejaculatio praecox." Since which time, we've heard not a line of doubt from the business press. "The economy is strong and getting stronger," said President Bush, and like good soldiers, the commentariat fell in line.

But today we have news that is hard to avoid. Newly revised data are out from that exciting, inspiring, fantastic first quarter.

Real economic growth did not accelerate to 4.4 percent from the 4.1 percent pace of the fourth quarter of 2003, as first thought. Instead, the growth rate fell, to 3.9 percent. Meanwhile, inflation rose faster than predicted. The inflation rate was 3.5 percent for gross domestic purchases, as opposed to the previously estimated 3.3 percent. The chain price deflator (a commonly used measure of inflation) was up to 2.9 percent from 2.6 percent, and core inflation (excluding food and energy) was up to 2 percent from 1.7 percent.

Forecasters were caught flatfooted by these revisions. They had expected the growth rate to be unchanged at 4.4 percent -- not rising inflation.

Why is this happening? The most important reason is the effect of increasing demand on imports. Imports came in high, partly as an enduring consequence of outsourcing and the loss of domestic competitiveness during the Bush slump. With a falling dollar and a rising price for fuel, imports are also more expensive, putting a double whammy on the trade deficit.

Moreover, it was spending on nondurable goods (including gas) that was up -- by almost 7 percent -- while spending on durable goods actually declined. This is not a good sign.

Why the surprise? It lies partly in the incurable optimism of members of the business press. They want growth and rising markets. They believe in the psychological power of their own voices. But they have no underlying theory beyond the idea that psychology matters and that optimism leads to growth. Doubters therefore get squelched. Our voices are dissonant, and our arguments are, well, just a bit too difficult. But when bad things happen, we are not surprised.

So a sober clear look at the statistics, distorted as they are, show that they are poised for stagflation and not robust growth. Why is this occuring? Well look at this MSNBC article on the economic dynamics of the "new economy" of outsourcing wage pressures on compensation.
'Dirty little secret'
"The dirty little secret is that no one is really looking at the quality of new jobs created," said Lawrence F. Katz, a labor economist at Harvard University who has advised Kerry. "We don't know within these broad occupational categories what the new jobs actually are."

Federal Reserve Chairman Alan Greenspan made a similar point during a Capitol Hill hearing last week when he said that the recent wage gains appear to be spread broadly across industries, but the Fed does not know yet how the gains are distributed within industries. He repeated his concern about a growing earnings gap between highly educated skilled workers and those workers with less education and fewer skills.

The result, he said, has been that inflation-adjusted wages have been "flat to declining" for the lower half of income earners, and rising for the highest-paid quarter of the workforce.

"It's a problem caused basically by our skill mix not keeping up with the technology that our capital stock requires," the Republican Fed chairman said, calling it a structural problem "that can be and must be addressed, because I think that it's creating an increasing concentration of incomes in this country and, for a democratic society, that is not a very desirable thing to allow to happen."

Benjamin Tal, senior economist at CIBC World Markets, said that when the Labor Department's industry trends are compared with much finer occupational trends tracked by the Census Bureau, the pattern is clear: The average wage in industries that gained jobs over the past three years was 30 percent lower than the average wage in industries that lost jobs -- a sharp reversal from the previous five years.

Given the broader trends in the global labor market, that makes sense. Much of the political focus has been on the outsourcing of service and manufacturing jobs to low-wage countries, but the real issue is not the flow of jobs abroad but the impact of those labor markets at home, Tal said. The threat of labor competition in China and India is preventing workers in the United States from bargaining up wages, even as the economy begins growing in earnest.

"Job losses to globalization is the wrong focus," he said. "It really should be these deflationary forces."[emphasis added]

First of all there are more jobs being outsourced than is being widely admitted. That's because the counting is only of jobs directly transferred, not the "opportunity cost" of jobs not created in the USA because of capital flight preference of East Asian countries. They are growing the jobs there, and we aren't here so every loss we have is not compensated by new jobs created in the normal economic destructive/creative cycle of the economy. This leads to a net loss of jobs without necessarily incurring large numbers of open transfers. But even if you do have a job that is created here in the States to replace lost jobs, the competitive pressure from the potential of outsourcing overseas is driving down compensation.

So the story is for every "good" or high paying job brought here through outsourcing, invisibly there are multiple other jobs who have their wages depressed through competition with potential outsourcing in Asia and elsewhere. It's clearly showing in the macroeconomic aggregate statistics and it's clearly present in anecdotal stories.

That's why outsourcing rhetoric like this is just plain wrong. It's wrong because it's looking in the wrong place.

But these macroeconomic arguments are abstract, while anecdotes suffer from the accusation that they aren't representative. How to drive this home on the mesoscopic level of the real impact of outsourcing? Well Nathan Newman does an admirable job presenting the real face of outsourcing for most people, even those who won't lose their jobs to overseas competition directly.
Whatever jobs are being created, most aren't accompanied with health benefits.

So says the HMO executives who aren't seeing new enrollments in their plans:

It's fair to say that a lot of jobs that are being created may not be the jobs that come with benefits," Ron Williams, president of Aetna Inc. (NYSE:AET - news), one of the biggest U.S. health insurers with 13 million members, told investors in early June.

That echoes recent comments by others in the industry...

The HMO's just aren't seeing people getting enrolled in employer-paid health plans. That's because the new jobs have lost a classic part of compensation, the healthcare benefit. You can bet that those that are keeping them are seeing higher premiums which is another way of lowering compensation. So that's the real face of outsourcing. Don't let either economic happy talk or people who glibly focus on misleading statistics try to tell you otherwise. It's not something off in the future, it's already here and the face of it is the little kid whose parents have to decide between their meds and soccer afterschool, in the clothes being just a little bit more worn and frayed when they're replaced, in the numbers of people who don't go to the doctor for preventive or early intervention care and so become very sick, and in the higher number of bankruptcies of ruined households. It's here and it's ugly. Don't let anyone in a suit and an air conditioned office using a power point presentation tell you otherwise.

Oh and one more thing, in the previous article the oldman has discussed how government subsidies of education have risen to a spectacular high, masking the real inflationary costs of education increases. But Greenspan is still holding out an education solution. That's misguided. If our people become educated but people don't want to hire them, or offer them less in compensation for their skills, things are still going to take a dive. The problem is that we have higher fixed costs of labor here in the USA, and that is what is leading the jobs to go elsewhere. As can be seen by history now, a marked increase in government subsidy of education has not reversed or even slowed the offshoring trend. So Greenspan you're wrong.


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