Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Friday, October 28, 2005






OUTSOURCING REDUCES GLOBAL WAGES

Those who advocate pro-free trade often justify their position by stating a desire to uplift the poor in foreign countries. Not only do I oppose that position on nationalistic grounds, I question the benefits to 3rd world countries. Lack of benefit to 3rd-world countries is a point I'd like to make mainly with "liberals."

Outsourcing does NOT raise aggregate global wages. In fact, outsourcing labor to a low-wage country REDUCES global labor wages and income. If a $90/day American laborer is substituted for by $2/day foreign laborer, it reduces aggregate global labor income. Global labor income is what buys production and creates demand. Outsourcing reduces aggregate global labor income, thus reducing total consumer spending world wide. American workers lose income and buying power with outsourcing. That loss is NOT made up for by increase in foreign wages. This is just plain common sense. It's impossible for cost reductions to make up for wage losses.

If American workers can't buy America's production, then foreign workers need to pick up the slack. Does anyone really think that's possible? Can $2/day foreign workers make up for the buying power lost by $90/day American workers? That's $88/day/worker in lost labor income per worker. It would take the labor income of 45 $2/day workers to make up that labor income loss. Does anyone really think that'll happen? Of course not. The only benefit to anyone is the short-term cost reduction to American outsourcers, and a slight price decrease for American consumers. The numbers just don't add up. Global labor competition causes aggregate global labor income to drop. It increases the labor supply available to American corporations, and decreases worker bargaining power. This is simple supply and demand. If the supply of labor increases 100-fold, it will drive the "price" of labor down. Labor "price" reduction means labor wage reduction. Thus, the end result will be a dramatic reduction in American labor income, as well as a lesser reduction in global wages.

Outsourcing and globalization don't "raise" anybody up. They drag all workers down. Jobs will go to the most impoverished workers, and employers won't pay them a penny more than they have to. We cannot enforce minimum wage laws, or other worker protections in foreign countries. Even more important, however, is that Corporate America doesn't want to. Why would they? It would increase the price of their exploited foreign labor. The poorer the worker, the more willingly they accept poverty-level wages. Their impoverishment is Corporate America's gain.

Let's not forget that someone needs to buy the goods produced. Who will buy them if American wages drop to the level of their enslaved foreign counterparts? People can't purchase goods without income. And very low income means very few goods purchased. Demand cannnot be created out of thin air. Consumers must have sufficient income to create that demand. Without demand, there is no need for production, and no need to hire workers.
The entire world economy would collapse without the Demand created by American consumers. That demand is created by American income and borrowing. We're almost maxed out on borrowing at present. In addition, inflation-adjusted American wages are declining. They've declined 1% over the last year, and 0.5% over the last 3 months. The last thing the US and the world need is a further decline in American wages. American wage decline hurts the US, as well as the major exporting countries. If aggregate American labor & consumer income declines, so does our ability to buy foreign imports. Increasing American labor competition with enslaved foreign workers is worsening this wage decline. It's not only in our best interests to keep jobs in the US, it's to the advantage of all countries that export to us. We need income to buy their goods.

"Opening up markets" sounds like a good idea. But it's a smokescreen. It's not the real motivation behind "free" trade agreements. The real motivation is "opening up" the American labor market to competion with slave-labor. Bush and his neocon supporters know this. They hope we won't see it. Many of us do, however. Hopefully we can make others see this as well.

unlawflcombatnt

EconomicPatriotForum

15 Comments:

Anonymous Anonymous said...

Wow, talk about taking it to a whole new level. Since NAFTA, wages have gone up, controlling for the cost of living, people are still better today than 10 years ago. As productivity increases prices should fall, or at least inflation should be near zero. which it is.

There you go again with your global income arguement, again you are wrong. You are correct if a $90/day job is displaced with a $2/day job in the same place, but its not. Hence, why we have not seen a fall in consumer spending world wide. No the loss is made up for by lower prices. You can not compare wages across nations without controlling for cost of living and exchange rates.

The U.S. will not experience a reduction in wages. The reasoning is threefold. First will have minimum wage laws (which I disagree with, but a different story), secondly those workers cannot be substituted for U.S. workers, immigration laws prevent this. Lastly, the biggest reason why will won't see a reduction in wages, we produce different goods.

If anything free trade should provide an incentive to attend college and get a high paying service job.

You state, "0utsourcing and globalization don't "raise" anybody up. They drag all workers down." Gosh is it such a bad thing for the poorest to get jobs. So what if they are only 1 penny higher, they don't have to take them. By doing so they are better off. Free trade makes people better off, it makes countries better off, but it cannot perform miracles.

A 1% decline in wages is minimum compared to increase in wages over the 90's. Even if your senerio holds true, corporations will lower prices or increase wages well before your senerio plays out. Which brings up another point, who are the corporations. Oh yeah, its you and me, we hold stock and therefore get additional income from dividends. Wages have dropped, but what about income?

2:15 AM  
Blogger unlawflcombatnt said...

Inflation-adjusted wages are less than they were in December of 2001, when they were $8.23/hour in 1982 dollars. In fact, July's $8.20/hour is 1% lower than December 2003's $8.29/hour.
BLS Hourly Wages

Wages are definitely declining in relation to prices. As I stated previously, only a fraction of the reduced cost of production from outsourcing is passed on to American consumers. It's simply illogical to claim otherwise. The jobs are outsourced to reduce labor costs to increase profits. If 100% of the labor cost savings were passed on to American consumers, there would be no increased profit from outsourcing. If that were truly the case (which it is not), there would be no outsourcing.

The low wages in foreign countries do represent what those workers could buy in this country. And the difference in what they're paid, compared to an American worker, is representative of the relative global labor income and buying power lost when an American worker and his income is replaced by a foreign worker and his lower income. That reduction in aggregate global spending power reduces aggregate global consumer spending, and aggregate global demand for production.

Not only will the U.S. experience a reduction in wages, it already has experienced a reduction in wages. The BLS Statistics from above verify this.

Free trade will not provide an "incentive" to attend college. In fact, it will do exactly the opposite. In excess of 300,000 high tech jobs have been lost in Northern California alone since 2001. These were jobs that employed workers who had already responded to this "incentive" to go to college. What kind of "incentive" does that provide for workers to obtain higher education in the future? What kind of "incentive" does it provide to increase H1B visas for highly skilled foreign workers, while they take jobs from highly skilled American workers? What "incentive" remains?

9:58 PM  
Anonymous Anonymous said...

I agree with unlawful and the only reason people are living better today than 10 years ago is because they have credit cards, can lease cars and get a home loan in which they pay interest only. Put very simply.

Does anyone have a "fair" comparison of what wages vs costs were in the 70s vs today? I think you would see the difference found there if someone would do it from a nuetral position rather than from an extreme political perspective.

I am only interested in learning about economics. I am the layman you speak to. I saw your post on the Centrist coalition page and followed it here to get more information.

7:37 AM  
Blogger unlawflcombatnt said...

Anonymous (from Centrist Coalition),

Thank you for your response. We certainly agree about the "cause" of our apparent increase in living standards. Credit cards and other sources of borrowing have allowed Americans to live much better than they would if they were only able to make purchases from their income alone.

The constant increase in consumer spending during the Bush years has been perpetuated by increased consumer "deficit" spending almost exclusively. Inflation-adjusted hourly wages are 1.6% lower than they were in December of 2002. Wages have generally been declining since January of 2003. Inflation-adjusted hourly wages have actually declined 1.0% since January of 2005. This information can be found at: BLS:HourlyWages

Despite the decline in real wages, consumer spending has continued to increase. This increase has been financed by increased borrowing alone. Credit card debt has increased dramaticly. Home equity extraction, via home equity loans, provides an extra $200-300 billion/year in spendable wealth for consumers. This amounts to 1.7-2.5% of our $12 trillion GDP. Without the increased consumer spending financed by borrowed money, our GDP would not be growing any. Most likely, it would be decreasing. This is because the lessened consumer spending would have decreased investment spending as well, since it is dependent on anticipated returns (which are the result of consumer spending.) Thus the direct loss of consumer spending, with a parallel decline in investment spending, would probably have put our GDP in the negative category.

The above losses in consumer spending and investment spending don't even take into account the new jobs, and the income from those new jobs, that were created by this debt-financed consumer spending. The creation of debt has simply allowed our spending to continue rising without increasing incomes. Obviously this is not sustainable.

There has been a disturbing trend in wages called the "wage-productivity" gap that I've described earlier in this blog. (Economist Ravi Batra provides an excellent description of this in Chapter 6 of his book "Greenspan's Fraud." This is an excellent book, and costs approximate $25.) In general, the wage-productivity gap means that wage increases have not kept pace with the increased productivity of American workers. The result is that American workers produce more wealth than they can purchase through wages alone. This situation would self-correct itself if it were not for the increased spending made possible by borrowing

Revenue and profits are the result of the sale of goods, not their production. The market value of production is determined by what consumers are willing to pay for that production. Less income normally means less ability to purchase production. Lower aggregate American consumer income would normally lower the aggregate value of American production, because it would lower the money available to purchase that production. Again, increased borrowing has allowed Americans to spend beyond their income. It has also allowed for a higher amount of investment to be profitable than would have otherwise been the case. In other words, it has allowed for overinvestment in relation to consumer income. Thus, businesses and corporations have been able to retain a higher fraction of their revenue, pay workers a smaller fraction of that revenue, and still be able to sell their entire production.

The increased amount of consumer borrowing has filled the consumption gap that would have otherwise been created by declining real wages. Borrowing has prevented the drop in consumer production demand that would have otherwise resulted. This consumer deficit spending has completely obscured the worsening wage-productivity gap.

This "borrowing" bubble will not continue indefinitely. If the wage-productivity gap has not narrowed by the time the borrowing bubble deflates, our economy will sink. There is no evidence that the wage-productivity gap is narrowing. And there is evidence that the combined "housing-borrowing" bubble is starting to deflate. I doubt it will be a "soft landing."

-------------

I certainly appreciate your question about inflation. Especially the part about a "fair" comparison. I don't know if there is anyone doing it from a completely neutral position. You can at least start with the information from the Bureau of Labor Statistics. (The above link to "Wages" should give you some idea regarding the effect of inflation on wages.) The BLS wage link shows "real" wages going back into the 60's. It appears that real wages were higher in the late 60's and 70's than they are now. The BLS adjusts for inflation using the Consumer Price Index.

There certainly is controversy about whether the Consumer Price Index is an accurate measure of inflation. From what I've read, it appears recent adjustments for inflation have underestimated it. There is a whole field called "hedonics," where the alleged increased "quality" of goods is factored in. For example, the current value of a computer is considered higher than it was previously, thus meaning it's current price is much lower than it should be, and therefore decreases the measure of inflation. In other words, a price of $600 might be considered deflation, because its real "value" should put it at $1200. This seems like a deliberate attempt to understate inflation to me. The cheaper computers from previous years wouldn't even work online today. So this alleged increase in "value" is a necessary change to obtain a computer that functions as well as a computer from previous years. This is just one of many examples of "hedonics," and how it's used to adjust (or distort) inflation measurement. There is a good link for a description of how inflation is calculated, and how it is probably being understated by the government. It can be found at:
GillespieResearch Let me know if this is useful.

For additional information on the "Wage-Productivity" gap, I'd recommend reading the postings on my blog by "DF." He's a French economist, and he's posted some very interesting information here. He also has his own blog at: Revolution2006

Thanks again for comments and for visiting my blog. Again, I'm glad I've sparked your interest in economics. That was my main objective when I began my blog.

Mike (unlawflcombatnt)

12:39 PM  
Blogger unlawflcombatnt said...

Note to posters:

I delete anything that appears to be an advertisement for a product. Information-type site postings are OK, but postings that are advertisements for consumer products will be deleted.

4:50 PM  
Anonymous Anonymous said...

http://mwhodges.home.att.net/inflation.htm

This is the link to the Grandfather inflation report in case you have not seen it. It explains the change in the CPI calculation as does Gillespie. I was told about the "fudge factor" in statistics class but this is outrageous. I never thought I'd see something like this and I am still having a hard time understanding how they can get away with it. Thats what we get for letting politicians do the math.

12:07 PM  
Blogger unlawflcombatnt said...

Steelman223,

Thanks for the link. I think I actually have a "Grandfather" link as one of my links. I'm not sure if it's the same one or not.

7:17 PM  
Blogger unlawflcombatnt said...

Steelman223,

Your source of information for this inflation tale does not have his facts straight.

The national debt and budget deficits increased dramatically under Reagan. The consumer price index increased 40% during Reagan's 8 years in office.

The real wages of American workers declined under Reagan.

I'm glad you referred me to this reference once again. Now I know why I didn't visit it more often. The author has a view of history that differs from the published facts of that era.

I'll try to come up with a better discussion of inflation. I would view the "hodges" reference with suspicion. His numbers do not agree with those published by the Bureau of Labor Statistics.

You might check out my reference for the Economic Policy Institute at http://www.epinet.org. They seem pretty honest to me.

7:42 PM  
Blogger unlawflcombatnt said...

Loosecannon,

Thanks for your response. I think the best overview-type post I've written is: Neocon Economy

You might also find the posts Capitalism and Wealth Distribution or Leftward toward Capitalism

Let me know if these are helpful.

10:07 PM  
Anonymous Anonymous said...

I always check the place over here dodge phelps

3:53 AM  
Blogger unlawflcombatnt said...

Loosecannon,

Thank you again for your comments. I'm not sure I can answer all of your questions. The approach I've taken is deliberately simplistic. My posts are of no benefit if readers don't understand them. As such, I've tried to write them in a way most people will understand. I'm hoping to dispel a lot of current economic mythology that many consider factual.

In addition, I've focused on what economists call "positive" economics, rather than "normative" economics. In other words I've focused on the way things actually are, rather than the way things should be. I try to avoid debates about "fairness" due to the subjective nature of fairness. I try to stick to points I can support with facts and logic, rather than subjective opinions or judgement calls.

The original purpose of my blog was to show that policies that help the lower 98% of the income range are also cause the most economic growth. Such policies are not only more humane, they are also best for increasing GDP and total wealth. In the long-run everyone is better off. Corporate America, as well as working America, would be better off.

Regarding your question about a "quasi fascist/fuedalist class structure," I'd like to redirect the question into one of greed vs.power. I doubt that policy is driven with the specific intent of creating a quasi fascist/fuedalist class structure. I do believe, however, that policy is driven by greed and by short-term gains that result in long-term losses. Again, the long-term effects of impoverishing the entire world will also reduce the wealth of the most affluent. There'll be less consumer income to buy their products. There'll be less demand for production. As a result, there will be less production. Since production creates wealth, it will also be reduced as well. The result is an overall decrease in the world's wealth, leaving less wealth for the affluent to confiscate.

Keynes clearly understood this. If the world's aggregate demand declines due to the impoverishment of it's workers, production will also decline. The wealthy will simply have less wealth they can confiscate. As money is concentrated in the hands of the affluent, more money goes into "savings," and less goes into the economy. Capital will not be invested without anticipated returns. An impoverished work force reduces anticipated returns because it reduces consumer spending. Thus, increasing investment capital, at the expense of increased impoverishment of the work force, does not increase investment. It reduces it. It reduces consumer spending and the production demand it creates. It reduces demand for production that investment capital would facilitate. Thus it reduces capital investment, even though it increases the amount of available capital. As a result, the upward re-distribution of wealth simply pulls money out of the economy. Such policies are not "pro-growth." They are anti-growth.

My post on BasicTheories might give further insight into what I've said.

I think I have stated much of my criticism of capitalism in the posts I've previously suggested, as well as the one above. The post titled Economic Growth, Wealth Distribution & Balance. I'm an advocate of capitalism, not an opponent. However, I do oppose many of its excesses. Also, I believe many of the alleged excesses result from restrictions to free enterprise, rather than lack thereof. That was much of my message in my post "Leftward Towards Capitalism." Even Adam Smith believed government should actively break up monopolies and eliminate any restrictions to competition between businesses and corporations. Government handouts to corporations, as well as laws protecting them from competition, are not examples of "free enterprise." They are examples of Corporate Fascism.

There's nothing "private" about "privatization." It's simply an example of taxpayer funding of an alleged private enterprise. It's functions much like socialism, except that taxpayer money is siphoned off into busines and corporate pockets. Privatization should really be labeled "corporatization." This is well beyond allowing Corporate America to engage in "free enterprise." This amounts to funding their profiteering with taxpayer money.

Before anyone gives up on "free enterprise," we should make sure we aren't wrongly blaming free enterprise for problems created by corporate fascism. The corporatists in this country are always touting "free markets," while doing everything to eliminate them. But they don't believe in free markets. They've just deceived the public into thinking so. They'd like us to believe our economic difficulties are to "onerous regulatory burdens" and restrictions to free markets. They're partially right. Many of our problems are due to restrictions of free markets, especially those protecting Corporate America's profits, as well as protecting them from competition.

10:31 AM  
Blogger unlawflcombatnt said...

Loosecannon,

Thanks again for your comments. I think we agree on most points.

My point regarding subjective vs. obvjective was that the objective is easier to explain, as well as having a more tangible basis of proof. In the case of progressive and populist economic policies, the goals of subjective "fairness" and objective benefits are served by the same policy. More progressive and populist policy would improve economic growth as well as being more subjectively humane.

Regarding the effect of politics on economic theory, much of what has been considered "scientific" economic theory is based on incorrect basic assumptions, as well as outright wishful thinking. Some of the "superstructures" you might be referring to are theories designed to justify a desired policy, rather than honest attempts to explain observed reality.

Supply-side mythology is one such phantom theory. It's nothing but an attempt to justify reducing taxation of the wealthy under the guise of economic "growth." Paul Krugman refers to it as a crank theory. I completely agree.

Your description of our economy as a credit monopolistic economy is excellent. We have a corporatocracy where consumer spending is financed increasingly through borrowed money. This is not a sustainable course. Our economy will eventually disintegrate, unless we "change the course."

11:53 PM  
Anonymous Anonymous said...

In the original post you said "Let's not forget that someone needs to buy the goods produced. Who will buy them if American wages drop to the level of their enslaved foreign counterparts? People can't purchase goods without income. And very low income means very few goods purchased."

If very low income leads to a decrease in demand, then that will force the companies to decrease prices to stay in business, right. Its the simple laws of demand and supply.

I would also suggest reading a book by Russel D. Roberts titled "The Choice: A Fable of Free Trade and Protectionism"
more info here... http://www.amazon.com/gp/product/0130870528/qid=1133347961/

2:55 AM  
Blogger unlawflcombatnt said...

Anonymous,

Prices do not fall immediately in response to decline in demand. This is the concept of sticky prices. In contrast, the quantity demanded does fall immediately, because consumers are limited as to how much money they can actually spend. Less income causes less spending. In fact, it has been well demonstrated that a decline in income will reduce consumption over any time frame shorter than the so-called "long-run." Prices adjust only over the long-run, and the "long-run" may take many years. In the mean time, consumer spending declines, demand for production declines, demand for labor to provide production declines, and aggregate consumer income declines as a result. This leads to still further declines in aggregate consumer spending and production demand, thus further reducing employment. The decline in labor demand not only decreases employment, it decreases the wages of those who are employed.

At present, the gap between consumer spending and wages has continued to widen due to ever increasing levels of consumer borrowing. This has obscured the decline in purely wage-financed consumer spending. Increased debt-financed consumer spending has allowed spending to increase despite wage declines. This is not a sustainable situation. Consumer spending cannot continue increasing while real wages decline. Eventually consumer ability to borrow will reach its limit, and consumer spending will fall. When consumer spending finally falls, so will our economy.

Though a simple microeconomic supply-demand-price relationship may apply to individual businesses or industries, it does not apply to the economy as a whole over the short or intermediate term. By the time the "long-term" is reached (if it ever is), consumer demand will have dropped significantly, resulting in a reduced GDP, wages, and standard of living.

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