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Do you hear that "giant sucking sound"? In the early 1990s, it was Presidential candidate Ross Perot's description of how the U.S. was losing jobs to Mexico. A decade later, it's not just Mexico that has people riled up. It's China, Taiwan, South Korea, Brazil, Chile, and other emerging markets. America's manufacturing sector is reeling, with some 2.7 million factory jobs lost since 2000. Workers are worried about losing their jobs, incomes, and benefits to low-wage competitors in the developing world.
Politicians on the state and national level, including the Bush Administration, claim to feel the pain of the unemployed, while Corporate America is coming under attack for closing factories and exporting middle-class jobs. Witness this intriguing exchange between Lou Dobbs, anchor of Lou Dobbs Tonight on the CNN cable network, and CNN correspondent Peter Viles.
Dobbs: All these CEOs in this country, we are paying them a lot of money, and they're geniuses.
Viles: Right.
Dobbs: They're giving away the manufacture of their products to people working for 30 cents an hour.
Viles: This is something the Administration has not yet mentioned. But up to half of the imports...come into the country because of decisions made by American corporations that think it's smarter to outsource from somewhere else in the world, bring the goods here, then either finish them or bring them as finished goods.
Dobbs: I think any CEO deserves $15 million to $20 million to figure out that, if they can just cut jobs and lower their cost, they can get another bonus. It's time for CEOs, those high-paid CEOs, to start doing a little heavier math than that.
Viles: Agreed.
Dobbs: And taking care of folks who count.
The pressure on Washington to "do something" is intensifying, especially now that the World Trade Organization talks in Cancun, Mexico, have collapsed. The standard policy prescription is protectionism in various guises: Higher tariffs, dumping charges, preventing foreign companies from bidding on government contracts, quotas, and the like.
However, protectionism was the wrong answer to global-competitive pressures in the early 1990s, and a decade later, it's still a disastrous policy initiative. Instead, government should aggressively increase its financial support of worker training and higher education.
THE COST OF TARIFFS. If there is one public course of action most economists agree on, Republican and Democrat, supply siders and Keynesians, economists from Harvard or the University of Chicago, it's that keeping borders open pays off big.
"The judgment of economists," said Lawrence Summers, economist and president of Harvard University in a recent talk, "the judgment of almost all of those who have thought carefully about the question, is that increased openness to trade makes a country significantly richer than it would otherwise be and makes its workers better off than they would otherwise be. And the primary reason why that is true is that they are able to import goods at lower cost and therefore their paychecks go further and their income, after correcting for the prices of things they buy, is substantially greater."
In the short term, though, the relentless global competition for profits and markets means some U.S. workers will be negatively affected, even after the economic recovery starts generating job growth. Many of the lost manufacturing jobs will never come back. Fierce overseas competition has forced Smokestack America to restructure its operations for the past quarter century -- laying off workers, investing in new technologies, consolidating operations, and opening plants in low-cost countries.
Adding to the gloom, well-paying white-collar and skilled service-sector jobs are heading overseas at a startling pace. Information technologies are making it easier to work with educated, cheap foreign labor. Many tech-savvy, well-compensated U.S. workers will get handed a pink slip as information technologies allow companies new opportunities for slashing costs and improving economies of scale. Lawyers, accountants, and brokers in the 2000s could be the auto workers, machine-tool operators, and welders of the 1970s.
TOMORROW'S JOBLESS. "The white-collar worker is about to go through what the blue-collar worker went through in the 1970s," says Paul Saffo, research director at the Institute for the Future. "In the global society, no job touched by a computer or a telephone will be secure. It's inevitable that a significant portion of jobs will go overseas."
Workers bear the brunt of capitalism's creative destruction, but what should be done if the cost of protectionism is too high? For one thing, government money is wasted when it goes to protecting companies and their high-paid managements. It's far more efficient for the federal government to subsidize laid-off workers with vouchers that can be used for more education or training, whichever human capital investment the worker decides makes the most sense for his or her circumstances.
Even more important is the federal government increasing its support of public universities and colleges. Three quarters of college students attend public institutions, and those campuses make a sad picture. State and local governments are slashing their support of higher education. Tuition is going up, and the quality of education is going down. The gap between a private education and a public one is widening, whether measured by spending per student, faculty salaries, faculty teaching loads, and academic credentials for incoming students, according to a recent paper by Thomas Kane and Peter Orzag for the Brookings Institution.
BUSH'S FOLLY. The decline in backing for public colleges by state legislatures and governors has been exacerbated by the economic downturn, but it's an underlying trend. The authors argue that state budgetary obligations to pay for Medicaid are crowding out higher education. To take just one of many possible figures, state appropriations for higher education relative to personal income have fallen from roughly $8.50 per $1,000 in personal income in 1977 to $7 per 1,000 in 2003. State appropriations would have been about $14 billion dollars higher if the ratio had stayed the same from 1977 to 2003, the authors calculate.
The lure of protectionism is that it's a cheap short-term solution. But it's very costly to consumers and business in the long run. The payoff from government keeping borders open while investing heavily in human capital -- training and education -- is potentially enormous. This is where the true cost of the Bush Administration's budget fiasco becomes apparent. The floodtide of federal red ink will likely block any massive investment in boosting the human capital stock of workers -- the true wealth of the nation.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online Edited by Beth Belton
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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