3.02.2004

This was forwarded to me recently:

On February 25 the Comptroller General of the GAO (the General Accounting Office) hosted Jodie Allen, managing editor of US News and World Report, as one in a series of discussions on "Conversations on 21st Century Challenges". She spoke for about a half an hour on the outsourcing trend, and how the conventional wisdom about free trade has yet to catch up to the current realities.

Allen noted that jobs have moved across borders for decades but that, this time, the jobs being lost are the high-tech jobs that were intended to replace the lost "Rust Belt" assembly jobs . What will replace the lost jobs that are now being exported? Have our leaders thought through the changes that lie ahead for our economy? she asked.

"The United States must appreciate that we are in a tumultuous period," she noted pointing to the rapid rise of India's and China's capabilities. She also expressed concern that workers in the US are not sharing in current productivity gains, exacerbating the trend towards a two-tier society, which is not healthy for democracy, which needs a strong middle class.

She mentioned two things in particular.

First, she used the example of Levi's moving its last plants overseas to illustrate how misleading the productivity gains that come out of aggregate statistics really are. Levi's moves all its production overseas, where it makes product for, say, a tenth of US labor costs. It continues to sell the same amount of product (maybe more) at about the same price (finally someone challenges the assumption that consumer prices go down when labor is outsourced – as if Nike and the Gap charge at marginal cost rather than what the market will bear). Now, all that revenue the Levi's Company generates with those sales is attributed to its few remaining US employees - the central office planners, accountants, and managers. So now it looks like the Levi's Corp's productivity is through the roof, but only a few people benefit.

That scene gets repeated over and over and we see that “productivity gains” are illusory and the benefits of the outsourcing go almost exclusively to owners of capital - corporate leaders and substantial shareholders. Almost none goes to workers. The middle and working classes of the developed world are indisputable losers in the current free trade regime.

She also cited an article in the WSJ a few months ago which examined how Walmart is wringing wage concessions from its Chinese contractors who pay individuals something like $10 a month. Her reaction to this was that if American consumers are prostrate on the altar of consumerism that our market machinery systematically depresses the wages of the most impoverished people in the world we should be ashamed of ourselves.

She tied it to Bush policy by mentioning that the current tax reform pushes the burden of taxation onto payrolls and off ownership of capital. Boosting the payroll tax to lower the income tax – taxing work instead of wealth – offers further incentive for companies not to employ Americans. We’re cutting off our middle class, and that can’t be good for our democracy.

Scary stuff eh kids? Keep reading and keep letting folks know what's really happening here because as goes the middle class, so goes America.

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