Who Stole the American Dream?

by Hedrick Smith

  In fact, Tonelson contended, instead of generating net American exports, America’s biggest corporations have been adding to the U.S. trade deficits by importing more than they export. “Despite their export mantra,” Tonelson observed, “U.S. multinationals are now running big and steadily growing trade deficits with the world overall and with their favorite offshoring sites in particular.” In 2008, for example, Tonelson calculated the trade deficit of U.S. multinationals at $172 billion.

  “The big argument is that trade deficits don’t matter,” Tonelson said, parroting the rationale of free trade economists. “Who cares? The economy is going strong. That was the main argument through mid-2007. Then when the economy got into deep trouble, it became clear to many politicians and economists that trade deficits hurt growth. So they really matter. In fact, they mattered all along, but throughout the 1990s and into the first decade of this century, their growth-destroying effects were masked by a series of bubbles—the tech and stock bubble of the late 1990s and the real estate and credit bubble of late in this last decade. But now, we can no longer rely on real estate or financial gimmickry for growth. So the losses from trade are really holding us back.”

  The Cost of U.S.-China Trade: 3.5 Million Jobs

  Job loss is where ordinary Americans have felt the crunch. According to Robert Scott, an economist with the Economic Policy Institute, a progressive Washington think tank, America lost 2.6 million jobs to China from 2001 to 2010, the decade following the free trade agreement with China, and close to another 1 million in the 1990s. Scott compiles his estimates the same way the government and business calculate the job gains from U.S. exports. In toto, he says, in the last twenty years, 3.5 million American jobs have been wiped out by offshoring work and by Chinese imports.

  Economists differ over those figures. Some trade specialists, including Mike Wessel, a member of the bipartisan U.S.-China Economic and Security Review Commission, think Scott has understated the job losses, because Scott counts only those jobs that were actually destroyed and not jobs forgone by U.S. corporations, which might have expanded their U.S. operations but for China.

  Orthodox market fundamentalists, such as Alan Greenspan and free trade thinkers such as Columbia University economics professor Jagdish Bhagwati, dispute the notion that trade with China—or trade anywhere—has caused job losses in the United States. Their view is that trade is a win-win for every country. Citing the theory of competitive advantage put forth by early-nineteenth-century British economist David Ricardo, orthodox free trade economists argue that each country shifts out of production where it is inefficient and gravitates to sectors where it is more efficient; old, outworn jobs are replaced by new and better jobs.

  Bhagwati, author of In Defense of Globalization, contends that “putting these jobs overseas is, in economic terms, no different than importing labor-intensive textiles and other goods…. The fact is, when jobs disappear in America it is usually because technical change has destroyed them, not because they have gone anywhere.” Gregory Mankiw, who headed President George W. Bush’s Council of Economic Advisers, adds that whatever “dislocations” are caused by “outsourcing” of U.S. production in the short run, trade delivers long-run gains in new high-tech jobs. Trade deficits don’t matter, according to Brink Lindsey, vice president and senior economist at the Cato Institute, a libertarian research institute in Washington, because the gains of the new winners in America more than offset the losses of those thrown out of work by trade.

  “I think that trade policy or trade flows, one way or another, don’t have an effect on overall employment numbers,” Lindsey asserted. “They affect the kinds of jobs we have. And so some number of jobs have definitely been eliminated because of Chinese competition. Elsewhere in the economy, other jobs have been created because of Chinese competition…. The net effect, most economists think, is a wash….”

  Others disagree. Economic revisionists like Clyde Prestowitz, the Reagan administration’s chief trade negotiator for Asia, dispute the old orthodox argument, contending that it denies reality and defies common sense. “For some time now our ‘best and brightest’ have been invoking false doctrines that are systematically undermining American prosperity,” Prestowitz wrote. “Leading among these is the economic orthodoxy of market fundamentalism, simplistic pure free trade….”

  Former IBM vice president Ralph Gomory contended, in testimony to Congress, that Ricardo’s nearly two-hundred-year-old theory does not match modern conditions. What America has lost to China, Gomory asserted, is not just a shift in production, but a shift in productivity, which puts the United States on the defensive. “When the U.S. trades semiconductors for Asian T-shirts, for example, that is trade in the narrow sense. And the conclusion of the most basic economic theories is that this exchange clearly benefits both countries,” Gomory testified. “But when U.S. companies build semiconductor plants and R&D facilities in Asia rather than in the U.S., then that is a shift in productive capability, and neither economic theory nor common sense asserts that shift is automatically good for the U.S. even in the long run.”

  The longtime dean of American economists, Paul Samuelson, a Nobel laureate from MIT, was so irked by orthodox economists that at eighty-nine he waded into the debate and accused the free market economists of purveying a “polemical untruth” about America reaping net benefits from trade.

  “There are no such neat net benefits, but rather there are now new, net harmful U.S. terms of trade,” Samuelson asserted. Sometimes, he said, trade does benefit both sides. But at other times, he said, America can suffer “permanent hurt” when a country like China improves its productivity. He challenged the contention that the balance works in America’s favor. “It is dead wrong about necessary surplus of winnings over losings—as I proved in my ‘Little Nobel Lecture of 1972,’ ” Samuelson declared.” And although he agreed with Bhagwati that technology accounts for some of America’s wage losses, he contended that trade exacts a toll in driving down real wages. Mainstream trade economists, he declared, were ignoring the “drastic change” in incomes between the rich, who are further enriched by free trade, and average Americans, whose “real wage has been lowered” by trade.

  That issue—the different winners and losers from trade—is central to Larry Mishel, president of the Economic Policy Institute. “Theoretically, the gains from trade offset the losses from trade,” Mishel said. “But nothing says there were more winners than losers, and … that for the bottom three-fourths of America that they are net gainers. In fact, I believe that most people have been losers from trade.”

  How People Fared at the Grass Roots

  Since free trade economists contend that people thrown out of work by trade eventually bounce back and get even better jobs, I decided to check that out. Six years after Rubbermaid shut down its plant in Wooster, Ohio, I went back to find people I had first met in 2004. Most were significantly worse off than before.

  Two of the lucky ones were Ron Wright and Mike Kendall. Each had piled up more than thirty years of seniority at Rubbermaid by 2004, and their seniority qualified them for the small workforce that Rubbermaid retained to operate a small distribution center in Wooster. Initially, their pay was cut sharply, but gradually they have inched it back up. Now in their sixties, they are on track for a reasonable retirement.

  But others in their age group with less seniority were forced into premature retirement in their midfifties. They have wound up with far less than if Rubbermaid had kept operating.

  Jump down half a generation to people in their midforties, and the pain is palpable. The people in the worst shape are almost impossible to find. They’re long gone, seeking work somewhere else. I heard their stories second- or thirdhand. Those whom I found were struggling.

  Sylvian Greene, who had put in eighteen years at Rubbermaid, said he and his wife, Lois, could not have survived without charity and public assistance. Together they had made about $80,000 a year at Rubbermaid; since then, even with federal assistan
ce, their income has been cut roughly in half. At first, Greene found work in a fertilizer plant and his wife as a home nurse. But in her first week, Lois severely injured her back lifting a patient and has not been able to work since. Two years later, Sylvian lost his fertilizer job. For three years he had little work, and the couple chewed through their Rubbermaid severance pay and savings until they were broke.

  “It is hard—really hard,” Greene admitted stoically. “Faith Harvest Church, they brought us groceries, paid our electric. The People to People ministry, they would pay our bills, give us money. It was nothing to go to the mailbox and there would be a $50 bill in there. My mom helped with house payments.” But eventually they fell behind and the bank foreclosed. Only the intervention of an understanding local judge gave them time to sell the house and get cash to pay off the mortgage and buy a cheap mobile home. By then Greene had been diagnosed with congestive heart failure, eventually qualifying for federal disability insurance. Otherwise, the Greenes survived on charity, welfare, and food stamps.

  Don and Ginny Lingle were in their midthirties when the plant closed. Full of optimism and energy, they decided to go into business for themselves. Ginny, who had worked in accounting, set up shop doing budgets and tax returns for small businesses. Don, who had done carpentry and maintenance at Rubbermaid, launched a contracting business. Ginny’s clients have been pretty steady. Don’s contracting has faced rougher sledding. People are slow to decide on projects—slower still in a tight economy. Fortunately, while at Rubbermaid, the couple had paid off the mortgage on a contemporary home. But with their income now uncertain, their big worries are the rising cost of health insurance and their lack of retirement savings. “It’s the unpredictability that gets to you,” Don admitted. “When you own your own business, you can’t tell what your work is going to be like. It fluctuates with the economy. There’s no security now.”

  Pam Constantino, a lively bundle of energy in her late forties, was a product processor at Rubbermaid. For her, as a single parent, the plant’s closing hit like a tornado. “After I lost my Rubbermaid job, I couldn’t make my house payments and my utilities,” she said. “So I had two people move in with me, my sister and a good friend—for three years.” Then Constantino got a temporary job at a nursing home and more recently at the Wayne County Kidney Center, making $10 an hour, 40 percent below her Rubbermaid pay, with slim benefits. “I am frugal,” she said. “I know how to go without, but I couldn’t live from paycheck to paycheck. I had to have roommates. Thank God I didn’t have a car payment. I had to borrow money for gas sometimes. ”

  The common thread in these and other stories that I heard from computer programmers in Silicon Valley or information technology workers in New Jersey is that even people who find new work come out behind, with lower pay and fewer benefits. That pattern is confirmed by a nationwide study done by the U.S. Bureau of Labor Statistics. In January 2010, only half (49 percent) of those thrown out of work in the three previous years had found a new job. The other 51 percent were still looking or had given up. Among the fortunate half, most were making less than before; more than one-third were down more than 20 percent. In short, job loss from global trade means a chronic drop in income and economic security.

  How Offshoring Widens the Economic Divide

  While technology and automation are certainly destroying some out-of-date jobs, economists increasingly see globalization as the heart of the problem. The figures show a stark shift from the 1990s to the 2000s. In the 1990s, American companies were hiring both at home and abroad. In the zero decade (2000s), the U.S. Commerce Department reports that major American multinational corporations added 2.4 million employees to their overseas workforces while cutting 2.9 million workers in America.

  Whether U.S. multinationals are chasing cheap labor or chasing customers, as business leaders contend, offshoring has sharpened America’s economic divide, according to Nobel Prize–winning economist Michael Spence of New York University. By his analysis, the United States has had two economies with very different track records since 1990. One is what Spence terms “the nontradable sector,” fields that do not face global trade competition, such as health care, retail, and public service. The other is “the tradable sector,” such as autos, electronics, and other manufacturing, all of which face foreign trade competition.

  From 1990 to 2008, Spence and a colleague found, virtually all (97.7 percent) of U.S. job growth came in the nontradable sector, mainly health care and government jobs, where the growth outlook now is poor. In the tradable sector, they found big job losses, lower pay and insecurity, and a widening income gap between the vulnerable U.S. middle class and a small fraction of high-income jobs in management, consulting, and finance.

  “You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the U.S.,” writes former Intel CEO Andy Grove. “That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?”

  Grove’s answer, revealing for an American CEO, is that offshoring U.S. jobs is far too important an issue for our nation to be left to our multinational companies and their CEOs. Grove argues that it will take a new national strategy and a broad commitment in U.S. industry to regenerate America’s muscle in manufacturing. A few glimmers have begun to appear—a handful of plants coming back from China, a modest uptick in manufacturing employment, and business leaders such as Grove speaking out. But much more needs to be done, as you will see in the final section of this book.

  CHAPTER 16

  HOLLOWING OUT HIGH-END JOBS

  IBM: SHIFTING THE KNOWLEDGE ECONOMY TO INDIA

  Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gain.

  —THOMAS JEFFERSON,

  letter, 1814

  What we are trying to do is outline an entire strategy of becoming a Chinese company.

  —JOHN CHAMBERS,

  CEO of Cisco

  In this new era of globalization, the interests of companies and countries have diverged. In contrast with the past, what is good for America’s global corporations is no longer necessarily good for the American people.

  —RALPH GOMORY,

  former IBM vice president

  AMERICA’S RESPONSE to the challenge from China in the 1990s was to shift toward high tech. That became the new rallying cry for business and political leaders. Some economists reckoned that traditional U.S. manufacturing was doomed because China and the rest of Asia were becoming the workshops of the global economy with their three hundred million or more low-cost, moderately skilled workers. America’s new high ground would be the knowledge economy—the Internet, IT, scientific research, product development, corporate services, finance—areas where American universities would generate high-end skills and where start-ups would smartly innovate the United States to a long-term competitive advantage.

  Bill Clinton, seeking support from Silicon Valley’s high-tech leaders, made the promise of masses of high-skill, high-wage, high-tech jobs a centerpiece of his 1992 presidential campaign and one of his first White House initiatives. The normally Republican CEOs of Apple, Oracle, Compaq, and Xerox backed Clinton. “Going digital” became the mantra for free traders on both left and right. That was the title chosen for an economic strategy book by William Niskanen, head of the libertarian Cato Institute, and economist Robert Litan of the liberal Brookings Institution. Free trade economist Jagdish Bhagwati forecast that “in the end, Americans’ increasing dependence on an ever-widening array of technology will create a flood of high-paying jobs….”

  The older generation coached Generation X to stake its future on becoming engineers, computer programmers, and systems architects—an irreplaceable army of “knowledge workers”—because knowledge economy expertise would protect them from low-cost Asian competitors. The dawning of the digit
al era, its enthusiasts asserted, was altering the global balance of economic power back in our favor. “You could think of it as brain power vs. muscle power,” said Harvard economist Richard B. Freeman.

  Free traders in Washington think tanks and in Congress, wanting to put the best face on America’s global trade policies and seeing high-technology industries as America’s strong suit, had pressed the government in 1989 to establish a new category of foreign trade—“Advanced Technology Products.” This category was set up to embrace high-tech products that require significant research and development to create and produce—the sectors of the economy where Americans had long outperformed the world. So trade in high-technology products was going to be the new yardstick for measuring America’s global performance.

  America’s Deficit in High-Tech Trade

  Through the 1990s, the United States did maintain its historic edge in high-tech trade, as expected. But all too quickly, blue skies turned gray. In 2002, America suffered a high-tech trade deficit—importing more high-tech goods than it exported. Initially, it was dismissed as an anomaly. But very quickly America became stuck in the red in high-tech trade. By 2006, America’s deficit in advanced technology trade had risen to $38 billion, and by 2011, only five years later, it had nearly tripled—to $99.3 billion.

  And what was the main source of America’s huge shortfall? Not the highly developed economies of Germany and Japan. With most of the world, the United States ran a slight high-tech trade surplus. China was the big exception. In 2010, only a decade after President Clinton and U.S. business groups were trumpeting American advantages in trade with China, the United States ran a $94.2 billion high-tech trade deficit with China, and it kept climbing—to $109 billion in 2011. To the consternation of U.S. free trade advocates, the Chinese were shipping more high-tech products to the United States than we were shipping to them.