Absent from Denver: The Gobal Economy

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WASHINGTON– A somewhat disturbing feature of the Denver Democratic Convention has been the absence of a serious, in depth debate on the shifting of economic power to Asia and of the depressing effect on American wages caused by the addition to the global labor force of hundreds of millions of eager and inexpensive Asian workes who can perform the same tasks at a much lower cost. 

This new competition from Asian cheap labor is the main source of the troubles of the squeezed American middle class. Rather rapidly, American workers had to realize that they could no longer get relatively high wages, as their competitors can perform the same tasks for a fraction of what a US worker is paid. But the Denver narrative was almost entirely focused on the need to correct lack of fairness and lack of attention to the problems of the middle and lower middle class in America, as if this were a self-contained American problem, created primarily by wrong headed Republican policies. The implication of this “domestic context approach” is that fiscal policies aimed at redistributing burdens and rewards are the main instruments to be used to fix this social injustice generated by misguided domestic policies. (Needless to say, there are important problems that are truly domestic: the financial recklessness that has contributed to the current housing crisis and the aburd cost of health care, to name just two egregious ones. But it is a mistake not to appreciate that the repricing of US labor, due to the Asian competition, has created a true systemic shift that cannot be fixed with a bit of adjustment and fine tuning).   

Failing to focus on the new role of Asia, the extremely powerful external economic factors that have affected America –with a devastating impact (especially on the manufacturing sector) were not closely examined. The accepted interpretation of the sources of the plight of the middle class went as follows. Millions of jobs were lost –it was said– under George Bush. As he is the steward of the economy, this must be his fault. (Anybody who knows better is aware that no President is in control of the economy; but in politics, unlike science, anything that has a ring of truth becomes the truth). Well, George Bush does have many faults, including improvident fiscal policies; but he did not create the Asian economic rebirth and the ensuing competition caused by cheap Asian labor. Sure enough, a new president can change approach. However, fiscal and social policies alone, however well intended, unless accompanied by a serious strategy aimed at creating new sectors in which America can outrank the competition, will not cause the structural changes we badly need to create new, competitive sectors.  

The fact is that the world balance of economic power has shifted to Asia. But this fact is absent from this campaign. All players continue to debate on the basis of the outdated assumption that America is still number one and thus what happens in America and to Americans is still mostly dependent on policies devised in Washington. Well, while America is still number one in many ways, Washington is no longer in total control. 

In Denver, (as elsewhere in this protracted campaign), absent a close examination of the rise of Asia and the damage that this phenomenon has inflicted on the least competitive sectors of the US economy, the whole discussion was focused mostly on the need to reintroduce fairness in a society managed until now by Republicans portrayed as disconnected from the general population. Fairness will be achieved by redistributing resources from those who have gotten too much during the pro-business years of George Bush to those who got only a few crumbs. Hence the long list of the needy and the assistance, aid and relief that will be provided to all who are struggling.

This may be fine and, to some extent at least, justified, as the needs are real and, in some instances, urgent. But the problem is that –whatever the merits of fairness or lack thereof– the whole debate failed to take into account that the main factor negatively affecting the welfare of the large US middle class is not to be found in the exaggerated profits of Exxon; but in the impact of hundreds of millions of new, reasonably skilled and cheap Asian workers who have entered the global jobs supply, thus taking away most of the functions that used to be performed in developed countries; while putting pressure on the salaries of those lucky enough to still have a job in the West. If certain skills are in abundant supply at a low price all over the world, it is hard for an American worker to obtain more money than the new competitors, while selling those same skills. Many US corporations, if confronted with increasing  labor costs, have the option of closing down and reopening in Asia. We all know this.

Yes, low wages paid to millions of reasonably competent factory workers in China and elsewhere do have a negative impact on wages in the US. If global labor cost are down, it is hard for US workers to be the exception, unless they are employed in extremely competitive, high value sectors not affected by what happens in lower value sectors. (There are some such instances of emerging high value sectors in America; but not enough. And this is the main problem that affects the real income of tens of millions of low skilled, low paid Americans. More on this later).

The downward pressure on wages for the average worker in the developed world is the least palatable effect of globalization for those in the West who are situated at the lower levels of the value chain. As a result, we have the relative impoverishment, or at least stagnation, of the middle and lower middle class. This is an issue with a clear economic origin but with obvious social and political consequences. These millions of Americans, squeezed by international competitors, are not doing well and thus are not happy. (The parallel housing crisis and high gasoline cost certainly do not help in brightening the picture). But what is much worse for them, as they look ahead, is that there is no new “grand strategy” that would help change the economic fundamentals –in terms of larger investments in new sectors accompanied by skills upgrades–and thus improve their condition any time soon.

The fact is that for the first time in modern history we Americans are not the most sophisticated low cost producers capable of invading weaker, less efficient markets and thus causing disruption in less sophisticated productive systems. We are –and we shall be for quite a few years— on the receiving end of the globalization revolution made possible by low cost Asian labor. In this new era the lower cost of others is disrupting us! For the time being, this is mostly because Chinese workers are cheaper, not necessarily better. Should they become better, as well as cheaper, this would add another layer of pressure on the US productive systems; and the US workers would be the first to feel the brunt of it.

But did we hear much about this in Denver? Not really. It would appear that the plight of US workers, real or a bit exaggerated as it may be, is entirely due to failed domestic policies; or, worse, policies that openly favor corporate interests at the expense of the millions of workers. So, as the cause of the problems is primarily domestic, we can devise a solution based on the reshuffling of domestic factors.

But this is wrong. The real underlying problem is the cataclysmic reallocation of labor and its negative consequences on the standard of living of US workers. A constructive way to cope with this transformation and the downward pressures that it has caused on the wages and thus standards of living of the US middle and lower middle class is to put forward and discuss the best plans aimed at upgrading skills and creating new competitive areas in the US economy. This is the only long term strategy that can provide a chance to regain competitiveness.

But the global economy and its imperatives were at best distant echoes in the Democratic Convention. We heard about all this suffering and ways in which the Federal Government in the hands of the well intentioned Democrats will take care of it. Of course, right before a national election taking place when the economic pie is shrinking, the temptation to use the zero sum logic is strong. And indeed this is what we have heard in Denver: “If many do not have enough, it is because the greedy and well connected few have gotten too much. So, the issue on the table is a necessary and radical redress”.

Unfortunately, while there is some merit to this position, it is fundamentally wrong. While issues of fairness should be discussed, it is a delusion to believe that, once properly addressed, the solutions devised will take care of the systemic deficiencies of significant segments of the US economy, due to loss of competitiveness in sectors invaded and conquered by lower cost producers from developing countries –China first and foremost.

Sure, we have to agree with the Democrats that there is something fundamentally wrong when those who manipulate capital, without adding much value in the process, collect ridiculously high fees for those services. Likewise, the disconnect between the quality of services rendered by corporate leaders and their compensation should be addressed. And certainly, a dispassionate conversation about what causes a growing gap between those on top and those below would  be useful. But only to the extent as this does not become an opportunity for airing conspiratorial or populist views, whereby the rich are all greedy crooks, and the not so well off are the hard working, honest people who have been betrayed by a Government corrupted by the lavish donations of corporations. Of course, there is some truth in all this. There is greed, and there is corruption and there are resources diverted to special interests serviced by large armies of Washington based lobbyists.

But the real picture is of America as a society progressively divided into two categories: those who actively participate as authoritative protagonists in the global economy, and thus reap its rewards; and those who are the victims of global change and who see their stakes diminished as a result of the worldwide reallocation of labor and, as a result, of its rewards.

The highly educated, savvy, competent Americans are doing well. The well managed global corporations have competitive technologies, skills and (at least in general) sophisticated upper management. This upper management created in the super universities, refined through intensive on the job training around the world and polished via MBAs in the elite schools is at home in a global economy where their business operates seamlessly in Chicago, Sao Paulo or Shanghai. The world is the oyster of the Wharton or Stanford graduates. MIT welcomes change, in facts it causes it –and so do Carnegie Mellon and Caltech and so on. And the educated elites who populate the R&D centers at Cisco Systems, Microsoft, Apple, Xerox, General Electric, United Technologies, Boeing and Johnson & Johnson, or the state of the art National Laboratories of Oak Ridge, Sandia, Lawrence Livermore and Los Alamos look at the future as new horizons full of exciting of possibilities, not as an unavoidable Asian tidal wave that will obliterate them.

And the cream of the crop within these corporate elites are the people who populate the recession proof Four Seasons Hotels around the world, those who shun the chaos of overcrowded airports as they fly with their “corporate barge”. They keep the luxury goods industry in business and certainly gasoline prices are not a major factor in the upkeep of their multiple luxury vehicles. Their children have the mathematical certainty of getting placed in one of the elite private schools, the springboards to get into the best universities and thereafter the good careers.

But everybody else, the worker bees of the American economy, those who do not make the changes but who are affected by the new competitive economy in which profit margins are thinner and thinner, are not doing so well. In the glorious past in which the US was the quintessential volume manufacturer, inundating markets with relatively cheap goods, the US worker, in steel mills, auto manufacturing or machinery, did reasonably well. Quality was good, competition modest, margins high. Thus management, (often pressured by labor unions much stronger than they are today) could afford to be generous. There was enough fat for all: shareholders and labor.

But all this is in the past. With the exception of those well equipped to participate in the globalized economy, all the others are still trying to comprehend what happened to them. Why is it that the good jobs are gone? Why is it that those that are still here pay comparatively less than before? Ho much more outsourcing can we expect? There is disquiet, anxiety, some anger and quite a bit of fear about a future that appears controlled by unknown forces. 

It is a complex situation, with many drivers. The main ones (related to the modernization of significant parts of the developing world) are totally beyond our control. Nonetheless, we need a new strategy that would require taking stock of a transformed world economy in order to determine how we reposition ourselves. Unfortunately, all this is complicated. It cannot be easily framed into a catchy campaign slogan. And, in any event, as the problems are huge and systemic, realistically there can only be long term viable solutions.

Hence, in a hot political seasons in which politicians have to give the appearance of having powers that in truth go beyond their reach, the temptation on their part is to bypass the real story of the impact of globalization and to assert that all the problems are domestic and that it is possible to go for the quick fix of redistributive politics as a way to finance assistance to the needy. (Of course there is more in the plans debated than just “taking from the rich and giving to the poor”. For example, a true reform of the health care system and all the waste and run away costs caused by the present setup has merit and it should be undertaken in any case, whatever the underlying economic circumstances).

But, while politically expedient, especially at a time in which the ranks of the worried needy have swollen, relief via taxation/redistribution will have only the important but limited effect of improving the short term economic conditions of many. Unfortunately, relief alone will do nothing to make the millions of marginally competitive or non competitive Americans better steeled to face the rest of the world. But this underlying reality is not discussed in the campaign as the real source of the current distress. And this is true for both parties, Republicans and Democrats.

On the Democrats’ side, the campaign rhetoric is about the masses of those who work hard and, at the end of the day, cannot get the commensurate rewards. Thus they feel cheated by “the system”. But here we have a fundamental misconception. In this conventional wisdom, it is assumed that “working hard” is the same as “working smart”. Whereas, while working hard and being diligent is very important, the kind of work that is performed, and how any type of work is ranked in terms of value within the new global context, is far more important.

This is why one should listen with some concern to the open ended promises of “getting back home those high paying manufacturing jobs”. The same jobs? Even though those same functions can be performed at a fraction of the US cost in China? This is dreamland.

By the same token, while something was said by Barak Obama about creating education opportunities for all, the way the issue was painted it would appear that the major obstacle to a good education and thus high paying jobs is the cost of education. Sure, obstacles to access are significant factors, especially in the US where there is a growing disconnect between the overall cost of living and the incredibly high cost of higher education. But, while access is very relevant, far more important (and not at all discussed) is the quality of education that is received through this laborious and expensive process. The real test of the value of this coveted and expensive education is whether or not it gives the student and future worker a real qualitative edge which, in turn, will allow him/her to be employed in companies that can command higher prices because of the superior and competitive quality of their products and services. And here we have a serious problem.

As I have already written, the quality of US secondary education is somewhere between mediocre and horrible. And, in most instances, those who receive horrible education tend to be the poor and the struggling. Being poor and uneducated is a life sentence to marginalization in a society that needs and rewards sophisticated skills. Unless, as a nation, we repair this huge deficiency, no matter what generous subsidy programs will be created in other areas, the education gap will stay there. As a result of this gap, we shall have an even larger chunk of our work force downgraded in terms of their earning potential, as their qualifications will be no better than those of comparable unskilled workers in Asia whose employers will win new business because their labor costs are lower. And people lacking competitive skills can work as hard as they want. They will compete for the scraps and they will be paid little, no matter what.

We did not hear much of this in the policy debates within the Democratic Convention. In part this is because any objective analysis of the disastrous failures of the secondary education system would have entailed a closer examination of the role of unionized teachers who happen to be staunch Democrats.

Of course, it would be nice to go back to the days when the US was by far the leading world economy, when Pittsburgh made all the steel and Hollywood produced all the movies; when General Motors had no competitors and the general public could openly laugh at those peculiar Japanese who in the 1960s were trying to sell their ridiculous little automobiles in America. In that era Americans with little education could be trained to be assembly line workers and take home a reasonably good pay.

But that era and that world is gone –for good. Of course, this does not mean that the whole of America lost its edge and has been left behind. While a large chunk of the old economy has been destroyed, some new sectors have emerged. It is America that has created the fundamental components of the new knowledge economy. The Internet came from America and so did the first PC and the first mass produced PC operating systems. The US productivity revolution of the 1990s has been due to the massive transformations in almost all sectors of the economy due to the adoption of information technology tools developed primarily in the US.

But this edge was not permanent. The development of information technologies was just the beginning of a process. While all this began in the US, it is now a global phenomenon. If the US gave the world the first rudimentary components of the Internet, a vast innovative process with many new international players ensued. Today, Korea has faster broadband than the US. Nowadays, the global economy allows me to have my PC examined via the internet by a Dell technician in Chennai, in the south of India. The internet may be originally American and Dell is a US company, but this job is performed in India. An Indian technician is the one who gets paid.

At a different level, the spreading of knowledge at least about basic manufacturing, gave an immense edge to Asia, as its armies of new, motivated workers could start making the same products at a fraction of our cost. These new dynamics –and not mean spirited Republican policies– are at the root of the displacement of millions of US workers. (The Republicans have their large share of responsibilities; but will get to these another time).

The ideal way forward is for all of us –as a nation– to acquire the worldliness of Henry Kissinger and the creative skills of Steve Jobs. Of course, this is impossible in the short run; but not impossible in absolute terms. Yet, be that as it may, any constructive way forward has to include an urgent and honest debate about the parallel deficiencies of our obsolete economic sectors and of our secondary education system. We need strategies leading to the substantial upgrading of the quality of our schools and what children learn. They are the future players in the global economy. Any team sent out there to compete without proper training will not achieve much. And, if this happens, the coach is rightfully blamed. If we want to win, we better look at who the coach is and what kind of training is given. If we say that we cannot get a better coach because we do not have enough  money to pay for talent, then we are really in trouble, as we shall keep losing.

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