Clearing Economic Delusion

The United States might be a superpower, but it is not a country that controls its own fate. Delusion does. Much of the U.S. public is deluded about the state of the U.S. economy.

Americans are deceived into believing that they benefit economically from outsourcing, offshore production and an unprecedented trade deficit.

The deceivers emphasize the lower prices, not the lost incomes and destroyed careers, that result when American workers are replaced by cheaper foreign labor. The deceivers allege that the trade deficit means that we get to consume more of the world's goods than we produce, with the added benefit that foreigners pay for our excess consumption by investing in America.

The truth of the matter is that "foreign investment" in the United States today consists of Asian central banks, mainly Japan and China, using surplus earnings from massive trade surpluses to prop up the U.S. dollar by purchasing U.S. government bonds.

By propping up the dollar, Asia keeps its goods and services cheap, thus worsening the U.S. trade deficit. Washington goes along because Asian countries use their export surpluses to finance the U.S. budget deficit.

Propping up the dollar undermines investment in factories or businesses that produce jobs for Americans. Stephen Roach, chief economist for Morgan Stanley, reports that in 2003 net investment in the U.S. business sector was 60 percent below the level in 2000.

The United States has become the world's largest debtor, in hock to foreigners for one-fourth of our Gross Domestic Product. The ratio of U.S. external debt (what we owe to foreigners) and U.S. exports is approaching the crisis ratios of banana republics. It is inevitable: America's mounting debts will produce a crisis. The dollar's value will plummet, and U.S. living standards will drop. Everything will become more expensive for Americans.

What helps to keep the overvalued dollar up is the fact that it is the currency in which the Middle East bills its oil. Every country has to purchase dollars in order to pay for its oil, and these purchases keep the dollar afloat. Just prior to the U.S. invasion, sanctions on Iraqi oil had run their course and were about to be removed. Saddam Hussein intended to bill Iraqi oil in Euros, which could have started the abandonment of the dollar by the oil-producing countries.

In the meantime, America continues to lose high-paying jobs and entire occupations to foreigners, because U.S. corporations outsource jobs and produce offshore. University of California professor Norm Matloff warns that outsourcing and H1-B visas, which bring foreign workers into U.S. firms, are destroying the U.S. software engineering profession. (Matloff's writings are available online and are worth more attention than this column provides.)

The shrinking computer science enrollments in American universities have finally caught the attention of the academic establishment. Computer science departments, which should have been speaking out long ago, have been muzzled, because they are heavily dependent on research and faculty funds from the very firms whose outsourcing practices are destroying the occupation in America.

Falling enrollments mean fewer faculty positions and graduate students. Despite their funding being threatened by fewer enrollments, most computer science professors are unwilling to contradict their corporate benefactors' false claim that "outsourcing is good for America." Another year of biting the tongue, another grant received.

Instead, the professors acknowledge that programming is a lost occupation for Americans and claim that there is still a future for American students in designing computer systems -- "computer software systems architecture." Nonsense, says Matloff, a computer science professor himself. He notes that it is impossible to design computer systems without having years of programming experience. If you lose programming, you lose the base for the occupation, and all the rest goes offshore as well.

Some economists claim that lost occupations will return to the United States once wages rise in India and China. Matloff's answer: "Did manufacturing work return to the U.S. over time as wages rose in developing countries? Of course not." America is carelessly forfeiting its manufacturing and high-tech occupations.

Other economists allege that new high-tech professions will rise to take the place of the lost computer engineering profession. Matloff punctures that delusion: Venture capitalists routinely demand that the new companies they finance outsource to the hilt.

U.S. universities have educated enough Indians and Chinese to fill every high-tech job American firms have to offer. The false claim that only drudgery jobs are outsourced is laughable.