I have an expression I present to my economics classes. It has a certain impact: the US is a a third world nation, we just haven't realized it yet. Our emerging status isn't obvious. Products remain relatively cheap (energy excluded) despite the falling value of the dollar against most foreign currencies. But there are real signs.



Most Americans who are paying attention have noticed a long term decline in manufacturing jobs in the US. Quarter after quarter, year after year, the government reports job gains, but those gains are primarily in service industries: health care (we're not talking doctors, here), restaurants and bars, retail trade and, until recently, construction. A close examination of the figures will usually reveal a decline in manufacturing jobs. This is not an accident.



Over the past 30 years, American manufacturing has moved offshore at an accelerating rate. Walk through any big box store (or any other for that matter) and look where things are made. Overwhelmingly, it's China or other developing nations. The process is inexorable. With “Globalization” we have opened the world's borders to free trade in goods and services. On the one hand, this has presented opportunities for US manufacturers to expand profits by shifting production to countries where wages are a tiny fraction of those in the United States. Goods made abroad can be sold at an attractive price in the US while still allowing producers to increase the difference between price and total cost, otherwise known a profit. Those companies with a sense of national pride and identity are, finally, forced to move some or all of their production offshore in order to survive.



Aside from the short term charm of finding bargains on the shopping rack, there are serious consequences here. Let's look them. The first problem is the disappearance of the American “living wage”. The only reason Americans have managed to avoid confronting their declining real income per capita it by increasing the number of family members working. There was a time, in American mythology at least, when people accepted that one working family member could support 4 people at a reasonable standard of living. This was the vision of America Nixon and Krushchev debated, famously, at an exhibit of the postulated US living standards presented in the Soviet Union. This was the Ozzie and Harriet version of American life which was broadcast to the world and to the home audience as standard: the norm. It wasn't, of course, but it was close enough to what middle America saw around them to be at least plausible. The incomes implicit in that early 1960's view of American life may have improved until the early 1970's (there was a war going on and war is always good for employment and incomes), but since that time statistics indicate that the real (inflation adjusted) incomes of American working people have actually declined.





This is a problem that is not going away. It's going to get worse. Several convergent forces are leading to US economic destabilization. One force driving this tragedy is free trade, also called globalization. One of the more profound spokesmen on this subject is Paul Craig Roberts an economist in the Reagan Administration who has written extensively on the topic and lends support to the argument that globalization is on the verge of ruining the US economy.



The loss of American manufacturing jobs is largely the result of American firms moving their manufacturing off shore, to labor markets in which workers earn a tiny fraction of US wages. Once the globalization process began in earnest, it became impossible for many American firms to maintain US production even if the wished to. Keeping jobs here would render these firm uncompetitive as the rivals moved to take advantage of peasant wages in places like China , India and other developing nations. Even signature American enterprises such as Boing are moving larger segments of their airliner manufacturing to other countries. The finished sub-assemblies for the 777 Dreamliner, for example, are flown to Seattle for final assembly. Highly skilled professionals, such as radiologists (medical doctors specializing in interpreting X-rays) are finding their work sent via high speed communications to much lower paid radiologists in places like India. The effect of allowing the unimpeded flow of capital and goods and services between nations is precisely the same as allowing the free movement of people across borders. In the end, we will experience a relative equalization of wages, world wide. Obviously, those in the current Third World will find wages improving. With billions of impoverished workers waiting in the “wings”, US workers will find their wage declines much more starting and profound than the increases granted to the struggling poor of the developing world.





Year $Billions

1980 2.7

1985 0

1990 -10.4

1995 -33.8

2000 -83.8

2001 -83.1

2002 -103.1

2003 -124.0

2004 -162.0

2005 -201.6

2006 -121.5

Source: www.italy.usembassy.gov/pdf/other/RL33536.pdf

The table, above, shows a relentlessly increasing balance of trade deficit with China. By 2006, the cumulative deficit with China was $950,500,000,000. It is larger today, and China is not alone as a nation with which we are running a deficit. There are many others, Japan being a notable example. Why are the Chinese, Japanese, Indonesians and others willing to hold claims against US dollars, claims they aren't going to use to buy US made goods or services?



This was a question that plagued me as an economist trying to explain the workings of currency markets and free floating exchange rates to interested students. Under normal market circumstances, the Chinese and others would simply convert dollars into currencies they were interested in using for purchases of imported goods; the value of the dollar would fall and that would make US goods cheaper, US imports more expensive and would tend to equalize our balance of payments situation. But that didn't happen. The US has been in a consistent balance of payments deficit since the early 1970's, and somehow the dollar didn't fall, US exports continued to shrink and US imports exploded. There are several factors at work, here.



The first is the fact that countries like China are seeing their development fueled in significant measure by sales to the US. If the Chinese cashed their dollar claims in for, say, Euros, the dollar would collapse effectively ending the US's ability to power Chinese economic growth. This collapse of the dollar would also mean the Chinese and other dollar holders would only get a fraction of their nominal dollar wealth in the form of Euros—they'd lose their “dollar gains”.



What the Chinese, and other dollar holders, have chosen to do is to buy US Government bonds, US corporate bonds and US properties. In effect, we purchase more from China than they intend to buy from us, and they simply lend the money back to us. In this way, the get interest earnings, and rents and profits from the US lands and businesses they purchase. In a real sense, the Chinese have financed the war in Iraq and Afghanistan.





Finally, should dollar holder dump dollars indiscriminately, they would scrap their holdings of the very currency they need to purchase crude oil from the OPEC nations who, until recently, have agreed to sell oil only for US dollars. Dollars used to purchase crude oil are called 'petro-dollars'. A very significant component of the world demand for dollars has to do with buying petroleum. It's interesting to note that, apparently, Saddam Hussein was proposing selling oil in currencies other than dollars before we deposed him. Equally interesting is the fact that Iran has been selling oil to China in Yuan.



The ultimate point, here, is the absolute unsustainability of the US's position. We cannot expect our trading partners to hold dollars in unlimited quantities, and as we've no hope of being able to achieve a positive balance of trade, that's exactly what we are effectively

seeking. That nations are cautiously moving out of dollar holdings is revealed by the rather steady overall decline in the value of the dollar over the past three years. This will continue.





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