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Jane White

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This Time It's Different -- Old Remedies Won't Fix Our Flat-World Economy

Posted: 05/06/2012 8:11 pm

Federal Reserve Chairman Ben Bernanke has tried to stimulate the economy by dumping $2 trillion in cash into the financial system, slashing overnight interest rates to zero and promising to keep them low for two years. The result: the slowest recovery in six decades.

Mitt Romney's Reaganomics stimulus approach -- cutting the corporate tax rate from 35 percent to 25 percent -- is a joke. A whopping 69 percent of U.S. corporations won't benefit because they currently pay zero taxes by passing through profits to investors who pay the taxes on their individual returns, a tactic known as "pass-throughs," according to The Wall Street Journal. This is one of the reasons why federal corporate tax collections amounted to just 1.3 percent of GDP in 2010, compared to 6.1 percent in 1952.

President Obama wants to remove tax incentives for companies who takes jobs abroad and reward those who bring them back home. But will a different tax tactic do the trick?

At least Obama understands the dramatic effect that globalization has had on our economy, unlike Bernanke and Romney -- I call it "evolnomics." The American economy has been transformed since I was a kid growing up in the 1950s when everything we consumed was made in America and we didn't consume as much. Today we spend more, save less, outsource jobs and automate jobs. I use an ATM to withdraw money, an electronic toll collecting system to pay tolls and buy virtually everything online --no bank tellers, toll collectors or store clerks are involved in these transactions. Not surprisingly, 95 percent of the job losses during the recent recession were in middle-skill occupations such as office workers, bank tellers and machine operators, according to researchers at the University of British Columbia.

As far as outsourcing is concerned, while Democrats can point the finger of blame at Dubya, a huge driver of our economic malaise results from Bill Clinton's decision to allow China's entry into the World Trade Organization in 1999 (and don't get me started on his involvement with NAFTA.)

There's a reason why more than 30 percent of factory jobs disappeared in the first decade of this century -- everything from dolls to clothing to iPads are assembled in China. Since 1999, U.S. based multinationals have cut U.S. employment by about 1 million, or roughly 4 percent, while adding 3.1 million workers overseas, a 39 percent increase. The Hackett Group says that about 112,000 jobs per year will continue to be lost due to outsourcing.

What's more, there's a strong chance that the economic malaise that's affecting virtually every European country except Germany has also been driven by the "rise of the rest" -- an issue that, as the case with the U.S. elections, does not appear to be addressed by the French presidential candidates. Francois Holland's plan to tax the rich so that the middle class can retire early doesn't cut it if middle class French jobs are disappearing due to outsourcing.

As Jean-Claude Trichet, the former president of the European Central Bank, put it: "Sixty-five years ago, the distribution of global GDP was such that Europe had only one role model for its single market: the United States. By 2016... the economies of China and India could be around twice the size of the eurozone economy."

And despite conventional wisdom that China's cheap currency is the driver of its economic growth, it's their cheap wages that hover around $1 an hour. And while Chinese wages have been rising rapidly, it will be awhile before they're on a par with wages in the U.S. "Chinese (wages have) been rising at 20 to 50 percent a year since 2001," said Harold Sirkin of Boston Consulting Group. "We're expecting it to be somewhere around $6 an hour by 2015," compared to the average $26 an hour Sirkin predicts an American worker will earn.

Michael Janssen of the consulting firm The Hackett Group says the end of outsourcing will come when wages climb high enough in India and China and decline enough in the U.S. that it makes economic sense to hire American workers. However, it's "still another 20 years before that happens."

This looks like a pretty bleak American future. While nobody in their right mind would argue that "second world" countries don't have the right to prosper -- the issue is whether they should do so at the expense of the first world's middle class. A dramatic drop to second-world wage levels in the U.S. will affect Americans' ability to afford homes, college costs and other necessities.

Any way you look at it, both the U.S. and Europe are facing the biggest economic challenges in our collective nations' histories and we've got to find new remedies to new problems rather than relying on same-old tax cuts, tax hikes or stimulus packages. So far it's looking not so good.

 
 
 
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