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USA 2010: Stuck in Unemployment

August 17, 2010

Loyd E. Eskildson, Basil & Spice

In the Bureau of Labor Statistics for July, 2010 report, about 14.5 million
Americans are wanting work but unable to find any. In addition, another 1.2 million
discouraged Americans have given up looking, and 8.5 million are working only
part-time for economic reasons. That represents almost 16 percent of the work force
-- about one out of every six adults, with 3.4 million fewer private-sector
jobs than there were ten years ago. We're stuck at 9.5 percent unemployment, despite
non-financial companies sitting on nearly $2 trillion in cash (Newsweek,
8/7/2010).

Important side effects include increased foreclosures (1 in 4 home


mortgages are underwater), bankruptcies, and homelessness, greater demand for
government support (unemployment, health care, welfare), declining home
values, reduced government tax revenues (income and sales taxes) and increased
deficits, and deteriorating work-force skills. A parallel problem is that
government debt now totals about $72 Trillion (unfunded Medicare, Social
Security obligations, state and local government debts, Federal government
debt) -- almost 5 times the GDP. Some contend this is the 'new normal,' our
equivalent of Japan's 'lost decade.' Actually, it is the result of misguided
policies on Free Trade and illegal immigration.

Cumulative trade deficits since 1976 total $9.2+ trillion. In 2007


(latest available 'reasonably normal' data), we had a $712 billion trade
deficit -- $418 billion if net petroleum imports are removed. Since the
average worker that year contributed $68,000 to GDP, this equates to slightly
more than 6 million unemployed U.S. workers. That figure is close to the
Economic Policy Institute's 5.6 million estimate for 2007, and consistent with
economist Peter Morici's assertion that "our massive trade deficit is the
biggest factor contributing to the nation's high and persistent unemployment
rate."
Free Trade proponents, however, claim even trade deficits increase U.S.
employment -- their rationale is that imported goods contain from half to
two-thirds content from other nations, including the U.S. Common sense, on the
other hand, says that if U.S. imports largely consisted of our own components
being re-imported, 30+ years of consecutive trade deficits should have created
full employment here by now. Further, tear-down analysis of the iPhone 3G
shows only $1.15 of the total was contributed by U.S. manufacturing;
preliminary data on the iPhone 4G, iPod, and iPad do not seem to differ.

Another argument supporting Free Trade is that this improves


international relations and reduces the chance of war. Reviewing China's The
People's Daily over time, however, shows China happy with every nation except
the U.S., its main trading partner and debt-holder. They're upset for being
blamed for low-interest U.S. rates and the 2007 'Great Recession,' and our
providing military support to Taiwan and supporting the Dalai Lama,
interfering in a China-Vietnam dispute over the Spratly Islands and offering
nuclear cooperation with Vietnam, frequent patrolling of its borders with
aircraft carriers, spy planes, etc., and repeatedly interfering in Chinese
domestic matters (human rights). (Note: A 2008 Pew Poll conducted in 24
nations found citizen satisfaction highest in China at 86 percent, with the U.S.
ranked #16 with 23 percent citizen satisfaction.) Improving international relations
and reducing the chance of war with China would be better accomplished by
simply minding our own business.

Clyde Prestowitz (The Betrayal of American Prosperity) asserts that the


often-cited 2004 McKinsey analysis showing a $1.12-1.14 benefit for every
dollar off-shored made unrealistic assumptions about how well displaced
workers did in finding new jobs. Another problem of such analyses is that they
do not recognize the resulting overall downward pressure on wages for all
jobs. As for redeploying displaced Americans into high-paying high-technology,
green technology, and biotechnology, forget it -- the U.S. lags Chinese
manufacturing in all three areas, and a }/2010 Wall Street Journal article
shows the likely potential employment in these areas is nowhere near the
amount required to restore the economy. As for growth in U.S. health care and
education -- both sectors exceed spending by our competitors, especially in
Asian and particularly in health care, and thus represent waste that bogs down
our multi-national enterprises.

Another objection to limiting Free Trade is the supposed link between


Smoot-Hawley tariff increases and the subsequent intensification of the Great
Depression. Reality is that Total Trade in 1929 was less than 0.8 percent of
GDP -- mathematically impossible of causing the 45 percent GDP drop that
coincidentally followed.

Finally, the original early 1800-ear arguments supporting Free Trade make
a number of assumptions that don't hold up in practice. These include David
Ricardo's 'immobile capital' -- investors would not want to move their funds
to another nation (Free Trade Doesn't Work by Ian Fletcher), no externalities
such as pollution or a nation losing control of its destiny (remember the Arab
Oil Embargo; China now holds $2.4 trillion of our debt, and Detroit has become
so hollowed out it is no longer capable of the military support it provided to
win WWII), mobile labor (not true when workers are bogged down with underwater
housing, language limitations, and unwilling to accept Chinese living
standards), and currency manipulation doesn't occur (China's RMB is estimated
to be 40 percent undervalued).

Moving to illegal immigration -- the Center for Immigration Studies


estimated in February, 2009 that 22.1 million immigrants hold jobs in the
U.S., with 6-7 million of those being illegal. Presumably that doesn't include
the millions of 'Anchor babies' from mostly Hispanic illegal immigrants. Those
supporting unrestricted immigration need to recognize the impossible burden of
tens of millions more poorly educated, high-fertility, and low-skilled people
coming from Mexico, Central, and South America, whose progeny lead all others
in U.S. high-school drop-out rates.

Three areas of action would revive our economy, end the unemployment
problem, and revive government treasuries:

1) Impose a 40 percent tariff on all imported goods from China; freeze all
proposals to expand Free Trade (Columbia, Panama, South Korea).

2) Require proof of citizenship prior to employment, with exceptions for


H1-B visas and 'green cards.' Green cards would be limited to one year, and
only permit agricultural work. Stop subsidizing U.S. farmers who then ship
goods into Mexico, displacing those farmers and workers.
3) Repeal the 14th Amendment (automatic citizenship for all born in the
U.S.A.). This has been an illegal immigrant magnet for decades.

We should also stop using the Trade Deficit to blame tax policy, and
instead learn from:

1) China's and Germany's economies, including the role of the state --


both expect about 9 percent or greater GDP growth this year, and have consistently
run trade surpluses; Germany has both higher taxes and higher-paid workers.

2) Foreign manufacturers (eg. Japanese and German car-makers,


ArcelorMittal and Anshan Steel, Mexico's Cemex, Sweden's Securitas, France's
Sodhexho, Venezuela's Citgo, and numerous others who have succeeded, or
propose to succeed, operating supposedly uncompetitive, over-taxed U.S.-based
production.

Source: Copyright (c) 2010, Basil & Spice