My apologies to Mr. Dobbs ...and a time for answers

My column last week was titled "Is Lou Dobbs a Communist?" I received numerous positive responses from readers and a bunch of negative responses, and even some hate mail. The haters called me a communist and a shill for the giant corporations. They called me insensitive and thin-skinned. Readers told me that my work as an economist was unproductive and useless while others thought my work was important enough to suggest that I should be outsourced or replaced by cheap immigrant labor. Of course, I was reminded several times that "if economists know so much about money and the economy, then how come they aren’t all millionaires?"

First of all, I would like to apologize to Mr. Dobbs if he in any way took offense at my article, and to anyone who thought that I called him a communist. You have my deepest apologies. Furthermore, I have some good friends and relatives who are unemployed and looking for work. Their situation is a source of great pain, grief, and concern for me. However, I know that if you let your heart, personal sympathy, and opinion guide your economic analysis you will always come up with the wrong answer.

I would like to point out that I only asked a question. I did not call him a communist. I only connected Mr. Dobbs with communists and socialists in that they both like to complain about unemployment, underemployment, the conditions of the working class, unfair labor practices, etc.

The main purpose of my article was to show that Mr. Dobbs has a point. The bulk of its content supports his claim that something in labor markets is wrong. I provided statistical evidence that unemployment is a larger problem than the unemployment rate would suggest. He is not just barking at the moon!

In other words, unlike many communists, socialists, and union leaders who are always complaining about labor conditions and always seeking some type of government assistance, Lou Dobbs has identified a particular time and place where labor conditions are of deep concern. My memory suggests that Mr. Dobbs has long been a supporter of free trade, open economies, and competitive labor markets; that he is not a big proponent of government welfare programs; and that he is generally suspicious of politicians and bureaucrats doing their job correctly in the public interest.

I consider him to be one of the smartest and most free-market people at CNN. One reader suggested that he might be the only non-socialist at CNN. I suppose that could be true.

You don’t have to like this:

With that said, I would like to reiterate that the problems in the labor market are not the result of free trade. There is more going on in the world than just free trade. Transactions costs are falling but there have been no major "free trade" breakthroughs recently. We have had a massive stock market bubble and at least a partial bust. The dollar has fallen from 120 Euros to 85 Euros. These are problems that cannot be fixed with protectionist policies. Protectionist policies will only make things worse.

The economy is already in bad shape, possibly much worse than is being reported by the government and media. If the wave of protectionism continues to build and a protectionist trade war breaks out, we will certainly experience a much more severe and lengthier economic depression. The problems of a few million people will become the problems of several billion people. This is what Lou Dobbs (and the rest of us) needs to guard against — fanning the fires of protectionism.

The fact that IT and other high-tech employment is contracting should not be surprising given a ten-plus-year boom in technology spending. But what is the cause of our structural economic problems and what can be done to resolve them? The fact that jobs have been reduced in the US and increased outside of the US reflects two forces. One force destroys jobs here; the other creates jobs there.

Much of the job destruction in the US is due to government. Government has raised the cost of employment with taxes, regulations, and litigation. None of this is beneficial to labor in general, and creates a barrier between employers and employees who could mutually benefit from an employment contract. Ask an employer just how difficult, costly and risky it is to hire an employee and you will begin to understand just how harmful and burdensome all the "pro-labor" legislation has become.

In recent years anti-discrimination laws, disability laws, the Family Leave Act, and many others have been heaped on top of an extensive list of anti-business government interventions. Recent scandals from the stock market bubble have resulted in new harsh regulations and threats to entrepreneurship. From Bill Gates to Martha Stewart, Washington D.C. has instituted a crackdown on success. Government has tied one arm behind the back of American workers and hampered their ability to compete. To add insult to injury, the American worker is then told to pay ever-higher taxes to fund the government bureaucracy, while corporations are given tax breaks for hiring foreigners. Health care costs are forecast to increase by more than twice the amount of CPI-inflation. Remember the new prescription drug benefit passed by Washington, D.C.? Remember that Medicaid, Medicare, and Social Security are going broke? No efforts are being made to reform any of these problems. Is it any wonder that the employers are moving overseas?

American workers are also losing against foreign competition in the market for high-paying jobs because of public education. While government schools struggle to keep pace with our old standards, the rest of the developing world is raising their standards and opening up educational opportunities. Math is where the money is, but American students don’t make the grade in math and science, or even reading and writing. Only a small percentage of college graduates obtain competencies in science, mathematics, and technology and we graduate far fewer engineers than Japan, Europe, or China.

We do graduate plenty of lawyers. There is approximately one lawyer in the US for every 300 people. In the UK there is one lawyer for every 650 people and in Japan there is only one lawyer for every 6,600 people. This is a clear sign of too much bureaucracy, too much red tape, too many regulations, and too many lawsuits. We do not need to kill all the lawyers, but we do need policies that will put them to honest, productive work and prevent them from engaging in lawsuit abuse.

Even if an American does get a good degree and can somehow avoid the burden of government, the cost of tools and capital is high in the US. Americans have stopped saving and have become spend-a-holics thanks to Alan Greenspan and the tax code. Americans used to save more than ten percent of their income; now they save less than two percent.

Americans are buying on credit, just like their government. If Americans aren’t saving and the government is borrowing, then the money must be imported. If foreigners are using their dollars to buy government bonds, then they are not buying our goods, and hence the trade deficit. Foreigners also finance much of our capital expenditures, but this also means that they increasingly "own" the US. As you can see in the graphs below, household borrowing, government borrowing, the budget deficit, and the trade deficit are all related and all were destabilized and sent into patterns of profligate spending when Nixon took us off the gold standard in the early 1970s. Since that time we have become increasingly dependent on paper to finance our standard of living. That cannot continue indefinitely.

Household Credit Market Debt Outstanding

Gross Federal Debt

Federal Surplus or Deficit [-]

Balance on Current Account

What are the forces that are creating jobs overseas? It is definitely not low wages. Wages are much lower in Africa and other places, but that is not where the jobs are being created. Wages have actually risen quite a bit precisely in the places where the most "good, high-paying" jobs are being "imported." Is it possible that it is high wages that is creating jobs?

Obviously this is not the case. The number of good jobs is increasing in the developing world is because those countries have discovered some of the keys of economic success. They have far less government regulations, far lower taxes, and far less litigation. These are places that have established a good business climate, and wages, incomes, and standards of living are generally rising. Many of these countries have placed a premium on good education and have developed skilled, hard-working labor forces. Citizens in those countries have occasionally taken to the streets to protest their governments and their bad policies. Additionally, these countries also have high savings rates — savings that can be used to develop businesses and invest in capital and technology.

These people do not hate America or Americans. They love America and our products. Our economic problems are our own fault. Maybe we could learn something from them.

Disclaimer: It should be pointed out that college graduates with degrees in economics make the highest starting salaries among the "easy" curricula, and that economists are overrepresented in the ranks of corporate CEOs. That doesn’t make us all lazy and corrupt. It should also be pointed out that economists have been replaced by cheap foreign labor, outsourced by graduate students and downsized by classroom technology for several decades. In economic contractions economists are often the first ones to go! Speaking of contractions, is there a tech wreck coming next week?