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In the U.S. the myth has been firmly established that the jobs that have been moved offshore are being replaced with better jobs. There is no sign of these jobs in the payroll jobs data or in the occupational employment statistics. When a country loses entry level jobs, it has no one to promote to senior level jobs. When manufacturing leaves, so does engineering, design, research and development, and innovation itself.

On February 16, 2006, the
New York Times
reported on a new study
presented to the National Academies that concludes that job offshoring is climbing the skills ladder. A survey of 200 multinational corporations representing 15 industries in the U.S. and Europe found that 38 percent planned to change substantially the worldwide distribution of their research and development work, sending it to India and China. According to the
New York Times
, "More companies in the survey said they planned to decrease research and development employment in the United States and Europe than planned to increase employment."

The study and the discussion it provoked came to untenable remedies. Many believe that a primary reason for the shift of R&D to India and China is the erosion of scientific prowess in the U.S. due to lack of math and science proficiency of American students and their reluctance to pursue careers in science and engineering. This belief begs the question why students would chase after careers that are being outsourced abroad.

No one seems to understand that research, development, design, and innovation take place in countries
where things are made
. The loss of manufacturing means ultimately the loss of engineering and science. The newest plants embody the latest technology. If these plants are abroad, that is where the cutting edge resides.

When a country gives up producing tradable goods, it gives up the occupations associated with manufacturing. Engineering and R&D depart with the manufacturing. It is impossible to innovate independently of the manufacturing and R&D base. Innovation is based on state-of-the-art knowledge of what is being done, and if the doing is done elsewhere, the innovator will find himself at a disadvantage.

Offshoring is causing dire problems for the United States. I have suggested that one necessary reform is to break the connection between CEO pay and short-run profit performance. As long as CEOs can become rich in a few years by dumping their U.S. workforce, the trade deficit will continue to rise, and more college graduates will be employed as waitresses and bartenders.

The short-run time horizon of U.S. management endangers the long-term viability of U.S. firms. This short-run time horizon is the result of a "reform" that sought to give investors the most up-to-date financial information by requiring quarterly reporting. The reformers did not consider the unintended consequences, which was to focus Wall Street, corporate executives, and boards of directors on short-run performance.

Economists need to inject some realism into their dogmas. The U.S. economy did not develop on the basis of free trade. If the costs that free traders attribute to trade protection are real, the costs did not prevent America's economic rise. Indeed, much historical research concludes that trade protection was the reason for America’s rise as an industrial and manufacturing power. [See, for example, R. W. Thompson,
The History of Protective Tariff Laws
(Chicago: R.S. Peale, 1888) and
Michael Hudson, America’s Protectionist Takeoff, 1815-1914 (2010). Frank William Taussig in his book,
The Tariff History of the United States
(New York: G.P. Putnam, 1914), documents that trade protection, not free trade, was US economic policy in the 19th century. Taussig argues that although the US had extensive trade protection, tariffs were not the main cause of the rise of the US as a manufacturing country and that both opponents and advocates of protective duties exaggerate their effects.]

Much American economic thinking is grounded in the fact of America's past success. Many economists take it for granted that as long as the U.S. has free markets, it will continue to be successful. However, much of America's success is due to World War I and World War II, which bankrupted rivals and destroyed their industrial capacity. It was easy for the United States to dominate world trade after World War II, because America was the only country with an intact manufacturing economy and the US dollar replaced the British pound as world reserve currency.

Many economists dismiss the problems with which offshoring confronts developed economies with the argument that it is just a question of wage equilibration. As wages rise in China and India, the labor cost differential will disappear, and wages will be the same everywhere. This argument overlooks the lengthy period required for the hundreds of millions of workers, who overhang labor markets in India and China to be absorbed into the workforce. During this time, hardships in currently high-wage countries would be severe. Moreover, once the wage adjustment is complete, the new developed countries would have the upper hand. Would they give up their competitive and strategic advantages?

The United States is the first country in modern history to destroy the prospects and living standards of its labor force in order to enrich the top 1% of the income distribution. Once a land of opportunity, America is being polarized by globalism into rich and poor. The denial of this reality has become an art form for economists.

For example, Matthew J. Slaughter, a member of President George W. Bush’s Council of Economic Advisers, wrote: "For every one job that U.S. multinationals created abroad in their foreign affiliates, they created nearly two U.S. jobs in their parent operations." In other words, Slaughter claims that offshoring is creating more American jobs than foreign ones.

Slaughter did not arrive at this conclusion by consulting the BLS payroll jobs data or the BLS Occupational Employment Statistics. Instead, Slaughter measured the growth of U.S. multinational employment and failed to take into account the reasons for the increase in multinational employment. Multinationals acquired many existing smaller firms, thus raising multinational employment but not overall employment, and many U.S. firms established foreign operations for the first time and thereby became multinationals, thus adding their existing employment to multinational employment.

Economists find many ways to obscure the facts. For example, Matthew Spiegleman, a Conference Board economist, claimed that manufacturing jobs are only slightly higher paid than domestic service jobs, so there is no meaningful loss in income to Americans from offshoring. He reached this conclusion by comparing only hourly pay and leaving out the longer manufacturing work week and the associated benefits, such as health care and pensions that are part of renumeration to full-time manufacturing workers.

At a November, 2006, press conference in Washington, D.C., Harvard University professor Michael Porter introduced a report from the Council on Competitiveness titled “Competitiveness Index: Where America Stands.” Porter, a principal author of the report, said that the report showed that Americans were benefitting from globalism.

Porter’s claims were inconsistent with empirical data, a fact that I pointed out at the time. Nevertheless, the Council on Competitiveness defended its report, and it became part of the stack of reports that have been used to convince Americans that they are benefitting from what is destroying them.

The competitiveness report boasts that the United States "leads all major economies in GDP per capita;” that "household wealth grew strongly, supported by gains in real estate and stocks;” and that "poverty rates improved for all groups over the past two decades."

By covering a 20-year period, the report was able to soften the economic deterioration from globalism with stronger performance from earlier periods. As globalism becomes more pronounced, Porter’s report shows that the U.S. economy performs less well. Indeed, the report acknowledges under-performance in critical areas. The gains that Porter finds over 20 years have their roots in the earlier period in President Reagan’s supply-side policy. They are not gains from jobs offshoring.

When Porter’s report was released, U.S. job creation in the 21st century was below past performance. Debt payments of Americans as a percent of their disposable incomes were rising while the savings rate had collapsed into dis-saving. Poverty rates had turned back up in the 21st century when the impact of globalism on Americans has been most pronounced.

The report mentions many times that the United States is the driver of global growth without emphasizing that U.S. growth is debt-driven. In 2006 both the U.S. government and U.S. consumers were accumulating debt at a rapid pace. At the time of Porter’s report, debt-driven consumption was exceeding U.S. output by a sum in excess of $800 billion annually. Trade and current account deficits were threatening the dollar's role as reserve currency. The competitiveness report makes these negatives sound like America is leading the world by driving economic growth.

The report claims, as do many economists, that the "U.S.A. attracts most foreign direct investment,” and that "the United States remains a magnet for global investment" because of "America's high levels of productivity, strong growth and unparalleled consumer market.” This claim fails to differentiate between investment in new plant and equipment and investment in existing assets.

The report suggests that foreign direct investment in the U.S. consists of new plant and equipment, and, thus, is creating jobs for Americans. However, foreign direct investment in the United States consists almost entirely of foreign acquisitions of
existing
U.S. assets. Foreign direct investment is merely the counterpart of the huge American trade and current account deficits. America pays for its over-consumption in dollars which foreigners use to buy up existing U.S. assets. One result is that the income streams associated with the change of ownership now accrue to foreigners and, thereby, worsen the current account deficit.

The graph below on foreign direct investment was provided by Charles McMillion of MBG Information Services in Washington, D.C. The graph makes it clear that foreign direct investment in the United States consists of foreign acquisition of existing U.S. assets. Foreign acquisition of existing U.S. assets hurts America by diverting income streams to foreigners.

The Council on Competitiveness report is also mistaken in its assessment of U.S. productivity growth. Economists maintain that labor is paid according to its productivity, and historically this has been the case in the United States. The correlation began to break down with the advent of offshoring to the Asian Tigers and deteriorated further with the advent of offshoring of manufacturing and service jobs to China and India. The historical correlation between productivity and wages has been further eroded by the importation into the United States of cheap foreign skilled labor on work visas. Many Americans have been forced to train their foreign replacements, essentially indentured servants, who work for one-third less pay. The result is a widening divergence of U.S. productivity from real compensation as the graph below shows.

The greatest failure in the competitiveness report is the absence of mention of the labor arbitrage and its consequences when U.S. firms offshore their production for U.S. markets. This practice translates into direct job loss and direct tax base loss, and it transforms domestic output into imports. Offshoring is capital and technology chasing absolute advantage abroad. Offshoring cannot be justified as free trade based on resources finding their comparative advantage in the domestic economy.