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Uncensored Opinions: April 2007

Saturday, April 28, 2007

Fairness in a Globalized World

After reviewing Jeffrey Sachs' public lecture on Globalization and Employment , I have a concern that a few major issues were not successfully dealt with. It is true that workers of the world will benefit overall and those from the LDCs will be on the road to wage equality with their counterparts in the west. Every decent person should applaud this result of globalization. It will go a long way in stopping wars, terrorism, and other lamentable social consequences of poverty. But the pace of wage equalization will be simply too slow and workers from the LDCs will continue to be exploited over a much longer time period than is appropriate and necessary. Another more serious consequence of "globalization", as it is being currently promoted, will be the impoverishment of the American middle class and a loss of political and economic power worldwide for the U.S. The economic theory supporting globalization is that the world's resources will be utilized more efficiently by direct competition among all the workers of the world with the lowest priced products being those made most efficiently. But this is a false assumption. The lowest priced products are simply those that whose total cost of labor and materials used in their manufacture in one country are less than that of other countries, the quality being the same. For example, if a hard disk is made in China, labor costs may be $3 representing 2 hours work,and the material cost could be, say, $3. The same disk, made in the U.S. could cost $12 in labor representing 1 hour of labor, and material costs could be just $2 representing a better management of raw material and recycling practice. The total costs for this product would be $6 if made in China and $14 if made in the U.S. If efficiency were the consideration that supports globalization, then this product should be made in the U.S. where labor is more efficient and materials are better utilized. But the multinational of the world are currently using China for their manufactures because their costs there are less. Unemployed and underemployed workers there are so abundant that the multinationals can exploit them, paying barely subsistence wages, and get by with it. But they still want to use the "efficiency" story to justify moving production there. It's plain and simply a lie. The labor rate in China is about $1.60 per hour for manufacturing workers and that in the U.S. is about $13 per hour. From what I think I understood from Jeffrey Sachs' lecture, the rate of convergence between LDCs and western wage rates is about 6 percent annually. Current GDP growth rates of 3 percent in the U.S. and 9 percent in China support this. At this rate it would take 36 years for Chinese wages to equalize with those currently paid to American workers. The consequences of this long time frame would be catastrophic to western workers desiring and trained to work in manufacturing industries as well as to the nation as a whole. Almost two generations of workers in the U.S. could be jobless. Until wage rates more closely equalize, all manufacturing will be done in China, and there will be a yearly drain of over $2 trillion of assets from American ownership to those of foreigners. This is my estimate of current asset transfer derived from the Federal Reserve Board's U.S. International Transactions (of $1.75 trillion in 2006). By my estimation, the net worth of major salable assets in the U.S. including all stocks,bonds(corporate and government),real estate, and money market assets currently are worth around $60 trillion, with approximately $15 trillion already foreign owned. With asset transfers averaging $3 trillion to $4 trillion annually for the foreseeable future, essentially all major U.S. assets could be under foreign ownership long before 36 years, perhaps in as few as 20 years. If that happens, one quarter of all taxes collected from U.S. citizens would be needed to pay off just the interest on government bonds held by foreigners. Interest and dividend payments to foreigners would add another $5 trillion to our trade deficit. I propose a better solution for both worldwide wage differentials and the exploitation of foreign workers, a worldwide minimum wage. If implemented quickly, it would avoid the dire consequences of globalization to the American wage earners and the American taxpayer. My article entitled Saving the Western Worker from Extinction, dealing with the benefits of a worldwide minimum wage has been previously posted on this site. What is needed is not a "low bidder" war between the workers of the world driving wages to subsistence levels worldwide, but a fair wage for everyone, with each country's workforce given a fair chance to compete.