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Renewed economic growth hasn't turned around job losses
The limits of recovery

October 31, 2003 | Page 8

LEE SUSTAR looks behind the economic statistics due out this week.

IF THE U.S. economy is growing so fast, why is job creation so slow? Despite growth rates in Gross Domestic Product (GDP) estimated at the highest since the boom of the late 1990s, the job market remains lousy--particularly in manufacturing, where 2.5 million jobs have disappeared in the last three years.

George W. Bush's recent trip to Asia sought to round up the usual suspects to blame--Japan and China. China alone accounts for about one-fourth of the U.S.'s $400 billion trade deficit. According to Bush administration officials, the problem is that the Japanese and Chinese currencies are undervalued relative to the dollar, making their imports artificially cheap.

Labor leaders, Democratic presidential candidates and some U.S. manufacturers complain about "unfair trade" from China, Japan and other Asian countries. It's a tidy explanation--but a wrong one.

Recall how the boom of the 1990s went bust. Then, the scramble for profits led to massive investment in the developing countries of East Asia, which depended on exports to the U.S. to fuel their growth. But the duplication of factories making similar goods put downward pressure on profits, which led investors to flee key East Asian economies. The result: an economic crash in Thailand, South Korea, Indonesia and elsewhere.

The U.S. economy kept growing until it faced the same problems seen in East Asia--overcapacity. Not only were there too many goods to be sold at a profit, but there were too many factories, offices, communications networks, airline seats and more.

As overcapacity smothered profits, the stock market slumped in 2000-2001. Today, capacity utilization--the amount of factory capacity used in production--is still only 74.1 percent, 6.6 percent below the average during the period from 1972 to 1992. This reflects "the slow process of working through a glut of boom-era investment that continues to litter the economy with underused factories," wrote the New York Times' Louis Uchitelle.

Rather than hire new employees, U.S. companies have kept eliminating jobs and squeezing more out of fewer workers. Productivity gains have averaged more than 4 percent over the last 18 months. These gains came despite a dramatic fall in business investment in new technology that's traditionally the source of productivity improvements. The result has been the worst period for job creation since the Great Depression of the 1930s.

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SO WHY are economic statistics due to be released this week by the Commerce Department expected to show that U.S. economic growth is finally accelerating? One reason is that the increase in productivity has raised profits and helped to keep average wages ahead of inflation, despite the rotten job market.

Meanwhile, low interest rates have continued to spur mortgage refinancing and other borrowing, helping to maintain consumer spending, especially for the well to do. Another factor: the devaluation of the dollar in relation to the euro, which helped U.S. industry compete with European rivals.

George W. Bush's $350 billion tax cut, although geared to the wealthiest Americans, also played a role. Wall Street economist Edward McKelvey estimates that consumers spent three-quarters of their tax break immediately, accounting for a large part of the growth spurt in the third quarter of this year.

Government spending provided another kick. In the second quarter of 2003, government spending rose 25.5 percent, including a jump in military spending of 45.8 percent. Together, all this was enough to push U.S. economic growth to its fastest pace in years.

Whether this is sustainable, however, is another question entirely. Some of these factors are one-shot affairs--the tax cut and the invasion of Iraq.

Crucially, the problems of overcapacity and job loss that plague the U.S. exist on a world scale--and every country is trying to push the crisis onto its rivals. The automobile industry, for example, has enough excess capacity to supply the U.S. market twice over--and Japanese and South Korean companies are opening plants in the U.S. even as American automakers eliminate jobs.

This glut--what Karl Marx called a crisis of overproduction--is the reason for the impasse in the World Trade Organization in recent years and a spate of trade disputes. The U.S. and the European Union have clashed over beef, bananas and Boeing commercial jets. More recently, the U.S. imposed tariffs on steel imports and sought to pressure China and Japan into letting their currencies rise in relation to the dollar in order to reduce the U.S. trade deficit.

Ironically, U.S. companies like Dell and Motorola are among China's top exporters. As General Motor's chief economist, Mustafa Mohatarem, told Business Week, China "is allowing American companies to participate in its growth. That distinguishes it from Japan."

Even Japanese companies are shifting manufacturing jobs to China to reduce costs. In fact, China last year became the top destination for foreign direct investment, bypassing the U.S. This doesn't mean the China-bashers are correct, however. According to the Wall Street firm Alliance Capital Management, China experienced a 15 percent loss of manufacturing employment between 1995 and 2002 as old state-run heavy industries were hammered by international competition.

Some 22 million manufacturing jobs have been eliminated in 20 large economies worldwide as companies slash excess capacity and seek to boost productivity. In Brazil, the decline was 20 percent; in Japan, 16 percent; in the U.S., 11 percent.

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EVEN IF Washington succeeds in pushing the Chinese and Japanese currencies higher in relation to the dollar, the problems for the U.S. economy won't end there. The U.S. has a $500 billion deficit in its current account--that is, the total amount of trade in goods, services, income and transfers that the country takes in.

Simply put, the U.S. economy consumes far more than it produces. It can do so because foreign investors are willing to hold onto dollars they gain through exports to the U.S.

All this amounts to a massive loan to the U.S. economy--with the Japanese and Chinese central banks playing a key role by buying up U.S. Treasury bills. This in turn helps to finance the ballooning U.S. government budget deficit, expected to top $500 billion in 2004.

Nevertheless, Washington policymakers calculate that they can pressure China and Japan into letting their currencies rise relative to the dollar anyway by threatening new restrictions on imports if they don't. That's what's really behind the hype about "fair trade" with China--a U.S. economic and political power play, backed by a more aggressive U.S. military.

So far, foreign investors have been willing to finance U.S. deficits because they want access to the American market--and figure that Washington won't have the kind of financial meltdown seen in countries like Thailand or Argentina.

White House officials, meanwhile, hope that their short-term boosts to the economy will help Bush's chances of re-election while buying time for a longer-term economic restructuring to increase U.S. competitiveness. They're also calculating that control of Iraqi oil will eventually provide further economic gains, along with bilateral trade deals and the proposed Free Trade Area of the Americas, all designed to maximize Washington's leverage.

The persistence of overcapacity, however, is likely to slow down world economic growth for the foreseeable future. That means continued threats to job security and income for workers the world over. And the greater the budget and current-account deficits in the U.S., the higher the risk of a financial crash.

There's no predicting the exact course of the economy in the months ahead. But what's certain is that the fundamental problems of the U.S. and world economy haven't been overcome--and that Corporate America will continue to try to solve the crisis on the backs of working people.

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