Ronald R. Pollina, Ph.D., Founder and President, Pollina Corporate Real Estate (1/4/2010)
Editor's Note: This article is excerpted from Selling Out a Superpower: Where the U.S. Economy Went Wrong and How We Can Turn It Around with the permission of Prometheus Books.
Globalization is a critical component of the 21st century American economy. It's happening and there isn't anything we can do to stop it, nor should we. America must be an integral part of the global marketplace if it is to remain a superpower. Thus far, as a nation, we have done a terrible job integrating ourselves into the 21st century global market. Many American corporations have done a masterful job and have benefited, but the majority of Americans have not. The fact that many American corporations are successfully integrating into the global economy does not mean that America or the American public is benefiting.
To believe that these large companies will rehire Americans when the economy finally starts to rebound is wishful thinking at best. It is in the world's emerging economies that market growth is occurring. It is also where they were hiring the greatest number of employees and offshoring American jobs well before the recession.
Stephen King, chief economist for HSBC bank in London, found that of the world's 40 largest international corporations, 55 percent of their work forces are located in foreign countries and 59 percent of their earnings come from abroad. If the growth in profits is from abroad, it's not surprising that this is where the lion's share of their investment in new plant and equipment will take place.
Over the next decade, the United States would need to create at least another 10 million jobs to keep pace with population growth. During the 1990s, the United States was creating approximately 2.2 million jobs per year, and this number dropped to less than half that number from 2000 to 2008. It is not just the recession that has caused this decline. As a nation, we simply do not have the ability to create the high quality jobs we once did. In past decades, we were able to replace good, well-paid jobs lost in industries like consumer electronics, automotive, and textiles with jobs in industries developed in the United States, such as personal computers, cell phones, and Internet and software development. As these jobs have been shipped offshore, no new industries have emerged to replace them.
There is no white knight industry that can produce the millions of high-paying jobs needed to replace the jobs lost during the recession. As new energy sources are being developed to replace carbon fuels, or developments are made in other areas, the jobs that go with production are often shipped offshore immediately. Increasingly, the scientific development of new products is also shipped offshore for further development and refinement.
The real threat of moving more manufacturing, research and development, and high paying service jobs offshore has been used successfully to keep wages down in the United States and has also been felt by employees in terms of their healthcare and pensions. With growing numbers of employees located offshore and an increasing share of investment taking place there, the line between domestic and foreign companies is certainly blurring.
Take American car companies for example. While they continue to lose market share in the United States, they are doing much better in emerging markets. In recent years, 65 percent of GM's sales were generated abroad. In 2009, the U.S. government bought 61 percent of General Motors and eight percent of Chrysler to prevent bankruptcy.
Early in 2009, GM outraged the United Auto Workers when it said it would be producing the Chevrolet Spark in China for export to the United States. Automotive News reported that based on a document circulated among federal lawmakers in May of 2009, GM plans to sell 17,335 China-made vehicles in the United States in 2011 and 51,546 by 2014. The plan called for a reduction of United States workers and more vehicles coming from Mexico and South Korea. The percentage of GM cars manufactured in China, Mexico, and South Korea and sold in the United States will rise from 15-23 percent over a five-year period, according to the document given to lawmakers.
Corporate America is not solely responsible for the offshoring of our nation's best jobs. Federal, state, and local political leaders create the laws and policies that often contribute significantly to driving companies offshore. Contrary to popular belief, companies do not move offshore solely because of lower labor costs. Our federal government and most state governments have created a business environment that has become hostile to business, while other countries have created business environments that are considerably more business-friendly. Many states have also created hostile environments for business through the use of overzealous taxation and regulation.
The United States is in a global economic war, and we're losing. India and China each have a collective will and strategy to win this economic war. As a nation, we Americans appear to have no will or strategy to win.
There appears to be little doubt that the balance of power is shifting away from the United States to the East, as China's and India's economies evolve. What is most important is that these two countries are not complementary economies, growing in unison with the United States, but rather to a large extent at the expense of the United States economy. In essence, they have pulled millions of jobs from the United States economy with the assistance of our federal and many state governments. For Americans, this means a far different future, one in which our standard of living will be diminished and our military dominance likely challenged.
While the governments of China and India appear to have a vision to achieve economic, political, and military power (China), which they are fulfilling, United States political leadership appears to have no such plan. We enter the twenty-first century as a complacent superpower. Our political leaders seem to feel that we, like the sons and daughters of billionaire parents, need not work hard to have a comfortable life. We have this sense of entitlement simply because we are Americans. We entered the 21st century at the pinnacle of success, a far different position than the one we were in when we entered the twentieth century.
A Goldman Sachs study estimated that by 2027, China will surpass the United States as the largest economy. The Economist stated that based on estimates of the Economist Intelligence Unit, China's economy could surpass America's by 2030 in terms of GDP purchasing power parity. Whether you want to use 2027 or 2030 as the target date, the fact is, America is headed for a less prominent position in the world order. History tells us that with economic power comes commensurate military power.
No nation has ever been able to sustain military power without its own internal economic power or that of another more powerful nation. The decline of our economic status, therefore, signals a major shift, not only in our standard of living, but also in our security. There are forces in play today in the United States that will allow the growth of China to gradually surpass the United States. The forces causing this change are not coming primarily from external sources, but rather from internal political mismanagement.
Due our political and economic policies, the nation was awash in cheap money. Americans who knew little or nothing about the real estate industry became real estate speculators. There was little fear of buying a house with no money down, or of buying a house you could barely afford. After all, the worst thing that could happen is that you would have to sell the house because you could not make the payments. The longer you could hold out having to sell, the more you would make, as house prices were skyrocketing upward. Wall Street and Main Street (i.e. regular folks) had cast aside all fear of risk taking. They were both gambling with other people's money.
Throughout our history, we have been dependent on government, both federal and state, to regulate us and to protect us from our own greed and ignorance, but this didn't happen in this situation. Our political leaders were too busy looking for contributors to their next campaign, many of whom were on Wall Street. Nothing pleased Wall Street more than deregulation. Many great new fortunes were being made on Wall Street, and Wall Street lobbyists made sure Congress got a taste of them.
A Complacent State?
While other nations awake and strive for greater economic strength and political respect, the United States, it would appear, has suffered from its own arrogance and has fallen into a complacent sleep. Has the United States "had its day," and if so, how far will it slide as others push to surpass it? We have dug a deep hole over many years, and it will take many years to pull ourselves out. This assumes that the leaders both at the federal and state level are bold enough to accomplish this daunting task.