ANALYSIS OF THE HIGH UNEMPLOYMENT RATE IN the USA

Jinhua Li

Jinhua Li, School of and Management, South China Normal University, Guangzhou, China. He is author of The Structure of Innovation Networks and Its Relationship with Knowledge Flow (2009). His research interests include systems engineering, analysis and modeling of the . Email: [email protected]

Abstract: The ongoing crisis of the US is the result of the US government’s neoliberal policies since the 1980s. The and global economic integration advocated by hollows out industry, generates asset bubbles instead, and results in structural unemployment and the transfer of labor to sectors of the virtual economy. The severe financial crisis triggered by the collapse of the latest and greatest of the asset bubbles, the housing bubble, has led the unemployment rate of the United States to rise sharply. In contrast, Chinese economic policies have resulted in tremendous economic achievements. As such they pose a big challenge to the neoliberal policy paradigm of the United States. The US government’s numerous false accusations against the Chinese government are little more than futile attempts to deny this.

Key words: neoliberalism; competitiveness; unemployment rate; virtual economy; real economy

The Conflict Caused by the High Unemployment Rate

Since the global financial and economic crisis caused by the US subprime crisis in 2008, the US economy has been depressed and the unemployment rate has risen to over 8 percent for 43 successive months. At the same time, corporate investment intentions are low and the government’s debt is ballooning (its absolute amount in 2012 was about 50 percent more than it was four years ago). In contrast, China’s annual GDP growth remains higher than 8 percent despite the challenges posed by the economic crisis. Some American politicians allege that China is responsible for their crisis as a way to prevent people from coming to the logical conclusions

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to which this scenario points. Instead, they condemn Chinese government policies, accusing it of trade so that they can claim to implement “retaliatory” trade protectionism. This is the background for the mounting Sino-US trade tensions amid which the United States has carried out a series of the “anti-dumping” and “anti-subsidy” investigations into Chinese products, such as TV sets, vehicle tires, seamless steel tube and photovoltaic products, which are exported to the United States from China. In his State of the Union message on January 24, 2012, President Obama showed a tougher attitude on trade with China, stating that the United States should tackle China’s unfair trade practices to revitalize the US manufacturing industry. In the meantime, the mainstream American media including blamed companies like Apple for producing in China and causing unemployment in the US. Moreover, in the US presidential election of 2012, both Obama and Romney competed in blaming China for US economic woes: for engaging in unfair trade practices including the low yuan and taking jobs from Americans. In short, they attempted to divert the Americans’ attention and transfer the responsibility of a crisis of the US’s own making by attacking China. Well, is it true that the Chinese take away jobs from Americans? Let’s begin with a look at some elementary data. According to US Bureau of Labor Statistics data on the US unemployment rate from 1981 to 2011 (see Figure 1), during the period 2000–07, that is in the years before the financial crisis, the unemployment rate changed very little. Thereafter, however, the unemployment rate in the United

%

9.7 9.6 9.6 10 9.3 8.9

7.6 7.5 7.5 8 7.2 7 6.8 6.9 6.2 6.1 6 5.6 5.6 5.8 5.8 6 5.5 5.3 5.4 5.5 4.9 5.1 4.5 4.7 4.6 4.6 4.2 4 4

2

0

1981 19821983 1984 1985 1986 1987 19881989 1990 1991 1992 19931994 1995 1996 1997 19981999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 1 US unemployment rate, 1981–2011

Source: US Bureau of Labor Statistics, http://www.bls.gov/cps/cpsa2011.pdf

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States rose to 5.8 percent from 4.6 percent in 2008, and even soared to 9.3 percent in 2009, which was almost twice of that in 2007. Data from the US Department of Commerce show, furthermore, that the bilateral trading volume between China and the United States was $365.98 billion in 2009, 10.2 percent lower than the previous year, and the trade deficit of the United States was $226.83 billion, decreasing by 15.4 percent. These data indicate that while US unemployment was soaring, the Sino-US trade volume and the trade deficit of the United States fell. Therefore, the soaring US unemployment after 2008 has been mainly the result of the financial crisis, not that of Sino-US trade. It is unconnected with China. Related empirical studies also support this argument. Xia (2010) points out that the international industrial division of labor determines international employment structure and international trade: trade surpluses do not create jobs and nor do trade deficits destroy them. The imbalance in Sino-US trade is therefore not the malign influence leading to high US unemployment that the politicians allege it is. Huang and Xie (2011) point out that one of the major factors leading to the unemployment is the US industrial structure: Americans should seek the reason of high unemployment in its sluggish economic growth. We hold the point of view that unemployment is a multi-factor, high order and nonlinear problem. Though the two aforementioned studies are not exhaustive, they reveal the cause of US unemployment to some degree. The idea that “the Chinese take away jobs from Americans” is not only untenable in theory but also inconsistent with reality. Rome was not built in a day. High unemployment in the US is not rooted in China, but caused by some deep and complex factors. They point to a profound reality: the US economy is very unhealthy.

The Ill effects of Neoliberalism

Neoliberal doctrine asserts the superiority of the system and opposes government intervention, and advocates and liberalization of and trade and opposes public , and government intervention in economies (“Study on Neoliberalism” Task Group in Chinese Academy of Social Sciences 2003). Neoliberal policies were not only implemented in developed countries such as the US and UK, but also promoted and attended to by the World Bank, International Monetary Fund, and WTO for transitional and developing countries. Given the US’s leading world role, neoliberalism was successfully imposed on much of the world over the past 30 years (Cheng and Wang 2005). The US too, since the 1980s, has implemented its own version of neoliberal economic policy—and this is the fundamental factor determining the current economic status of the United States. In the 1970s, western countries, especially

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the United States, faced stagflation. The result was a crisis of Keynesianism. The neoliberalism now emerged from the margins to become mainstream. In the 1980s, the Reagan administration greatly promoted neoliberal reforms (referred to as Reaganomics, a mixture of monetarism and supply-side economics). However, the US economy at that time relied on “Reagan’s Imperial Circle” which appeared to involve plundering global resources more centrally than neoliberal reforms in the effort to get out of the stagflation and enter a new growth track. The George H. W. Bush administration (1989–92) pursued neoliberal policies further and they now came to be designated the “Washington Consensus.” In this form, neoliberal policies were imposed the world over in the form of privatization, , and integration of the global economy. Its results were, however, economic depression in the United States and economic volatility in the rest of the world. In the early 1990s, the Democratic Clinton administration (1993–2000) sought to “develop the economy before the military,” and obtained a great breakthrough in the strategically important industry, information and communications technology, and adopted some Keynesian policies while still being neoliberal, and this inaugurated the era of the “new economy.” However, the Republican George W. Bush administration (2001–08) returned to the policy of Reagan and the older Bush, and once more promoted neoliberalism around the world, resulting in economic depression in the United States. When the Obama administration of the Democratic Party took charge in 2009, the US economy had already slipped into deep recession. Since 1981, different US governments have promoted neoliberalism to different degrees, resulting in certain differences in economic growth and employment levels. According to GDP data provided by US Bureau of Economic Analysis, and unemployment (see Figure 1) and CPI data provided by the US Bureau of Labor Statistics, the unemployment rate, the GDP growth rate and the CPI rate in various US governments were markedly different (see Table 1). Figure 2 shows employment levels from 1980 to 2011. Based on Table 1, Figure 1, and Figure 2, we can see that (1) under the Reagan and Clinton administrations unemployment decreased, while it increased under the elder Bush and fluctuated under the younger. (2) Average unemployment and average CPI inflation rates were lowest under the Clinton administration and higher under the Bush administration, the older Bush administration and the Reagan administration in that order. (3) Average GDP growth rates were highest under the Clinton administration with the Reagan administration, the older Bush administration and the Bush administration posting the next highest rates. (4) From 1981 to 2008, the average unemployment rate decreased on the whole, but the amount of employment increased constantly. Thus US economic health was greatest under

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the Clinton administration which was least neoliberal, and worst under the Bush administration which was the most neoliberal.

Table 1 GDP, unemployment rate and CPI during US governments of 1981–2008

Reagan Old Bush Clinton Bush administration administration administration administration (1981–88) (1989–92) (1993–2000) (2001–08)

Average GDP growth rate 3.4 2.2 4.0 2.0 Average unemployment rate 7.54 6.3 5.2 5.26 Average CPI inflation rate 4.65 4.35 2.61 2.83

Sources: US Bureau of Economic Analysis, http://www.bea.gov/national/gdpchg.xls; US Bureau of Labor Statistics, http://www.bls.gov/cps/cpsa2011.pdf, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Numbers in thousands

160000

140000

120000

100000

80000

60000

40000

20000

0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 2 Total US civilian labor force in employment, 1981–2011

Source: US Bureau of Labor Statistics, http://www.bls.gov/cps/cpsa2011.pdf

It is undeniable that this neoliberalism benefits the US economy through external plunder. However, neoliberalism has big ill-effects. Even the Clinton administration of the new economy was not the best period in US economic history (Cheng and Wang 2005). Meanwhile, as seen from the consequences of neoliberalism practiced around the world, neoliberalism is not the panacea for all matters, and has ill-effects. The implementation of neoliberalism in developed countries leads to a severe gap between rich and poor, a virtual economy bubble, and industry hollowing. According to Cheng and Wang (2009a), neoliberalism is the theory

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and policy that has led to the current financial and economic crisis. In addition, the developing countries including countries in Latin America and East Europe suffered even more serious consequences when they accepted neoliberalism.

The Effect of Industry Hollowing and the Virtual Economic Bubble

Industry hollowing refers to the recent tendency for material production and , which center on manufacturing industry, to be transferred massively and rapidly from one country or region to another country or region. It results in a sharp decline of the proportion of material production in a nation’s economy and a serious imbalance between the production of physical and non-physical goods (Zheng 2008). Neoliberal policies which liberalized finance, trade and investment, created conditions for capital expansion and speculation activities by the western developed countries. Seeking higher returns, capital flows along three paths to result in industrial hollowing: industrial capital flows rapidly from low-end manufacturing sectors to high-end ones, from home to abroad, and from the real economy to the virtual economy. Let me elaborate. First, capital moves from low-end to high-end manufacturing industry. The new technological revolution of information technology, the rapid rise of knowledge and technology-intensive industries and development of the tertiary industry in the United States, transformed traditional manufacturing. The great improvement in the efficiency of manufacturing, the reduction in the hours worked, ledto dramatically decreased employment opportunities. Early in 1986, Drucker (1986), a famous management theorist, indicated this change:

The is not changing; it has already changed—in its foundations and in its structure—and in all probability the change is irreversible… The second major change in the world economy is the uncoupling of manufacturing production from manufacturing employment. Increased manufacturing production in developed countries has actually come to mean decreasing blue-collar employment.

The improvement in manufacturing efficiency was accompanied by higher labor costs, so the profits made in the low-end labor and capital intensive manufacturing sectors decreased and industrial capital gradually shifted from low-end production to more lucrative high-end R&D and marketing activities. Second, capital flowed from home to abroad. In their search for cheaper raw materials and labor and more extensive markets, international adjusted the layout of production by establishing joint ventures or fully owned subsidiaries abroad or by outsourcing production to foreign companies. For example, in the United States, the three major automobile companies have set

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up their factories overseas and Apple contracted its product-assembling to Foxconn. Statistics from the US Bureau of Economic Analysis1 show that the total volume of foreign investment by the United States increased steadily from 207.752 billion USD to 4,155.551 billion USD from 1982 to 2011 (Balance of Payments and Direct Investment Position Data) and the total asset of non-bank branch institutions of America’s international corporations in overseas countries rose from 3,416.071 billion USD to 14,449.484 billion USD from 1997 to 2007 (Financial and Operating Data). US companies top the world in both number and scale. And these companies have played a central role in the industrial hollowing of the United States. Third, capital shifts from the real economy to the virtual economy as the latter offers far higher returns than the former. Thus this results in the rapid expansion of capital in virtual economic sectors at the expense of the real economy. Currently the virtual economy has grown to become the dominant force of the US economy. This too was foreseen by Drucker back in 1986:

The third major change that has occurred in the world economy is the of the “symbol” economy—capital movements, exchange rates and credit flows—as the flywheel of the world economy, in place of the “real” economy—the flow of goods and services. The two economies seem to be operating increasingly independently. This is both the most visible and the least understood of the changes.

Unfortunately, though Drucker accurately judged the position of the “symbol” economy, he failed to predict its terrible results. Let’s have a look at the crazy performance of the US virtual economy (Zong 2012). In 2010, the volume of global currency transactions exceeded 1,000 trillion dollars while the transactions related to manufacturing accounted for only 1 percent of this total. The money stock was 17 times higher than GDP. In the United States, known as the biggest financial empire, the virtual economy experienced rapid development in a crazy manner: the output of the virtual economy and service industries increased from 11 percent of total output in 1950 to 88 percent today; profits made in the finance, real estate and service sectors account for 70 percent of total profits in the national economy; the aggregate of financial derivatives increased from 72 trillion USD in 1998 to 672 trillion USD in 2008, up nine-fold in a decade, while the country’s GDP failed to even double. As a result, the output of US manufacturing industry dropped dramatically from 29.7 percent of GDP in 1960 to 12 percent in 2007. The energy, steel and automobile sectors in the United States, which once led the world economy and made the US the biggest manufacturing country, gradually declined. For example, coal output decreased by one-third, petroleum output by one third, and steel output to one-sixth of China’s.

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With the hollowing of manufacturing industry, more and more people are escaping real economic sectors to join virtual ones. Industrial hollowing will inevitably cause structural unemployment, but it doesn’t necessarily bring about the reduction of employment opportunities in general, because emerging virtual economic sectors create a large number of jobs. In fact, in the 30 years before the financial crisis, the total jobs offered in the US economy steadily expanded (see Figure 2). Figure 3, drawn from US Bureau of Labor Statistics data, shows that hours worked and employment in the US manufacturing sector were both declining from 1987 to 2009, but the total jobs in the US economy as a whole kept growing. This means that non-manufacturing sectors were creating new jobs and workers were being transferred to new sectors.

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

1991 2011 1987 1988 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Hours worked (billions of hours worked)

Employment (millions of jobs)

Figure 3 Hours worked and employment in US manufacturing sector, 1987–2011

Source: US Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/opt/msp_dataset.zip

The virtual and real economies must exist in appropriate proportions so as to maintain the stability of economy because the former is based on the latter and the former fails to develop without the support of the latter. Imbalanced virtualization and hollowing of industry will inevitably result in economic bubbles and, when they burst, create economic crises affecting employment and activity in both the real and virtual economies, as Figure 3, depicting losses of employment in both sectors in 2008 and 2009 shows. Stiglitz (2010: 3) said:

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The economic crisis had several components: was an unfolding residential real estate crisis, followed not long after by problems in commercial real estate. Demand fell, as households saw the value of their houses (and, if they owned shares, the value of those as well) collapse and as their ability—and willingness—to borrow diminished. There was an inventory cycle—as credit markets froze and demand fell, companies reduced their inventories as quickly as possible. And there was the collapse of American manufacturing.

Therefore, when economic crisis occurs, real economic sectors can’t rapidly expand their capacity to generate employment. It is estimated that US unemployment can’t be reduced in the near future.

The Effect of the Relative Decline of Industry Competitiveness under Global Competition

The global economic integration advocated by neoliberalism has promoted the process of economic globalization which provided opportunities to emerging economies such as the BRICs to rise rapidly. Their industrial competitiveness rose rapidly and the world division of labor changed. The vice president of the International Monetary Fund, Zhu (2010) argues that the gravity of world economic development has moved from the developed economies to the emerging economies and the developing economies, which has a significant structural impact on all aspects of global economic operations. According to the United Nations database, Asian GDP as a proportion of world GDP rose from 12.3 percent in 1960 to 25.8 percent in 2010. In 2009 and 2010, Asian GDP exceeded those of the United States and the European Union. Asia now ranks first in the world. Improvement in the industrial competitiveness of emerging economies is the mirror image of decline in the industrial competitiveness of developed economies. Thus, the share of the latter’s products and services in the international market has reduced accordingly, and their domestic manufacturing sectors and employment levels are affected adversely too. Among emerging economies, China has the most dynamic performance. From 1978 up to now, China has experienced sustained and rapid economic growth. China entered the ranks of middle income countries and exceeded the United States in manufacturing value added to become the world’s premier manufacturing country in 2008. In 2010, China surpassed Japan in terms of the size of its GDP to become the world’s second largest economy. In 2011, China’s total import and export volume ranked second in the world. Now, China is the world’s premier manufacturing country, the second largest economy and has the most foreign exchange reserves. As such it is a strong competitor of the world’s premier

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economic power, the United States. According to the annual global competitive- ness index ranking issued by the World Economic Forum’s official website, we can enumerate the rankings from 2005 to 2011 of several developed countries including the US, Germany, Japan, UK and several developing countries including China, India, Brazil and Russia (see Table 2). US global competitiveness ranking was declining from 2008 to 2011, while China’s ranking was on the rise, leading the BRIC countries. In the twelve pillars of competitiveness, Chinese advantages are market size, macroeconomic environment, health and primary education and labor market efficiency, while US disadvantages are macroeconomic environment, institutions and goods market efficiency. Although there is still a large gap between the comprehensive indexes of the two countries, the gap has narrowed.

Table 2 The global competitiveness index 2005–11, rankings of selected nations

US Germany Japan UK China India Brazil Russia

2005 1 6 10 9 48 45 57 2006 6 8 7 10 54 43 66 2007 1 5 8 9 34 48 72 58 2008 1 7 9 12 30 50 64 51 2009 2 7 8 13 29 49 56 63 2010 4 5 6 12 27 51 58 63 2011 5 6 9 10 26 56 53 66

Source: The World Economic Forum, http://www.weforum.org/reports

In the latest report “2013 Global Manufacturing Competitiveness Index” by Deloitte and the US Council on Competitiveness,2 China ranks first with an index score of 10, Germany second with an index score of 7.98, the United States third, India fourth and fifth. This study was first introduced in 2010. Having gathered data from more than 550 senior manufacturing leaders, the ranking of 38 countries in the next year and in the next five years is appraised. The report found that access to talented workers is the top indicator of a country’s competitiveness— followed by a country’s trade, financial and system, and then the cost of labor and materials. Because US industry has hollowed seriously for many years, the country’s domestic labor force has undergone major changes and the proportion of industrial workers is low. Figure 2 and Figure 3 show that US manufacturing employment was decreasing ceaselessly from 1987 to 2008, and the proportion of manufacturing employment to total employment was also declining. The number of US industrial workers has also declined. Meanwhile, because of high wages, good social welfare and short working hours in the United States, its labor costs are high, and its industrial workers seem less hard-working and industrious compared to those of China. This is why, for instance, though US politicians and public

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opinion favor Apple moving production back home, Apple still remains in China. For most Apple products, “Made in the US” is no longer an effective choice. This is not because the foreign labor cost is lower, but because the enormous size of overseas factories, high elasticity, and the hard-working nature and skills of their industrial workers all exceed those of the US’s native factories and workers. Internationally, the Chinese Model has become well-known and controversial. It is opposite of the neoliberal model. As Cheng and Wang (2010b) argue:

The unique characteristic of the Chinese model of economic development is quite different from that of other countries. Its features can be summarized as “Four Dominant Modes Economic System,” that is, the multi-type property rights system in the public main body, the multi-essential factors distribution system in the labor main body, the multi-structured market system under national leadership and multi-aspect opening-up system supporting oneself. Owing to the extraordinary characteristics of this model, namely, the public-owned capital being coupled to the , the Chinese model of economic development may be called a socialist market economic model with Chinese characteristics.

Because the Chinese model has been so successful, it has attracted both worldwide attention and worldwide controversy. The Chinese model provides a new kind of development model as an option for developing countries. It poses a big challenge to the neoliberal order dominated by the United States.

Conclusion

Though the currently high unemployment rate in the United States is mainly the result of the financial crisis and economic crisis, it has deep roots in the neoliberal model of the last three decades. The neoliberal model inevitably leads to industrial capital flowing quickly from low-end manufacturing to high-end manufacturing, from home to abroad, and from the real economy to the virtual economy. This capital movement ultimately brings about serious industrial hollowing and generates virtual economy bubbles in the United States. When the severe financial crisis triggered by the collapse of the economic bubble had a significant impact on the virtual and real economies, the unemployment rate rose sharply and continuously. Another factor related to the US high unemployment rate is the relative decline of US industrial competitiveness under global competition. The Chinese model has brought tremendous benefits to the Chinese economy, so China’s industrial competitiveness rose rapidly and the economic gap between China and the United States narrowed. At the same time, the Chinese model has attracted worldwide attention and controversy. It provides a new kind of

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development model for the developing countries, and poses a big challenge to the neoliberal order dominated by the United States. This is why the US government issues a lot of false accusations against the Chinese government. That is why so much discussion about China along such lines as “the Chinese take away jobs from Americans” appeared during the US presidential election.

Notes

1. http://www.bea.gov/iTable/index_MNC.cfm 2. http://www.deloitte.com/view/en_GX/global/industries/manufacturing/3e4898b27c50b310VgnV CM3000003456f70aRCRD.htm?id=gx_theme_GCMfg

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