A world of opportunity: although some world economic changes have negatively affected American workers, the United States is uniquely positioned to thrive in the global economy.

When I was in graduate school, working towards my masters degree in international business, one of the books we were required to read was The American Challenge ("Le Defi Americain") by Jean-Jacques Servan-Schreiber. Published in 1968, the book presented a penetrating assessment of the success of American corporations in exploiting commercial opportunities created by the European Common Market. It called upon European corporations and governments to meet the American challenge.

Servan-Schreiber's diagnosis held that Europe was slipping behind in the global race for technological progress and was rapidly becoming a satellite of the American industrial machine. This development was the result of America's superior ability to organize and manage marketing and production systems on top of its overwhelming industrial and financial power. All of this had been built up during and after World War II while almost all other industrialized countries had been laid waste by that war and were in a long stage of recovery afterward. During the two decades following the war, the United States strode the world as an economic titan, with very little serious economic competition, as its factories satisfied the needs of the recovering countries.

While reading The American Challenge in 1978, it occurred to me that the postwar period of relatively easy American prosperity had passed. The nations of Western Europe and Japan had recovered and, during the 1970s, their new factories were producing products that really did meet the American challenge. By the time the 1980s rolled around, we were being warned that "Japan, Inc." was eating our lunch, taking over industries and markets ranging from automobiles to consumer electronics that had long been dominated by U.S. corporations. By 1989, the situation had gotten so bad that movie director Michael Moore filmed Roger and Me, a documentary about the closure of General Motors plants near Flint, Michigan, that resulted in the loss of 30,000 jobs.

Ironically, 1989 also turned out to be the year that the speculative stock market and real estate bubbles in Japan popped. Prices plunged, sending the Japanese economy into an economic depression that continued for more than a decade.

Meanwhile, in the United States, the advent of the personal computer spawned new industries that produced the hardware and created the software needed to satisfy the exploding demand for these machines that had become affordable to almost everyone. New industries replaced the old; a principle of capitalist theory called "creative destruction," which predicted such an outcome, actually appeared to be working. But even while the economy seemed to be healthy, as indicated by statistics such as relatively low unemployment, there seemed to be a different mood on Main Street than there was on Wall Street. Why, for example, did a family need two breadwinners, in order to maintain a middle-class lifestyle, while families in earlier generations had been able to do it with one breadwinner?

The year 1989 was also the year that the Berlin Wall and Iron Curtain were pulled down. The countries of Eastern Europe were suddenly part of the world economy, open to new investment and economic development. Meanwhile, over in Communist China, economic reforms, the first of which were introduced under the leadership of Deng Xiaoping in 1978, were transforming that country as well. Add to that India's turning away from a policy of national economic self-sufficiency, and the workforce available to the global economy effectively doubled in a very short period of time. No longer were Americans competing primarily against the workers of economically advanced Western Europe and Japan. They were now competing against workers who were oftentimes as educated and technically capable as themselves, but were also willing to work for a fraction of what Americans earned for doing the same job.

Globalization 

Initially, the most vulnerable Americans were the low-skilled blue-collar workers in relatively labor-intensive manufacturing jobs. With a billion people living in poverty, China offered a gigantic pool of cheap labor that multinational corporations were eager to exploit. Following Deng Xiaoping's grand tour of economic zones in the south of China during 1992, foreign investors began to have access to a wide range of industries. Consequently, direct foreign investment into China increased enormously after 1992. By the late 1990s, China had become the largest recipient of foreign investment in developing countries, accounting for almost a third of the total foreign direct investment flows in the developing world. Manufacturers from all over the globe were setting up shop in China in order to take advantage of the opportunity to minimize their labor costs.

In addition to benefiting from an absolute advantage in low-cost labor, manufacturers in China also benefitted from a currency exchange rate that massively undervalues China's currency. Some economists estimate that the Chinese yuan could be as much as 40 percent cheaper than it is. This makes the costs of setting up operations in China very cheap for foreign corporations. The resulting competitive advantage props up Chinese exports, production, and jobs at the expense of its trading partners.

Perversely, U.S. government tax policy also provides incentives for American multinational corporations to establish subsidiaries offshore. Under present tax laws, companies are allowed to indefinitely defer paying corporate income taxes on profits earned overseas. The deferral is good until these firms repatriate the profits back to the United States, at which time they are taxed at the standard corporate income tax rate. Since the U.S. corporate income-tax rate is one of the highest in the world, there is a very strong incentive for companies to reinvest those profits outside of the United States. As a result, Congress agreed to provide tax relief for one year, so that companies could repatriate profits back to the United States at a much lower tax rate. Companies succeeded in getting this 2004 tax break by arguing that it would enable them to use those profits to invest in the United States and create jobs for Americans. Of course, it's virtually impossible to prove whether or not they actually did that.

The early stages of globalization and outsourcing cost millions of U.S. manufacturing jobs, but various experts assured us that this was nothing to worry about because they were blue-collar Rust Belt jobs. The United States was transforming itself into a service economy, they said, helped along by the new technology of the Internet. Information technology, services, and cutting-edge research and development would create the clean, high-paying jobs that would keep America on top. Few seemed to consider that, in order for an economy to create real wealth, people have to make things, and grow and raise something. How does one go about creating wealth in a service economy, where I wash your clothes and you cut my hair? Imagine a situation where all manufacturing took place in China. How long would it be before the country that produces tangible products, from automobiles to ships, starts dictating to the country with the service economy?

With the passage of time, technological advances have made worldwide data communications available at very low cost. As a result, a growing list of services can now be zapped across international borders electronically. We're all familiar with call centers in India, but electronic service delivery has also extended to accounting, computer programming, engineering services, and a whole lot more. Economist Alan Blinder wrote in the Washington Post that "the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades."

Proponents of globalization argue that outsourcing millions of electronically deliverable service jobs will reduce costs and boost productivity in the United States. But the virtues of globalization don't look so benign from the viewpoint of an American computer programmer or accountant. They've done what they were told to do: they went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn.

When good-paying manufacturing and service jobs move offshore, displaced American workers are often forced to take lower-paying jobs that offer inferior benefits and little, if any, upward mobility. But even the availability of these jobs is coming under pressure. Ironically, at the very time millions of jobs are being outsourced, millions of illegal immigrants are flooding into the United States, to escape poverty and unemployment in their own countries and look for jobs here. And this is in addition to the hundreds of thousands of immigrants that Congress allows to enter our country legally every year.

Crisis and Opportunity

While the overall situation presently appears bleak, that does not automatically mean that it's hopeless. With every crisis comes an opportunity for a better future. The good news is that, just as Congress helped to create this mess, through poor economic and foreign policies, Congress can help to get us out of it. The power to do that rests in the hands of just 535 people: 435 representatives and 100 senators. To control a majority, the voters would only have to influence the election of 268 people. By using the political freedom that still remains in our system, we can overthrow the government every two years without firing a shot.

Furthermore, each of us has the ability to shape a better future through the educational guidance and encouragement we give our children. Meaningful and rewarding careers are most likely to be based on the talents that have always defined the American spirit: imagination, invention, and entrepreneurship. Our country is still the best-positioned to take advantage of the evolving world economy, thanks to the freedoms we still enjoy. By encouraging our children to develop the skills they'll need to compete and succeed in this new economic environment, we will be helping the United States exploit the potential of a wide-open global marketplace.