Greenspan’s Memoir Misses Mark on Iraq, U.S. Economy

Former Fed Chairman Alan Greenspan's memoir has put him in the news these last few days. He has upset Republicans with his comments on various presidents, with George W. Bush getting the brickbats and Clinton the praise, and by saying that Bush's invasion of Iraq was about oil, not weapons of mass destruction.

Opponents of Bush's wars welcomed Greenspan's statement, as it strips the moral pretext away from Bush's aggression, leaving naked greed unmasked.

It is certainly the case that Iraq was not invaded because of WMD, which the Bush administration knew did not exist. But the oil pretext is also phony. The United States could have purchased a lot of oil for the trillion dollars that the Iraq invasion has already cost in out-of-pocket expenses and already incurred future expenses.

Moreover, Bush's invasion of Iraq, by worsening the U.S. deficit and causing additional U.S. reliance on foreign loans, has undermined the U.S. dollar's role as reserve currency, thus threatening America's ability to pay for its imports. Greenspan himself said that the U.S. dollar "doesn't have all that much of an advantage" and could be replaced by the euro as the reserve currency.

By the end of last year, Greenspan said, foreign central banks already held 25 percent of their reserves in euros and 9 percent in other foreign currencies. The dollar's role has shrunk to 66 percent.

If the dollar loses its reserve currency status, the United States would magically have to move from an $800 billion trade deficit to a trade surplus so that it could earn enough Euros to pay for its imports of oil and manufactured goods.

The most notable aspect of Greenspan's memoir is his unconcern with America's loss of manufacturing. Instead of a problem, Greenspan simply sees a beneficial shift in jobs from "old" manufacturing (steel, cars and textiles) to "new" manufacturing such as computers and telecommunications. This shows a remarkable ignorance of statistical data on the part of a Federal Reserve chairman renowned for his command over numbers and a complete lack of grasp of offshoring.

The incentive to offshore U.S. jobs has nothing to do with "old" and "new" economy. Corporations offshore their production because they can more cheaply produce abroad what they sell to Americans. When corporations bring their offshored production to the United States to sell, the goods count as imports.

Had Greenspan bothered to look at U.S. balance of trade data, he would have discovered that in 2006, the last full year of data, the United States exported $47.580 billion in computers and imported $101.347 billion in computers for a trade deficit in computers of $53.767 billion. In telecommunications equipment, the United States exported $28,.322 billion and imported $40.250 billion for a trade deficit in telecommunications equipment of $11.883 billion.

Greenspan probably has given offshoring no serious thought, because like most economists he mistakenly believes that offshoring is free trade and learned in economic courses decades ago before the advent of offshoring that free trade can do no harm.

For most of the 21st century, I have been pointing out that offshoring is not trade, free or otherwise. It is labor arbitrage. By replacing U.S. labor with foreign labor in the production of goods and services for U.S. markets, U.S. firms are destroying the ladders of upward mobility in the United States. So far, economists have preferred their delusions to the facts.

It is becoming more difficult for economists to clutch to their bosoms the delusion that offshoring is free trade. Ralph Gomory, the distinguished mathematician and co-author with William Baumol, past president of the American Economics Association, of "Global Trade and Conflicting National Interests," the most important work in trade theory in 200 years, has entered the public debate.

In an interview with Manufacturing & Technology News (Sept. 17), Gomory confirms that there is no basis in economic theory for claiming that it is good to tear down our own productive capability and to rebuild it in a foreign country. It is not free trade when a company relocates its manufacturing abroad.

Gomory says that economists and policymakers "still are treating companies as if they represent the country, and they do not." Companies are no longer bound to the interests of their home countries, because the link has been decoupled between the profit motive and a country's welfare. Economists, Gomory points out, are not acknowledging the implications of this decoupling for economic theory.

A country that offshores its own production is unable to balance its trade. Americans are able to consume more than they produce only because the dollar is the world reserve currency. However, the dollar's reserve currency status is eroded by the debts associated with continual trade and budget deficits.

The United States is on a path to economic Armageddon. Shorn of industry, dependent on offshored manufactured goods and services, and deprived of the dollar as reserve currency, the United States will become a Third World country. Gomery notes that it would be very difficult -- perhaps impossible -- for the United States to re-acquire the manufacturing capability that it gave away to other countries.

It is a mystery how a people, whose economic policy is turning them into a Third World country with its university graduates working as waitresses and bartenders and driving cabs, can regard themselves as a hegemonic power even as they build up war debts that are further undermining their ability to pay their import bills.

COPYRIGHT 2007 CREATORS SYNDICATE INC.

*The above article has been excerpted from Paul Craig Roberts’ article, “America's Hegemonic Status Slipping Away.” Mr. Roberts is an economist. He served as Assistant Secretary to the Treasury in the Reagan Administration where he earned the nickname the “Father of Reaganomics.” He was an editor and columnist for the Wall Street Journal and Business Week. In 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States. Currently he is a nationally syndicated columnist for Creators Syndicate and a frequent contributor to EconomyInCrisis.org.

Economy In Crisis relies on financial support from its readers. Your endorsement is greatly appreciated. Click here for other ways to get involved.