BUS 402-090

Globalization’s Impact on the United States Middle Class

Destruction of the American Middle Class

Monifa Bourjolly, Eric Dutes, Wahidah Fowler, Juana Garcia, Walmsley Gedeon

5/15/2011

Globalization’s Impact on the United States Middle Class

The United States experienced with globalization so far has not been very rewarding to the American middle and lower classes. We have been told over and over by our policy makers that free trade is a good thing that it would help the economy to grow and create new jobs. This has been far from the truth. In the last decade, we have seen the result of the trade in flows increased the inequality of earnings. The middle class wages has been stagnate while the income of the corporate elite has risen. Globalization has essentially erased all of the gains made in the early 7os by the American middle class. Globalization is destroying the American dream and the American middle class standard of living.

While free trade is promoted as an engine for economic growth, disparate wage and worker protection laws among countries make it an engine for economic growth for the wealthy and economic decline for the American middle-class.

For the past several decades, as the American economy gradually merged into the one global economic system, the manufacturing jobs, white color jobs which are the “bread basket” of the American middle class, are being outsourced to developing countries. Regrettably, for the American middle class, the rest of the world does not have the same minimum wage requirement and worker protections laws that we have. Thus, the giant corporations that control our economy are able to pay workers in other countries slave labor wages to produce their goods and import them to the United States to compete with products made by American workers. This has resulted in a mass flight of manufacturing facilities and job loss to the United States.

Under the globalization’s economic structure the American middle class cannot continue to be the middle class that we have known. The middle class most important asset to the global economy is its labor, and that has been devalued by the cheap labor on the world market. As we move toward globalization’s goal one world labor force, it is apparent that the middle class standard of living will continue to fall.

Globalization accelerated through the world after the end of the cold war. Combined with the technological changes in communication and transportation, globalization created a haven for American corporations looking to maximize profits. This has resulted in an income distribution upward. From 1972 to 2001, the bottom 20 percent of wage and salary earners got only 1.6% percent of income in over the three decades. The majority got less than 11 percent. But the richest 1 percent got an increase of 18.4 percent. Between 1980 and 1995, U.S. wage inequality grew by 15%. By contrast, the wage inequality in Germany declined by 7%. (Economist, 1996). The average annual pay of a Chief Executive Officer (CEO) of the major U. S. corporations went up from $7,773,000 to $9,600,000 from 2002 – 2004. During that same period the adjusted median annual income went down from $46,058 to 44389. Three of four U.S. workers have not finished college and are therefore confronted with global competition for their jobs. More than half of workers with less than a four year college degree have experienced a loss of income in the past decade (Mishel and Bernstein, 1993). The effects of deindustrialization on wages is most evident in Detroit, which lost 67,000 automobile manufacturing jobs (at 26% above the average wage for the U.S.) and gained 72,000 service jobs (at 4% above the average wage) in two decades from 1970 – 1990 (Deskin, 1996, 62).

Another factor that has also contributed to the income inequality in the U. S. is the decline of labor unions. The rate of worker unionization in the U.S. has fallen since 1960 to 13%; the ability of unions to pursue their consistent position of narrow wage differentials has been undermined (Freeman and Katz, 1994).

Factor price equalization theory is another contributing factor to globalization’s income inequality hypothesis. Factor price equalization is an economic theory, by Paul Samuelsson (1948), which states that the relative price for two identical factors of production in the same market will eventually equal each other because of competition. The price for each single factor need not become equal, but relative factors will. Whichever factor receives the lowest price before two countries integrate economically and effectively become one market will therefore tend to become more expensive relative to other factors in the economy, while those with the highest price will tend to become cheaper. According to the theory, without intervention of states to control imports, there will be equalization of wage rates across the globe, even in the absence of multinational capital investments or low wage worker immigration. Factor price equalization is expected to continue as trade barriers fall, transport cost are reduced, communications improved and the newest techniques spread worldwide. It is estimated that that free trade will reduce the wages of unskilled U.S. workers about $1000.00 per year, a development spurred by the 1993 NAFTA agreement (Leamer,1996a).

Globalization is a political arrangement among nations that can be undone by popular disturbances. Economic breakdowns, disagreements by individual nations, popular rebellions of people resisting social turmoil and injustice brought on by globalization can derail and weaken it. Lately, this system has developed some cracks. The United States government who has been the driving force of this system has lost some of it global luster once the cold war had ended. The war in Iraq and the fiscal crisis at home have further damaged the United States reputation around the world and created a lack of trust to its leadership. “The old order – the American political assumptions and economic principles that have dominated the trading system for six decades – no longer prevails so easily (Greider, 2009,94). After six years of negotiations by the World Trade Organization, a new global trade agreement died on the drawing board. They were rebuked by Brazil, China and India.

Over the past decade Latin America has rebelled against the financial conditions imposed on them by Washington that has destroyed their economies and made them more dependable on foreign capital. Most of the Latin American countries have adopted a left-leaning social agenda that is not in the best interest of the international bankers.

Globalization is also showing some cracks at home. Recently, authoritative figures like, Robert Rubin, President Clinton’s treasury secretary , economic advisor and a darling of Wall Street, proclaimed in a in paper he co-authored for the Hamilton Project. The paper explained, “Between 1973 – 2003, real GDP per capita in the United States increased 73 percent, while real median hourly rate rose only 13 percent. Prosperity has neither trickled down nor rippled outward.” In other words this neo-con is admitting that family incomes have stagnated or lost ground, while capital and corporate returns have soared. He warned that this disparity threatens the future of the trading system, and maybe even the stability of the “capitalist, democratic society (Greider, 2009, 96). Alan Blinder, another high ranking official from the Clinton era came forward with more alarming message. He’s a Princeton economist, who served on President Clinton’s Council of Economic Advisers and later as Vice Chair of the Federal Reserve Board of Governors. He stated that American workers are going to face even worse consequences in the future. “Tens of millions” more jobs, he said are vulnerable to offshoring. These are not only factory jobs, but also in high end occupations that are filled by well educated people and members of the affluent middle class. In an essay in Foreign Affairs, he estimated that as many as 30 million to 40 million jobs in professional technological occupation can in theory be shifted abroad, thanks to long distance digital communications. He professed that such profession such as accountants, lawyers, technical experts, software designers, and those in many other high tech-jobs are readily replaceable by capable people in other societies who can earn much less for doing essentially the same work. He warned “If we economist stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not we will quickly become irrelevant to the public debate” (Greider, 2009,97). Lawrence Summers, another Clintonite, and formerly President Obama’s chief economic advisor affirmed in an article he authored in the London Times in 2006. “Let us be frank”. He stated “What the anxious middle class often is told is often feels like pretty thin gruel.” He explained that the basic problem “is the divergence between the fortunes of capital and the fortunes of labour.” Had he been so truthful when he held public office, there would have been a public outrage.

Globalization benefits the wealthy and further deprives the poor, resulting in a widening wealth gap worldwide between the rich and the poor, especially harmful to the low-income consumer. Income earners in the top one-fifth in the United States make almost twentyfold what income earners in the bottom fifth make. This ratio doubled over the last two decades. The top 1 percent of income earners holds about 40 percent of the country’s wealth, more than double the percentage in 1975. American families with incomes over $100,000, the richest group of Americans, saw their average net worth soar by 22.4 percent from 1995 to 1998, to $1.7 million per family. The United Nations reports that the wealth of the 200 richest people in the world is greater.

Many argue that the growing world economy has significantly disadvantaged workers, particularly in manufacturing jobs, because wages are unrealistically low in many countries. They maintain that this has had a negative effect on U.S. wages. But the connection between world trade and wage inequality is not direct. It is the service sector of the economy where job growth has occurred.  Many low-level service jobs have a pay scale, which is close to the minimum wage. It is the failure of the economy to provide these workers the protections, which previously had been provided to manufacturing jobs that have created much of the wage imbalance.

The U.S. economy is coming apart at the seams. Unemployment remains at nearly ten percent, the highest level in almost 30 years; foreclosures have forced millions of Americans out of their homes; and real incomes have fallen faster and further than at any time since the Great Depression. Many of those laid off fear that the jobs they have lost, the secure, often unionized, industrial jobs that provided wealth, security, and opportunity will never return.

The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else’s income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

This is what the political scientists Jacob Hacker and Paul Pierson call the “winner-take-all economy.” It is not a picture of a healthy society. Such a level of economic inequality, not seen in the United States since the eve of the Great Depression, be sorry a political economy in which the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class. Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan. It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly awards political voice and power.

It is generally presumed that economic forces alone are responsible for this astonishing concentration of wealth. Technological changes, particularly the information revolution, have transformed the economy, making workers more productive and placing a premium on intellectual, rather than manual, labor. Simultaneously, the rise of global markets, itself accelerated by information technology, has hollowed out the once dominant U.S. manufacturing sector and reoriented the U.S. economy toward the service sector. The service economy also rewards the educated, with high-paying professional jobs in finance, health care, and information technology. At the low end, however, jobs in the service economy are concentrated in retail sales and entertainment, where salaries are low, unions are weak, and workers are expendable.

Champions of globalization portray these developments as the natural consequences of market forces, which they believe are not only benevolent (because they increase aggregate wealth through trade and make all kinds of goods cheaper to consume) but also unstoppable. Skeptics of globalization, on the other hand, emphasize the distributional consequences of these trends, which tend to confer tremendous benefits on a highly educated and highly skilled elite while leaving other workers behind. But neither side in this debate has bothered to question Washington’s primary role in creating the growing inequality in the United States.

Hacker and Pierson refreshingly break free from the conceit that increasing inequality is a natural consequence of market forces and argue instead that it is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich. Congress has cut tax rates on high incomes repeatedly and has relaxed the tax treatment of capital gains and other investment income, resulting in windfall profits for the wealthiest Americans.

For decades, U.S. companies have been outsourcing manufacturing jobs to countries with much cheaper labor. Now, companies are doing the same with business services and even professional work that foreign workers can do over the Internet. Poor foreign countries have large numbers of job-hungry workers who will work for wages far below the U.S. minimum wage. Globalization has American companies importing goods for sale in the United States that they once produced here. Sometimes American firms own the foreign factories outright. Or, foreign companies may own them and contract work for American importers. American companies began to take greater advantage of international outsourcing in the 1970s. Many kinds of factory work began to shift overseas—clothing, steel, toys, television sets, and computer hardware and chips. This shift of cheaper labor resources has truly affected the growth potentials of the middle class by the stagnation of its skilled workers due to the unavailability of jobs.

During the 1980’s we saw the election of President Ronald Reagan, the end of The Cold War and the acceleration of globalization in The United States of America. What started as a good will gesture to poorer, third world nations has begun to bring the once mighty America to its knees. Welfare rolls will continue to rise as American companies send jobs overseas and the American worker to the unemployment line. The working middle class, once the backbone of our nation, will soon be a thing of the past. However, they will still be visible; you can take a look inside the waiting rooms of state welfare offices to see them.

During the 1990’s we saw the election of President Bill Clinton, the systematic closure of US military installations and the passage of The North American Free Trade Agreement (NAFTA). When congress passed NAFTA, companies began the race to see who could produce the best and most for the least. Such agreements reduced or eliminated tariffs (taxes on goods imported into a country). Without tariffs, cheap foreign-made imports can often undercut the prices charged by American manufacturers with their higher paid workers.

Imagine a working mother waking up one morning, going to work as usual, only to find that she is one of 5000 workers who will soon be looking for another job because the factory where she has worked for the past 10 years is closing. The company is not going out of business. They will be sending the production work that used to done for nine dollars an hour in America to a plant in Costa Rico that employs people for three dollars an hour. Instantly she is thrust back into the pool of the unemployed, a pool she has not been in since high school. She essentially has no hirable skills. Well this is the reality many Americans began to face as offshore labor became the thing of the future and domestic labor a thing of the past.

Essentially the United States could never eliminate domestic labor nor does it aim to but low expenses, maximum output, and increased revenue compliment the outsourcing approach to business. Over 80 US firms indicated that outsourcing their professional services saved them between 20-40% annually. This is the number one reason why companies outsource. In most situations you can find cheaper labor through outsourcing and if the quality level is the same there is no reason why you should not outsource. By directing a part of the work towards outsourcing you gain flexibility and you are able to focus on your company’s core competencies. This increases work flow and allows you to finish projects faster. Sometimes you might have to outsource because what you are looking for cannot be found locally. For instance, you might want a good project manager and the local market does not have one to hire. Outsourcing can provide you access to a need that is not available at a local level. By being able to contact people from other regions/countries you might be able to contact really good professionals. You can hire them through outsourcing and you would get better employees at a cheaper rate. These factors would make outsourcing seem almost a more efficient way to do business.

An under-appreciated incentive to outsource is the high regulatory cost of employing a United States worker versus a foreign worker. Social Security, Medicare, FICA, OSHA regulations, unemployment insurance and a whole host of other government-imposed costs make employing local workers less attractive in light of overseas talent, for whom none of these costs must be paid. The desire to minimize corporate income taxes as well is an undeniable enticement. Overseas countries are aware of this desire and offer generous tax incentives to companies that outsource their operations there.

Another financial edge offered by outsourcing is risk management. As HYPERLINK “http://www.horizontech.com/reasons-companies-outsource.html”HorizonTech.com states, “outsourcing enables management to turn over to its suppliers certain classes of risks – such as demand variability and capital investments. Such risk transference is made difficult or impossible by working with contracted or salaried U.S. employees. For instance, if a company wants to launch a new product, it can either hire new employees in-house or utilize outsourced talent to get the job done. The in-house employees are now on payroll, and will need to be paid regardless of whether the new product sells. Ditto for their Social Security, FICA and the other government costs discussed earlier. Outsourced talent, on the other hand, can be dropped in a heartbeat if product sales do not justify continuing to pay them. This is just one example of how companies use outsourcing as a risk management tool.”

Some of the most commonly outsourced jobs in America happen to be the most commonly cultivated jobs of the American middle class. The impact of the dissolution of these positions has directly affected the life blood of the economy. One of the most routinely outsourced business tasks is customer support, particularly phone support. The cost of employing, providing office space and training, and paying taxes on American support reps can be rather high, whereas an outsourced call center in a country like India can frequently do the job for a fraction of the cost. Of course, the decision to outsource customer support is a trade-off. I myself have heard and experienced overseas support horror stories about reps who speak broken English, fail to comprehend problems and make the entire support experience a grueling process.

Accounting is a textbook example of a corporate job that has been subjected to outsourcing because it involves a standard accounting methods that professionals all over the world know. Overseas workers are routinely trained in American accounting practices, making it easy and convenient for American businesses to outsource their financial statements and other book keeping tasks. Given the sensitive nature of the work, it is important for businesses to make sure that they are working with competent and qualified workers. At my own job at WPIX channel 11 we outsource our accounts payables function. Our corporate office eliminated our whole service center offshore in a quest to alleviate debt and expenditures. It makes things difficult because of the language barriers. Often enough, I spend some of my work day putting out fires caused by this gap in communication but cannot ignore the noticeable effects on our bottom line on our monthly Profit and Loss statements. Unfortunately I cannot say that outsourcing doesn’t have its benefits but I believe as a society we pay a higher cost in the decline in lifestyles.

Computer programming is also a commonly outsourced for similar reasons. Standard programming projects (like a message board, calculator, or database) can be quickly and easily completed by outsourced teams for pennies on the dollar in relation to what experienced American programmers would charge for the same work. But as HYPERLINK “http://www.flowtown.com/blog/disasters-in-outsourcing-a-what-not-to-do-guide”Flowtown cautions in its article on disasters in outsourcing, programming is most intelligently outsourced for only such cookie-cutter tasks:

“An important project that will form the backbone of your entire company and requires ideas and knowledge that only the top executives at your company possess should not be outsourced, as the language barrier and supervising difficulty can lead to a sub-standard finished product. In-house workers who can be directly supervised and easily communicated with will get the job done faster and more efficiently than less-expensive off-shore workers”

The outsourced task that gets by far the most media acclaim is manufacturing. The U.S. economy has transitioned from being primarily a manufacturing economy to being primarily a service economy. In 2010, our economic strengths as a country lie in such things as financial services and telecom rather than in physically assembling products. There are so many reasons that account for this trend, including the government costs mentioned earlier in this paper (Social Security, Medicare, unemployment, etc.) of hiring Americans to the inescapably cheaper manufacturing labor available elsewhere, primarily overseas. You just cannot beat cheap labor. The move to send manufacturing jobs to Mexico has taken way. Along with Mexico, Costa Rico, the Dominican Republic, and China were also recipients of manufacturing jobs from American companies. The manufacturing workers here in the United States were left with no jobs, no health insurance and little help from the companies they had shown their loyalty to for so many years. The fact is manufacturing is among the most frequently outsourced business tasks and will remain so for many years to come at the expense of the American Middle class.

The outsourcings of all these important job functions have also had an adverse effect on our rate of unemployment in our country. Outsourcing totally changed the dynamics of unemployment. From a labor perspective, most professional service workers aren’t unionized and helps foster the transition to outsourcing talent. The U.S. working population is declining and the U.S. Census figures indicate that the U.S. will require an additional 15.6 million workers to maintain the current working population in 2015. Goldman Sachs reports to date we have lost approximately 300,000 to 500,000 jobs to outsourcing and a projected loss of 6 million over the next 10 years. The Forrester research indicates a lower projected job loss of 3.3 million over the next 15 years and UC Berkley states that we currently have 14.1 million jobs at risk due to outsourcing potentials. However, the reality of retaining these jobs undoubtedly impact citizens, both shareholders and taxpayers. The cost of this impact will ultimately be transferred to citizens in the form of increased taxes or reduced corporate dividends. With that being said, most U.S. states are struggling with their budgets and have forced them to have a more optimal view towards a new approach to business which in turn brings about the consideration of the positive benefits of outsourcing.

Business executives are increasingly convinced that outsourcing of professional services can provide their companies with the major cost benefits by allowing goods and services to be produced at the most economic prices without the traditional barriers of national and corporate boundaries. On the other side of the coin, trade unions and unemployed individuals blame many of the economic woes to outsourcing. The phasing out of job functions has increased our unemployment statistics, has been crippling to our economy by slowing wages, decreased our product value while increasing productivity and blurred the social economic classes of the American social hierarchy. American workers who lose their jobs because of outsourcing may need retraining and extended unemployment benefits. The American taxpayers will undoubtedly have to make major investments in public education at all levels. In the new globalized job market, American workers will have to prepare to compete not only with each other but also with those in India, China, and everywhere else in the world.

The state of America’s unemployment rate makes one question how an economy with such a promising future of becoming a stronger world power, be stricken with such disenfranchisement. The toll of the unemployment rate is not only affecting those that have not received competitive education, but also those that have received the best standard of education the world knows. Seventeen million college graduates are working at jobs that do not require a degree. That being said, some degrees equate to toilet paper, once you cannot utilize it, it becomes worthless. One may ask how can America go about getting its citizens to become competitive on a global level to help preserve the middle class? Perhaps, America should change its governmental structure all together by implementing a Planned Economy. An additional argument is that the American Government should create more jobs that cannot be outsourced, such as construction jobs or new innovative industries. Another alternative to resolve this problem is for American’s to totally transition to higher paid jobs, abandoning their previous careers. There are numerous tactics that can be implemented to build the American middle class back up, but which one is achievable?

The rate of unemployment is completely eliminating the middle class faster than the great depression. It is predicted that at the speed jobs are being filled, it may take at least seven years for the gap to be filled. Gerri Willis expressed, “8.5 million people are currently getting unemployment insurance and over 40 million receive food stamps” (Creating Jobs for the Middle Class, By Gerri Willis). One might ponder, is the unemployment rate high in America because they are not producing industries that the world is demanding? Thirty years ago, jobs that made up fifty percent of employment has dropped below forty percent. In the 21st century, jobs that are lower wage are growing rapidly to over forty percent, while higher waged jobs are decreasing. As stated on Civil Unrest Unemployment, “In the past three years, nearly one in five U.S. workers was laid off from the job, according to The Disposable Worker: Living in a Job-Loss Economy, a Rutgers University of Connecticut report released in late July”. Do you see the trend? The middle class is vanishing due to jobs that can satisfy their lifestyle being eliminated.

It can be suggested that America can benefit dramatically by implementing a semi-planned economy to help their economy transition to what would become more profitable for all. A Planned Economy is when the state directs the financial system towards what they feel would be profitable. Typically, economies, including America’s are Market Based/Competitive Enterprises but countries have seen progression with Planned Economies, while some have planned implementing this governmental structure.  Countries that utilize Planned Economies consist of North Korea, Libya and Saudi Arabia. To implement this, the government must put into practice what they feel to be the best decision for distribution and production of goods. When discussing what a planned economy consist of Babylon.com stated, “In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives” (www.babylon.com). Though this economy may contradict the democratic and ethical threads that have made up America’s regulations and laws, it may be a must needed implementation that forces the economy to become more profitable. This may help increase the middle class and prevent it from disappearing.

America’s direct competition is China, one that does not frown on the implementation of a planned economy. This type of economy allowed them to achieve great success in a limited amount of time. China’s industries are becoming increasingly more profitable in contrast to America’s as their Gross Domestic Production is 9.6% in comparison to 2.6% in America, as stated in 2010. Does this mean that the Chinese, which is solely a communist government, have found the right threads that have allowed their industries to have a competitive advantage over America? One may argue that a government that sets a cast system is unethical because it does not allow people to execute the freedom to do as they please. Though these systems consist of security and growth, it lacks democracy. Does America need democracy while its country goes jobless and the middle class becomes totally obscure? Many may argue, no. The issue with this system is that the American government would have to create higher paid jobs. Due to the country being one of the most debt-ridden countries in the world, it would seem extremely impossible for the government to create these jobs.