Funny Money Policies: How Our Obsession With Growth And Cheap Labor Undermines Economic Policy

A front-page story in the Washington Post on July 31 of this year might have considered other reasons why growth has not led to more employment, besides simply claiming that growth has been “too slow”. First, the jobs that workers would have gone back to have largely been off-shored as employers sought cheap foreign labor. Second, cheap foreign labor by way of illegal immigration seems to have been welcomed by domestic employers trying to fill the remaining jobs at home. Third, jobs have been “outsourced” to the consumer (the ultimate source of cheap labor), who is now his own checkout clerk, travel agent, baggage handler, bank teller, gas station attendant, etc. And fourth, the swollen, bloated financial sector has drained enterprise and energy from the real economy into the symbolic economy. The financial sector now accounts for 40% of total profit in the US. And what have they been producing? Bets on debts and toxic assets.

These obvious but unmentioned facts suggest other policies for increasing employment beside the mindless call for more “growth,” gratuitously labeled “economic growth” when on balance it has become uneconomic.

Let us consider each of the four reasons and related policy implications a bit more.

First, off-shoring production is not “trade”. The good whose production has been off-shored is sold to satisfy the same market that its domestic production used to satisfy. But now, thanks to cheap foreign labor, profit is greater and/or prices are lower (mainly the former). Off-shoring increases imports, and since no product has been exported in exchange, it also increases the trade deficit. Because the production of the good now takes place abroad, domestic stimulus spending simply stimulates imports and employment abroad. Demand for domestic labor consequently declines, lowering employment and/or wages. It is absurd that off-shoring should be defended in the name of “free trade”.  No goods are traded. The absurdity is compounded by the fact that off-shoring entails moving capital abroad, and international immobility of capital is one of the premises on which the doctrine of comparative advantage rests–and the policy of free trade is based on comparative advantage! If we really believe in comparative advantage and free trade, then we must place limits on capital mobility and off-shoring. Budget deficits, printing money, and other measures to stimulate growth no longer do much to raise domestic employment.

Second, for those jobs that have not yet been moved abroad or cannot easily be off-shored (e.g., services such as bartending, waiting tables, gardening, home repairs, etc), cheap foreign labor has become available via illegal immigration. In the United States, many employers seem to welcome illegal immigrants.  Most are good and honest workers, willing to work for little, and unable to complain about conditions given their illegal status. What could be better for union busting and driving down wages of the American working class, which includes many legal immigrants? The federal government, ever sensitive to the interests of the employing class, has done an obligingly poor job of enforcing our immigration laws. Immigration reform requires deciding how many immigrants to accept and who gets priority. All countries do that. Most are far more restrictive than the US. Whatever reforms we make, however, will be worthless unless we control the border and actually enforce the laws we will have democratically enacted. Ironically our tolerance for illegal immigration seems to have caused a compensatory tightening up on legal immigrants and tourists—longer waiting periods and more stringent requirements. It is cheaper to “enforce” our immigration laws against those who obey them than against those who break them—but quite unfair, and perceived as such by many legal immigrants and people attempting to immigrate legally. This is a very perverse selection process for new residents.

Third, the automation of services of bank tellers, gas station attendants, etc. is usually praised as labor-saving technical progress. To some extent it is that, but it also represents labor-shifting to the consumer. The consumer does not even get the minimum wage for his extra work, even considering the dubious claim that he enjoys lower prices in return for his self-service. Ordinary human contacts are diminished and commerce becomes more sterile and impersonally mechanical. This is particularly evident in one context: Interaction between people of different socio-economic classes is reduced. When I worked at the World Bank, for example, I remember that the mail clerks were about the only working class folks that professional Bank staff came into daily contact with. Even that interaction was eliminated when automated carts were introduced that delivered mail to each office cubicle. While not highly productive, such jobs provide a valuable service and also an entry into the work force, and help distribute income in a way more dignified than a dole. Reducing daily contact of World Bank staff with working class people does nothing to increase sensitivity and solidarity with the poor of the world. And of course this does not only apply to the World Bank.  The idea that it is degrading to be a gas station attendant or mail handler, and that we will re-educate them to become petroleum engineers or investment bankers, is delusional on several levels.

Fourth, a “Tobin tax”, a small percentage tax on all stock market, bond market, and foreign exchange transactions would slow down the excessive trading, speculation, and gambling in the Wall Street casino, and at the same time raise a lot of revenue to help close the federal deficit. This could be enacted quickly. In the longer run, we should move to 100 percent reserve requirements and end the commercial banks’ alchemy of creating money out of nothing and lending it at interest to people who can’t pay it back. Our money supply would move from being mainly interest-bearing debt of private banks to being non-interest bearing government debt. Money should be a public utility (a unit of account, a store of value, and a medium of exchange) and should not be the by-product of commercial lending and borrowing for private profit.

Excuse my populism, but the working class in the U.S., as well as in other countries, really exists – and it is here to stay. Cheap labor and funny money policies in the name of “growth and global competitiveness” are class-based and elitist. Even when dressed in the emperor’s new wardrobe of free trade, globalization, open borders, financial innovation, and automation, they remain policies of growth by cheap labor and subsidized money for banksters. And we wonder why the US distribution of income has become so unequal? Obviously it must be because growth is too slow—the single cause of all our problems!

That we would be better off if we were richer is a definitional truism. The question is, does further growth in GDP really make us richer, or is it making us poorer by increasing the uncounted costs of growth faster than the measured benefits? That simple question is taboo among economists and politicians, lest we discover that the falling benefits of growth are all going to the top 1 percent, while the rising costs are “shared” with the poor, the future, and other species.

Herman Daly served as Senior Economist at the World Bank’s Environmental Department from 1988 to 1994. He has since taught in the School of Public Policy at the University of Maryland. Daly is one of the pioneers of the concept of “steady-state economics”. For his work, he has been awarded the Right Livelihood Award and the Heineken Award of the Royal Netherland Academy of Arts and Sciences. In 2008, he was elected as “Man of the Year” by Adbuster Magazine.