[This review was published in the Fall 2010 issue of The Journal of Social, Political and Economic Studies, pp. 381-388.]


Book Review


How the Economy was Lost

Paul Craig Roberts

CounterPunch and AK Press, 2010


          Of all the excellent books coming out about the financial crisis and the condition of the American economy, this is clearly the most insightful.  This is because it focuses on the “real economy,” and not mainly on the witches’ brew of finance, monetary policy and institutional failure that created the Crisis of 2008 and that the others have analyzed so completely (and much more than Roberts does in this book).  Roberts sees that that unseemly mixture has been superimposed on top of an already hollowed-out American economy, stripped of its industry and jobs by rampant offshoring, immigration both legal and illegal, and cheap imports.  Because of that deindustrialization, monetary and fiscal policy have little to work with as Americans seek to recover from the crash.  People expect a “recovery as usual,” but the substance is no longer there upon which to build more than a superficial revival of employment and incomes.

          Paul Craig Roberts has served in a number of prominent positions as an economist, but as one of the genuine “truth seekers” in the intellectual world he has been so outspoken that over the years a series of doors have been slammed shut on him.  His professional career testifies eloquently to the fact that what the special interests and ideologues most demand is conformity.  It serves, of course, as a badge of merit to those who want an honest analysis.  We say this despite not especially relishing the brash rhetoric with which he has come to adorn his dissatisfactions: “…fraudulent finance… the quislings in Congress… the crowd of thieves… the banksters… the incestuous relationships… whores aligned with elites.”  (Such inflamed epithets aren’t congenial to the dispassionate discussion preferred by educated people or to the civility that will be required during the decades of economic and social upheaval and of ideological confusion ahead, of course; but they do appeal to the “red meat” types who like their truth presented with well-deserved testosterone.)

          As Assistant Secretary of the Treasury during Ronald Reagan’s first term as president, Roberts had the job of finding a cure for the “stagflation” that by combining high inflation with a high level of unemployment had reversed the usual trade-off between inflation and employment.  The answer, he found, was in “supply side economics,” which mixed “tighter money” to tame the inflation with lower tax rates to stimulate economic activity.  At other times, Roberts served as associate editor of the Wall Street Journal, held “numerous academic appointments” (including one at Stanford University), was the first “outside economist” for Business Week for which he wrote for 16 years, held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies, and authored books and a vast number of columns.

          The book reviewed here is a collection of columns published by CounterPunch during the past five years, together with some undated essays that elaborate further on the themes addressed by the columns.  All of it could benefit from editing to remove the many repetitions that are inherent in a series of columns that over time hammered home the same insights; but although this is important to a reader, it is irrelevant from an intellectual standpoint, since it is the ideas that are important.

          There are several parts to Roberts’ detailing of America’s deindustrialization and employment crisis.  What the columns emphasize most is “offshoring,” by which manufacturing and other business operations are located in other countries to produce goods and services for sale in the American market.  “Many U.S. companies use foreign labor to manufacture abroad the products that they sell in American markets.”  According to a USA Today report, “IBM’s staffing in India has jumped from just 9,000 workers in 2003 to 74,000 workers in 2007.”  He observes that “Bangalore is India’s Silicon Valley.  A 21st century creation of outsourcing, Bangalore is a new R&D home for Hewlett-Packard, GE, Google, Cisco, Intel, Sun Microsystems, Motorola, and Microsoft… At last count, Bangalore had more than 150,000 software engineers.”

The transfer of manufacturing to other countries does more than remove American job opportunities.  One result is that “the U.S. is rapidly giving away its technology, which is rapidly being captured.”  This is because “no one seems to understand that research, development, design and innovation take place in countries where things are made.”

          In his own writings, this reviewer has stressed how non-labor-intensive technology will before long cause “most of the return to go to capital, not to remunerated employment.”  If he is right about this, it makes it doubly important from a country’s point of view for its citizens to own a substantial portion of the capital, so that they may realize the return off it.  Roberts doesn’t comment on this much, but it is significant that he confirms the point by saying that “the U.S. has been financing its trade and budget deficits by turning over the ownership of existing U.S. assets and their income streams….”  He points out that “foreign direct investment in the United States consists almost entirely of foreign acquisition of existing U.S. assets,” and that “one result is that the income streams associated with the change of ownership now accrue to foreigners.”

          Roberts has repeatedly sounded an alarm about the fiscal and trade deficits’ potential destruction of the U.S. dollar’s status as the world “reserve currency.” “To be the reserve currency means that your currency is the accepted means of payment to settle international accounts.”  Considering the number of times he mentions it, and the importance he rightly assigns to it, it would be well if his columns explained in detail what the consequences of such a loss of status would be.  He does say that if the reserve status is lost, the United States will have to move to a trade surplus (and this would require a vast reversal of the huge trade deficits the U.S. has long been incurring) in order to earn enough in foreign currencies to pay for its imports of oil and manufactured goods.  Oddly, this would seem to require that the United States return to manufacturing on a grand scale, something Roberts very much desires; and yet he repeatedly warns of possible catastrophe from a loss of reserve status.   

While all of these things are occurring, American firms are bringing in foreign workers through “work visas,” which include the H-1B visa for an annual 65,000 skilled workers, the Trade NAFTA visa for “Mexicans and Canadians who are willing to work in the U.S. at below prevailing wages,” and the R-1 visas to bring in “young people from abroad… supplied by contractors to restaurants….”  These workers, displacing Americans, are among the “legal immigrants,” but they are supplemented, of course, by the millions of illegal immigrants coming across a calculatedly porous border or overstaying their initially lawful presence.  “Americans… cannot find work in the unskilled and semi-skilled jobs taken over by illegal immigrants.” 

          The results of this displacement of American jobs, Roberts says, are devastating.  He cites “…record unemployment in engineering fields and a major drop in university enrollments in technical and scientific disciplines.”  He gives the details about the decline in technical-workers’ pay between 2000 and 2005, and says that almost all of the new jobs created in the United States in 2007 were in service work, certainly not in manufacturing.  The   result is that “the vast majority of jobs in the BLS [Bureau of Labor Statistics] ten-year jobs projections do not require a college education,” resulting in “a lack of jobs for educated people.”  Given “the stark increase in U.S. income inequality in the 21st century,” this amounts to a vast undercutting of the position of the American middle class.  This accompanies the deteriorated situation of the millions whose incomes depend on semi- and unskilled labor.  Meanwhile, there are those who profit immensely from the many ways of invoking cheap labor, “lending new meaning to the phrase ‘class war’.”  Roberts adds his voice to what so many testify to: “The rich are getting much richer and luxuriating in the most fantastic conspicuous consumption since the Gilded Age.”

          He refutes as a “lie” the oft-asserted allegation that “there is a shortage of qualified U.S. workers.”  In February 2006 [well before the unemployment caused by the current recession], he wrote that “I receive a constant stream of emails from unemployed and underemployed engineers with many years of experience and advanced degrees.  Many have been out of work for years.”

          Roberts stands as a clear adversary to the ideology and interests that support the hollowing-out of the American economy.  It is a fundamental disagreement with prevailing “free trade” ideology for him to believe that the American people’s interests should be a subject of concern.  He cares about the fate of Americans.  In contrast, “companies are no longer bound to the interests of their home countries… Patriotism is no longer a characteristic of the American business elite.”  Whereas free trade ideology rationalizes its divorce from national loyalty in terms of “global economic efficiency,” Roberts sees it differently: “In the United States of America today, ‘free trade’ is a shield for greed.”  This leads him to take a dim view of the various much-lauded free-trade compacts.  Such agreements as NAFTA have been “enabling acts that [have] enabled U.S. corporations to dump their American workers, avoid Social Security taxes, health care, and pensions, and move their factories offshore to locations where labor is cheap.”


These concerns about the real economy are central to Roberts’ discussion, but he has much to say on other subjects.  One of them is to comment on the responses that have been made by the George W. Bush and Obama administrations to the financial crisis.

          It should be noticed that his critique was made contemporaneously with the bailouts and the stimulus spending, and is thus not attributable to hindsight.   In March 2008, after the initial signs of the crisis had become apparent but several months before the spectacular events of September and October of that year, Roberts advised that “of course, something needed to be done to forestall the implosion of the financial system, but a less costly alternative was at hand.  The mark-to-market rule could have been suspended in order to halt the forced sale and write down of assets and to provide time in which to sort out derivative values.” 

          That fall, Roberts again brought much wisdom to the table.  It was a time when the Federal Reserve and U.S. Treasury were making panicky hour-to-hour judgments about which financial institutions to rescue.  Roberts urged, instead, going to the root of the problem, stopping the leak at its source rather than seeking to mop up its many effects.  (An analogy to the response to the BP oil spill in the Gulf of Mexico suggests this way of expressing it.  In the spill, tThe most immediate need was to stop the gushing well.  It would have been to little avail simply to clean the beaches time after time without stopping the flow at its source.)  His column in early October argued that “the bailout is focused on the wrong end of the problem.  [It] should be focused on… the defaulting homeowners… Stopping the problem at its origin would restore the value of the mortgage-based derivatives and put an end to the crisis.”  A week or so later, his column said “the U.S. Treasury estimates that as few as 7 per cent of the mortgages are bad… If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage-backed securities would be made whole, and it would be unnecessary to pump huge sums of public money into banks.”  As an alternative, he pointed out at that time that “two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.”  (The “uptick rule” is one that prevents a downward cascade in a stock’s value by requiring that the stock can only be “sold short” if it has moved up in price in the previous trade.)  As precedent for his suggestion of bailing out the mortgages, not the banks, he cited the fact that “during the Great Depression of the 1930s, the Home Owners’ Loan Corporation refinanced 1 million home mortgages in order to prevent foreclosures.”

          So far as the stimulus package enacted during the first weeks of the Obama administration was concerned, Roberts had the prescience to see it in the context of conditions in the real economy.   Because of the hollowing-out that had occurred in American manufacturing, “all Obama’s stimulus program can do is to reduce the number of unemployed temporarily” (and even this is “assuming Mexican immigrants do not get most of the construction jobs”).  “Monetary and fiscal policy cannot help when the problem is that American jobs have been relocated offshore.” If consumer demand is stimulated, the large-scale purchase of imports will mean that “between one-fifth and one-fourth of new consumption expenditures will stimulate foreign economies.”

          It is worth noting that even though Roberts sees a yawning chasm between himself and both the Republican and Democratic parties as they exist today, the policies he proposed at the height of the financial crisis provide considerable intellectual support for those who voted against the bailouts and the stimulus package, and who decry the enormous growth of government debt and the enlarged governmental role in the economy. 

          His refusal to identify with either party is founded in his perception, which he holds in common with many other commentators, that there is a crisis in what Americans like to consider their “democracy.”  The crisis is summed up when he says “never before in our history has the elite had such control over the government.”  In his usual straight-forward rhetoric, Roberts says “the U.S. is a failed state… One conclusive hallmark of a failed state is that the crooks are inside the government,” where “the insiders manipulate economic policy for their enrichment at the expense of everyone else.”

          One aspect of this is that everything is now for sale.  “Economists today are interested in money, and they provide apologies for ‘globalism’ that bring grants to their departments from transnational corporations.  Today a person who speaks economic truth has no future in the economics department of a university dependent on outside money.”  Speaking more generally, he says that “in America ‘truth’ has long been for sale.”   When one combines control by an elite and a multitude of special interests with a suffocation of all dissenting opinion, the unreality of the self-assigned appellation “democracy” becomes apparent. 


No one can hope to fix the whole toxic mix – economic, financial, social and political --   by enacting a finite set of “reforms,” but in the context of the series of book reviews we are writing in the wake of the financial crisis it seems worthwhile to report at least some of the reforms Roberts advocates:

          .  Separate CEO pay from short-term profit performance.

          .  Adopt a Value Added Tax (VAT) and abolish the corporate income tax.

          .  End the Iraq and Afghanistan wars, and close America’s more than seven hundred overseas military bases.

          .  Give up the goal of American “global hegemony.”

          .  Adopt a “wage equalization tariff” to “wipe out much of the advantage of offshoring.”

          .  Become aware of the anti-national nature of “free trade ideology,” and adopt the protection of American industry that has historically been so important.

          .  Declare all “credit default swaps” to be fraudulent contracts, except where the item that is insured is owned by the one obtaining the swap.

          .  Reinstate the uptick rule.

          .  Ban the short selling of any national currency.

          .  Subject derivatives to careful regulation.


In this review, we have lauded Roberts for keeping his eyes on the real economy, not just on the financial mess.  This is not to say that even he goes far enough in seeing the underlying forces at work.  He sees the devastating impact of cheap foreign labor on American manufacturing and jobs, but doesn’t seem aware of the simultaneous development in the world of non-labor-intensive technology, which will before long supplant even the cheapest foreign labor and will radically change the world’s economies and societies from their foundation in remunerated employment.  This shift to relatively workerless technology will challenge all existing ideologies and political systems. 

                                                                                                                                                                                    Dwight D. Murphey