Booming Global Workforce Keeping U.S. Inflation Down, but at a Cost

WASHINGTON – While Alan Greenspan has won praise for his successful 18-year battle to keep inflation under control, he's the first to say he's had a lot of help. Among those most responsible are tens of millions of workers in China, India and Eastern Europe.

Adding all those workers to the global economy has made the Federal Reserve's inflation-fighting job easier by increasing competition. That has helped hold down labor costs — the biggest single expense for employers — and, as a result, prices.

It has come at a cost: Many of the jobs being done overseas used to be in America.

Last week, General Motors Corp. announced plans to cut more than a quarter of its North American manufacturing jobs — 30,000 in all — and close 12 facilities by 2008. Those cuts will be added to the more than 3 million manufacturing jobs — one in six — that have been lost since mid-2000.

"U.S. manufacturing jobs have withered over the past five years and many of those jobs are never coming back," said Mark Zandi, chief economist at Moody's Economy.com, a private consulting firm.

For those U.S. workers who still have jobs, the pressure on their wages has intensified as companies use the threat of moving more production overseas — where labor is far cheaper — as a way to extract concessions from their U.S. workers.

This phenomenon has hit manufacturing the hardest. But service workers are starting to be hurt as well. The ability to transmit digitally massive amounts of information to faraway places has led companies to send overseas jobs in such high-tech areas as architecture, computer software, medical services and engineering.

"It is one thing to celebrate keeping inflation in check. It is another thing to celebrate that living standards are stagnant or falling for most American workers," said Thea Lee, policy director for the AFL-CIO.

All the goods flowing into the U.S. from overseas have produced a record trade deficit that must be financed by borrowing from abroad.

In 1987, the year Greenspan took over as Fed chairman, the U.S. had a deficit in its current account, the broadest measure of trade, of $160.7 billion. Last year, that deficit set a record of $668.1 billion and is projected to go even higher this year.

Like most economists, Greenspan is an ardent supporter of free trade and has said the current account deficit should improve gradually without destabilizing the U.S. economy.

Other economists worry that foreigners suddenly might decide to stop holding so many U.S. investments, driving down the dollar's value against other currencies, as well as U.S. stock and bond prices.

Greenspan also has a benign view about how the U.S. can deal with workers who have lost jobs and or seen their wages depressed because of foreign competition. He thinks the country can solve this problem by doing a better job of educating workers so they have the skills they need for the high-tech jobs of the future, rather than the low-skill jobs that increasingly are moving to other countries.

That solution, Greenspan believes, will help combat the growing wage inequality in the U.S. This trend has seen incomes for high-income Americans rise sharply while the wages of low-income workers have been stagnant.

According to figures from the Census Bureau, the top 20 percent of U.S. households earned 50.1 percent of all income last year while the bottom 20 percent received just 3.4 percent of total income.

Other analysts are not so sure that Greenspan's approach will work, especially given that high-tech jobs are being sent to countries with well-educated workers who earn far less than Americans.

"The idea that you can educate yourself out of this problem is not accurate any more," said Jared Bernstein, an economist at the Economic Policy Institute, a liberal think tank in Washington.

Greenspan had a different worry in recent congressional testimony. He said the Fed and other central banks will have to be diligent about fighting inflation once the beneficial effect of the huge increase in the global work force begins to wane.

Greenspan will step down as Fed chairman at the end of January, so that will be a problem for Ben Bernanke, his designated successor.