Yves here. One thing I have noticed on posts that discuss the US labor market and trade is reflexive and frankly somewhat dogmatic defeatism. The position seems to be “China and Bangladesh have such cheap labor, there is no way we can compete.”
This view is simplistic. First, in capital intensive industries, direct labor is less than 10% of final product costs. So things like flexible, responsive manufacturing (ie, adding value to the customer by being more adaptive, minimizing inventory losses and order lead times) can overcome the impact of labor cost differentials, as can more mundane factors, like physical proximity to the end customer. And there are areas where the US still has a cost and technology lead, such as in coated paper (which believe it or not, unlike newsprint, is fussy to produce). Second, much of the low level labor cost savings of offshoring is considerably offset by greater managerial costs (more coordination needed) and various other offsets (longer lead times, which reduce flexibility, greater transit times, higher shipping and inventory financing costs). Third, US tax policies actually encourage offshoring.
By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
Policymakers, economists and commentators of all stripes have recently debated the correct primary policy response to the current unacceptably high rates of unemployment: fiscal stimulus or education and job retraining. However, the policy debate has ignored the 800-pound gorilla in the room: globalization and its implications. As a result, the most frequently debated remedies will not promote sustainable full employment.
During the recession (Dec 2007-June 2009), about 7.5 million jobs disappeared and the number of people employed fell to levels experience in the late 1990s. Clearly there is a cyclical component.
However, there is also clear evidence of global-secular forces at work. From the cycle peak in March of 2001 to the recent cycle peak (Dec 2007), 2.45 million goods-producing jobs were lost. During the November 2001 to December 2007 cyclical expansion, over 1.2 million jobs in durable goods manufacturing were lost versus the 1.44 million lost during the most recent recession. About 0.9 million jobs were lost in nondurable goods during that expansion versus just under 0.48 million during the recession.
The non-cyclical nature of the job losses during the cyclical expansion and the limits of demand stimulus as a remedy is clear, Final sales to domestic purchasers of durable and nondurable goods grew by about 25% and 18% respectively (as reflected in the GDP quantity indexes), considerably faster than real GDP which grew by about 11%.
Productivity growth cannot reconcile the growth in relevant GDP quantity indexes, with 12% and 15% declines in the size of the respective work forces. However, the trade deficit can. The trade deficit as a percentage of GDP increased from about 1.25% in 1996 to about 3.6% in 2001. It peaked at about 5.75% in 2006 before falling to about 5.10% in 2007 and 2.74% in 2009. It has since rebounded and is about 3.7% of GDP (QII 2010).
However, the trade deficit itself is not the 800-pound gorilla. The 800-pound gorilla is the fact that in the absence of a return to a sustainable external position, domestic stimulative policies and job training will be unable to achieve a return to sustainable full employment.
From 1996 to 2001, the effect of the growing trade imbalance on output and the labor market was masked by the irrational exuberance of the tech bubble and the transitory increases in investment and consumption that it drove. When the tech bubble burst, the drag from the trade deficit remained and the US experienced a recession even though final sales to domestic purchasers exceeded potential output.
Post the crash of 2001, the US authorities employed economic policy accommodation to close the output gap. The Fed lowered the targeted Fed funds rate to 1%. It stayed there for 18 months and was then ratcheted up slowly over 17 FOMC meetings. The private savings rate approached zero. The budget deficit grew and the cyclically adjusted fiscal budget became decidedly negative and has remained so.
The stimulus narrowed the gap. However, there was a dark side to the attempt to achieve full employment via stimulative domestic policy. Given the trade deficit in 2005 (the only year in which the output gap was closed), US based economic agents had to demand/spend on final goods and services $1.0572 for every $1.00 of income. Full employment was accompanied not only by an unsustainable external deficit, but also unsustainable asset prices, private debt levels and levels of consumption (and savings) relative to income as well as higher public debt levels. When the public’s willingness to increase its debt load waned as real estate prices fell, consumption, economic activity and employment fell along with it. We are now experiencing balance sheet recession and existing debt levels appear to be a barrier to increased private and public sector debt-financed demand.
Most troubling, but not surprising, the trade deficit is growing again and is unsustainable at about 3.7% of GDP. The external imbalance is not a temporary phenomenon. The simple and sad fact is that an unsustainable trade deficit implies that full employment levels of GDP are also unsustainable. Intellectually, one can segregate domestic economic concerns and problems from the international, but US prices, output and incomes are no longer exclusively determined domestically. Furthermore, US economic policy not only affects the rest of the world, but those responses in turn affect the US economy.
However, the debate over monetary and fiscal policy in the US goes on as if the US existed in isolation. One can argue that ethical and political imperatives require domestic fiscal stimulus, but to argue that fiscal stimulus is the cure to the current economic difficulties is incorrect. Education and job retraining are also laudable goals, but they will not solve the macro problems in the US labor market.
The US must initiate policies that will encourage migration of economic resources to the tradables sectors and help realize external sustainability. US economic agents will not return to the tradables sector unless US tradables are competitive and viable. Some exchange rate adjustment is undoubtedly necessary. However, the magnitude of required currency adjustments necessary to alone achieve balance are not only unlikely to occur, but would proved destabilizing to the world’s capital markets if they were realized quickly. Increased tariffs or other forms of protectionism are likely to invoke retaliatory actions and possibly a destructive trade war.
Consequently while the US pursues currency adjustment through international agreements and negotiations, the US must pursue all available domestic policy steps to make US industry and workers more competitive and to encourage capital, labor and firms to return to the tradables sectors. The possible policy steps include changes to the tax code and regulations that handicap firms and workers in the US in addition to job training in the tradables sector.
69 comments
Comments are closed.
In broad sense share of labor cost in total cost of production
is more than 50 pc. Often cited final car assembly at 10 pc labor cost is totally misleading. Calculated share of labor of each and every input including overhead and indirect labor cost will show a very different labor cost picture.
Another often ignored point is the fact that increasingly final demand will be in EM economies. So the burden of logistics costs will increasingly fall on developed world.
For auto manufacture labor cost is estimated by experts in the industry as approx %7.
Just curious. Auto manufacturing facilities such as you find in Detroit are basically assembly plants, with components being shipped in just-in-time from points all over the globe. Does the 7 % labor cost you reference include the labor costs of the component parts or just the assembly operation?
The possible policy steps include changes to the tax code and regulations that handicap firms and workers in the US in addition to job training in the tradables sector. Richard Alford
Or we can try progressing to true capitalism from our present pseudo-capitalism. How can we out-compete younger more enthusiastic adopters of our current system like China and India?
England wanted war with Germany in WWI because it was easier than trying to compete with her. I suspect the US will eventually try something similar unless we adopt a more completive economic model.
If we want to attract genuine capital to the US then we need to practice genuine capitalism. And how can we have genuine capitalism with a government backed banking cartel in the government enforced monopoly money supply?
“England wanted war with Germany in WWI because it was easier than trying to compete with her.”
WTF? England’s entry into WW1 was almost accidental and largely related to post-Napoleanic war treaties and strategies.
If England didn’t want to compete with Germany, then they didn’t want to compete with the US either, which was their other major industrial rival. Yet England didn’t declare war on the US, did they.
Could someone further describe how tax policy encourages transiton of industry / jobs to foreight interests. I belive that component is not understood and needs more specific light.
Yves, the labour cost is 10% because it’s made in
China or Bangladesh. If it’s made in USA, the cost
would easily go to 30% or 40%.
It would be very bad for American workers when
their salaries are as competitive as Chinese workers.
This is a simple fact conveniently ignored by those
who blame the value of Chinese currency for the trade
imbalance.
America could improve its trade balance if it’s willing to
export the many high-tech items which are on the list
of export control. But, I don’t think Americans would
be willing to ease those restrictions, which are actually
more stringent than the Chinese controls on rare earth
metals.
“Yves, the labour cost is 10% because it’s made in
China or Bangladesh. If it’s made in USA, the cost
would easily go to 30% or 40%.”
No, the 10% number is for US labor. People unfamiliar with modern manufacturing often don’t believe that the labor component of the costs is so low, but the people who have to pay for it know that it is (they’ve got lots of accountants).
BTW, there are other types of manufacturing, for example semiconductors, where the labor costs are an even smaller percentage.
“America could improve its trade balance if it’s willing to
export the many high-tech items which are on the list
of export control.”
Which high-tech items are those? “Export prohibited high-tech” is a Chinese code phrase for weapons. What should we sell them? F-22’s, Virginia class subs, maybe H-bombs? I’m sure we could find eager buyers.
I have seen hi-tech equipment go straight to China. There was a lot of incentive to get items through the US Department of Commerce.
There are a lot of hidden labour costs (over salary) in US and other advanced economies: sick pay, holiday leave, health insurance, government payroll taxes and employee red tape compliance – and pensions!
All this adds significantly to finished goods and services.
Most accountants are familiar with the difference between direct salary/wage costs and total burdened labor costs. “Direct labor costs” are the _burdened_ (benefits, etc.) labor costs of those who work directly on the manufacturing. They do not include the CEO’s salary.
After over a century of compounded productivity gains by the American workforce, the only real question is the distribution of wealth. First and foremost, since these economic gains also include mechanization and computer aided design and production, the 40 hour work week needs to be commensurately reduced. I propose a 3 day work week, with total compensation including all benefits to mirror current levels.
This would free up the citizenry to lead lives that are not wholly owned in terms of time to an outside force, private capital. The social order would finally begin to be informed by the decisions and time allocated based on self determination and not economic need. People may find themselves as entrepreneurs starting small family businesses, but the family obligations of child rearing, care of sick, or elderly can begin to be less of a government funded necessity, resulting in a shrinking of taxes for these services.
Education may also find tax relief, as young fathers and mothers assume primary education responsibilities in preparation for high school and beyond. But the main point is a need to reconceive the people of America asmore than a pre existing labor pool or market, especially at the dawn of automated manufacturing, similar to the drone air craft used by the military. I find the ideas of NC once it leaves the discussion of economics to be extremely limited when it comes to the political. The discussion of the political economy has been brought back in full force, certainly by Yves editorial direction. But I can see that direction was a result of having to face the consequences of a financial crisis with far reaching political consequences. The entire social order is under discussion here and not as a academic exercise, but because it is clear without terrible ideological filtering what the nature of power is and who has it as unmasked by the need to keep Wall St and the back bone of our manufacturing sector from total collapse.
While you debate the policy moves of big business and government, people are getting their own ideas about what should rise out this mess, this not quite completed or cleaned up mess.
All these idiotic statistics miss the point. A country ought to exist for the benefit of its people. Ours exists for the benefit of monopolistic corporations, executive swindlers, inheritors, politicians and their lackeys. The system is maintained by religious propaganda, in which economic growth plays the role of heaven. Statistics are freehand manipulation in support of the propaganda. At best they make one’s eyes glaze over; at worst they cover up everything resembling truth. We are told ad nauseum that the solution is jobs, but the real problem is the wholesale destruction of opportunity, which makes each succeeding generation more overeducated (at least on paper, although today’s college diploma is worth less than a high school education circa 1960) and underemployed and faced with a choice between criminality and slavery to a corrupt and deranged machine.
If beggar thy neighbor is the solution, we’re lost.
A commune in the woods is looking better & better.
Galt’s Gulch is looking better and better. Do you know the way?
Galt’s Gulch is looking better and better. eric anderson
You know, I wish we did have the equivalent of Galt’s Gulch to disprove the theories of the goldbugs. It is ironic (to me) that Ayn Rand favoured gold and the free market because a truly free market in money creation would soon make gold look ridiculous, imo.
“China and Bangladesh have such cheap labor, there is no way we can compete.”
The opposite is true: China and Bengladesh have such cheap labor because this is the only way they can compete… A wage equal to the global average day’s wage of would be entirely uncompetitive for a low productivity nation like China.
Once you add transportation costs, and other factors, wages there must be even lower.
Were the US to further lower its wages by reducing hours of work, China would be a customer, not a supplier…
The whole of US competitive disadvantage lies in its waste of labor created by a work week that is too long…
The policies America has engaged in for the last 30 years are producing extreme wealth for the top 2 percent and poverty for the rest of us. If we continue these policies, which seems likely, we are headed for a serious meltdown. When are we going to have some leadership in this country?
The statistics can be simpler.
In 1984 the Personal Savings Rate was 10.4% and it was .5% by 2005. (BER) In 1991 consumers were removing $56Billion in equity from their homes for consumption. By 1998 their were removing $116Billion and by 2005 they were removing $577Billion for personal consumption. (2007 Greenspan and Kennedy study of Home Equity Withdrawals) Now is generally accepted that all incomes except for the top 1% have been stagnant for over 25 years. I believe that overall those incomes were actually going down and consumers were compensating by first reducing savings and then borrowing.
From 1980 until 2009 the Fed has been lowering interest rates during each recession but never returning them to previous highs as the economy seemed to recover. Those interest rates are now about 0%. There overall effect was to stimulate spending during good times and bad.
CalculatedRisk has a very nice graph showing the recovery time for employment after a recession. It shows that from the early 1980s those times have been getting longer and longer which was not the case from 1945 to the early 1980s.
Using those simple sets of statistics it is easy to see that the American consumer has been under increasing disadvantage of some sort.
Coincidently at that same time American corporations were moving production overseas which was a very large disadvantage to the middle class. Also coincidently in the late 1980’s we had a 3 million person illegal immigration problems and by 2005 we had about a 15 million person illegal immigration problem. That was a very large disadvantage to the bottom 10% of wage earners.
The costs of education have sky rocketed. We can not allow increased pollution to become a corporate income driver and taxes have to be paid by someone.
I conclude that reeducation and tax policy will not reverse these trends. We all know the answer but we don’t like the medicine.
We all know the answer but we don’t like the medicine. Jim the Skeptic
Oh, you mean a general bailout of the population with new debt and interest free legal tender fiat combined with the abolition of the government backed fractional reserve lending (counterfeiting) cartel?
I doubt many know that is the answer but it follows directly from the application of moral principles:
1) The banking cartel has cheated savers of honest interest rates.
2) The banking cartel has driven borrowers into unserviceable debt via the boom-bust cycle which the cartel causes.
The banking cartel has cheated the entire population (borrowers and savers). Thus the entire population should be bailed out.
From what I’ve read, Bernanke agrees (as much as a banker can). QE2 is meant to lower long term interest rates so the government can borrow the money for new fiscal stimulus.
So no, even the central bankers don’t believe austerity is the answer.
F. Beard says “Oh, you mean a general bailout of the population with new debt and interest free legal tender fiat combined with the abolition of the government backed fractional reserve lending (counterfeiting) cartel?”
No, the obvious answer is to reverse the operations that caused the problems.
Reduce the imports by any means necessary. Start with the currency manipulators and move on to outright tariffs!
Reduce employment of illegal immigrants by any means necessary! Fine employers at confiscatory levels. Bankrupt a few companies who break the law.
Reduce the imports by any means necessary. Start with the currency manipulators and move on to outright tariffs! Jim the Skeptic
But free trade is good. And when goods cross borders, troops don’t according to Bastiat.
Reduce employment of illegal immigrants by any means necessary! Fine employers at confiscatory levels.
Oh, so now the poor immigrants are to blame for the obvious sins of the bankers?
Bankrupt a few companies who break the law. Jim the Skeptic
Government backed fractional reserve lending is crooked as hell but it is legal. How about we abolish that? Do you think this is the first financial crisis the bankers have caused? They killed at least 36 million in WWII.
We can all be bailed out (including the banks in nominal terms) with a free distribution of new debt and interest free legal tender fiat (United States Notes) combined with the elimination or phase-out of FRL to prevent inflation.
Debt forgiveness is Biblical (Deuteronomy 15). Why not do what the Lord commands and avoid a lot of grief?
The bailout would go to every US adult so the savers would be equally compensated too.
Free trade is an oxymoron. There is nothing free about it. International trade has always been a zero sum game, some win some loss. China is a classic mercantilism empire. When you can kill labor leaders at will there is nothing free about it. The only people profiting from “free trade” in the United States are the banksters, multinational corporations and their major shareholders and thats it. That leaves the other 98% shit out of luck. People in this country never learned history. This country was built on protectionism. As for wars, are you kidding me? International banksters leads to wars a.k.a. our American history. I bet there are a lot of sovereign nations(Iraq?) who would love to develop their own resources and not have to fight the idiotic Americans over them. Also this libertarian philosophy is pure bunk and go live in Somalia if you love libertarians so much.
The only people profiting from “free trade” in the United States are the banksters, multinational corporations and their major shareholders and thats it. That leaves the other 98% shit out of luck. ceasley7
Mostly true. But it is not free trade that is to blame. It is our government backed fractional reserve lending cartel in the government enforced monopoly money supply that is to blame. Without that, the corporations would have been forced to share wealth rather than loot it via the government backed counterfeiting cartel.
And I don’t want to move to Somalia. I’d rather advocate for the US to practice genuine capitalism so the many can no longer be looted by the privileged few (the counterfeiting cartel).
I do agree with that the United States should finance our deficits with interest free U.S. Treasury Fiat currency and the need to abolish the Fed. Several past Presidents followed the Constitution and issued U.S. Treasury Notes. The war of 1812 was partly financed this way along with the Civil War. And both wars had the international banksters in the background instigating them. The international banksters financed and help supplied the South. This enabled the South to almost gain their independence even though they were vastly outnumbered and lacked a manufacturing base. Sounds lack what would happen today if a war between China and the U.S. broke out, the difference being our Wall Street international traitor banksters would finance China instead of the U.S. like they are doing now.
So don’t blame illegal immigrants for taking jobs from the bottom 10% of wage earners and then sending the money back home. Don’t blame employers for breaking the law by hiring them.
And There will always be corporations who benefit from unbridled Global Free Trade(GFT) and even some employees owe their jobs to foreign trade. So let’s not interfere with GFT!
As I said “We all know the answer but we don’t like the medicine.”
For the record I am in favor of Balanced Global Trade and legal immigration. And I want my fellow citizens to be gainfully employed.
The answer to our dilemma is more jobs for Americans. There is no other substitute. I am just as angry with the banksters as you are, but they did not cause this massive problem. They just triggered the inevitable disaster. It would have happened anyway because consumers can not spend what they do not have! Good paying jobs were becoming more and more scarce.
I repeat, we all know the answer but we don’t like the medicine.
I am just as angry with the banksters as you are, but they did not cause this massive problem. They just triggered the inevitable disaster. It would have happened anyway because consumers can not spend what they do not have! Jim the Skeptic
The counterfeiting cartel, since it can create (by lending) temporary money, is the cause of the boom-bust cycle. It drives up prices with debt during the boom that cannot be repaid during the bust. Should people have not borrowed then to buy houses? Yes, in aggregate they should have given the middle finger to the bankers and saved for their homes. However, we don’t act in aggregate do we? Those who did borrow from the counterfeiting cartel drove up prices for those who didn’t. The choice then was borrow from the counterfeiting cartel oneself or be forever priced out of the housing market.
I repeat, we all know the answer but we don’t like the medicine. Jim the Skeptic
Debt forgiveness is Biblical. But rather than forgive the debt, the equivalent could be achieved by bailing out the entire population with new debt and interest free legal tender fiat.
And if your remedy is austerity then why do you apply it to the victims, borrowers and savers, rather than the villains, the banks?
However, the banks have victimised themselves (suicide bankers, as Max Keiser calls them). A bailout of the debtors (as well as savers) would fix them too in nominal terms.
Losers? Only those who wish to be very rich in a poor country.
Technological advancements have reduced the percentage of “direct labor” in some products more than others. But you have to consider the other direct and “indirect” cost drivers as well. Supervision and plant administration, quality control, human resource personnel, safety and security personnel, cost accounting, real estate taxes, personal property taxes, building maintenance and insurance, source material suppliers, etc. Lay out an imaginary “buy vs build” capital budget project on a spreadsheet for yourself and I am sure you will find it cheaper to off shore it and you can reduce your risks as well.
It seems to me China has huge metropolitan areas designed as a matter of policy to support a manufacturing/industrial sector. Programs the central government underwrites, sponsors and maintains to support various industries. Predatory policies designed to take advantage of economies of scale, to capture markets, and to keep the rest of the world dependent on China as the world’s key manufacturing source. They are very aware of marginal cost and revenues and aren’t above “dumping” products in markets to maintain their control and discourage competition.
I haven’t personally visited Chinese manufacturing facilities, but I understand from what I have read, the working conditions and pay are abysmal for the average Chinese. This isn’t what we want. We don’t want to compete head to head against poor exploited Chinese workers, with a race to the bottom for the American worker. There is a very lucrative partnership composed of multi-national owners and executives with Chinese central planners and we need to break the partnership up with smart tax and trade policy before it’s too late. Multi-national off-shorers are interested in next quarters bottom line as well as their bonuses. An attitude of “the devil take the long term consequences for the average American because I got mine today”.
So, I think we need to intelligently target and impose impose tariffs on selected goods, modify tax policy to encourage capital investment in American industry and channel investment dollars to domestic production facilities. On shore payroll based credits, generous credits for development and capital investment in U.S. facilities, capital gains on sale of equity investments based on a companys’ on shore production\employment presence (and maybe certified onshore material components, such as products that are 70 % American made for example), and treat investments in multi-nationals that are mere labels with a 90 % off shore presence as ordinary income. And underwrite investments in America’s infrastructure with good paying jobs that will make American industry more competitive (this was what I thought Obama was going to do. Bail out Main st. instead of bailing out Godman Sachs). Maybe it’s too late now.
I will leave the implementation details to minds much brighter than mine, but I do believe unless we act and act soon, things are going to erode until it gets so ugly you don’t want to even think about it. It may be painful in the short term, but the consequences of not acting will surely be more than future generation of Americans can bear.
Gray markets come into this.
Back 30 years ago, a lot of independent jobbers directly imported fancy Japanese cameras & electronics, thus undercutting the official importers.
At the time, everyone wondered why the Japanese put up with it.
The answer was simple. Gray marketing stripped the official importers of their profits. Instead of letting the official importers earn a profit, gray importation brought all the profits back home to Japan – where they belonged! That the official importers (who, remember, had contracts) all went bust & restructured, well, that wasn’t Japan’s problem.
China is cheap, yes, but in the air I smell something else. China could have set its prices here or there, high or low, relative to their actual cost of production. But did they?
Did China set its prices, or were their prices dictated to them by multinationals looking for maximum profit? In other words, are US offshoring companies guilty of squeezing both ends? Just like the Japanese were, 30 years ago.
Which means China is in a lose-lose situation. If they let the renminbi appreciate, the international cartels who actually control their factories will pack up & go elsewhere.
I hear Vietnam is hungry. Why are countries so stupid?
Good points. However what I have seen of Chinese factories are workers who are significantly less productive than American workers, but the productivity loss is made up by sheer numbers. Secondly why do not analysts compute the “fat salaries” that the MNC bosses enjoy? Is it not part of the “labor cost” of the product. What seems is that the fat cats have taken on significant hikes in their won salaries, offshored their plants and use cheap (almost slave like labor) to run their companies. But if the average Joe does not have a job, he’s not going to buy any of these products. The funny part is that even the Chinese labor force is not going to be able to afford those. So it seems to be a zero sum game-when it will end I dunno
“And there are areas where the US still has a cost and technology lead, such as in coated paper (which believe it or not, unlike newsprint, is fussy to produce). ”
lol.
no. coated paper is like steel in the 90’s. US has no technological lead, non competitive price, poor customer service, and downright arrogant in world market. Essentially, US steel industry was only adapted to one market, US. And when car industry and small manufacturing collapses, US steel industryy is no more. It simply cannot compete in the open.
Same thing happens in paper industry right now. US coated paper industry is only adapted to US publication and packaging industry. And as magazine die and walmart package everything in china, US coated paper can’t compete worldwide.
here is a simple question. Have you ever: browse and look at japanese magazine or printed paper product? (that famous smooth, velvety non acid paper? Do you know what is the biggest paper company in the world?) Magazine is the prime example of large quantity of coated paper being used. US paper quality is too low for asian demand specially fine chinese character print. (They need higher print resolution. A finish product from US wont sell, quality is too low.)
More importantly, ask around and try ordering high quality printed product (brochure or packaging) ask for rush order, with strange colors and odd fold. Call japanese, chinese, US companies. Ask for quotes, efficiency of customer service. Ordering anything in the US is a big pain. Where as in Asia, call up, handshake. money transfer. And you don’t even have to check sometimes, if you know the guys. For long US contract, you even have to worry if the guys in the US will survive and help nurse the bleeding.
What happen in China and Indonesia is this: They have the most advance technology (German printing press/ink, Japanese techniques and inks) With ultra cheap high quality pulp. You can’t beat tropics. On top of that, most of newer plants are all coastal near forest. (Borneo, south china)
It’s not about labor cost. This is purely about quality, price and service. US product has none of it.
So, I for one expect US paper industry to go the way of US steel industry. It can only exist with massive government trade protection, subsidy, heavily tied up to regional consumer. The industry as a whole tries to sustain high labor cost, antiquated technology, unefficient transportation, high oil cost, etc, not to mention far away from big non US market. The top ranking paper making will be Japanese, chinese. Then US followed by europeans. You want the best paper product, you call japanese. You want’ quantity you call chinese. You wan’t cheap you go to country like Indonesia or thailand.
Germany and Japan products are thriving in asia despite crazy high currency. Primarily US problem is cultural attitude and lousy customer service. On top of expensive and poor quality.
yes. US paper companies has ZERO chance to exist outside US. It has no cultural ability (poor customer service is the result)
overall picture:
http://www.np-g.com/e/ir/manage/strength/index.html
I wish that wasn’t true, but it is. Critical typos in time-sensitive materials are impossible to correct when the printer is five thousand miles & many cultures removed. Three years ago one of my suppliers lost his entire stock of datebooks due to a font mismatch that came about when he upgraded his antiquated computer earlier in the year. That year his product arrived late (in December). The problem was discovered almost immediately, but there was no time to reprint.
Armoro,
You completely discredited yourself by putting a link up to a paperboard manufacturer. Paperboard has absolutely nothing to do with coated paper. I think I can infer safely you don’t know what you are talking about.
The Chinese have yet to compete effectively in coated paper, I don’t know where you are getting your factoids from. Starting up a coated paper mill is very difficult and if you don’t do it correctly, you hemorrhage cash. A successful mill startup takes 2 years and 20% of the capital costs (and those run over a billion). An unsuccessful startup is a sinkhole.
The Chinese have been VERY heavily subsidizing their coated paper makers. They aren’t competitive on a freestanding basis.
As for US delivery, US coated paper makers make significant use of paper merchants. I see you make no mention of them.
Of course it is subsidized. Only losers believe in free market. Just as every ounce of aluminum and steel in the US are produced using “subsidized” electricity, tax break, labor protection, various exemption one way or another. You think “free enterprise” will invest in $200-400m plants without government protection? Buy gold. You double your return in a year without the risk.
Everybody in the world understand what the real american business is about now. (you think asian paper industry doesn’t know how to bribe the clintons too? lol)
The stat above from 2002, perfect illustration how the industry changes in the past decade. The big US players are dropping like flies. Can’t compete in the world market as US economy nose dives.
The only way US coated papermill can survive is through highly subsidized products such as textbook. But packaging/printing feed are gone. (growth for next few years at least) Expect massive plant closures. Specially the weakers one. Those mom and pop’s paper mills in the middle of nowhere/no access to ports are gone. The medium one with access to capital and a little export market might survives a little longer. The big guys been shedding assets long
Same picture, if you don’t like nippon paper stat. (or go check what’s left in big paper conglomerate assets, then compare it to asian newly open paper mills technology. Same pictures. Shrinking size, outdated technology, international front end collapsing.)
http://www.census.gov/epcd/susb/2001/us/US32212.HTM
“Increased tariffs or other forms of protectionism are likely to invoke retaliatory actions and possibly a destructive trade war.”
As though the “free-trade” policies we’ve been pursuing for 30+ years haven’t been destructive? We’ve destroyed the US manufacturing base, destroyed labor unions, destroyed the middle class and destroyed the fiscal sustainability of the nation. WTF do we have left to lose?
“The possible policy steps include changes to the tax code and regulations that handicap firms and workers in the US in addition to job training in the tradables sector.”
Richard’s proposal would not come close to accomplishing what needs to be done. For example, in “The Predator State,” Jamie Galbraith explains quite effectively that better education and job training won’t do a thing if there are no jobs.
No, what needs to be done goes far beyond corporate taxation and business regulations. We need to encourage individuals to stop speculating on the secondary markets and start really investing in the domestic economy. In part, this means providing significant tax advantages and accounting treatment for domestic business sectors that need to be revitalized. It also means ending the treatment of profits made from the stock market as capital gains and barring the use of fractional-reserve leverage in stock purchases, both of which exalt speculation and asset price inflation over actual investment. I’d even go further: if you have enough time and money to develop an HFT algorithm, you can afford to get taxed on profits made using that algorithm at a 99% rate.
We need to stop thinking of fiscal policy, monetary policy, tax policy and business regulations as separate things and instead thinking of them as part of a larger incentive machine that define a de facto domestic industrial policy. For the last thirty years, this de facto policy has been geared to encourage and facilitate capital flight. This has never really been about wages.
Good point!
Estimates of labor cost as a per cent of manufacture cost have become political.
In particular, OVER estimates have become a justification for tolerating the unlimited offshoring of American manufacturing.
For a non-partisan view, the standard analysis of labor cost in auto manufacture (by industry experts) is 7%.
How is that 7% calculated? Does it include the salaries and perks of the top honchos who went to ask for bailouts in their private jets? I doubt it. A comparison is always made between the cost of an American autoworker and lets say a Chinese autoworker, but how many times have you seen comparison of CEO/VP/C-Suite execs with similar jobs in India or China? If these top management job costs were also included in the cost of the typical car, I’m sure it will be a higher percentage. So why don’t these top jobs also get offshored?
The 800 lb. gorilla in the room is the global wealthy elite IMF austerity program which you all have ABSOLUTELY NO EFFING control over. Think; intentional herd thinning,top down mandated reduction of global consumption, perpetual conflict, class war, rich against poor, and two tier ruler and ruled world as you read along.
From the Irish Left Review …
“The rest of this article is indebted to (that is: nicked from) this wonderful paper by Mark Weisbrot and Juan Montecino over at CEPR.
So, those notorious optimists at the IMF must be locking up the happy pills these days, because they now predict that world economic growth is set to slowdown from a modest 4.8% in 2010 to a dismal 4.2% in 2011. They attribute this – and I quote – to “low consumer confidence and reduced household income”… shock! People have less money than before! And they’re buying less crap! Thank the Good Lord for IMF reports, eh? Otherwise we’d all be in the dark.
Yet, despite all this, the IMF still seems to be pushing the fiscally austere credo. Weisbrot and Montecino point out that in 2008/09 31 out of 41 IMF patron countries were pursuing what they refer to – rather innocuously – as ‘pro-fiscal or monetary policy’. That’s neo-liberal policy to you and me.
The authors sum this policy up as:
“[A]ttempting to recover [from the crisis] by means of an internal devaluation.”
Plain English: kicking the domestic economy back into the early 19th century. Or:
“This means that the economy must contract and unemployment must rise sufficiently in order to push down wages and other costs to the point where there is a significant real devaluation, while keeping the nominal exchange rate fixed.””
Link to the “paper” referred to, and more, here …
http://www.irishleftreview.org/2010/10/23/reaper-cometh/
Deception is the strongest political force on the planet.
Richard Alford understates his case. Full time jobs did not bottom until February 2010, 9 million jobs below the June 2007 high water mark. Secondly the US trade deficit was 64.9 Billion in August, about 5.3 percent of GDP.
http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
Wasn’t Timmy Geithner in California this week implying that 10% unemployment was acceptable? Someone needs to measure cruelty and how this related to officials touting the so-called benefits of education and job retraining. This is almost as cynical as blaming borrowers for the housing bubble crash. Yet we hear it continuously, we’ve heard it from Robert Reich, we hear it from local politicians who defend predatory pay day lenders: “The poor just need to be educated, then they won’t be victims” This is what Bill Gates said when he took advantage of programmers and IT talent at hugely reduced costs outside of the US. Training was never an issue in India, or Argentina or Brazil, those folks *would be trained* the advantages of outsourcing being so lucrative.
Yves:
One area where the rules in the US need changing is in the costs to the economy of our social ideals about “equality” In the day when money seemed no object there was little push to balance
social gains with social costs.
1.Medical. Right now individuals are allowed to make choices which then needs be paid by society
At the end of life it is the family who is allowed to keep members alive even when any recovery is hopeless. And parents are allowed to decide to keep alive those preemies and malformed who will need lifelong close care
2. Education. At an earlier time programs for “special children” meant enriched programs for the best and brightest. Now of course it means those who have the greatest difficulty learning.
3. The ADA which insists on altering the country to meet the needs of the disabled.
4. Legal. Show trials as that of OJ cant cost seven figures. I would much rather put that money to improving pubic defenders.
5. The grand daddy is Affirmative Action.
a) what is the cost of making the employer responsible for protecting women gays etc from offensive remarks and behavior?
b) Costs of the hypothesis that all “men” are created equal. What is in fact desired is the right to “life, liberty and the pursuit of happiness” not the equality of achieving happiness. This is of course measured by counting heads.
Below is an exerpt from a recent article bemoaning the drop-out rate in our most needed employment area Science and Maths.
“Only about 20% of underrepresented minorities who aspire to a STEM degree actually earn one within 5 years, according to a longitudinal study cited in the NRC report by researchers at the University of California, Los Angeles . And it’s not just minorities who are falling out of the science pipeline. Only 33% of whites and 42% of Asian-Americans complete their STEM degrees in 5 years, the UCLA study finds. “It’s really an American issue,” says Hrabowski, a mathematician and longtime UMBC president. “It’s simply unacceptable for such a large majority of students not to achieve their goal [of a STEM degree]. We must find ways for larger numbers of American students to excel in science.”
The new report says that retaining STEM majors will require better academic, social, and financial support for students. Some of those steps are relatively inexpensive, says Hrabowski, although the report does recommend that the government launch a scholarship program to boost the number of needy minority students that could eventually cost $600 million a year.”
http://www.sciencemag.org/cgi/content/full/330/6002/306?cookietest=yes
This is by now a knee-jerk reaction. If we want to maximize the numbers graduating, it is obvious that the most bang for the bunch is to help those near the top. Which is exactly what we don’t do.
(think of gaussian distribtions)
Finally an interesting caution:
“Analysts examining a firm and the qualifications of its top management team discount the educational background of African American managers who graduated from prestigious universities while accepting the qualifications of white managers with the same college credentials, according to two experiments reported in the current issue of Organization Science, a journal of the Institute for Operations Research and the Management Sciences (INFORMS®).
“We found that possessing high educational prestige was less beneficial for firms led by African Americans than for firms with white leaders,” write the authors. In fact, the effect of having a highly prestigious education was significantly negative for teams that were led by African American executives. “Even though participants had plenty of information about the firm’s financial performance and the management team’s accomplishments on which to base their assessments, the interactive effects of race and educational prestige remain. We can only surmise that this is due to assumptions of affirmative action through race-based preferential selection of African Americans into prestigious institutions.”
The question of when a condition is medically hopeless is not clear cut. Virtually every long-term survivor of the AIDS epidemic was told between 1979 and 1996 (when effective treatments came in to use), that that they needed to accept the fact they were going to die. Psychiatrists of that time would label people with AIDS, many of who are still alive today, as “bordering on the delusional” for believing that they could live another five years despite having AIDS.
If it were up to the government, would any health insurer have had to spend money keeping gay people with HIV/AIDS alive? (Until the 1990 Ryan White Care act, neither political party wanted the federal government to spend federal funds on AIDS research, testing, treatment, or prevention.) Or would it have allowed health insurers to slowly euthanize them with psychotropic drugs to keep them “compliant” and morphine to keep them “comfortable?” That certainly would have been the popular choice in America of that time.
The Holocaust did not begin with the Jews, Mr. Schwartz, it begin with the National Socialists euthanizing the mentally ill, those with expensive medical conditions, and those “judged incurably sick, by critical medical examination.” The Aktion T-4 program, as it was called, helped the Nazis learn the practical aspects of murder by gas chamber, injection, etc. http://en.wikipedia.org/wiki/Action_T4 Allowing the government to decide that some people are too expensive to be kept alive is just a variant on the National Socialist idea that scarce funds should be spent on “life unworthy of life” and “useless eaters.”
Allowing the government to decide that some people are too expensive to be kept alive is just a variant on the National Socialist idea that scarce funds should NOT be spent on “life unworthy of life” and “useless eaters.”
Actually, Obama appointee Ezekiel Emmanuel, Rahm’s brother, supports cutting AIDS funding so that more money can be spent on HIV-negative women and children. He attempted to create a zero-sum game, pointing out how the money spent on each person with HIV/AIDS can go, instead, to caring for multiple poor women and children.
http://www.huffingtonpost.com/anand-reddi/truth-and-reconciliation_b_660586.html?ir=World
Better link:
http://www.huffingtonpost.com/anand-reddi/united-states-global-heal_b_654002.html
After reading plschwartz’s idiotic “survival of the fittest” post I was tempted to rip him a new one, but you’ve done such a good job that I won’t even bother with what could only be a distant second. After blowing trillions on propping up the banksters, plschwartz seems to think our biggest economic problem is that, as a society, we’re not willing to throw AID’s sufferers and the mentally handicapped in the street.
P.S. Thanks for the T4 link. I hadn’t heard about that, and it sheds great light on the mentality of the “survival of the fittest” types.
Oh, you’ve convinced me. There should be no government mandate to purchase health insurance. This way you can opt out and pay your own medical bills directly.
I also had my big pro-education moment not too long ago, thinking we should support students in math and science better. But, then I realized we don’t keep them employed either.
So, if 30-40% are graduating, we’ll need to bring that down because they’re not going to survive anyway.
That should save a couple more bucks.
The problem I have with this post is that the author merely asserts that the trade deficit is unsustainable. Why is the trade deficit unsustainable and why does it render fiscal policy helpless?
You’re kidding right? In the beginning “free trade” sounded beautiful. I all of sudden could buy my imported textile clothes at a cheaper price. As for the Carolina textile workers fuck them was the economist answer, retrain was the politician’s answer, and on and on. Now multiply this one industry by the thousands and the unemployed textile worker in the carolina workers become 30 years later this shithole of an economy we have today called the first post-industrial service economy on a projectory course to a Mad Max economy. So if everybody is working at McDonald’s what the hell is fiscal policy gonna accomplish. Monetary and fiscal policy are ineffective in a debt laden service economy. Game set match. Thank our coward politicians and traitorous international banksters that we bailed out in an excess of trillions of dollars when you take in the externalities and opportunity costs. The new name of the U.S. should be either cowardistan or retardistan. Either one is fine with me. The WTO treaty approved by our Government in 1996 was the death nail. Hell we even lost our sovereignty. If we ever had it?
Excellent points and you do have a way with words.
However the US case is not hopeless. The Chinese and Indians have copied our fascist pseudo-capitalism. They are thus due for some major turmoil. All the US has to do then is to adopt genuine capitalism (and thus attract genuine capital). It is highly unlikely that China or India would see the wisdom of that till it was too late and the US had re-industrialised.
And both wars had the international banksters in the background instigating them. ceasley7
It is only our ignorance that allows us to be enslaved to them. It is not their gold that gives value to government money but government privilege that gives value to their gold which is why they hate Greenbacks.
However, I am a libertarian so let government money be legal tender for government debts only (taxes and fees) and let private monies be good ONLY for private debts.
Having separate government and private money supplies should satisfy everyone.
But first, let’s bailout the population with FULL legal tender fiat until the debt is cleared.
The above gaggle of posts exemplify the good, the bad, and the irrelevant in vastly unequal proportions. The overwhelming majority of comments are irrelevant, being expressions by the powerless as to what “we” ought to do. There is, alas, no such “we”: This is a class society, folks, “them” and “us”; we measly posters are out of the power loop. Nor is the American public about to reverse its political retardation. Get real, idealists! Or else save bytes and just say, “Everybody be nice.” The bad comments bring up the second rank, consisting mainly of libertarian cranks turning their favorite handles, usually involving the evils of a fractional reserve banking system. Somebody told them to take a hike to Somalia; I quite agree. The sliver of good commentary offers falsifiable observations as to the evolution of capitalism as a world system; and what, in consequence, our rulers (the corporate/imperialist elite) are doing to the rest of us. Poster “i on the ball patriot” makes a very good point concerning the concerted offensive of late capitalism, aka Race to the Bottom. This offensive has been successfully proceeding ever since the Reagan years. Of course, real-world analysis is Yves Smith’s strong point, and why this blog is so valuable. –Capitalism is the Titanic after its encounter with the famous iceberg. Most of you well-intentioned folks are rearranging the deck chairs; which will bring you but a better view of the rescue that will never come. Oh, well, I suppose that it beats facing reality . . . .
The current banking system is the root of the problem. As long as we have a banking system where the bankers can both create money, and be bailed out with real money and assets if they lose they money the never had in the first place, this mess will continue. The bankers’ 30-1 leverage made them Too Big To Fail, and so politicians preserved the banks by impoverishing the people of the US, UK, Ireland, etc.
Insisting that that the current banking infrastructure is Too Big To Question is either defeatist or intended to maintain the status quo.
Thank you. Bingo.
The bankers’ 30-1 leverage made them Too Big To Fail, and so politicians preserved the banks by impoverishing the people of the US, UK, Ireland, etc. Externality
That impoverishment could be reversed in the case of the US since the US Treasury could simply gift the entire adult population with enough debt and interest free legal tender fiat (US Notes) for borrowers to pay down their debts to market price levels and to compensate savers for years of suppressed interest rates.
Inflation risk? Then reduce the banks’ ability to leverage to compensate for the new high powered money.
Want to abolish fractional reserve lending completely? Then make those checks from the US Treasury big enough to replace all credit in the system with real money and set reserve requirements to 100%. The entire US population would then be debt-free. About time too. We are long overdue for a debt-Jubilee.
Capitalism is the Titanic after its encounter with the famous iceberg. Most of you well-intentioned folks are rearranging the deck chairs; which will bring you but a better view of the rescue that will never come. soloduff
So what will come after it, wise guy, that hasn’t been tried already and rejected?
What no ideas, just defeatist talk?
Oh, well, I suppose that it beats facing reality . . . .
soloduff
Reality starts as an idea. One can be a victim of flawed ideas or seek to replace or improve them.
F. Beard: You are incorrect. Reality does not start “as an idea,” as you claim. Science teaches us that reality starts in real possibilities. If your fine ideas are to be anything better than wishful thinking, the burden of proof upon you, the advocate, is to confront what is sometimes called “the agency problem,” namely, identifying the political/economic forces willing and able to implement your ideas. My observation relied upon the (to me) obvious observation of the unfitness of the American public–and, of course, of their rulers, the corporate/capitalist elite–for anything of moral or intellectual worth in the realm of political discourse. Most of these folks have never heard an adult conversation on topics of civic virtue. Ask yourself why you presume that you are privileged to live at a time in history when crisis will be resolved by good ideas. I.e., ask yourself why you insist upon the American Exceptionalist vanity that national degeneration is for other folks. (Presumably you would have been spinning out All-American Can-Do ideas on the deck of the Titanic.) And by the way: I am not a “defeatist,” since I long ago opted out of the Rat Race, a.k.a. the American Dream. (If one withdraws from an unworthy contest, one is not defeated, but relieved.)
If your fine ideas are to be anything better than wishful thinking, the burden of proof upon you, the advocate, is to confront what is sometimes called “the agency problem,” namely, identifying the political/economic forces willing and able to implement your ideas. soloduff
Good point. As for a general bailout of the population, I expect near everyone to get behind that because it fixes near everyone (except maybe the lawyers who will lose a lot of business).
As for a reform of the monetary system, it is do or die. The US cannot hope to compete with younger and more enthusiastic followers of its own fascist model. We shall move on to genuine capitalism and again lead the world or fall behind.
Ask yourself why you presume that you are privileged to live at a time in history when crisis will be resolved by good ideas. I.e., ask yourself why you insist upon the American Exceptionalist vanity that national degeneration is for other folks.
Well, good ideas are a minimum. I don’t know what the future will bring but it is a huge comfort to me that there is a way out.
Yeah, the population is degenerate but it has plenty of excuse. I hope that it will be willing to return to the idealism of its youth if it can only be shown a way to do so with a minimum of discomfort.
Free market capitalism, even as poorly and hypocritically as we have implemented it, is the greatest thing the world has seen so far. It is worth the effort to try to make it live up to its ideals.
>>However, the debate over monetary and fiscal policy in the US goes on as if the US existed in isolation. One can argue that ethical and political imperatives require domestic fiscal stimulus, but to argue that fiscal stimulus is the cure to the current economic difficulties is incorrect. Education and job retraining are also laudable goals, but they will not solve the macro problems in the US labor market.>>
The cause of our present difficulties is the “global savings glut”, which causes our currency to rise. Much of it can be attributed to countries manipulating their currency. The solution: fiscal policy. If we spend enough to cause other countries to at least ponder whether the US is the best place to park their money, then the global savings glut will end. (Also, if we announce forthright that we are intentionally trying to reduce investment in US bonds, then whatever we do won’t harm our reputation too much.) Meanwhile, if we invest the money in worthwhile things, then we’ll be in a position to survive whatever comes next.
I’d personally like to see this solution discussed more, as it seems more simple and effective than any of the other solutions I’m seeing tossed around – including doing whatever it might take to force China to revalue, or capital controls in the US. Even if any of those solutions might work, they still don’t address the problems like our crumbling infrastructure and other areas of chronic underinvestment, which we would face as soon as we solved the underemployment problem.
Now, I’m sure that this will upset some folks but here goes.
Although my knowledge is 10 years out of date (textiles) here is how it works in America.
As a percentage of cost we figured that raw materials was around 60%, labor 10% to 15%, energy for our operation 3% to 5% and the remainder overhead.
We figured that we could continue to drive labor costs down through the use of automation (the mighty microchip).
And because our focus was on short run, quick change operations and specialty niche products it was difficult to use offshore operations.
So the point is that labor costs were minor (although we spent a good bit of time there) and the real cost was raw materials.
No serious thought was given to reducing raw material costs – no contracted production, no just in time, no contracts with cotton producers — none.
And you will see this with many raw materials including fibers, plastic resin, coal, fuel oil, forest products, etc.
The reason why is GIVE BACKS.
These are monetary inducements to be able to “buy” business from the OEM.
Now this is actually a kickback wrapped in words like “manufacturers rebate” “Piority Customer” or even the “European way of doing business”.
Since the cost of raw materials is written off as an expense the cash rebate is easily disappeared.
The real reason for offshoring is not labor cost but rather shipping the accounting offshore to allow ever increasing amount of fungible dollars to be created and disappeared.
i dont understand why nobody mentions ENVIRONMENTAL COSTS.
in China you can pour dioxin into the river, spew smoke all over the city, and nobody will care. a few thousand people might get cancer or their kids might die but so what, you helped make a cheaper iPad.
if ENVIRONMENTAL COSTS and their associated HUMAN SUFFERING AND HEALTH PROBLEMS were factored into chinese production, or indian production (think shipbreaking, ‘another day another death’), it would have a huge impact.
the problem is that chinese and indian human life is not considered as important as american life in the economic spreadsheets of the ‘leaders’.
its so funny that economists dont seem to understand this. business people understand it perfectly damn well.
Yeah, as oppose to dropping bomb on Iraqis heads. Definitely alternative energy use.
(United states has zero credibility when it comes to human right, pollution per capita, or any economic matter. Stop giving advice to the world.)
I’m happy that both Yves and Richard mentioned tax policy among potential remedies.
As with the drug war, and the US health care system, there are probably too many vested interests to make real change possible. Continued forfeiture of legitimacy is the most likely prospect.
In regards to your first paragraph Yves. It’s not just about labor costs; it’s all those other pesky labor factors that make it more beneficial to move to other countries. Such as all those rotten undeserved “benefits” that employees seem to want; vacation time, health care, a 40 hour work week, a break and lunchtime. Not to mention for some crazy reason workers complain and cry when they get their arm cut off in a machine so we these crazy safety laws. Good foreign workers are self reliant and take personal responsibility for their freedoms.
I think the main point is being missed. American’s aren’t competing with the Chinese or Bangledeshi. They are competing against robots. Yes Robots! Robotics and automation are eliminating jobs in bulk. The Chinese and Indians are currently still able to compete somewhat against automation (though that won’t last forever). These “manufacturing” jobs are never coming back because the these jobs never left. They are just not done by humans anymore in Detroit.