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Archive for the ‘Productivity’ Category

If you have not read this article, you need to.  It is presented as a “why the middle class is squeezed” in America piece, with the premise being that we were once great enough to be the world’s manufacturing powerhouse but we no longer are and this is our fault.

Wrong.

Let’s start with this:

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Ok, so why not?

Is it because the Chinese are smarter?

Is it because we lack the ability to perform the manufacturing?

Is it our tax structure?

In short, is it our fault?

In a word: NO.

This, my friends, is why:

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

It’s easy to be “speedy” and “flexible” when you effectively own your “employees” as slaves!

How many of you caught the paragraph up there?  At midnight, without warning, the factory foreman went into dormitories in which the workers were sleeping, roused them and effectively compelled them to work a 12-hour shift with nothing more than a biscuit and cup of tea.

Did you get that?  These are not employees, they’re slaves.

After all, were they employees they’d be working for great wages, right?  Uh, maybe not.

The facility (Foxconn) has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

The unimaginable part is that these employees are slaves.  A communist nation can get away with this sort of thing.  They can, and do, prevent the organization of those employees into a consolidated negotiating block, imprisoning or simply “disappearing” anyone who tries.  A coordinated strike is impossible, meaning that labor has no balance of power with capital.

This power does not come from natural economic forces.  It literally comes from the barrel of a gun.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Are you reading this America?  How do you square college costs escalating at double or more the rate of inflation and crushing levels of debt with the premise of a technically-trained workforce?  You can’t.

….in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Free market principles are fine right up until people start using slave labor on an effective basis, along with environmental arbitrage, as the means of “progress.”  And let’s not mince words: That is exactly what has happened.

Absent intentional interference in our monetary and economic system on both sides of the Pacific what happened can’t be sustained.  Americans cannot buy iPhones without money to spend on them and they cannot have those funds absent “free credit” and ponzi bubbles without good jobs.

In other words, absent the intentional distortion that is generated by massive deficit spending by state, local and federal governments what happened can’t as it immediately self-corrects.  Henry Ford understood this — which is why he paid his employees enough so they could buy one of his cars!  He not only drove down the cost of building a car he increased the modestly-skilled laborer’s wage so he could afford one.  He took the efficiencies he found in automation and manufacturing and allocated some of it to labor so that the total economic surplus would be recycled back into the purchase of his, and others, products.

That’s what productivity improvement is, it’s what powers the natural deflation that is the ordinary state of all economies over time, and it brings common improvement in the standard of living for the majority of the people.

“We shouldn’t be criticized for using Chinese workers,” a current Apple executive said. “The U.S. has stopped producing people with the skills we need.”

What Apple (and other companies) want are employees that are housed in dormitories, can be roused at midnight to work a 12-hour shift on demand fueled with only a cup of tea and a ten cent biscuit, paying them $17/day.

THAT is what Apple and these other firms demand.

It is absolutely true that America cannot fill that demand, because at one dollar an hour you can’t manage to put the food on your table for a family of four, say much less pay rent, electricity or gasoline for your car to get there and back!

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

That’s absolutely true.  But America remains a monstrously-large market and America has no obligation to let you bring products into this nation without tariff or impost while you exploit the existence of authoritarian governments and environmental arbitrage.

A 100% tariff on all of Apple’s foreign-produced or assembled products should make the decision easy — is this really about the availability of a workforce, in which case it would not matter to Apple, or is it really about state-sponsored enslavement and exploitation?

The “big story” of the U.S. economy is that we have substituted expansion of debt for meaningful increases in productivity.

For the past 30 years, the U.S. economy has become increasingly dependent on explosive debt expansion for its “growth” rather than on meaningful rises in meaningful productivity.Growth is in quotes because growth based on secular increases in productivity–that is, the same investment of labor and capital produces goods and services of greater value–is qualitatively different from “growth” based on a pyramiding of debt.

Real growth based on rising productivity is sustainable, “growth” based on ever-greater expansions of debt is not.

What has kept the Status Quo from falling off the debt cliff over the past four years is the substitution of exploding Federal/public debt for no-longer-rising private debt.  If Federal borrowing were to return to 2006 levels, the economy would immediately experience a severe contraction.

We can understand this reaction as that of a debt junkie economy suddenly deprived of massive infusions of fresh credit.

This substitution of public debt for private debt is simply an attempt to fool Mother Nature.The justification of the Status Quo for impoverishing future generations is the massive expansion of Federal debt is needed to “kick start” the economy, i.e. “get us through a rough patch.”

After four years of kick-starting and muddling through rough patches, the economy has yet to recover benchmarks set in 2007, much less grown.  Meanwhile, the kick-starting added $6 trillion in visible public debt and trillions more in off-balance sheet obligations and backstops.

Substituting debt for productivity is also an attempt to fool Mother Nature.Here’s how the substitutiion works: when productivity is flat, then “growth” can be created by leveraging the economy’s surplus into greater amounts of debt, which can then be squandered on mal-investments and consumption to foster an illusion of “growth.”

Note that I use the phrase “meaningful productivity.”If a highrise tower is built in the middle of nowhere and sits empty, the construction and related costs (inspections, transport of goods, utilities, etc.) are added to the gross domestic product (GDP) as “growth,” even though the empty building is not adding any real value to the economy.

The same can be said of millions of unneeded medical tests, millions of doses of medications that don’t work as advertised, etc.–all the costs of sickcare that rarely add productive value to the economy but which are all added to the GDP as “growth.”

If you leverage $100 per month in surplus capital in a household into a $100,000 home equity loan that is squandered on luxury cruises, a new kitchen, boats and dining out, then that explosion of spending boosts “growth” like a shot of cocaine.

But then what happens when the borrowed money has all been spent? What happens when the borrower defaults?  The underlying assets–the boat, home, etc.–can all be auctioned off, but a massive loss remains to be swallowed by the lender.

Needless to say, the bankrupt borrower will be unable to borrow another $100,000 any time soon, even if interest rates are lowered to near-zero.

That’s what happens when you try to fool Mother Nature by substituting debt expansion for increases in meaningful productivity.Eventually the surplus that is being leveraged into debt reaches the point where it cannot leverage any more debt, and the over-leveraged borrower defaults at the first financial bump.

An economy that is dependent on constant massive increases in debt to fund its “growth” is not sustainable.  In a very real sense, the U.S. has been fooling Mother Nature for 30 years.  Now we’ve overleveraged the nation’s shrinking pool of surplus capital and assets, and the last rabbit has been pulled from the magician’s hat.  Mother Nature (i.e. reality in the form of a transparent, marked to market balance sheet) is about to take her revenge on all those who reckoned she could be fooled forever by ever-expanding debt.

Charles Hugh Smith – Of Two Minds

Once again, with feeling (’cause that’s all they got!)

Asking the wealthiest among us to pay more, and taking new steps to help the least well-off — the jobless and the poor — are good policy. But politically, and perhaps even economically, the president can’t lose focus on a group often left on the sidelines of the political conflict over rich and poor: the long-suffering middle class.

So why aren’t we talking about trade policy?  The fact that while we keep arguing that “Free Trade” is a good thing, every time we open our borders to more free trade we get a larger trade deficit and more middle-class jobs go overseas?

The writer laments school funding, but that’s a common lefty liberal load of crap:

If the news on incomes wasn’t bad enough, the middle class was dealt a second blow last week when a report by the Washington research organization Third Way showed that schools serving this segment of the population have vastly under- delivered for their students. (Disclosure: I am a member of the board of trustees of Third Way, though I didn’t participate in preparing the report.)

No one should be surprised by Third Way’s finding that, compared with schools in the wealthiest districts, those serving middle-class families spend about $1,600 less per student, have three more students per teacher, and pay teachers $6,000 less per year.

Money has basically nothing to do with educational outcomes.  What we’ve done in this nation is a crime when it comes to our schools – moving away from phonics to “whole language”, dumbing down the math curriculum and removing direct instruction everywhere it can be removed and allowing disruptive students and those who simply are outside the bell curve’s second standard deviation to remain in the common classroom, then insisting that they not be “behind”, thereby dumbing down the curriculum and progress for everyone else.

None of this is an accident and none of it has anything to do with money.  In fact, mathematics, history, English and the other basics of learning haven’t changed in a hundred years.  There is no need for “new” textbooks or any sort of technology beyond pencils, paper, a chalk board and flash cards in the first two or three grades!

The rest of the article talks about the “workers of tomorrow”, yet the image at the top is that of a blue-collar worker – the very person who we have done our damndest to outsource to China.

The facts are this: We do not need a lot of rocket scientists.  Oh sure, we need some, just as we need some engineers, doctors, physicists and computer programmers.

But we also need lots of people who work with their hands and we must have an economy that favors producing things.  Outsourcing the building of things to places where labor is $5/day does not produce a strong middle class.  The fact of the matter is that whether we like it or not intelligence is a bell curve and the average is 100.  The average person is not the award-winning rocket scientists of tomorrow, nor the innovator in high-tech design.  That’s the guy or gal who’s two, three, or even four standard deviations beyond “normal” intelligence.

All economies need those people, but those people are not the norm.  The norm is the guy or gal who builds cars, nails on roofs, repairs plumbing and fixes your AC when it breaks.  He or she needs a trade making and maintaining things, and those things need to be produced here.

Pull your head out of your ass America.  We can neither send everyone to college to be a rocket scientists nor should we.  The majority of people are in fact average – that’s what average means.  The brightest and best should indeed be given every opportunity to excel, but for everyone else we need an economy that provides real work that rewards them for their ability and effort, and provides a path forward for those individuals.

It can’t be done when the manufacturing and other goods-producing jobs are in China and the options for a job here are to be a Doctor or pull coffees at Starbucks.

This guest essay by longtime correspondent Kevin Mercadante examines the costs to making short-term profits and government spending the metrics that guide the entire economy.

Political Myopia and America’s Manufacturing Decline
by Kevin Mercadante

For decades voices in the woods have been warning us of impending crises in the foundational systems that make the U.S. economy go. We’ve been advised of impending disasters in Social Security, Medicare, pension funding, the national debt, healthcare, energy and increasingly, employment. Charles and others sounded the alarm on the housing bubble years before it hit.

But as has become our happy little way, we ignore warnings, preferring to dismiss them as the staple fodder of the “gloom-and-doom” crowd.

We should have learned our lesson with the exploding of the real estate bubble, but perhaps we haven’t. It could be that we’re doomed to experience the falling of one domino after another until we come out of our media induced entertainment stupor fully prepared to face more than a few ugly realities.

While the fallout of the housing and mortgage collapse has proven to be a crisis worthy of capturing our attention, other dominos are indeed falling, but doing so with far less fanfare and concern.

A BIG sector where the battle is already lost

Earlier this year, the IMF reported that China has over taken the US as the world’s top manufacturing nation ( IMF Bombshell: Age of America Nears End ). Over the past few decades we’ve had abundant warning that such a transition would occur. Mostly we’ve ignored the signs, contenting ourselves that the service economy and more government spending would more than replace what ever would be lost, and that come what may, America is still No.1!

But manufacturing isn’t just another sector of the economy—it’s the economic foundation of all modern industrial societies. To one degree or another, all other economic sectors rest on the foundation of the nations manufacturing production. It’s preposterous to believe that services and government spending can carry real economic growth in an economy devoid of the production of real goods—certainly not a nation as large as the U.S.

Because manufacturing produces tangible goods, it is the key to exports. Exports, in turn, are the key to trade surpluses and trade surpluses are the source of large international reserves—the kind that produce coveted creditor nation status.

China, Japan and Germany are creditor nations. All have large international surpluses, because all have large manufacturing sectors contributing to outsized exports that produce regular trade surpluses. And while the experts tell us that our manufacturing decline is due to high wages, it’s worth noting that both Japan and Germany have wage levels that are at least as high as the U.S, yet both have thriving manufacturing and export sectors. What is it that they can do that we can’t? We even have far more natural resources than either country!

Is the decline of manufacturing and our status as the world’s biggest debtor nation coincidental? Hardly.

But it gets worse. Manufacturing is also the fulcrum of technology, an area in which the U.S. has long claimed dominance, almost as some sort of birthright. As manufacturing goes, so will military-, computer- and medical-technology—and the high paying jobs they provide. The implications of the manufacturing decline are far more ominous than the collapsing of the housing bubble.

Politics and the manufacturing decline

If manufacturing is so important, we should be asking a critical question: where has our leadership been in the face of our decline?

I’m not talking about the current leadership—but I’m not excluding it either—the blame on this goes back at least a couple of decades. Have we the citizenry been holding our leaders accountable? It appears not.

What’s worse is that there seems be no “good guy” political party on this issue. As much as we might love to believe that there’s a good guy vs. bad guy element behind every issue, alas there isn’t. Both the Republicans and the Democrats have made substantial contributions to the country’s manufacturing decline, albeit from different directions.

What are some of the things Republicans have supported that have had a material negative impact on the nations manufacturing base?

• Advancing favorable tax policies to conglomerates that move manufacturing production overseas.
• Championed brushfire suburban development (“any development is good development”), sucking the life out of urban areas—which once were the very centers of American manufacturing.
• Enthusiastically supported the FIRE economy for its ability to grow and create jobs much more rapidly than capital intensive manufacturing.
• Allowed their patriotism and unbridled optimism over “all things American” to cause them to underestimate the capabilities of foreign competition.
• Demanded balanced budgets when Democrats were in control—but when Republicans are in power they shift to “deficits don’t matter”. Deficit spending creates a false sense that money can be created out of thin air, rather than earned through the production and export of real goods.

And how about the Democrats—the one-time champions of union workers?

• They’re the purveyors of not in “my back yard” (NIMBY)—if it’s ugly, noisy or dirty, move it somewhere else. How does manufacturing grow or even survive in that environment?
• In growing suburban areas, they use “environmental concerns” to keep out manufacturing, businesses with physical inventories and even suburban agriculture (pesticides, animal habitat destruction, etc.)
• They tend to favor “gentrification”, which is code for the elimination of the working class. They want sanitized neighborhoods, clear of work vehicles, chicken coops and physical inventory.
• Though they claim to want to restrict growth in the suburban fringe, many seem to live there anyway.
• Though they tend to cry foul over the corruption of the FIRE economy, they nonetheless tolerate it willingly because it’s “clean”.
• They’re the party of tax-and-regulate. Any tax as a good tax—especially when it’s levied on businesses. That’s a difficult environment for any business to operate in, but more so for manufacturing concerns because they’re capital, inventory and labor intensive.

Not surprisingly, there are common platforms between the parties. For example, both are obsessed with maintaining the escalation of property values. But decades of relentless increases in real estate prices have done more than their share to degrade small business, agriculture and manufacturing. Property becomes so expensive that the land beneath a business enterprise is worth far more than the business itself. The land is then sold to make way for subdivisions, condominiums, office buildings and strip malls—the very nesting grounds of suburban development and the FIRE economy.

Neither party is concerned with true urban renewal or worker retraining—the kinds of efforts that could resuscitate a declining manufacturing base and provide jobs for millions of workers. Generous student loan programs are supported for elite university educations, but little emphasis is placed on community colleges and technical schools training workers for jobs closer to the ground.

What politicians of both stripes have been truly good at is keeping the issue out of public site. They’re as quick to bury the debate as they are to show up at ribbon cutting ceremonies at the opening of brand new (foreign owned) manufacturing plants in their home districts.

Is it at all hard to see why America’s manufacturing base has eroded to second class status?

Our favorite form of political participation: Blame the other party

There’s an article of faith in American politics: what ever is wrong with country is the fault of the other party. It’s not just the leadership of the two parties that engage in the practice either—it’s a common belief of the man on the street. That’s a simplistic belief that shows that we’re not emotionally prepared to face and deal with our problems.

Democrats tend to believe that the nation is in good shape as long as a Dem is in the White House. A March poll on President Obama’s approval rating found that while only 42% of the general population approve of the president’s job, fully 80% of Democrats do. What could explain such an enormous gap in perception?

The Republican faithful are no different. The very economic conditions contributing to Obama’s low approval rating were well in play during 2007-2008 when George W. Bush was at the helm. The economy was heading down the drain while Republicans were in denial—after all, their guy was in and all was well. Now they rail against Obama’s continuation of Bush’s policies as if the economic decline began in January of 2009.

Will that kind of partisanship fix anything?

Charles has written many times that the nation’s ills will not be fixed by tinkering at the fringes, policy adjustments and promises of reform. Yet this is what politicians in both parties promise—and what we choose to believe even as reality screams otherwise. No real sacrifice, no real change—just get rid of the other party and all will be as it should. Is that a solution? Has it saved American manufacturing? Even more important, will that be our strategy for dealing with other major problems?

The truly dark side of ignored problems is that by the time they become front page news, it’s already too late! The task will no longer be to fix a broken system, but to build a new one from the ground up. Will this be the course with deficits, pension funding, healthcare and energy? We can hope not, but the trend is very unsettling.

Kevin Mercadante is a regular reader of Of Two Minds, a professional blogger and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more.

Of Two Minds