Are You Better Off Than The Previous Generation?

Yesterday, GM announced that it is offering buyouts to 46,000 older workers so that, under the terms of their new contract with the UAW, GM can replace them with workers that will be paid substantially less. 

On page 30 of Chapter 1, I asked the question, “Are you doing as well as someone in your position thirty years ago?”  This action by GM is a perfect example.  The people hired to replace these older workers will probably be very happy.  They’re probably people who have been working other jobs for $8 an hour, and now feel like they’re really moving up in the world.  But, compared to the preceding generation, they’re taking a very big step backward. 

This is the problem with our economy.  The downward spiral is slow enough that younger workers can’t see what’s happeing to them.  Only someone who’s been in the workforce for many years can put today’s events into proper perspective and see the damage that’s been over the years. 

This action by GM will do absolutely nothing in the long term to improve its competitive position. Foreign competition will simply respond by lowering their prices. GM’s problem is the same problem plaguing Ford and Chrysler – our trade policies. It has nothing to do with cost. If it did, wealthy countries with highly paid workers like Japan and Germany wouldn’t be killing us in the automotive market.Rather, the problem is that our trade policies are based on a flawed 200-year old economic theory of trade known as “comparative advantage.” It is flawed because it does not take into account (because the author could not foresee) what happens to per capita consumption when nations become very densely populated, or what happens when a reasonably-populated nation attempts to engage in free trade with such a nation.

As a result, we have an enormous trade deficit that has nothing to do with Americans being over-paid on under-productive. It has nothing to do with the quality of our cars. It is structural and irreversible without employing a tariff structure that is indexed to the population density of our trade “partners.”

 

Pete

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