Five Short Blasts – Some feedback on the theory

I’m out in Los Angeles at an annual conference that I attend regarding our enterprise trucking software for our intermodal trucking division. We had many presenters, one of which was a VP from the Port of Los Angeles talking about all the various upcoming projects (which will result in more tariffs), new “clean air” initiatives, etc. There are many industry experts and many leading intermodal trucking companies represented and since all we (the intermodal trucking companies) deal with are imports/exports I couldn’t be closer to a source of “economic impact” if I wanted to. Needless to say, at lunch and dinner I got into some interesting economic discussions related to what we do. Everything from illegal immigrant drivers, outsourcing, lack of labor pool in the U.S., etc. I presented your theory (or at least parts of it) and got some interesting (as always) responses that I felt compelled to share with you. As always any comments are appreciated.

 

1.       At dinner everyone at my table argued that there are not people in the U.S. that would do the jobs that we have these “illegal” or legal immigrants doing (farming, McDonald’s, and Hotel Room cleaners were some of their examples). Even at much higher wages which I was certain to point out. They were absolutely adamant that regardless of the wages (reasonable obviously) people simply would NOT do that type of work. I remember you being very adamant that people WOULD in fact do these jobs for better wages.

2.       The 2nd common theme was that there are simply not enough technically proficient people (we were talking specifically IT) in the U.S. labor pool. I’ve been hearing this a lot lately and apparently Bill Gates agrees. http://www.workforce.com/section/00/article/25/41/45.html

3.       Lastly, a couple of the people I talked to agreed or could understand that “as population densities increase, per-capita consumption declines”; however they said that this only applied to places like China or India and doesn’t apply to the United States. An example one of them used was that of Manhattan, New York. He said that there is a lot of money there and people buy more “stuff” than you can imagine. Apparels was one specific example I remember. I found this to be interesting as it didn’t occur to him or concern him that we could very easily become a China or India.
 

Again I simply wanted to share this experience. As an aside my best friend (who is a Mortgage Officer) borrowed my copy of “Five Short Blasts” many months ago and has finally got around to reading it. He has called me on multiple occasions and conveyed his interest and acceptance of this theory. It was definitely a wake-up call or at least an exercise in awareness for him and he said he was going to read it again.

-Brian D.

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One Response to Five Short Blasts – Some feedback on the theory

  1. petemurphy says:

    Interesting feedback, Brian! Regarding each of those issues:

    1. My response to this first issue is going to be pretty long because it’s very complex. First of all, to suggest that we don’t have enough workers simply flies in the face of our national unemployment statistics. With about 375,000 people filing for unemployment every week, it’s clear that there is no shortage of labor. I think that we can immediately rule out the argument that there aren’t enough American workers available to do the work.

    That leaves several other possibilities to explain this assertion that these industries can’t find workers:
    a. Are Americans simply unwilling to do this work?
    b. Are Americans willing to do the work, but not at the wages being offered?
    c. Are there localized shortages of American workers?
    d. Or is it all a lie, perpetrated by those who profit by paying low wages, and repeated by those who have bought into it?

    a. I can immediately debunk the first question. I have seen and continue to see American workers perform jobs much more unpleasant than those you listed – picking crops, cleaning hotel rooms and working at fast food joints. I see Americans cleaning septic tanks and sewer lines. I see Americans picking up garbage. I myself have worked long hours in the hot sun digging post holes and erecting fence along highways. It was a long time ago, back in the late ’60s, but I earned $3.35 an hour – enough to pay half of my tuition at a private university just by working during the summer. That’s the equivalent of about $20 an hour today. It was good money and I loved it. I worked alongside grown men proudly doing the same work and making a decent living for their families. There is nothing that people won’t do to make a decent living doing honest work.

    b. I noticed in your post that your co-workers who were making this argument that people wouldn’t do the work even if the wages offered were raised, qualified it by using the word “reasonable” to describe the wages. I suspect that they would not consider $20 an hour “reasonable” for doing unskilled, manual labor. But that’s exactly what such work paid decades ago. Today it’s considered unreasonable because it would eat into the owner’s profits.

    By reducing the labor supply very slightly (which is what we would do by eliminating illegal workers and by drastically reducing the number of legal immigrant workers), the demand for labor relative to the size of the labor force would increase. This improvement in the supply and demand equation would translate into higher incomes.

    We have a tendency to think of workers and customers as two separate groups. “I can’t afford to pay my workers more. Customers won’t buy the product at the price I’d have to charge.” What we forget is that workers and customers are exactly the same people. We’re all workers. We’re all customers. If, as a worker, my wages are doubled, I suddenly have twice as much disposable income to spend as a customer. But what have I gained if prices double too? They won’t double. On average, labor is only about two thirds of the cost of a product. The price of the product would rise, but not at the same rate. Because wages would rise faster than cost, products would actually become more affordable, not less.

    At this point, I’ll admit that some business models may not support higher wages. Would McDonald’s survive in today’s climate if they had to double their prices in order to pay such wages? Maybe. Maybe not. Somehow they not only survived, but thrived in spite of the high wages paid decades ago. But if not, then what that tells you is that this is a service/product that people value very little. They buy the product only because it’s so cheap. If it wasn’t there, they’d be perfectly happy with the alternative.

    c. There may indeed be localized shortages, especially in the case of farming. Even if wages were raised to $20 an hour, there may not immediately be workers available in the local area. But it wouldn’t take long for the word to get out and for workers to start arriving. Soon, more small towns would spring up near the farms to house people coming in to do the work. Just because workers wouldn’t suddenly materialize out of thin air is no reason to conclude that workers aren’t available somewhere.

    d. Calling this a “lie” may be a bit strong. People simply don’t understand that an over-supply of labor is a bad thing, not a good thing. It’s a shortage of labor that provides incentive for productivity improvement and real, meaningful economic growth (as opposed to growth that is nothing more than cancerous population growth). We have been brain-washed into believing that inflation is bad, and that wage growth is a prime source of inflation. In fact, there are two kinds of inflation – good inflation and bad inflation. Inflation that is fueled by wage growth (driven by labor shortage) is good inflation, although accommodations must be made for people on fixed incomes. Inflation that is fueled by shortages of raw materials is a bad thing. That kind of inflation drives up prices without a corresponding increase in wages.

    2. Saying that there are not enough technically proficient people is patently false. As more and more people are being layed off, they turn to job retraining in the hope of starting a new career. Colleges and technical training companies are cranking out “technically proficient” graduates like crazy. But they all struggle to find work. There may have been a time, like back in the ’90s during the “dot.com” boom, when they were temporarily in short supply, but no longer. Again, this is just a rationalization for outsourcing or bringing in cheap immigrant labor.

    3. I really loved the example offered of people in Manhattan buying lots of apparel. That may be. But how many of them live in 2,500 square foot homes? Very, very few. So their per capita consumption of all of the materials that go into a home – lumber, concrete, drywall, roofing materials, paint, wiring, electrical fixtures, plumbing, etc. – is very low. What is their per capita consumption of autos compared to the rest of the population? How about lawn and garden equipment? What about boats? (In spite of their being surrounded by water, their per capita consumption of boats is extremely low.) As compared to the rest of the population, how many Manhattanites are golfers and own golf clubs? What is their per capita consumption of infrastructure like roads, bridges, pipelines, transmission lines, etc.? All of it is very low.

    Of course, Manhattanites are part of the American fabric, and every nation of any size needs both cities and rural area. My point in Five Short Blasts was not that people shouldn’t congregate into cities. Rather, my point was that nations – including both their cities and rural areas – should never become so densely populated that their average per capita consumption begins to decline – places like Japan, Germany, Korea, China and so many others that are many times more densely populated than the U.S. That’s when a falling per capita consumption really starts to erode the balance of supply and demand for labor.

    This is all a very difficult subject to effectively communicate over a dinner. For many reasons, people just don’t want to believe that population can be a problem. Economists don’t understand how we can have a healthy economy without a continuously growing population. Some people can interpret the suggestion that over-population is a problem as a challenge to the value of their very existence, not to mention a challenge to cherished beliefs about family size, religious convictions and so on. But the time is long past when we can simply ignore the problem in the hope that it goes away. It won’t if we aren’t willing to face reality.

    Pete

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