Time to End the War on Wages

December 9, 2008

For the past two decades or so, the federal government and the Federal Reserve have waged a relentless war on wages.  This war was a “shadow” war, a subset of the war on inflation that began with the Reagan administration in response to the soaring inflation of the ’70s.  But never mind that most of that inflation was caused by soaring oil prices.  It was assaulted on all fronts, and that included wages. 

Paul Volcker and the Federal Reserve attacked with interest rates.  But the real weapons of mass destruction were in the hands of the federal government.  The first was trade policy.  We threw open our doors and welcomed any and all foreign competition, regardless of whether or not they reciprocated, and the impact on wages was devastating.  As we were blinded by the flash of low prices, the blast wave leveled factories across the whole country.  Then came the biological weapon – immigration policy.  The labor market was flooded with immigrant workers, legal and illegal, white collar and blue-collar.  The aftermath of this war is that blue-collar wages are now lower than their peak in 1977 and median family income is now lower than it was in 1969.  Family net worth is lower than it was in 1976 and family indebtedness has soared to record levels as Americans have struggled in vain to hold onto their standard of living. 

Sunday, while being interviewed by Tom Brokaw on “Meet the Press,” President-Elect Obama remarked that all sides in the auto industry must come together and make concessions, including further wage and benefit concessions by the UAW.  With wages of $28 per hour, assembly-related workers are already paid below the national mean income and, with wages at $14 per hour, non-assembly-related UAW workers’ pay is already well below the median income.  Is cutting their wages further and cutting tens of thousands of jobs to help the Big Three survive in some form his idea of helping the middle class?  Will he claim moral victory if a few of us manage to hold onto low-paying jobs, saying that at least those jobs weren’t lost too?

High wages aren’t the problem.  Wage inflation that exceeded the overall rate of inflation is what gave Americans the highest standard of living in the world.  Since wages only represent two thirds of the cost of products, rising wages driven by a strong demand for labor actually improve purchasing power.  Cutting wages cuts prices at a slower rate and purchasing power is lost.  Inflation-fighting focus needs to be on the other factors, things like raw material shortages, product shortages, rising taxes and so on.  Want to help the middle class?  Start focusing on driving a demand for labor.  Your stimulus plan will be a nice kick-start, but we need permanent jobs – the ones our misguided trade policy gave away.  We need policies that will increase market share of the domestic automakers, not cut their capacity to match declining market share.  We need policies that will drive the domestic automakers to hire more workers, not cut their jobs and cut their pay. 

Ultimately what we need are immigration policies that stop feeding an over-supply of labor and trade policies that hold foreign nations accountable for upholding their end of the bargain.  They can either buy as much as we buy from them or we can take action to cut imports.  One way or the other, balance must be restored.  It’s their choice, but it’s our responsibility to make sure that one or the other happens.


Cutting UAW Wages to Zero Wouldn’t Save Big Three

December 3, 2008
When asked about the possibility of further concessions to help the Big Three automakers during a press conference today, Ron Gettelfinger, president of the UAW (United Auto Workers) responded that they’re willing to help, but pointed out that “our research shows that even if we cut our wages to zero, it wouldn’t save the Big Three.”

As crazy as it sounds, he’s right, and here’s why. UAW wages and benefits account for about 10% of the cost of a GM, Ford or Chrysler vehicle. If their wages were completely eliminated, the immediate effect would be to reduce production costs by 10%, potentially putting the automakers back in the black. However, in order to truly become profitable, the Big Three would need to boost their volume. To do so, they’d have to take advantage of their new profit margin to cut prices or offer discounts to attract buyers. If they did that, here’s what would happen:

  1. Foreign auto exporting nations would simply sell their currency and buy dollars, manipulating the exchange rate in their favor, keeping the price of their vehicles competitive without even needing to cut labor costs.
  2. The U.S. would howl about currency manipulation, of course, but so what? We’ve been doing that for decades and the results – none – have become predictable.
  3. The Big Three will then have to cut prices once again in a desperate but futile bid to hold onto market share, and they’ll find themselves again on the brink of bankruptcy.

What about the foreign-owned domestic plants? They’re already profitable enough that they can afford to simply cut prices and take a little less profit margin but, ultimately, if push came to shove, their foreign owners would be perfectly happy to close those plants and bring “home” (to Japan, Korea and Germany) their manufacturing jobs, placing them once again under the protective umbrella of currency manipulation.

Ultimately, it’s the trade deficit that is destroying the domestic auto industry, just as it’s destroyed every other manufacturing industry in the U.S., from textiles to outboard motors. And it’s impossible to “compete” our way out of a trade deficit with nations like Japan, Korea, China and Germany because the deficit has nothing to do with labor costs or currency valuation. It has everything to do with their badly bloated labor forces and low per capita consumption, the inevitable consequences of being grossly overpopulated. The only remedy in such trade situations is tariffs, designed to compensate the U.S. for their inability to provide us access to equivalent markets.

Americans often complain that our government should be run more like a business. OK, let’s run our trade policy like a business, exiting relationships that don’t yield positive results and putting our trade balance sheet back in the black. Let’s stop being the world’s global trade chumps.

 


Detroit Auto Industry’s Plans: Survival, but No Chance of Recovery

December 3, 2008

http://www.reuters.com/article/ousiv/idUSTRE4B10C620081203?sp=true

The Detroit Big Three (General Motors, Ford and Chrysler) are set to present their “recovery” plans to Congress tomorrow.  What Congress will hear are plans to close thousands of dealerships, eliminate brands like Pontiac and Saturn, lay off tens of thousands of workers, shut more plants and make further cuts in UAW wages and benefits.  Boring stuff.  Minutae.  Not the kind of thing that impresses Congress.  What Congress wants to hear are the really important details – things that get 5-second soundbites on the evening news – things like cutting CEO salaries and selling their corporate jets.  Few of these congressmen really care whether or not the auto industry survives.  What they care about is looking tough with fat cat CEOs.  That’s the kind of thing that gets votes. 

Not one will challenge the automakers’ plans for “recovery.”  You won’t hear “explain to me how this is a recovery plan.”  “This looks more like a plan to slowly vanish.  Can’t you guys come up with a plan that would actually grow sales and employment in your industry?  Do you really call cutting more and more brands and closing more plants ‘recovery?'” 

I wish I could be the one to reply to that question.  “Congressman, how can we possibly grow our market share, much less sustain it, when we give free access to more and more foreign automakers?  Our three companies are now competing with twenty individual foreign companies, and many more brands within each company, for the U.S. market.  Given that level of competition, it’s a miracle we’ve been able to hold onto anything close to 50% of the domestic market.  To make matters worse, we don’t receive access to equivalent markets from a single country in which these foreign automakers are headquartered.  You asked us for a realistic plan.  This is reality.  Reality is that it’s impossible for three domestic automakers out of a total of two dozen global automakers to hold onto anything more than about one eighth of the market and, unless we start getting access to equivalent markets, there’s no way to avoid further cuts and downsizing.”

Unless and until this nation comes to grips with the effects of idiotic trade policy that makes the American market the “free parking” space on the global monopoly board, not only is the domestic auto industry doomed to collapse, but so too is the American economy in its entirety, just as it has begun to do.   And until economists become more open-minded about population growth, allowing them to see the effects of bloated labor forces and low per capita consumption, and until they begin to question the adequacy of economic theories that were formulated in the 18th century when the world’s population was less than one seventh of today’s and when the industrial revolution had barely begun to revolve, there’s little chance of any of them questioning their beloved free trade or their darling principle of comparative advantage upon which it’s based. 

Regardless of what happens in Washington this week, you can be sure that our economy is only going to get worse because the root cause, our $700 billion per year trade deficit (a cumulative $9.1 trillion since 1975), remains unaddressed.


Another Turn in Ford’s Turnaround (aka Ford’s Death Spiral)

May 23, 2008

http://www.reuters.com/article/ousiv/idUSWNAS506520080522?sp=true

The above article describes Ford’s plans to cut production and lay off more workers in response to recent further declines in sales driven by high gas prices.  In the past, such shifts in the market, away from one product line (SUVs and trucks) toward another product line (smaller cars) wouldn’t have been such a big deal.  Just throttle back on one factory and add shifts at the other.  But it doesn’t work any more.  Why?  Because high gas prices aren’t the problem.  The problem is that the U.S. market for small cars is glutted with suppliers from Japan and Korea who offer no comparable market in return for access to ours.  The result is predictable – a slow death for U.S. car-makers who are being steadily eaten away by parasitic trade “partners” who come to the trade table with nothing but an appetite. 

Last month I posted the following about an article that touted Ford’s “turn-around” plan, and re-characterized it as a death spiral at the same time that industry analysts incorrectly hailed it as Ford’s redemption:

https://petemurphy.wordpress.com/wp-admin/post.php?action=edit&post=12

It’s not my intention to pick on Ford here.  Their situation is merely a proxy for what’s happening to U.S. car-makers in general.  My point is that the government has little time left to act if it wants to save the last vestige of American manufacturing by abandoning its experiment with “free” trade and returning to the sensible trade policies that once built this nation into the world’s preeminent industrial power.  And the UAW needs to recognize that it has been reduced to a stooge of the free trade cheerleaders by its “if you can’t beat ’em, join ’em” approach of advocating for workers’ rights in trade deals. 


The UAW: A Stooge of the Global Automotive Corporations

May 19, 2008

http://www.freep.com/apps/pbcs.dll/article?AID=/20080519/BUSINESS06/805190321

http://www.uaw.org/cap/08/issues/issue16.php

The above links will take you to an article in the Detroit Free Press about the pathetic deal the UAW negotiated for its members with American Axle and to a page from the UAW web site that defines its policy on global trade. 

The UAW (the organization, not its individual workers) has become a stooge of the global automotive corporations. The UAW wastes its time advocating for workers’ rights in trade deals, believing that this will somehow make a difference in our trade deficit and reverse the destruction of the manufacturing base of our economy. This is exactly the approach that the global corporations want them to take because they know it won’t make a bit of difference, as decades of experience has shown. They want the UAW to take this approach because it distracts the UAW from the only approach that has any real hope of making any difference – lobbying for withdrawal from the WTO (the global referee of the parasites that feed on the U.S. host) and a restoration of tariffs – the only trade policy that has been proven to work – the trade policy employed by the U.S. for the first 170 years of our nation’s history to build us into the world’s preeminent industrial power, the envy of every nation on earth. By contrast, following a turn toward “free” trade with the signing of the Global Agreement on Tariffs and Trade in 1947, America has been turned into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle.

And while this was taking place, the UAW has been whipped into a compliant lap dog, resiging itself to this failed “free” trade policy and deluding itself into believing that it’s making a difference by advocating for workers’ rights in trade agreements. If workers’ rights are the source of our problems, then how does one explain the well-paid, well-treated workers in wealthy countries like Japan and Germany, countries kicking out butts in automotive trade, living well at the expense of their UAW American counterparts?

Our nation now has 170 years of experience with tariffs, followed by 61 years of experience with “free” trade. Any objective analysis of the results can come to only one conclusion: it’s time for a return to the trade policies that made this country great in the first place.

 


Ford’s Turnaround Plan: a death spiral

May 4, 2008

http://www.usatoday.com/money/industries/manufacturing/2008-05-02-ford-buyouts_N.htm#LogIn

I think this article is interesting for two reasons:  (1) The demise of either Ford or Chrysler is one of my 2008 predictions and (2) the reaction from some readers (see the comments) is typical of the misunderstandings about the role of “free” (blind) trade.

But first, a general comment is in order.  Ford’s turnaround plan looks a lot like that of Chrysler and GM: each turn in the turnaround involves making the company smaller and smaller – the very definition of a downward spiral, mirroring the overall U.S. economy. This won’t stop and neither will the overall decline in manufacturing and our economy in general (as we continue to bankrupt ourselves with our enormous trade deficit) until we abandon our screwball “free” trade policy and restore the tariffs (employing the population density indexed tariff structure that I called for in Five Short Blasts) that once made this country the world’s preeminent industrial power and wealthiest nation. 

“Ford Motor Co. will offer buyouts to about 1,300 workers at assembly plants in Chicago and Louisville, as part of the automaker’s plan to adjust capacity with demand for its vehicles, a spokeswoman said Friday.”

Decades ago, there were no such things as “buyouts.”  If a company failed, they simply let everyone go.  It wasn’t that big of a deal because they’d soon land on their feet with an even better, more lucrative job.  But, beginning in the ’80s, as the overall U.S. economy found itself locked in a death spiral, companies began to fear unruly mobs of peasants at their gates with pitchforks and torches.  The solution?  Numb them with “buyouts” that look like big money at the time but which are soon exhausted when their animosity toward the company has been dulled by the passage of time.  The effect is that America’s manufacturing workers trudge off silently into the night, sheep being driven toward what appears to be a greener pasture but is instead a green-painted slaughter house.  And the overall worsening of the supply and demand labor equation drags everyone down a little at a time – almost imperceptibly – like a slow drip from a faucet.

Readers’ reactions?

“The unions have not single handedly hurt the automotive industry.

The CEO’s have! They charge an arm & a leg for a product that has cheap plastic inside & out that breaks a week after you drive it off the lot.

They build gas guzzlers & have no inovative alternatives. The alternatives shown at the car shows will be built in 2010. They should hire the two kids that fiddled with a prius & ended up earning one hundres miles per gallon! TWO TEENAGERS! The Japanese probably have hired them already.”

While I have no love for CEO’s, come on!  They’re making exactly what American consumers have wanted.  Where’s the criticism of Toyota, Nissan, Mercedes and all the others who crank out equally garish monstrosities, for which they charge as much or more than GM, Ford or Chrysler? 

Here’s another:

“Keep cutting little three. This is the reason I will not buy any of their products. They cut jobs and add more foreign content to their cars. And do we see the prices of their cars coming down from that cheap labor?”

So, you’re saying you’d buy their cars if they stopped cutting costs?  And how much have the Japanese, Korean and German cars fallen in price lately?  Price has nothing to do with our trade deficit.  It’s due to granting free access to our market to nations that have nothing to offer in return.

“Union people keep demanding more so the big three cannot compete in price. The unions help keep the poor workers so quality stinks. No wonder they are losing market share, dah. I have not bought a vehicle from the big three since 1987. I refuse to support over priced union demands.” 

Wow, this guy is decades behind the times.  Does he not know that the UAW has been taking wage cuts for many, many years while, at the same time, improving quality to match the best the Japanese have to offer?  It seem he’d rather hand his money over to foreigners than to support a higher demand for labor in the U.S. that would drive up his own income. 

Is it any wonder there isn’t a greater outcry against our trade policies when people are so poorly educated about the problem?  Come on, Americans.  It’s time to stop blaming ourselves, get mad, and demand answers from our leaders.

Pete


Are You Better Off Than The Previous Generation?

January 18, 2008

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