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After destroying the US middle class, how will US corporations survive?

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  • Sun, Jan 23, 2011 - 05:19am

    #1

    Travlin

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    After destroying the US middle class, how will US corporations survive?

Here is an issue I have been struggling to understand and I would appreciate anyone’s views.

I increasingly see the US as a corporatocracy.  To lower costs, and vastly boost profits, manufacturing jobs were shipped to China.  Service jobs are also being outsourced overseas.  US workers are now competing on a global basis  with people in emerging countries, who have an increasing level of skills.  They will gladly work for much less than a US worker can survive on, as even the bare necessities cost much more here.  The steady destruction of the American middle class is clearly evident and destined to grow worse.  Yet personal consumption by US citizens accounts for about 70% of US gross domestic product.  The corporations are destroying the American people who comprise the primary market for what they sell.

US corporations have to be aware of this.  They must think they have some way to deal with this loss of market.  Here are my tentative conclusions.

As US based corporations destroy US consumers they expect foreign markets to pick up the slack, especially countries like China, Brazil, and India.  My projection of this trend is – The decline of the US middle class will accelerate and the shrinkage in size will be severe.

Though US corporations no longer make things in the US to export, that doesn’t matter to them because they set up the factories in China to make them for export all over the world, and retain even bigger profits.  My projection of this trend is – The ownership and knowledge to run these factories will increasingly move to Chinese hands and eventually they will cut out the US corporations and peddle the goods directly, leaving the US corporations high and dry.

The mega-corporations are not US companies, or international companies, or multi-national companies; they are truly stateless global entities with loyalty to no one.  Many have more resources than a small nation, with much better management.  They exits only to continually increase profits by any means necessary.  Destroying a nation, even the US, is irrelevant to them in the pursuit of profit.  But their own existence is paramount and they must have a plan for how they will survive.

I have not studied corporatocracy, and I don’t approach this from a political angle.  But my analysis of economics has led me to these tentative thoughts.  I would like to hear from anyone who has thought about or studied this issue, or just wants to comment.

Do the analysis and conclusions seem sound?  What am I missing here?  I would appreciate your thoughts.

Travlin 

  • Sun, Jan 23, 2011 - 03:28pm

    #2
    Peak Prosperity Admin

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    Re: After destroying the US middle class, how will US …

Well I’m certainly no expert in this but for what its worth here is my opinion.

The US was perfectly happy with capitalism after world war II because we were on the top of the economic food chain. We had the factories, the capital, the people and the skills. But as capitalism went more global corporations became global entities. As global entities being loyal to any one nation doesn’t make sense the focus is all about becoming larger, making more money and putting competitors out of business. So a main component of capitalism is really about attrition.

Its only natural that if this is your thinking then you go globally to the cheapest labor sources, which usually happen to be the poorest countries, then sell to more prosperous countries at a profit. But here in the ‘problem’ once one company makes this move to cheap labor their competitors are forced to do the same or go out of business. At this point it should be clear that capitalism has no allegiance to any country. I’m not saying this is good or bad. I’m just making the observation.

So now we have what you have stated here:

The mega-corporations are not US companies, or international companies, or multi-national companies; they are truly stateless global entities with loyalty to no one.  Many have more resources than a small nation, with much better management.  They exits only to continually increase profits by any means necessary.  Destroying a nation, even the US, is irrelevant to them in the pursuit of profit.  But their own existence is paramount and they must have a plan for how they will survive.

You’re not missing anything. You’re observations are correct. IMO what happens now is pretty simple. Corporations now run the world. They will cycle through cheap labor sources throughout the world moving from one to the other. As those countries economies expand and labor become more expensive then they move to the next one. Government don’t matter any longer which means the will of the people don’t matter any longer. All that matters is that global companies become largers and try to beat each other out which means in the end only a handful of mega corporations control the world economy and thus the worlds governments.

  • Sun, Jan 23, 2011 - 04:04pm

    #3
    Peak Prosperity Admin

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    Re: After destroying the US middle class, how will US …

[quote=Travlin]

 The steady destruction of the American middle class is clearly evident and destined to grow worse.  Yet personal consumption by US citizens accounts for about 70% of US gross domestic product.  The corporations are destroying the American people who comprise the primary market for what they sell.

[/quote]

I think your question may be answered with this thread:

https://www.peakprosperity.com/forum/blackstone-makes-big-move-chinese-housing/43724

China now has the factories and industry that we had at the turn of the last century. Their population may be working for low wages compared to us, but they are *working,* and I’m guessing their middle class is growing just like ours did.

always follow the money … they may be telling *us* that things are looking up, but their actions speak otherwise.

~s

  • Sun, Jan 23, 2011 - 04:11pm

    #4
    Peak Prosperity Admin

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    Re: After destroying the US middle class, how will US …

 

Corporations will survive to a degree, but overall this system of CRAP has to go.  Take JP Morgan for example, just click below.

 

The More Americans That Go On Food Stamps The More Money JP Morgan Makes

 

Outsourcing is not the major destructor of job loss.  Downsizing through automation is the major contributor to this phenomena.  It will only continue, I think for the better, but our current mind set coupled with our messed up culture and value system is what will hold us back.  

  • Sun, Jan 23, 2011 - 04:17pm

    #5
    Peak Prosperity Admin

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    Re: After destroying the US middle class, how will US …

[quote=Johnny Oxygen]

But here in the ‘problem’ once one company makes this move to cheap labor their competitors are forced to do the same or go out of business.

Government don’t matter any longer which means the will of the people don’t matter any longer. All that matters is that global companies become larger and try to beat each other out which means in the end only a handful of mega corporations control the world economy and thus the worlds governments.[/quote]

I really don’t think this is true.  Yes, labor costs are a large portion of a companies products, but there are many other factors.  Transportation costs while small are still significant, quality issues, language barriers, cultural barriers, governmental barriers are all big issues as well.   I think if you truly want to understand why we keep ending up with so many large companies and movement of companies to certain parts of the world you have to look at governmental interference as the key motivator. 

This interference tends to favor the larger businesses and those that have the ability to overcome the high costs involved in globalizing.   For example, look at a small manufacturer.  They are at a cost disadvantage to a larger player just because of economies of scale, but can often complete with a niche product or better quality or service.  However as regulatory burdens (government sponsored unionization, environmental, OSHA, …) grow the smaller business can not survive and either goes out of business or sales to the larger corporation who has the resources to either comply with the increased regulatory burden or they flee the burden by moving operations to coutries where the burdens don’t exists.  So many people point to the labor as the reason for globalization but I believe it is much more often the regulatory differences  (real or via bribery) that are the root cause for the globalization we see today.

Even Chris in one of his latest articles opined on the issue.  Peter Schiff regularly brings up the subject as he keeps getting hit with new burdens that make it very hard on the smaller brokerage firms.  Just look at how often new legislation is sponsored/supported by the big players in a market.   Do you think they would naturally want more legislation?  It’s seen by the big players as a way to squeeze out the smaller players.

Some articles:

Small Business, Big Regulatory Burden

The Tale of Two Washingtons

Consider that nearly a dozen Standard & Poor’s 500 companies based in the United States were in the process of or had recently completed the relocation of their headquarters overseas as Mr. Locke was being sworn in by the Obama administration. Corporate executives cited excessive tax, labor and regulatory burdens as the primary reasons for leaving America.

 

  • Sun, Jan 23, 2011 - 04:34pm

    #6
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    Re: After destroying the US middle class, how will US …

[quote=Travelin]

The corporations are destroying the American people who comprise the primary market for what they sell.

US corporations have to be aware of this.  They must think they have some way to deal with this loss of market.[/quote]

I think this kind of represents an easy to fall into thought process that results in all kinds of bad conclusions .  We have to understand that the world economy is large, complex, and distributed. There is no “the corporations” entity that runs the world.  It’s thousands and thousands of  businesses competing independently.  It’s just like there is no “the people” entity representing all the people of the world excluding the corporations.  However, if you look at the statements you made you have a very “us versus them” thing going on.  You imply a concerted effort rather than each component doing what is right for it’s own survival at the moment.

Instead you have to ask, why do we see such out of balance situations.  Most large, complex, and distributed systems will generally reach a sort of equilibrium (at least on longer time scales).  Generally I find the problems we see are the result of someone trying to “control” the system, when they are very likely to cause many unintended consequences from the attempt.

If you haven’t read “The Black Swan”, you really should.  It definitely gives a new perspective on complex systems.

  • Sun, Jan 23, 2011 - 04:45pm

    #7
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    Re: After destroying the US middle class, how will US …

Many made it to the middle class based on borrowed money. Many of the corporate profits were based on borrowed money too. It is slowing – not because there is less available credit, or less available perceived capital – but less available resources.  While some may view this as a dire circumstance, it is, in fact, a natural course of action. 

When the economy was providing close to full employment, at the same time, our natural environment was under full assault.

 

  • Sun, Jan 23, 2011 - 05:41pm

    #8
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    Re: After destroying the US middle class, how will US …

 

Travlin,

     I’m glad you have seen the light. The U.S. is a corporatocracy. John Perkins coined the phrase “corporatocracy” in his book Confessions of an Economic Hit Man.

http://www.youtube.com/watch?v=n7Fzm1hEiDQ

The economic hitmen, global elite, or whatever you’d like to call them, have now turned on Americans in a more aggressive fashion:

“What goes around, comes around. We in the United States accepted this for a long time. We accepted that these economic hitmen would go to other countries, be able to exploit their resources, bring us really cheap tennis shoes and t-shirts that are made in slave sweat shops, bring us cheap petroleum that comes from destroying rain forests… we accepted this. We turned a blind eye to it. And now it’s come home to roost. The same techniques that have been used in the Third World in building this empire overseas are now being used against the American people.”

http://www.youtube.com/watch?v=RXkx41uvesA

Predatory Capitalism. How does it feel?


  • Sun, Jan 23, 2011 - 06:33pm

    #9
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    Re: After destroying the US middle class, how will US …

[quote=rhare]

 

I really don’t think this is true.  Yes, labor costs are a large portion of a companies products, but there are many other factors.  Transportation costs while small are still significant, quality issues, language barriers, cultural barriers, governmental barriers are all big issues as well.   I think if you truly want to understand why we keep ending up with so many large companies and movement of companies to certain parts of the world you have to look at governmental interference as the key motivator. 

[/quote]

At the risk of generalization, labor is the biggest proportion of the cost of goods for most commodity items. And in the service sector it is close to 100% of the embedded costs. Globalisation is all about corporations seeking out the lowest labor burden, end of story. To dismiss this and rope in “other factors” by way of a root cause explanation, such as  government regulation, environmental concerns, et. al. is just propaganda straight out the Rush Limbaugh playbook. These tertiary considerations, although real, are most certainly not the dominant reason for globalisation.

It is true however, that regulatory mandates are more easily absorbed by large corporations than small businesses, and in early stage capitalism you can observe the counter-intuitive effect of large companies actually advocating additional regulation, as they know it will disproportionally effect their small business competition.

However, this phenomena disappears in late stage fully developed capitalism where large corporations have no real competitive fear of small business, they are now far more pre-occupied with reducing labor costs as their employee head counts soar, dramatically multiplying the affect of fully burdened labor cost on profitability. While small business can compete in niche markets on aspects of quality, brand identity, and other social nuances, the large scale footprint in terms of total commerce is coming from the big multi-nationals, especially as the effective demand of the US middle class is declining, along with average wage earner (household) income. This places the commodity purchase profile squarely in the domain of low price as being the dominant consumer consideration, a factor that small local businesses cannot hope to compete against.

In the area of non-commodity goods and discretionary spending, small business can do little better, where as in commodity goods small businesses that are not globalised stand near zero chances of competing, there is at least some opportunity to serve a niche market. In this area, coercive forces once again rear their ugly heads, companies large and small have discovered that the wages of stateside employees are profoundly affected by the cost of worker substinence, e.g. real estate prices and cost of living. Business do their level best to push down these costs, supporting and advocating any initiatives that reduce the workers cost of living, as they know full well that this savings can be exploited to the corporations benefit in the form of across the board reduced compensation.

It is this fashion that a partially insidious dependency of capitalism manifests, and we can use the much maligned Wal Mart as an excellent example. Approximately 1/5th of all Americans shops at Wal Mart and it’s not because of the stellar store ambience. It’s because they have the lowest prices and it’s the only place where much of the population can afford to buy the commodity items needed for substinence.

It’s notable that Wal Mart sources much of their product from the Chinese supply chain.

This ubiquitous availability of cheap substinence goods has the effect of depressing US worker wages in other unrelated industries, as the workers cost of living decreases so do the wages paid as compensation. To illustrate, interchange real estate instead of grocery pricing. The wages employers must pay workers are deeply effected by local real estate prices. Expensive housing means expensive wages, as every worker must live somewhere. For this reason, businesses seek out communities with low real estate costs, because they know they can decrease wages as the workers have lower rents.

It is no accident that Wal Mart is the largest corporation in the world, this company and their business model of monopsony play a pivotal role in the ability of US corporations to depress stateside worker wages. Coupled with widespread off shoring of jobs to China, this combination aims for a particularly damaging marriage of political economy.

Using environmental and regulatory excuses to explain globalisation is dangerous and misleading premise. They are factors, but not dominant ones.

  • Sun, Jan 23, 2011 - 07:52pm

    #10
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    Re: After destroying the US middle class, how will US …

“Wage Arbitrage” has been going on since, well, since forever. Rome fell because of an energy crisis – they ran out of slaves. I think many hunter gatherers captured slaves as well so it isn’t just we “advanced” societies. The American Colonies were an old world labor off-shoring endeavor. But New England eventually lost out it’s textile mills to the Southern US who in their turn lost out to Asia.

So, it’s not a new thing, and really, is Global Mega Corp any less loyal to America and Americans than the textile mills in the south were anti-American because the killed the industry in the north? Are they worse than the meat packers in Chicago in the bad old days or any number of other companies who used workers up and tossed them away? After all, who owns those modern corporations? Isn’t it the Cal-Pers mutual funds and millions of baby-boomers all clamoring for an extra 100th of a percent of return so they can show the world how powerful they are??

So, one group using their strength and power to get the upper hand and become even stronger and more powerful is nothing new. But one thing that is new today might be the powerful no longer need to force us into slavery, we volunteer.

And why do we do that? Because we want to be more powerful too! We show how powerful we are by acquiring as many artifacts of power as possible. We display our new flat screen TV like a scalp! And if the corps make TVs cheap enough we can also brandish an iPod too – making us doubly powerful!

Anticompetitive tactics usually work in the short run I’d guess, between walmart and cheap fuel, inefficient little retailers and many locally owned business have been eliminated to the glee of shoppers everywhere – except the ones that work at walmart, the same with Netflix who have finished off that last bastion of Mom and Pop business (the video store) and will soon eliminate their main cost of doing business – the DVD and I’d guess the labor to ship em.

What was the question? Oh yea, when things actually become painful and the divide obvious and the corps ‘human rights’ begin to sink in, only then the proletariate will rise up and cut off some corporate heads (metaphorically speaking of course) – but we are a long way from there yet. Most people still vote for tax cuts for the rich because they think they can be rich some day, just gotta buy enough lottery tickets… 

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