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

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  • Sun, Jan 23, 2011 - 07:54pm

    #11
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    Re: After destroying the US middle class, how will US …

I’m old enough to remember the 50’s when the social commentators told us that in the future much of labour would be performed by robots and we would therefore be able to lead a more luxurious life spending less time working and have more time for leisure and pursuit of the arts.

So what went wrong?

IMHO I don’t believe that the problem lies in globalization per se, but in the way that it has been developed. The improvement of living standards throughout the world is an admirable social goal and tends to have the salubrious effect of reducing the rate of population growth. So what did go wrong? Looking back at the 50’s all major Western nations had a highly progressive taxation system that imposed very high tax rates on wealthy individuals and corporations. Whether this was good of not it had the effect of keeping the Gini coefficient for wealth quite low. This has been attacked over the years as rampant socialism, especially in the US, and the taxation system has been dramically reduced to its current level with the concomitant increase in the Gini coefficient. I should note that many of these changes were promoted by corporations in their own self interest to the point that they have now become so big as to have captured governments and direct their policy. I understand that in some ways corporations can’t help themselves since they are mandated by law to maximize their bottom line, at the risk of shareholder suits, but this gives rise to short sighted thinking. This is capitalism, as it exists today, in its final stages of moving to global dominance.

Just this past week the WEC (World Economic Forum, meeting in Davos) released a paper calling for an additional $100 trillion of credit (DEBT) to be produced over the next decade. This would basically double the level of global credit (DEBT). As CC followers know we need more debt like a hole in the head. How will this be achieved? As the $US is near its death bed it would appear that the plan might be to initiate a new, possible global, currency (which might be either the sole or the reserve currency). We can expect the Gini coefficient to increase toward the ultimate value of 1, while the vast majority of the world’s population (not merely those ejected from the US middle class) will live in perpetual debt slavery.

Is this inevitable? Well the future is never fixed but grows out of the trends of the present. This is only one scenario. Another is the complete devastion and social collapse that is the subject of several threads here. Another is total nuclear armageddon. A brighter future for all humanity would involve the wealthy losing the current class war and the establishment of an egalitarian society. Such change is deeply resented in the US where social principles and values are decried due to the propaganda directed against equality, notwithstanding the preamble to the US Constitution. As an example look at how the Georgia Guidestones have been denigrated when there is much to commend these principles and an informed, enlightened discussion as to whether these are desirable and achievable goals in needed. 

 

  • Sun, Jan 23, 2011 - 08:43pm

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

[quote=Johnny Oxygen]

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.

[/quote]

You left out “we had the oil”…….

  • Mon, Jan 24, 2011 - 12:04am

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

 

Maybe I am wrong, but I get the gist some of the posts to this thread believe the USofA can be fixed. I find that idea quite funny. Here, go through this 5 part video series by Dr Joseph Tainter, it should give you a different perspective:

http://www.youtube.com/watch?v=ddmQhIiVM48

In the context of cost and return, what is, the definition, of “net”?

  • Mon, Jan 24, 2011 - 01:39am

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

Thanks everyone for the many thoughtful replies.  We have a good discussion going.  I was out today so I need to dig into the provided information before I can say much.  One post I can comment on now.

[quote=Rhare]

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.  <snip>  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.

[/quote]

Rhare, you made an important  point.  I was aware of that, but to keep the post at a reasonable length I had to make things simple and short.  I’ll elaborate here to prevent misunderstanding. 

I don’t see a wicked cabal plotting in a secrete room to destroy America.  I see the usual process of history were multiple interests compete for influence, and some join forces when interests coincide, “ .. doing what is right for it’s own survival at the moment.”  However, it seems increasingly clear to me that the current effect is that the American middle class is being destroyed as large corporations respond to the competitive demands of global economics.  And the middle class needs to be, “ .. doing what is right for it’s own survival at the moment.”

When US corporations feel compelled to “kill the goose that laid the golden egg” of the US market, they must have their own strategy for survival.  I want to know were I fit into that, and what my strategy should be.

Thanks for your thoughts.

Travlin

Although this is a repost of a Zero Hedge article from the Daily Digest, I think it embodies exactly the type of corporate and government mindset and action which is destroying our country:

“Speaking of people who are willing to sell their country out for a Dollar – GE had excellent earnings and I got my daily “WHUCK?!?” moment this morning when Obama named Jeff Immelt the head of his Economic Advisor Panel, replacing Paul Volker who quit when he realized this country is totally being controlled by Souless Corporate Interests who are embodied by none other than – Jeff Immelt.  

Yes, it’s the same Jeff Immelt who just signed a deal to transfer America’s Avionics Technology to China’s State-owned Commercial Aircraft Corp. of China who (and I mean who, not Hu, althogh it’s easy to see how this is confusing) intends to go into direct competition with Boeing, who is not only a top US military supplier but our nation’s largest manufacturing exporter BY A MILE – so much so that Durable Goods have to be measured ex-Aircraft to smooth out their shipping cycle.  

General Electric Co.’s CEO Jeffrey Immelt Boeing sells $68Bn worth of airplanes per year and has over $300Bn worth of orders for the 787 backlogged.  The company directly employs 157,000 employees, mainly in the USA and, as they build their planes here and tend to use American parts, they in turn employ roughly 1M more people, accounting for close to 10% of our nation’s total manufacturing employees.  As I mentioned when the deal first broke – the technology GE is turning over to China represents 100 years worth of advances in American avionics and, just because GE legally got their hands on the patent rights over the years – does not give them the right to put a bow around them and hand them to Hu (not “who,” this time I literally mean Hu).  

 

 

For the rest of the article …

http://www.zerohedge.com/article/alpha-2-says-%E2%80%9Ccliff-ahead%E2%80%9D

So he’s fired huge numbers of employers, lost tremendous value for his shareholders, took taxpayers’ money for bail-outs, and committed an act that, in past times, would be construed as treason … and Obama rewards him by appointing him to this post!?!?!?

Does anyone else get outraged about this because I sure am!!! 

  • Mon, Jan 24, 2011 - 03:11am

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

[quote=Travilin]When US corporations feel compelled to “kill the goose that laid the golden egg” of the US market[/quote]

Compelled is a good word. Unlike the Marxists around here Wink, I don’t feel that most of the corporations prefer to send jobs oversees, but rather they have to because labor and other costs can’t be brought in line with whats required to be competitive due to direct government interference in the market place.  Taxes, pensions, government sponsored unions, health care, regulation, all those things that government has meddled with are facets in creating the scenario we have today.  The primary factor being the distortion of the cost of money by the Federal Reserve. 

[quote=Travilin]I want to know were I fit into that, and what my strategy should be.[/quote]

You fit in by trying to be competitive with those vying for your job.  If the government is making your skill or job be shipped overseas due to a non-competitive environment, then you need to work to change the government.   However, we have no evidence that this realization is taking place, rather we still keep hearing about how the government is going to create jobs.  They can’t, all they can do is spend until they can spend no more. 

Strategy – have skills that will be valuable when the collapse occurs and we all have to start living locally again. That doesn’t necessary mean handyman skills (woodworking, farming, etc), but skilled labor will be required as well.  When we can not longer afford to farm our work abroad then jobs will begin to appear.  Of course if the government continues to try and maintain the same bueraucratic control, then things will get much much worse after a collapse until a revolt/revolution occurs.  Service sector (non-skilled and luxury) as well as government are probably the least marketable post currency crisis.  Of course, if we manage to kick the can down the road some more, then government bureaucrat might be valid for a bit longer.  I just wouldn’t count on it….

  • Mon, Jan 24, 2011 - 03:31pm

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

[quote=rhare]

Strategy – have skills that will be valuable when the collapse occurs and we all have to start living locally again. That doesn’t necessary mean handyman skills (woodworking, farming, etc), but skilled labor will be required as well.  When we can not longer afford to farm our work abroad then jobs will begin to appear.  Of course if the government continues to try and maintain the same bueraucratic control, then things will get much much worse after a collapse until a revolt/revolution occurs.  Service sector (non-skilled and luxury) as well as government are probably the least marketable post currency crisis.  Of course, if we manage to kick the can down the road some more, then government bureaucrat might be valid for a bit longer.  I just wouldn’t count on it….

[/quote]

Nice.

I suspect the collapse will be so thorough there will be nothing government has to revolt against. Possible?

  • Mon, Jan 24, 2011 - 11:44pm

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

According to USA Today, the average hourly wage for a Chinese worker is $1.84/hr. If we use the Pliketty and Saez average wage earners’ data from the 90th percentile segment of the US wage earning population, we see an average of $14.90/hr for the US worker.

Very nearly an order of magnitude difference.

Now, let’s look at the fully burdened cost to carry a US worker. A burden rate is the actual hourly rate that it COSTS an employer to carry a worker, which includes his or her salary, vacation and sick pay, health insurance (if applicable) as well as externalized costs like unemployment insurance, workman’s comp insurance and payroll taxes. The difference between the fully burdened labor cost and the employees’ gross pay is a fair approximation of the total regulatory and governmental direct costs. I just pulled the labor cost records for my company (non-union), and our fully burdened costs are on average, 32% over the employees gross pay. If I back out the internalized employee costs (vacation, sick, and holiday pay) and solve just for externalized governmental regulatory costs, I get 26% directly attributable to regulatory overhang. So 26% of the employees’ gross pay is added to the bill which is the governmental required contribution to my burden rate.

So let’s have a look a the numbers in a comparative sense:

–         For the average American wage earner in the 90th percentile category, the wage rate is $14.90 (as before) and 18.78/hr after the regulatory burden is added, or about $3.87/hr extra.

–         And the Chinese worker is still 1.84/hr. Not sure how much regulatory burden there is in a totalitarian Communist state, guessing not much.

So if the government eliminated all of the direct labor burden costs from the employers’ payroll, we’d save $3.87/hr for each average worker, but the American worker is still more than 800% more expensive than the Chinese worker!(Assuming all of the regulatory savings are deducted from the total burden cost) These numbers will vary by industry and by specifics, but by and large, the proportions are pretty much standard, and provide clear and logical explanation why large companies offshore jobs as fast as they can. The larger the employee head count, the more lucrative the savings. Good luck making yourself more competitive against this cost model.

This is all part of the repetitive and evergreen refrain from the corporatists, complaining that environmental regulations, taxes, and various and sundry bogey man are all conspiring to make running a business impossible, and naturally, anyone that might suggest such complaints are farcical, and cannot be backed up by real numbers is naturally a Communist and un-patriotic. They use labels like “job killers” , “environmental whackos” and other pejoratives to describe their outrage that they can’t just pour caustic chemicals down the sewer, that workplace safety (hey that costs money) is required to provide some modicum of worker protection, and dammit, they are forced to pay for this stuff and taxes to boot. Its just un-American. So, you know, we’ll just take our jobs offshore, where we CAN just pour stuff down the sewer, until those folks stop persecuting us. And those labor camps in China, hey, not my problem. But it’s not the money. No, really it’s not, it’s the principle!

Take a gander at the massive profits being posted by the large multi-nationals that participate in these large scale offshore schemes, and make your own call as to which side of this specious argument you want to be on.

  • Tue, Jan 25, 2011 - 02:21am

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

[quote=darbikrash]For the average American wage earner in the 90th percentile category, the wage rate is $14.90 (as before) and 18.78/hr after the regulatory burden is added, or about $3.87/hr extra.[/quote]

Only one problem, you have only included direct labor costs attributed to payroll taxes and benefits (unemployment,healthcare, etc) and excluded the far bigger problem of other regulatory compliance. According to the SBA this runs about $10,585/employee/year in 2008 for businesses with fewer than 20 employees, versus only $7,755 for firms of larger than 500 employees. And in the last few years that costs has undoubtedly gone up due to the massively complex recently passed legislation..

So for small employers, at 2000/hrs/yr that’s an additional $5.29/hr over what you show for regulatory compliance.

So what do you get?  Smaller employers going out of business or selling to larger employers, and larger employers that can, moving their positions abroad to avoid the costs. 

But there are many other problems with your analysis.  For instance you took a direct comparison with a US$ exchange without accounting for the vast difference in purchasing power of the employee within China (see PPP valuations).  You really have to multiple the value of that dollar by about 4.  So, what does this mean?  It means the value of the pay in China is really about 4x the direct exchange rate.  That $1.84 is really the equivalent of $7.36 in equal purchasing power.  So still low, but not near the “sweatshop” rate you make it out to be.  Why does it buy so much more in China, because all those businesses that don’t have the same regulatory burden also don’t pass it on to their consumers.

[quote=darbikrash]This is all part of the repetitive and evergreen refrain from the corporatists, complaining that environmental regulations, taxes, and various and sundry bogey man are all conspiring to make running a business impossible, and naturally, anyone that might suggest such complaints are farcical, and cannot be backed up by real numbers is naturally a Communist and un-patriotic. They use labels like “job killers” , “environmental whackos” and other pejoratives to describe their outrage that they can’t just pour caustic chemicals down the sewer, that workplace safety (hey that costs money) is required to provide some modicum of worker protection, and dammit, they are forced to pay for this stuff and taxes to boot. Its just un-American. So, you know, we’ll just take our jobs offshore, where we CAN just pour stuff down the sewer, until those folks stop persecuting us. And those labor camps in China, hey, not my problem. But it’s not the money. No, really it’s not, it’s the principle! [/quote]

Ah, the usual Marxist/statist rantings. Evil businesses, let the government protect us, care for us, save us from ourselves… Honest, we know what’s good for you.. Blah blah blah….  I can see how well it’s worked so far. Surprised I see you still have no clue that all this meddling with a large complex system like the economy by government results in all kinds of unintended consequences.  All those good intentions that try to protect us from the 1% of evil and generate far worse problems.

 

  • Tue, Jan 25, 2011 - 03:37am

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

 Well I see I am back from the land of the vanquished. That didn’t last long. Smile

Regarding your response, I am afraid (as you might guess) that I have to raise an objection or two. Nice try though.

I did note specifically in my post that I consider direct costs only, namely because indirect costs are way too abstract to be useful for this comparison. For example, the aggregated regulatory costs the report you reference cites is a veritable dumping ground for the operations budget of much of the US government. This includes the Homeland Security budget, the cost to generate electricity, and other fixed costs taken to run an entire country and broken down to simulate a direct burden on a business. I consider this to be an entirely unrealistic dataset for the purposes of comparing Chinese labor costs with direct US labor costs. These costs (some 1+ trillion) are reduced to taxation inputs, which are present whether the company offshores or not, so we cannot use this metric as a contribution to the decision matrix of the total costs of employment.

Yes, all business would like lower taxes, even mine. You could just as easily argue the total decremented loss to the tax base when jobs are sent offshore and no doubt prepare a elegant report showing a net loss as compared to the regulatory accounting

I’m afraid I cannot accept the use of such data for a meaningful comparison of offshore labor burdens, compliance with the Federal and State tax codes differ quite significantly in actuality from the effective rates due to deductions – as you well know.

 From the report you linked:

The report uses various methods to determine how the costs of regulations are

distributed: between businesses and individuals, among sectors of the U.S. economy,

and among businesses of different sizes. These tend to reflect the initial or statutory

burden of the regulations, that is, based on who bears the initial compliance costs. It

needs to be acknowledged that this initial compliance burden can be shifted, and the

final incidence of regulations may differ from this initial or statutory assignment of the

regulatory costs. The difference between the initial incidence and how costs are

ultimately divided depends on the demand and supply elasticities in the respective

product and input markets. The final incidence of the federal regulatory burden is likely

to differ from the initial incidence of costs. Of course, this is exactly analogous to the

distinction between how a government collects a tax versus who ultimately pays for the

tax. Collecting 100 percent of gasoline taxes from the service station owner does not

necessarily mean that the owner bears the full burden of the gas tax. Rather, the gas tax

is passed on to consumers to the extent they are willing to pay a higher price at the

pump.

 

And…

 

Before costs can be allocated across these five business sectors, a more general

cost allocation is necessary, specifically how much of the regulatory burden falls in the

aggregate on businesses. This task requires a delineation of the regulatory burden that

falls initially on business from the burden that falls initially on individuals and state and

local governments. As discussed in Section II, the report does not attempt to map out

the subsequent shifting of this burden from businesses to individuals (e.g., in the form of

higher retail prices) or from one business sector to another (e.g., in the form of higher

energy prices or health insurance premiums). It is worth emphasizing that all regulatory

costs are ¾ and can only be ¾ borne by individuals, as consumers, as workers, as

stockholders, as owners, or as taxpayers. In other words, the distinction between

“business” and “individual” is one that focuses on the compliance responsibility, fully

recognizing that ultimately all costs must fall on individuals. Moreover, the degree to

which businesses are able to shift compliance costs forward onto consumers can only

be determined with highly specific information about the market elasticities. For example,

without the price elasticity of demand, we cannot determine with any level of certainty 

what percentage of the regulatory cost will be shifted forward beyond the statutory

incidence.

The direct labor costs are the only meaningful way to draw this comparison, unless you are trying to use data to fit an agenda.

But there are many other problems with your analysis.  For instance you took a direct comparison with a US$ exchange without accounting for the vast difference in purchasing power of the employee within China (see PPP valuations).  You really have to multiple the value of that dollar by about 4.  So, what does this mean?  It means the value of the pay in China is really about 4x the direct exchange rate.  That $1.84 is really the equivalent of $7.36 in equal purchasing power.  So still low, but not near the “sweatshop” rate you make it out to be.  Why does it buy so much more in China, because all those businesses that don’t have the same regulatory burden also don’t pass it on to their consumers.

I’m really trying to get my head around this catastrophe, you are conflating cost of living comparisons with cost of goods? The $1.84 is what the US corporation pays for an hour of labor, what this buys the Chinese recipient is of no concern to this discussion.

 

Ah, the usual Marxist/statist ratings. Evil businesses, let the government protect us, care for us, save us from ourselves… Honest, we know what’s good for you.. Blah blah blah….  I can see how well it’s worked so far. I see you still have no clue that all this meddling with a large complex system like the economy by government results in all kinds of unintended consequences.  All those good intentions that try to protect us from the 1% of evil and generate far worse problems.

 

This may surprise you, but I am not particularly enamored of the way our government is handling these issues, regulatory or otherwise. I think the fiscal policies are irresponsible and I do not advocate a position that government knows best, especially a government captured by corporatist interests.

However, the notion that this “large, complex system” is better left to natural market forces to resolve the structural abominations of capitalism is an even worse idea. I’d guess I’d feel a little more inclined to take this discussion more seriously if there was even a tacit acknowledgement that maybe, just maybe, that there a few (OK maybe a lot) of things that free markets cannot provide for. But this reflexive blame game that regulation is the cause of all that ails us is just more monochromatic prattle that it is all the “gubmint”.

 

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