Labor and Energy Costs

Posted by PITHOCRATES - July 1st, 2013

Economics 101

If you want to Destroy an Industry and Kill Jobs all you have to do is Raise the Cost of Labor

What happened to American manufacturing?  The Industrial Revolution swept through the United States and made America an industrial superpower.  By the beginning of the 20th century the United States became the world’s number one economic power.  Immigrants poured into this country for those manufacturing jobs.  Even though some of these jobs may have come out of a Dickens novel.  Because being able to eat had it all over starving to death.  And in America, with a good factory job, you could put food on your family’s table.

Most of those manufacturing jobs are gone now.  Why?  What happened to the once booming textile industry?  The once booming steel industry?  The once booming automotive industry?  Unions happened to them.  That’s what.  These jobs were so horrible and unfit for humans that unions stepped in and organized them.  But the jobs never got better.  Based on the ever more generous union contracts they kept demanding.  Increasing the cost of labor more and more.  Which chased the textile industry out of the country.  And much of the steel and automotive industries as well.

Is there anything we can learn from this?  Yes.  If you want to destroy an industry, if you want to kill jobs, if you want to damage the economy, all you have to do is raise the cost of labor.  The largest cost to most businesses.  Which is why many businesses have been replacing people with machines.  Advanced machines.  Computer-controlled machines.  Robots.  Because they can work 24/7.  They’re never late.  Never hung over.  Never out sick.  They don’t take lunch.  And they will work as fast as possible without ever complaining.  This is why businesses like machines.  For they let them lower their costs.  Making them competitive.  So they can sell at prices lower than their competitors.  Allowing them to remain in business.

Uncompetitive American Manufacturers go to Emerging Economies where they can be Competitive

Labor is a big cost of business.  Especially in an advanced economy.  With a high standard of living.  Where people own houses and cars.  Where those houses have central heat, air conditioning, televisions, sound systems, kitchen appliances, washers and dryers, etc.  These things cost money.  Requiring paychecks that can afford these things.  As well as pay for clothes, groceries, gasoline, utilities, etc.  Common things in an advanced economies.  But not all that common in an emerging economy.  Where factory workers aren’t accustomed to those things yet.  And don’t demand paychecks that can pay for those things.  Yet.

Still, people in developing economies flock to the new factories.  For even though they are paid far less than their counterparts in advanced economies these factory jobs are often the highest paying jobs in their countries.  And those who have these jobs have a higher standard of living than those who don’t.  Even when the occasional factory burns to the ground or collapses killing everyone inside.  As sad as that is.  But if you want to eat and provide for your family these factories often offer the best opportunity.

So this is where American manufacturing jobs go to.  Where labor costs are lower.  Allowing business to stay competitive.  Because if they can’t be competitive no one will buy what they are selling.  And without any revenue they won’t be able to pay their suppliers.  Their employees.  Or their energy costs.  Another large cost of business.  Especially for manufacturers.

Unions and Regulatory Costs haven’t made Emerging Economies Uncompetitive Yet

A lot of houses today come with a 200-amp electric service.  Assuming a house uses about 100 amps on average that comes to 24,000 watts (100 amps X 240 volts).  Now consider a large manufacturing plant.  Like an automotive assembly plant.  That can have anywhere around 8 double-ended unit substations.  Which are pieces of electrical distribution equipment to feed all of the electrical loads inside the plant.  Each substation has two 13,800 volt 3-phase primary electrical services.  If you’re looking at one you will see the following from left to right.  A 600-amp, 15,000 volt switch, a transformer to step down the 13,800 voltage to 480 voltage, a 480-volt main switch, a bunch of 480-volt switches to feed the electrical loads in the plant, a ‘tie’ switch, another bunch of 480-volt switches, another 480-volt main switch another transformer and another 600-amp switch.

The key to a double-ended unit substation are the two 480-volt main switches and the tie switch.  Which normally distributes the connected electric load over the two primary services.  With both 480-volt main switches closed.  And the tie switch open.  If one service fails because a car knocks down a cable pole these switches will sense the loss of that service.  The 480-volt switch on the side of the failed service will open.  And the tie switch will close.  Feeding both sides of the unit substation on the one live primary service.  So each primary service carries half of the connected load.  Or one primary service carries the full connected load.  Assuming each unit substation uses 600 amps on average (2 services at 300 amps or 1 service at X 600 amps) that comes to approximately 13,194,070 watts (600 amps X 13,800 volts X √3 X .92 PF).  Where we multiply by the square-root of 3 because it is three phase.  And assume a 0.92 power factor.  If a plant has 8 unit substations that comes to 105,552,562 watts.  Which equals approximately 4,398 houses with a 200 amp service.  Now to further our crude mathematical approximations let’s take a typical electric bill for a house.  Say $175 on average per month.  If we multiply this by 4,398 that comes to a monthly electric bill for this manufacturer of about $769,654.  Or $9,235,849 per year.

So here is another way to destroy an industry, kill jobs and damage the economy.  By increasing the cost of electric power.  Which is already a very large cost of business.  And ‘going green’ will make it even more costly.  As the Obama administration wants to do.  With their war on coal.  The cheapest source of electric power we have.  By increasing regulations on coal-fired power plants.  Even implementing some kind of a carbon tax.  To punish these carbon emitters.  And to subsidize far more costly green energies.  Such as solar.  And wind.  Going from the least costly to the most costly electric power will greatly increase a business’ electric utility costs.  Easily adding 15%.  30%.  40%.  Or more.  A 40% increase in our example would increase the electric utility cost by $3,694,340 each year.  If a plant has 1,200 workers that’s like adding another $3,000 per worker.  And we’ve seen what higher labor costs have done to companies like General Motors.  Chrysler.  And the textile industry.  By the time you add up all of these new regulatory costs (Obamacare, green energy, etc.) businesses will be so uncompetitive that they will have to follow the textile industry.  Out of the country.  To a country that will let them be competitive.  Such as an emerging economy.  Where unions and regulatory costs haven’t made them uncompetitive.  Yet.

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Bad Liberal Democrat Policies chased the Industrial Base out of Detroit

Posted by PITHOCRATES - June 2nd, 2013

Week in Review

A growing population is to government coffers what growing revenue is to business.  More money.  Governments at all levels collect their money by taxing the population.  The greater the population is the greater the amount of taxes they collect.  So a growing population increases the money coming into a government’s coffers.  While a shrinking population gives you a Detroit (see How to save a city by knocking down thousands of its buildings by Tim Fernholz posted 5/31/2013 on Yahoo! Finance).

The problem with Detroit, which could soon host the largest municipal bankruptcy in the country’s history, is its shrinking population. With its industrial base decimated by automation and outsourcing, a city of 1 million people in 1990 dropped to 700,000 this year, with 200,000 people leaving the city since 2008. That reduced the taxe base to fund public services. Fewer public services coupled with lower population density weighed on crime, public health and the economy.

Yes, its industrial base was decimated by the loss of all those manufacturing jobs.  But the real question is why businesses left Detroit.  And there is only one reason why a business leaves one location for another one.  Because of a more business-friendly environment elsewhere.

Detroit became a liberal Democrat bastion.  Supported by high taxes.  Including a city income tax.  And costly regulations.  These are what chased businesses out of Detroit.  After decades of this nonsense the regulations for doing work in the city grew so great that business just went elsewhere.  Or cheated the regulations.

Money flowed into city coffers.  And the public sector grew.  Including generous pay and benefit packages for their public sector workers.  Paid for with wealth they transferred from the private sector to the public sector.  Until the private sector said enough is enough.  And left the city.  For a more business-friendly environment somewhere else.  Taking all of those jobs with them.  And with no jobs people left the city.  Looking for jobs.  But as the tax base shrunk the public sector remained bloated.  Which was a problem.  A big problem.  As more and more money went for those pay and benefit packages.  Including generous pensions and health care benefits.  And less to city services.  Causing urban decay.  In time this accelerated.  With fewer and fewer people paying the taxes to support the public sector.  And when they could no longer support the public sector the city started running deficits.  Pushing it towards the “largest municipal bankruptcy in the country’s history.”  All because of an unfriendly business environment.

So this is what decimated the city’s industrial base.  Anti-business liberal Democrat policies.  For if the city wasn’t so anti-business the industrial base would still be there going strong.  Attracting new businesses from other anti-business locations.  Instead of what they have in Detroit.  A city half the size it once was.  Where they talk about tearing down houses and turning these old neighborhoods into farmland.  In what once was the automobile capital of the world.  Amazing what bad liberal Democrat policies can do.

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FT119: “To save American jobs the Left tries to keep out low-priced Mexican imports but does little to keep out low-priced Mexican labor.” -Old Pithy

Posted by PITHOCRATES - May 25th, 2012

Fundamental Truth

The Left opposes Cheap Mexican Labor in Mexico but they like having it in the U.S.

One of the more interesting things about the political left is their inconsistency about their opposition to free trade.  They opposed the North American Free Trade Agreement (NAFTA) because they said all the good manufacturing jobs would go south of the border.  They said Mexicans work too cheap.  And that was unfair to the American worker.  For the American’s generous wage and benefit packages could never compete with the Mexicans who are willing to work for so much less.  With NAFTA rich American capitalists would just screw their American employees and move their operations to Mexico.  Where they would exploit the poor hapless Mexican workers.  Forcing them to work at a fraction of the American wage and benefit package.

Of course that’s not the way the poor hapless Mexican workers see it.  They loved those manufacturing jobs.  Because those jobs had some of the most generous wage and benefit packages available in Mexico.  They flooded those factories.  And the lucky few to get those jobs did quality work.  The things they made in these Mexican plants were as good as anything in the U.S.  And they cost less.  Allowing the American consumer to buy more.  Which raised the standard of living for everyone.  The American consumer.  And the Mexican consumer.  The only ones who lost were the few working in those U.S. plants that closed.  Who became bitter.  And demanded the government impose tariffs on those low-cost imports.  To save American jobs.  While lowering the standard of living for the American consumer.  And the Mexican consumer.

So the Left opposes this cheap Mexican labor.  In Mexico.  They don’t seem to mind it so much, on the other hand, when it’s in the U.S.  The Left opposes building a wall on the border.  They oppose asking for proof of citizenship from anyone who looks Mexican in a region with a high concentration of illegal aliens.  They oppose requiring a photo I.D. to vote.  They oppose deportations of illegal aliens who’ve been living and working in the U.S.  While they are in favor of blanket amnesty for those here illegally.  And providing them a fast-track to U.S. citizenship.  Which is rather odd considering the way the Left feels about that cheap Mexican labor.  So why are they opposed to imports manufactured by low-cost labor while they are in favor of bringing that low-cost labor into the United States.  For either way it will displace a higher-paid U.S. worker from a job.

The Lost Tax Revenue from Abortion and Birth Control comes to about $155 Billion per Year 

 Yes, that is a good question, isn’t it?  Some, I’m sure, will say once those illegals become legals they’ll join unions.  Which would make them no longer cheap labor.  Perhaps.  But with the decline in U.S manufacturing there aren’t a lot of union jobs anymore.  It is more likely that they will go to where there are good manufacturing jobs.  In the nonunion South.  So it is likely they would add further pressure on those high union wages and benefits.  So why, then, would the Left want to grant citizenship to those here illegally while at the same time opposing cheap Mexican labor?  Two reasons.  Abortions.  And birth control. 

As it is in most things in life it’s about the money.  The Left likes to tax and spend.  Well, not so much like but love.  It’s what they live for.  They want to spend money to provide pensions.  Health care in retirement.  And now health care before retirement.  They want to spend money to end poverty.  They want to spend money to give everyone a college education.  They want to spend money to subsidize green energy.  They want to spend money for school lunches, childcare, art, public television/radio, birth control, abortions, etc.  If it’s something they can spend money on they want to spend money on it.  Of course to spend all of this money you need what?  That’s right.  Money.  And two of the Left’s defining issues have actually reduced the available money to spend.  Birth control and abortion.

According to Public Agenda the number of abortions increased during the Seventies until they totaled approximately 1,300,000 by the end of the decade.  They stayed at or above this level for a little over a decade and then started falling in the late Nineties.  Let’s take one year of these numbers and crunch some numbers.  If 1.3 million abortions didn’t happen and the women carried these babies to term and they earned the median income of $46,000 (and paid $7,530 in federal income taxes) today that would have come to an additional $8.4 billion in tax revenue per year.

According to the Guttmacher Institute there were 62 million U.S. women in their childbearing years (15-44) in 2010.  Approximately 62% of these women were currently using birth control.  Bringing the number of women using birth control in 2010 to 38,440,000.  If birth control was unavailable let’s assume 50% of these women would have stopped having sex.  And let’s assume the women who continued to have sex became pregnant and carried their pregnancy to term.  Bringing in 19,220,000 new babies into the world.  Based on the median salary of $46,000 they would have contributed another $145 billion in tax revenue.  Added to the lost tax revenue from abortion that comes to a grand total of $155 billion in lost tax revenue per year.  Over a decade that comes to $1.5 trillion.

Granting Amnesty to Millions of Illegal Aliens can make up for Lost Tax Revenue due to Birth Control and Abortion 

During the Obamacare debates the Congressional Budget Office (CBO) projected the cost of Obamacare over a 10-year period at $940 billion.  They have since revised that up to $1.76 trillion.  The opponents of Obamacare say it is too costly.  With a national debt of already $15.7 trillion we simply can’t afford to pay for Obamacare.  The proponents of Obamacare have been using questionable accounting practices to get that number down.  Such as collecting new taxes before paying any benefits in some of those years in that 10-year projection.  But the interesting thing to note here is that these discussions would be moot had it not been for birth control and abortion.  Which has cost the nation in tax revenue what Obamacare will cost.

These numbers are only crude calculations.  A more detailed mathematical analysis would have produced a far greater number in lost tax revenue.  Because the population would have also been expanding.  So the numbers used as constants in the 10-year projections above would have been growing larger in each year of that 10-year projection.  And producing larger amounts of tax revenue in each of those 10 years.  This is why Social Security worked so well for the first few decades.  There was a growing population.  And there was always far more new workers entering the workforce than leaving it.  What changed that was birth control and abortion.  And people choosing to have smaller families.  Not a bad thing in itself.  But this decision to have smaller families has doomed Social Security and Medicaid.  For they created those programs based on larger population growth rates.  That simply no longer exist.  And the only way to fix that is by having a lot more babies quickly.  Or for the baby boomers to die off quicker.  Which critics of Obamacare say Obamacare will help do via death panels.

Or you could try something else.  You can jumpstart the population growth rate by granting amnesty to millions of illegal aliens.  To make up for lost tax revenue due to birth control and abortion.  And what makes the illegals from Mexico so attractive to the Left is that many of them are devout Catholics.  Thanks to the Catholic Spanish Empire who brought their language, culture and religion to the New World.  And Catholics frown upon the use of abortion and birth control.  But this can be a risky bet for those on the Left.  Yes, they could really boost the population growth rate.  And they may get these new citizens’ votes in the early years out of gratitude.  But eventually the Left’s attacks on religion may eventually make these people vote Republican.  So they may get a large increase in tax revenue to spend.  Just as they lose power in Washington.

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Obama Favors Protectionism to Save Manufacturing Jobs that Employ Few while Increasing Costs for Consumers Everywhere

Posted by PITHOCRATES - January 28th, 2012

Week in Review

In full campaign mode, Obama seeks the support of unions in the manufacturing industry (see Why Manufacturing Can’t Solve The Jobs Problem by Roya Wolverson posted 1/27/2012 on Time Business).

Among other things, Obama’s State of the Union speech Tuesday drove home the idea that U.S. industries need more protection. “Over a thousand Americans are working today because we stopped a surge in Chinese tires,” he said in his speech. That’s all fine and good if your goal is to hold on to U.S. manufacturing jobs. But it’s not going to solve the country’s overall unemployment problem. And in the end, it may cost the American consumer more than those jobs are worth.

For one thing, raising trade barriers on imported goods like tires makes tire-buying more expensive for American consumers, which, as Matthew Yglesias points out, only undermines those consumers’ ability to spend elsewhere. It also provokes countries like China to raise trade barriers on U.S. goods, which makes the job of increasing U.S. exports and export-related jobs even harder. Even if protections did save some manufacturing jobs, they wouldn’t be enough to move the needle on unemployment. It’s worth remembering that only 11% of U.S. jobs come from manufacturing, thanks to globalization, which has taken jobs abroad to lower-wage countries, and technological advances that have increased worker productivity. And that percentage has been declining steadily for several decades.

…And since we can’t reverse that process, the biggest gains in the job market can’t come from greater protections, but instead from gains in technology. Standard Chartered’s Gerald Lyons made the point today that, despite the enduring public perception that technology kills jobs, for every one job technology destroys, it creates 2.1 other jobs. Thus, instead of clinging to our past by supporting unproductive industries and erecting trade barriers, the U.S. has to find “the types of jobs that are fit for this country’s future,” argues Diamond.

Once upon a time the whale oil business was booming.  And a lot of people where employed in the whaling industry.  Until John D. Rockefeller came along.  Who created Standard Oil.  Introduced Americans to kerosene.  And put the whale oil business out of business.  Creating far more jobs in the petroleum exploration and refining business than the whale oil business ever did.  Now if President Obama were in office during this time he would have placed a tax on kerosene to protect those whale oil business jobs.  Because although he may talk about the jobs of the future, he wants to protect the jobs of the past.  Especially if they are protected by a strong union.

When only 11% of U.S. jobs are  in manufacturing, this protection of the jobs of the past is also very costly.  Because to save 11% of jobs in the economy he will raise prices on everything in the economy.  Meaning 100% will pay a surtax so the 11% can keep these jobs of the past.  So to sustain a little economic activity he will kill a lot of economic activity.  Which doesn’t make sense.  But it will protect union jobs.  And sustain contributions to Democrat coffers.  Which is the whole point of saving these jobs of the past.

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China to Eclipse the American Empire?

Posted by PITHOCRATES - April 25th, 2011

Detroit is a Microcosm of American Decline

If you want to see a potential future of the United States, take a look at one of our big cities.  Say Detroit, for example (see Motor City finds labor clout weakened amid spending cuts, new legislation by Michael A. Fletcher posted 4/25/2011 on The Washington Post).

Bold action by Republican governors to rein in government spending and labor power by curtailing collective bargaining rights have been met with raucous, if ultimately unsuccessful, protests from union leaders and their allies in places including Wisconsin and Ohio.

But [Mayor] Bing’s move to extract new concessions from Detroit’s 12,000 municipal workers has been met with no such outpouring…

First of all, let’s get are arms around the size of 12,000 municipal workers.  On average let’s say each worker grosses $35,000 annually.  That is just under half a billion dollars in wages.  Now add in their benefits and it approaches a billion a year.  Just for wage and benefits for city workers.  It doesn’t count the cost of light bulbs, electricity, toilet paper, road salt, buildings, vehicles, etc.  That’s just the cost of people.  And that’s a lot of money.  For an impoverished city with a declining population.  And a declining tax base.

By the way, Mayor Bing is a Democrat.  He is not alone.  The sinking weight of the big city budget deficits transcends political party.

The absence of any large protest highlights the conundrum facing labor and its progressive allies as more states, cities and towns run by their putative Democratic allies are confronted with staggering debt and budget problems…

In New York and California, Democratic governors have not attacked collective bargaining, but they have also demanded major concessions from workers to help close yawning budget deficits.

In Wisconsin and Ohio, new Republican governors have significantly curtailed or eliminated collective bargaining rights for public employees, moves they said were made to give themselves as well as local leaders a freer hand to make badly needed cuts.

Michigan’s new Gov. Rick Snyder (R) signed legislation last month empowering his appointed emergency financial managers to void municipal union contracts in distressed municipalities across the state.

Of course, we got here for a couple of reasons.  People are living longer.  Living retirees consume pensions and health care.  And these benefits are generous.  Created at a time when they could be generous.  Following World War II, the United States rebuilt war-torn countries.  Everyone worked.  And bought a car.  Some bought a couple.  From Detroit.  The Motor City could charge what they wanted.  For where else were people going to buy a car?  UAW line workers lived like kings.  Worked hard.  Retired early.  And doctors kept them alive with ever improving health care.  Some lived longer into retirement than they actually worked.  And all of these costs began to build up in the pipeline.  Waiting to burst out at the other end on some future generation.

And that’s what happened.  War-torn countries eventually rebuilt their manufacturing.  They began to provide for themselves.  Some even provided for others.  They started building quality products at affordable prices.  Long story short, Toyota surpassed General Motors (GM) as the number one car manufacturer.  And GM, saddled with those legacy costs from what proved to be a too generous time, went belly up, bailed out by the government.  And as went the U.S. automotive industry, so did the Motor City.

Decades ago, when Detroit earned the proud moniker Motor City, it was home to a thriving and decidedly blue-collar middle class built largely by the clout of organized labor. Detroit is now renowned as a national symbol of urban dysfunction, and as Bing tries desperately to change that reputation, he often finds himself at odds with the city’s labor unions…

Even as the city is shrinking, Bing calls the current state of city services unacceptable. And he says they are not going to improve unless he can reduce the city’s personnel costs, which are overwhelming the budget. This year, the city paid $200 million in pension benefits, which Bing said was $25 million more than the city paid for fire department and ambulance services last year.

“The old days when getting a good city job meant that you put in your 20 years with the expectation that city government could take care of you for the next 40 is no longer a realistic or viable option,” Bing said.

Generous automotive jobs could pay a lot of taxes.  And did.  The city government grew right alongside the U.S. automotive industry.   But with those auto jobs went the city’s tax base.  And now the municipal workers are going through the same thing the auto workers did.  Only worse.  Because their benefits were even more generous.

Now he wants workers to take on an additional 20 percent of their health insurance premiums. He also wants them to take smaller pensions, and to eliminate defined-benefit pensions for all new employees.

Bing said he has no choice. “If we do nothing, by 2015, fringe benefits are on pace to consume half of our entire general fund revenue,” Bing said. “That is not sustainable. We can’t afford benefit packages so rich.”

Supporters of the public sector will argue they aren’t getting rich.  They’ll argue that they could earn more in the private sector.  True, some could.  But most couldn’t.  Because if they could they would go to the private sector to make more money.  No one chooses to stay somewhere to earn less.  There’s a reason they stay.  And it’s not the wage or salary.  It’s the benefits.

That’s how it was for [a retiree], who went to work for the city as a typist in the health department in 1968. She retired as a 911 operator in 1998 at age 48, and the city is obligated to pay her $24,000 a year for life.

The current Social Security retirement age is 67 for anyone born after 1959.  And there’s talk about raising it still because people aren’t dying soon enough into retirement.  Improvements in health care are keeping people alive longer to consume ever more retirement benefits.  It’s busting the federal treasury.  As well as the treasuries in the big cities.  You just cannot have people retire at 48 years of age these days.  Not if you expect to remain solvent.

This kind of generosity is just not sustainable.  Retirees are consuming more than they ever contributed to their retirement and health care.  And the working young are paying more and more to support them while cutting into their own retirement savings.  Something’s gotta give.  To reverse the American decline.

China the new Japan of the Eighties?

What, you may ask?  What may give?  Perhaps the United States (see IMF bombshell: Age of America nears end by Brett Arends posted 4/25/2011 on MarketWatch).

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now…

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

China is still communist.  Like the Soviet Union was.  So the Age of China may feel more like the Cold War.  Only without us being a superpower.  So how will that feel in America?  Possibly like it felt to live in Eastern Europe behind the Iron Curtain.  Economically dependent on your overlord.  And wholly at their mercy.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

This sounds like what they were saying during the Nineties about Japan Inc.  Just before they entered a devastating deflationary spiral.  Before that, though, some were saying here that we needed to do what the Japanese were doing.  Business and government were working together.  It wasn’t that laissez-faire capitalism nonsense we were clinging to in the United States.  Japan Inc. was a juggernaut.  They got so rich that they were buying up landmark U.S. properties.  A National Lampoon cover showed a Japanese CEO sitting at his desk with a sign saying the United States was a wholly own subsidiary of his company.  It was the end of America as we knew it.

Well, it wasn’t.  The government built a huge asset bubble.  And the thing about bubbles is that they eventually burst.  And when it did, the Japanese economy tanked.  For a decade.  Or two.  The Japanese called the Nineties the Lost Decade.  The lesson the Japanese learned?  A “state-guided form of capitalism” doesn’t work.  It may in the short term.  But not in the long term. 

China may be surging now like the Japanese were in the Eighties.  Will they be able to avoid Japan’s fate, though?

The Difference between China and the United States is Labor Costs

The MarketWatch article misses one salient fact.  First of all, let’s consider the Soviet Union.  If the state was good at ‘guiding’ an economy, why did the Soviet Union fail?  I mean, they had a prosperous manufacturing industry.  Lots of people were building things.  The problem was, they were building things that no one wanted to buy.  Whereas the things they did want to buy (soap, toilet paper, etc.) were always in short supply.  You waited in line to buy those things.  Look at Cuba.  And North Korea.  These are all state-guided.  And they all suffer from abject poverty.  And, at times, famine.  Clearly, the ‘state-guided’ is not the reason why China is doing so well.  It’s that other thing.  The capitalism.  Which the Soviet Union, Cuba and North Korea did not/do not have.

Now we have capitalism.  As did Great Britain.  And at one time, we each had the world’s largest economy.  But we surpassed Great Britain.  And China is about to surpass us.  So is there anything we can draw from this.  Something the British and the Americans have that the Chinese don’t?  I’ll give you a hint.  Think about Detroit.

How many times do we hear about unions striking Chinese industry?  Not many.  For one, there is only one Chinese trade union.  All-China Federation of Trade Unions (ACFTU).  It’s not exactly what you would think of when you think of a union in the UK or the USA.  Some would say that the ACFTU represents the government’s interests more than the workers.  And that’s the difference.  China doesn’t have the high labor costs we have (or the British).  Or the generous benefits.  And they have no legacy costs.  For their industrial workers.  (Or their municipalities.)  And this is why manufacturing jobs left the U.S. and went to China.  They could make things cheaper.  And as we pay more of our income in taxes to support an ever growing public sector, the less we have to spend on material goods. 

It’s just simple arithmetic.  It’s not a matter of greed on the consumer.  Just like union workers want higher pay and benefits, so do they.  So they can buy more stuff.  And if they can’t have the higher pay and benefits like they have in the unions, they at least want low taxes.  Or low prices.  But their paychecks aren’t as generous.  And their taxes are high.  Which leaves them with less disposable income than their union brothers and sisters.  Making them the ideal market for those low-priced Chinese imports.  And as long as the ACFTU holds Chinese wages down, they’ll keep buying those imports.

But can they?  Will the Chinese workers rise up one day?  They have nothing to lose but their chains.  As Karl Marx would say.  Will they overthrow the ‘capitalism’ in ‘state-guided capitalism’?   Making it a more pure form of communism?  More like in the former Soviet Union?  It may be the only thing that can stop this Chinese juggernaut.  A workers revolt.  An authentic communist revolution.  In already communist China.

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LESSONS LEARNED #52: “The political right is usually right.” -Old Pithy

Posted by PITHOCRATES - February 10th, 2011

The Right Knows Business.  The Left Doesn’t.

Creating jobs is important.  Without jobs no one has any money.  No one can buy anything.  And the government can’t tax what we don’t have.  So jobs are important.  To those on the right.  As well as on the left.

Now critics of the Right claim that those on the right only care about profits.  Not people.  Whereas those on the left claim they care about people.  Not profits.  In some sense this is true.  Those on the right tend to understand business.  They know a business can only survive by making a profit.  And only a business that stays in business can create jobs.  The Right understands this.

Those on the left, on the other hand, don’t really understand business.  They don’t understand incentive.  Only duty.  And sacrifice.  For others, that is.  Not them.  They don’t think a business should make a profit.  That they should give any excess revenue to their workers.  Or to the government.  In other words, business owners, they feel, should serve others.  They should work and sacrifice so others may live better.  Workers shouldn’t have to work hard or sacrifice.  But owners should.

Protecting an Industry only Delays the Inevitable

Some great entrepreneurs created some great businesses.  Made life better for all of us.  Provided good, inexpensive clothing.  Made high quality steel cheaper and more plentiful than any other nation.  Built cars than the average working man could afford.  These titans of industry built this nation.  Because of them we surpassed all other nations and became the most powerful economic engine of the world.  Life was good.  There were lots of jobs.  Lots of stuff.  And lots of homes filled with the most modern stuff available.  America was the place to be.  People waited in line to immigrate to our shores.

Unfortunately, big piles of money attract a lot of people.  And not just workers begging to get a job in these new industries.  No.  It was people looking out for the workers.  Labor unions organized workers.  To get a ‘decent’ wage.  And better working conditions.  Cost of labor went up.  Which made the price of what they sold go up.  Imports started to look more attractive.  So government stepped in and slapped tariffs on those.  To force Americans to pay the higher price for our domestic goods.  Then they legislated ways to further ‘protect’ these American industries.  And how did that all work?

Well, take a look at the American textile, steel and automobile industries.  The Left overreached.  And killed these industries.  They’re no longer the dominate industries they once were.  We have no textile industry to speak of anymore.  The once big steel towns look more like ghost towns.  And the government had to bail out 2 of the Big Three auto makers.  Those generous union contracts added thousands to the price of a car.  Allowing Toyota to take over the top auto manufacturer spot from GM.  By providing the same or better quality for less.

Bad Jobs Today may have been Good Jobs Yesterday

That’s what happens when you protect an industry.  That industry has no incentive to innovate.  To be better.  To be more efficient.  To be more productive.  To give the consumer what they want.  Because when the consumer doesn’t have a choice, where else is the consumer going to go?  So protected industries rest on their laurels.  While others innovate.  And became better.

Combine that with union wages and benefits that keep getting higher and higher and what do you get?  Inferior products that cost more than the higher quality imports.  The Big Three sold crap during the Seventies.  Opened the door to the Japanese.  And a few decades later they took over the top spot from GM.  No matter how much we tried to protect our domestic automotive industry.

Say what you want about life before labor unions but the fact remains that we had more jobs.  And as dangerous or as dirty as those jobs were, people still came to this country by the thousands to get those jobs.  People were falling off the Golden Gate Bridge during construction.  Did that dissuade people from wanting to work on that bridge?  No.  There was a shanty town with people waiting for others to fall and die so they could get their job.  Sure, by today’s standards, these were some pretty nasty jobs.  But not then.  In fact, they were pretty damn good jobs.  Compared to what else was out there.  How can we say this?  Because they chose those jobs over the other jobs out there.

The Greed of the Left Killed the Golden Goose. 

Henry Ford had a bold idea.  He was going to mass produce a car so he could sell it at a price that the working man could afford.  To get the best people in his plants he offered $5 per day.  Twice what other manufacturing jobs were offering.  No union made him do this.  The market did.  He got the best mechanics and the lowest turnover rates.  Other businesses had to follow suit to retain their best people.  And working conditions improved.  Because of the greed of these business owners.

Contrast that to today where union contracts force high wage and benefit packages onto a manufacturer.  And contractual obligations that make it near impossible to get rid of excess workers during times of weak demand.  Using the Ford model, Detroit became the Motor City.  An economic dynamo.  Under the union model, GM and Chrysler went bankrupt.  And Detroit is considering bulldozing sparsely populated neighborhoods into farmland.

When profit wasn’t a dirty word businesses prospered and provided jobs.  When the left came in to protect the little guy from those greedy business owners they made it difficult to make a profit.  Business struggled to compete with their competition.  And when they couldn’t, they shuttered operations.  Jobs disappeared.  The greed of the left to protect against the greed of the right killed the golden goose.  And all those good manufacturing jobs grew legs and left the country.  Where they’re now providing a better life for other workers.  Like they once did here.

Greed is a Hell of an Incentive

The Right understands business.  The Left doesn’t.  But it has never stopped them from trying to tell businesses how they should conduct business.  And the more they get involved, the more business suffers.  The more jobs we lose.  And the less competitive we get as a nation.

FDR tried for a decade to end the Great Depression.  Nothing he did worked.  When World War II came along, something had to change.  There was a crisis.  We needed to provide war material to our allies.  So the FDR administration told American industry to do what they do best.  They let them make profits.  Restored incentive.  And the government said they would interfere no more.  Well, that unleashed the floodgates.  Workers were hired and factories worked round the clock.  Businesses made profits that let them innovate.  Improve productivity.  Trucks, planes, boats, weapons, etc., poured out of American factories.  The Allies armies were mechanized.  Jeeps and trucks moved our armies.  While the Nazis used horses to pull their artillery and supplies.  The Arsenal of Democracy, the Detroit dynamo of industry, won World War II.  And men like Henry Ford made it all possible.  Because they were greedy.

The post-war era was one of the most prosperous times in our nation.  There were jobs for everyone.  And a better life was there for the taking.  Times would stay good until the Left ushered in their Big Government programs beginning in the Sixties.  To protect the little guy.  And it’s been downhill ever since (with a brief respite during the Reagan Eighties).

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