Tuesday, February 18, 2014

Meet the Job Killers: The Job Creators

The job creators have many creative ways to extract wealth from the economy. Some do it by buying a company in bankruptcy, dumping their pension obligations on taxpayers, firing all the union workers, and flipping the firm for a huge profit—just like many corporate raiders have been known to do—such as Mitt Romney, Carl Icahn and Gordon Gekko. But there are many other ways our job creators can extract wealth, and that's by killing jobs.

Robots, automation and computers have greatly increased worker productivity, while also displacing many American workers in the process. But not only wasn't this increased productivity not shared with the workers in the form of equally higher wages, the jobs that these displaced workers might have otherwise gravitated to were sent overseas, leaving them with nowhere else to turn—except maybe to lower-paying jobs in the service and retail industries (that is, if enough such jobs were even available).

So it wasn't just technology that helped cause high unemployment, stagnate wages and a declining labor force; it was also the job creators, who were enabled by our political leaders with bad trade policies, a skewed tax code and their ongoing assault on labor, and who also allowed for the offshoring of those lost jobs.

If taxes are used to finance research, and then that research is used by American companies who hire foreign workers with H-1B visas to innovate new products, and then those products end up being made overseas with contract manufacturers in Asia, and then those American companies import those products back to the U.S. to be sold to American consumers, how does that help Americans (other than with lower prices) if it also displaces American workers (or depresses their wages) in the process?

Offshoring also allows American companies to skirt corporate taxes, thereby further diminishing the tax base, because more unemployed and low-paid workers will also be paying less in tax revenues. So going forward, how will more offshoring and guestworker visas enable the job creators to start the process of a new round of "American innovation" to create more and better paying jobs here in America with an already over-saturated work force?

What would induce the job creators to forsake a percentage of their profits and build factories here and hire American citizens? No corporate taxes? No regulations? No minimum wage? No labor laws? No EPA? Just more government subsidies? What else do the job creators require to be "more competitive in a global economy" so that they are able to create jobs in America? No government at all? Instead of a "free market", would they prefer a "free-for-all" market? And if they had everything they could possibly hope for on their wish list, what could the American worker expect in return? A job? One that paid enough to put a roof over their head with enough left over for food? Would they be paid with company tokens? Would they have to spend those tokens at the company's store, like some were once required to do?

The U.S. trade deficit represents all the lost wages that American workers would have otherwise earned (and been taxed on) and spent in the U.S. economy, had American companies exported, rather that imported their products. But instead, those wages were paid to workers in other countries, who in turn, paid taxes to their government, who in turn, invested in their infrastructure.

As it is today, if Americans can't equally benefit from new technology, wouldn't taxpayer's research dollars be better spent on food stamps and unemployment benefits (or a basic income) for displaced workers? Windows 98, the iPhone, and Facebook are old inventions; and how will a driverless car help millions of unemployed or low-paid Americans if those cars are also made overseas? And how many McDonalds or Walmart workers will be able to afford to buy a driverless car?

High unemployment and stagnate wages were directly caused by politicians (in both parties) by enabling high unemployment and stagnate wages—much more so than there were any mysterious market forces at play, or any new technological advances. Automation, computers and robots have only contributed to unemployment, just as it would with a self-checkout line that displaces a cashier at the grocery store; but the displaced cashier can't then go apply at the local Nike or Apple factory, because they don't exist. Instead, the unemployed cashier might be competing with 10 other unemployed cashiers for a job at the local car wash, to work for minimum wage.

But why have so many politicians, media pundits, central bankers, think tank researchers, government policy makers, congressional and state legislators, and our economists been asking (or wondering, or explaining) why America has high unemployment and stagnate wages—when to most common observers, the answer is really quite simple, and only requires a little common sense.

The reason is because of laws passed by our politicians (some with good intentions, but with unintended negative consequences; some because of pure ignorance; some were too lazy to read the bill; and some because of political ambition (those who were influenced by our corrupted campaign process). But most of these laws were written and passed intentionally and by design—such as the trade agreements, the tax code and the deregulation of the financial institutions. This was not by accident, there is no mystery here, there was a deliberate and calculated driving force behind all this—to extract more money from the bottom to the top.

America's politicians have been influenced by money in politics. They have not been encouraged to do what was right for America and the American workers, but what has been in their own best interests and to the best advantage of businesses (more specifically, big businesses), those who always use the argument that what is good for business is good for the worker. But business is not in business for the worker, but only for profits—or rather, for those who control the distribution of those profits—even it means becoming more profitable by using no workers at all. Workers are only the "necessary evil" of any business, and job creation is only a byproduct of the cost of doing business. Businesses aren't established for the sole purpose of creating jobs.

The politicians, the media, the central banks, the think tanks, the policy makers and our economists have had, what many feel, has been a false debate as to why America has had high unemployment and stagnant wages—when most of the time, only common sense should prevail.

Some argue that the biggest reason for the decline in labor force is because of an aging population (even though currently, high school graduates vastly out-number retirees), or that Americans are just "dropping out" of the labor force because they became "discouraged" after not finding work (which is very true), or that "millions" are going on disability (which is blatantly false), or because of technology (which is only part of the equation), or because of the loss of our manufacturing base to low-wage countries (which is by far the biggest reason: because we not only lost those jobs, but the multiplier effect associated with those lost jobs. Our supply chains have been decimated over the past 30 years because of offshoring.

Virgil Bierschwale from Keep America at Work points out in what he calls "Musical Countries" where middle-class jobs in the U.S. are offshored to China (until their wages went up), when then those jobs are outsourced to another lower-wage country (like Vietnam, until their wages go up), and then they move to an even lower-wage country (like Cambodia, until their wages also rise). And in this offshoring game of "Musical Countries", it's always the local worker left standing when the music stops—when their jobs move on to another lower-wage country, decimating their labor market and their economy that these "multinational" offshoring companies left in their wake while seeking ever cheaper labor costs.

In doing this, businesses, in their quest for lower wages, have also created a new (but temporary) market for their goods and services (aka "a new emerging market"); but when these businesses leave town, they also destroy the "demand" in those markets. Just look at all the small towns across America whose people relied on the local factory for their livelihoods. This happens to entire countries...like America for example. Just as it will eventually happen in China. China's middle-class has grown over the last 30 years as ours had grown in the previous 30 years, as ours has declined in the past 30 years.

American businesses (such as Nike or Apple) shouldn't be allowed to sell their products in the U.S. unless they are made in the U.S. — but as Virgil Bierschwale also points out, there's no reason why they can't build a factory in China and sell their products to Chinese citizens; or build a factory in Vietnam and sell their products to their citizens. Or export their products made by American workers to China and Vietnam. The U.S. could import products made by foreign companies in foreign countries, but only so long as there was no trade deficit (and if an American company didn't have a financial interest in those foreign companies).

But American businesses have been allowed to offshore domestic jobs to make their products in foreign countries, only to export them back to sell here in the U.S. —because our politicians allowed them to (supposedly, to cut costs to make these American companies "more competitive in a global market place"). But the only reason has been to cut labor costs (and to avoid environmental laws) to increase their profits margins—but not to keep them from going out of business, or because maybe their markets were somehow being threatened by another competitor, but just to stuff their own pockets with ever more each year. (An exception might be in the case of an American monopsony, but more on that further on.)

When hasn't a business ever tried to cut costs to increase its profit margin? And for most businesses, that's the ongoing cost of labor after the initial capital investment. Once an ongoing concern becomes established, businesses have always tried to cut costs (overhead) wherever possible, but without sacrificing any profits—which for business owners, represents something that they believe has to be infinite, and should always increase every year—and never remain stagnant, and especially, should never regress (unlike their belief in how they pay their employees).

Businesses have used many ways to cost cuts: replacing the contents of their products with inferior materials (like the rivets on the Titanic); or in the packaging of their products (like putting less potato chips into a larger bag); or by giving contributions to politicians that will weaken collecting bargaining rights for their workers (like instituting "right to work" laws, union busting, and usurping already established labor laws and eliminating or under-funding the institutions that enforce these pre-existing laws).

Or to offset their costs, they will use other methods to increase their sells by using marketing and labeling techniques to falsely advertise those inferior products—or rely on a previous established "brand name" for once superior products (before using their cost-cutting strategies).

Using automation, computers and robots has always been a part of their strategy to reduce the cost of labor, and far longer than businesses have used outsourcing to lower-wage states (and holding jobs as hostages for local tax incentives); or by offshoring to low-wage countries (when importing became more profitable), which also allowed them to manipulate the tax laws with overseas earnings and corporate taxes.

Now America has had high unemployment for the past 5 years, a declining labor force for the past 14 years, and stagnant (or declining) wages for the past 30 years. But not just for one reason or another, but for multiple reasons: the war on labor; the offshoring of jobs, newer technology, bad trade agreements and a skewed tax code—all which contribute to the myriad problems of American workers. At any given point in time, one may contribute more, but collectively, they all have had a negative influence on the American worker. And judging by the past 30 years, there has not been one good argument as to why we should expect different results going forward. That's why we should realistically expect more lost jobs (for all the reasons mentioned), a further decline in the labor force, more high unemployment, and continued stagnant wages (unless of course, the politicians in both parties reverse this long-term trend, which is highly unlikely).

But in a new spin, some are trying to say that low wages is a "good" thing for American workers. In an article in New York Times: When Cheap Foreign Labor Gets Less Cheap, Torsten Slok, the chief international economist at Deutsche Bank Securities, says "In a way it's good news that U.S. wages are going down, because that's making us more competitive year to year."

Who does he think he's fooling? And who exactly are companies like Nike and Apple supposedly competing with, besides another "multi-national" offshorer and corporate tax dodger? And why? Because a foreign institutional investor (or bank, hedge fund or private equity firm) might have a large interest in an American company and believe that they should be allowed to influence American labor and tax policies? (And expect much more of the same if the TPP trade agreement is ever passed.)

And of course, it's not just offshoring, but it's newer technology as well, that is also helping to over-saturate the labor market —leaving millions with nothing to do and oppressing wages for those who can still manage to find work.

As was noted in that New York Times article, the most valuable part of each computer (a motherboard loaded with microprocessors and memory) is already largely made with robots. Whereas, people do things like fitting in batteries and snapping on screens (so easy, a caveman can do it). As more robots are built, largely by other robots, assembly can be done here as well as anywhere else. That will replace most of the workers, though you will need a few people to manage the robots.

So why then are unemployed American workers still being blamed for lacking skills, even though that myth has already been debunked. (Also see a related post: H-1B Guest Worker Fraud and the "Lacking Skills" Scam—another way businesses cut labor costs in their quest for infinite profits).

And if robots are going to displace American workers, one can also assume the "robot managers" will either be working in the lowest-wage countries or they will be brought here on a guestworker visa. And if the robots were ever manufactured here, then the only skills that would be needed (according to the job creators) would be Americans with Ph.Ds for "fitting in batteries and snapping on screens".

Excerpts from Paul Krugman in The Rise of Robots:

Robots mean that labor costs don’t matter much, so you might as well locate in advanced countries with large markets and good infrastructure (which may soon not include us, but that’s another issue). On the other hand, it’s not good news for workers! This is an old concern in economics; it’s “capital-biased technological change”, which tends to shift the distribution of income away from workers to the owners of capital. Twenty years ago, when I was writing about globalization and inequality, capital bias didn’t look like a big issue; the major changes in income distribution had been among workers (when you include hedge fund managers and CEOs among the workers), rather than between labor and capital. So the academic literature focused almost exclusively on “skill bias”, supposedly explaining the rising college premium. But the college premium hasn’t risen for a while. What has happened, on the other hand, is a notable shift in income away from labor. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets.

In another New York Times article, the author asks, "Is digital technology destroying middle-class jobs? Does it exacerbate income inequality? Does it boost economic growth and productivity — without creating the jobs that ought to come with economic growth?

(Excerpted) Kodak, once the hot photography company of the time, at its peak employed 140,000 people. Instagram, the great photography company of the analog age, only had 13 employees when it was bought by Facebook for $1 billion in 2012.

Two economists from the Massachusetts Institute of Technology notes in their newly published book titled The Second Machine Age: “Rapid and accelerating digitization is likely to bring economic rather than environmental disruption, stemming from the fact that as computers get more powerful, companies have less need for some kinds of workers.”

The next 40 years of innovation is not going to look much different from the past 40 years, which hasn't been nearly as transformative or wealth-creating as the discovery of electricity and the invention of the light bulb.

Again, from Paul Krugman in Robots and Robber Barons:

The American economy is still, by most measures, deeply depressed. But corporate profits are at a record high. How is that possible? It’s simple: profits have surged as a share of national income, while wages and other labor compensation are down. The pie isn’t growing the way it should — but capital is doing fine by grabbing an ever-larger slice, at labor’s expense.

Recent college graduates had stagnant incomes even before the financial crisis struck. Increasingly, profits have been rising at the expense of workers in general, including workers with the skills that were supposed to lead to success in today’s economy ... there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad ... many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered ... Increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

There is a big, lavishly financed push to reduce corporate tax rates; is this really what we want to be doing at a time when profits are surging at workers’ expense? Or what about the push to reduce or eliminate inheritance taxes; if we’re moving back to a world in which financial capital, not skill or education, determines income, do we really want to make it even easier to inherit wealth?

And then there's the power of the monopsony (that was mentioned earlier), a market similar to a monopoly except that it's a large buyer, not a seller, that controls a large proportion of the market and drives the prices down. Sometimes referred to as the buyer's monopoly (such as Walmart), by using its huge economy of scale to demand lower prices from its suppliers, forcing many to offshore jobs to low-wage countries to meet Walmart's price demands.

Paul Krugman (once again, we can never get enough of Paul) regarding Comcast's recent push to acquire Time Warner) "When and why did we stop worrying about monopoly power?" — and Paul Krugman again: Monopsony Begets Monopoly, And Vice Versa — and a related post from 247 Wall St: Comcast: A Monopoly or a Monopsony?

But as the economist Jared Bernstein says, Before Blaming the Robots, Let’s Get the Policy Right—meaning, let's hope and pray the politicians (in both parties) get the polices right, and not the way they've been doing for the past 30 years.

Below are excerpts from an 8-page summary from the full 124-page study titled Global Wage Report 2012/13: Wages and Equitable Growth that was released by the International Labour Organization. The report looks at the differences in wages around the globe, and how they have been influenced by the economic crisis. It also includes global and regional wage trends and statistics, as well as policy recommendations. (Then think of Virgil Bierschwale's analogy of "Musical Countries").

Differences between the regions are particularly stark if we look at the cumulative wage growth from 2000 to 2011. Globally, real monthly average wages grew by just under a quarter, in Asia they almost doubled, while in the developed world [like the U.S.] they increased by about 5 percent...While wages grew significantly in emerging economies, differences in wage levels remain considerable. In the Philippines, a worker in the manufacturing sector took home around $1.40 for each hour worked. In Brazil, the hourly direct pay in the sector was $5.40, in Greece it was $13.00, in the United States $23.30 and in Denmark $34.80.

Between 1999 and 2011 average labor productivity in developed economies increased more than twice as much as average wages. In the United States, real hourly labor productivity in the non-farm business sector increased by about 85 percent since 1980, while real hourly compensation increased by only around 35 percent.

The global trend has resulted in a change in the distribution of national income, with the workers’ share decreasing while capital income shares increased in a majority of countries. Even in China, a country where wages roughly tripled over the last decade, GDP increased at a faster rate than the total wage bill—and hence the labor share went down. The drop in the labor share is due to technological progress, trade globalization, the expansion of financial markets, and decreasing union density, which have eroded the bargaining power of labor. Financial globalization, in particular, may have played a bigger role than previously thought.

A decrease in the labor share not only affects perceptions of what is fair—particularly given the growing concerns about excessive pay among CEOs and in the financial sector—it also hurts household consumption and can thus create shortfalls in the aggregate demand. These shortfalls in some countries have been compensated by increasing their net exports, but not all countries can run a current account surplus at the same time. Hence, a strategy of cutting unit labor costs, a frequent policy recommendation for crisis countries with current account deficits, may run the risk of depressing domestic consumption more than it increases exports. If competitive wage cuts are pursued simultaneously in a large number of countries, this may lead to a “race to the bottom” in labor shares, shrinking aggregate demand.

One of the key findings of this literature is the growing inequality in income, in terms of functional and personal income distribution. In terms of functional income distribution, which concerns how national income has been distributed between labor and capital, there is a long run trend towards a falling share of wages and a rising share of profits in many countries. The personal distribution of wages has also become more unequal, with a growing gap between the top 10 percent and the bottom 10 percent of wage earners. These internal “imbalances” have tended to create or exacerbate external imbalances, even before the Great Recession, with countries trying to compensate the adverse effects of lower wage shares on consumption demands through easy credit or export surpluses.

The existence of large current-account surplus in some countries suggest that there is room to better link productivity increases and wages as a means to stimulate domestic demand. Policy-makers should be careful not to promote a race to the bottom in labor shares in deficit countries or throughout the Eurozone. Austerity measures that are imposed from the outside and bypass social partners harm effective labor relations.

“Internal rebalancing” can begin by strengthening institutions for wage determination. Given the difficulty with organizing workers, particularly in the context of increasing labor market segmentation and rapid technological changes, more supporting and enabling environments need to be created for collective bargaining. Low-paid workers also need stronger protection in wage determination. Minimum wages, if properly designed, have proved an effective policy tool which can provide a decent wage floor and thus secure a minimum living standard for these workers and their families.

It is unrealistic to try to achieve income distribution solely through labor market policies. Redistribution will also require a number of changes that lie outside of the scope of labor markets, including reform and repair of financial markets to restore their role in channeling resources into productive and sustainable investments. There are other critical dimensions of “rebalancing” which deserve a more detailed analysis, including the balance between taxation of capital and labor incomes.

In developing economies, employment guarantee schemes that pay minimum wages are ways to create incentives for private firms to comply with the minimum wage. But because in developing and emerging countries only about half of all workers are wage earners, additional measures are needed to create more wage jobs and to raise the productivity and earnings of those in self-employment. Raising average labor productivity remains a key challenge which must involve efforts to raise the level of education and the capabilities that are required for productive transformation and economic development. The development of well-designed social protection systems would allow workers and their families to reduce the amounts of precautionary savings, to invest in the education of their children, and to contribute towards stronger domestic consumption demand and raise living standards.

So there's no mystery or unexplainable market forces at play here; the average "man of the street" has been witnessing, firsthand, all the reasons and causes for a declining labor force, lost jobs and stagnant wages for the past 30 years—and they have been complaining all along.

It hasn't been just because robots that are putting people out of work, or that they are entirely to blame for stagnating wages (although automation contributes to the reason); but it's primarily because the politicians (both Republicans and Democrats alike—the CEO's enablers) have allowed this to happen—and they still do today. And yet, our political leaders (not seeing or ignoring the massive iceberg ahead) stubbornly refuses to change course.

Maybe members of Congress should be replaced with robots too (or we could offshore their jobs to India), and the taxpayers can further reduce the deficit. But why stop there? Maybe robots can replace the job creators as well, because although robots don't go on strike for better wages like human employees could, at least robots wouldn't be paying themselves multimillion-dollar salaries every year like the job creators do.

1 comment:

  1. UPDATE from the New York Fed

    The Job-Finding Rate

    "The job-finding rate is still substantially below its pre-recession levels, suggesting that it is still difficult for the unemployed to find work ...both the vacancy-to-unemployment ratio and matching efficiency declined during the Great Recession and have not recovered since ... the most important factor in the low job-finding rate is the persistently low level of vacancies per unemployed."