Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: January 2012

Globalization, Capitalism, and China

A January 22, 2012 New York Times story, The iEconomy: How U.S. Lost Out on iPhone Work, has been getting a lot of coverage.   The article makes clear that Apple and other major multinational corporations have moved production to China not only to take advantage of low wages but also to exploit a labor environment that gives them maximum flexibility. The following quote gives a flavor for what attracts Apple to China: 

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

The article highlights these conditions to make the point that manufacturing is not coming back to the United States because these conditions cannot be replicated in the United States. 

One aspect not stressed in the article is that many of the labor policies described are actually against the law in China and contrary to Apple’s own claims about its labor standards.  See William K. Black’s analysis here.

If you are interested in a more detailed picture of just what goes into making Apple products so profitable you should listen to or read the transcript of a This American Life radio segment which aired in January.  The segment is based on a Mike Daisey performance in front of a small audience.  Mike is a self proclaimed technology geek who just adores Apple products.  At least that was before he visited the Foxconn (Taiwanese multinational corporation owned) factory located in China in which many Apple products are assembled.  The program discusses the labor conditions at Foxconn and other similar multinational corporations operating in China.

These multinational corporations have helped make China the world’s top exporter of manufacturers, both overall and of high technology goods more specifically.  China’s share of world exports of information and communication technology products (such as computers and office machines; and telecom, audio and video equipment) has grown from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods (such as semiconductors) from 4 percent to 21 percent over the same period.  Of course, while these exports are officially recorded as Chinese exports, approximately 60 percent of all Chinese exports and 85 percent of all Chinese high technology exports are produced by foreign companies operating in China.

The issue here isn’t one of China stealing manufacturing jobs from the United States or other developed countries.  According to the U.S. Bureau of Labor Statistics, total manufacturing employment in China actually fell by over 9 million over the period 1994-2006, from 120.8 million to 111.61 million.  Total urban manufacturing employment, which would include most foreign operations, declined sharply from 54.92 million to 33.52 million. 

In fact, China’s growth has generated few decent employment opportunities for urban workers, regardless of their employment sector.  The International Labor Organization did an extensive study of urban employment over the period 1990 to 2002.  Although total urban employment increased slightly, almost all the growth was in irregular employment, meaning casual-wage or self-employment—typically in construction, cleaning and maintenance of premises, retail trade, street vending, repair services, or domestic services.  More specifically, while total urban employment over this thirteen-year period grew by 81.7 million, 80 million of that growth was in irregular employment.  As a result, irregular workers in China now comprise the largest single urban employment category. 

The issue here isn’t even one of China versus the United States.  It also isn’t one of dictatorship versus democracy.  Rather it is one of capitalism’s logic.  Said simply, large multinational corporations and their allies in both the United States and China have successfully created a global system of production and consumption that gives them maximum freedom of operation.  It is this logic that keeps pushing more free trade agreements, attempts to create more flexible labor markets, and more attractive conditions for business investment, both here and in China.   And it is this logic that needs to be challenged on both sides of the Pacific. 

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Another Failure For The Best And The Brightest

The Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings.  As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”  

Federal Reserve officials suspected that housing prices were peaking (see chart below).  But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down. 

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The Financial Times described the general Federal Reserve stance as follows:

Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.

“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” . . . .

Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC. 

The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:   

offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” . . . .

The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.

“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.  

So how did the best and the brightest get it so wrong.  Perhaps the major reason is because it served their interests to pretend there was no housing bubble.  The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble.  In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change.  It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.

The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.

shiller-housing-bubble-graph.jpg

As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains 

First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.

By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.

This was a huge problem – because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.

The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.

In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt.  As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”

As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession.  Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals. 

The Jobs Report

The recently issued December 2011 employment report, coming four years after the official start of the recession in December 2007, included some good news: 200,000 jobs were added and the unemployment rate fell to 8.5%.  Although a hopeful development, there remains strong reason for caution.

Looking first at the job numbers, Doug Henwood, writing at his Left Business Observer blog, noted the following:  

Over a fifth of that gain, 42,000, came from couriers and messengers—meaning all those FedEx and UPS folks delivering holiday packages ordered from the likes of Amazon. Online retailers had a great December. Not so much for brick and mortar retailers, who’d apparently expected otherwise and hired ambitiously, adding another 28,000 to the headline figure. Given the ultimate disappointment of the holiday season, retail-store-wise, and the explicitly temporary nature of the courier jobs, these gains—which together accounted for over a third of the total—are likely to be reversed in January.

Considering the unemployment rate he added: 

[T]he unemployment rate, which is down from its recession peak of 10% in October 2009, has been flattered by what’s known in the trade as labor force withdrawal. That is, you’re not counted as unemployed if you’re not actively looking for work. Many of the unemployed have simply given up on finding work, and they’re not counted as unemployed. So even though the unemployment rate is down a point and a half from that 10% peak, the share of the adult population working for pay, the so-called employment/population ratio, is exactly the same now as it was at that peak.  That is not what we’d see in a normal recovery. We’re still 6 million jobs below the pre-recession peak at the end of 2007. At the growth rate we’ve seen over the last six months, it would take almost four more years to recoup those losses—and that’s not allowing for population growth. We’re still in a very deep hole and emerging only very slowly.

In fact, according to the Economic Policy Institute, “The jobs deficit of the 2008-09 period, defined as the number of jobs lost since the recession started plus the jobs we should have added to keep up with the normal growth in the working-age population, remains well over 10 million, and at December’s growth rate the United States will not recover its pre-recession unemployment rate until 2019.”

Here is an Economic Policy Institute chart illustrating just how far the employment/population ratio has fallen and thus how many people remain marginalized. 

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To provide a different perspective on how bad labor conditions are in the United States, the Wall Street Journal recently ran an article describing how a number of U.S. multinational companies were pressing Canadian workers to accept sharp pay cuts or face layoffs by citing lower wages elsewhere.  “But instead of pointing to the usual models of cheap and pliant labor, such as China or Mexico,” companies like Caterpillar are “using a more surprising example: the U.S.”

Yes, we are now pulling everyone else down.  According to the Wall Street Journal, U.S. manufacturing unit labor costs fell 13% from 2000 to 2010.  By comparison, unit labor costs rose by 2.3% in Germany, 18% in Canada, and 15% in South Korea over the same period.  The chart below illustrates trends in hourly compensation (as compared to unit labor costs) for workers in manufacturing.  Nothing to be proud of in those figures.

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The Minimum Wage and Capitalism

On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation. Nevada also indexes its minimum wage but its increase takes place in July.

The state of Washington has the highest state minimum hourly wage at $9.04.  Oregon has the second highest at $8.80.

Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour.  A full-time worker making the federal minimum wage earns just $15,000 a year.

There are those who argue against state laws requiring an inflation adjustment to the minimum wage.  Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy.  This is an interesting argument.  At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living.  Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.     

Actually, those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage.  The minimum wage has not kept up with inflation. This is true even in states that currently index their minimum wage.  The reason is that indexing began after years of real wage decline. For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976.  In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.

The federal government does not automatically index the federal minimum wage and the chart below highlights the extent of the decline in its real value. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress.  The red line shows the real value of the minimum wage in 2010 dollars.  In real terms the federal minimum wage remains considerably below its value in the 1970s.

wage-trend.png

A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival.  This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.

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