There’s a kernel of good sense in Richard Florida’s observations about the perverse effects of federal housing policy:
The old government-backed system had a rationale of sorts in the old industrial order, providing a “geographic Keynesianism†which spurred consumption of durable goods coming off of U.S. assembly lines – everything from cars to refrigerators, washer-dryers, air-conditioners, and TVs. But little of that is produced in the U.S. anymore – it’s now a subsidy to offshore manufacturers. And the economy is far less manufacturing-intensive and far more knowledge-driven.
but IMO it’s vastly over-stated and over-stated in a way that obscures the real conundrum that faces us. It’s simply untrue that we don’t produce refrigerators, washing machines, and so on in the United States. We produce billions of dollars of them. Sub-Zero refrigerators and Wolf ranges, for example, are made in the U. S. A.
But we don’t produce commodity-priced products. We produce the high-end stuff, we do so without employing nearly as many people in manufacturing as we did a generation ago, and there’s a good reason for it. It’s very difficult for American manufacturers to compete with overseas competitors who have something approaching a zero cost of labor. The functions of many of these devices have been well-established and fixed for decades, they require a certain amount of material, the material is traded in a world market.
Strengthening unions and raising wage rates won’t solve this problem as intimated by Simon Johnson:
We can argue about proximate causes, including the relative roles of new technology and globalization, but there is no question that unionized jobs, well-paying assembly line work and prosperous small-business niches have all tended to disappear.
Quite true. But the converse isn’t true. The only way we could have more highly unionized jobs that provided well-paying assembling line work would be to start putting up barriers to the products of countries that had lower costs of production than ours or, like the Germans and Japanese, show marked preference for products made here. That might result in more Americans having high-paying manufacturing jobs but it would also result in fewer Americans having refrigerators, televisions, and cellphones. It’s hard for me to imagine a president going before a joint session of Congress and pitching that.
Given the rhetoric of the last couple of decades it’s also hard for me to imagine a president proposing policies that would encourage the sale of stuff that we do manufacture here: the target market is the rich.
Simply put we can have policies that benefit American consumers in an egalitarian fashion or we can have policies that help American workers. Having both would be pretty darned hard.
I think your simply put is too simple. “American consumers in an egalitarian fashion” are American workers. Most of those who do not work are either retired, dependent upon somebody else, or unemployed. Pretty much all of these groups are, in one fashion or another, being subsidized by the employed. The only exception is the very rich, and then only if you assume that the higher income of the very rich is entirely due to their own valuable contributions.
If wages are flat or declining, consumption will flatten or decline as well – this is intuitive. The answer may or may not be more unionization (I think it may be part of the answer, but definitely not the whole thing), but the economic assumption that lower prices are better for society than higher wages has long struck me as indefensible.
What I’m suggesting, Maxwell James, is that our interests as consumers are at odds with our interests as workers. If we subsidize consumption, it will be at the expense of jobs. If we subsidize production (and hence at least at the margins, jobs), it will be at the expense of consumption, at least for most of us.
In my view this is the fruit of decades of lousy policy.
We once owned an injection molder whose CEO said “we are simply going to drive down our cost of production until our cost of labor is less than the freight cost for the foreign competition. Then we’ve got them” How? High cavitation mold making for throughput. Precise process control for near zero scrap. Downstream automated material handling. Expert sourcing and purchasing. Automated pick and place in the warehouse. Lean overhead. And it worked. Great, in fact a bonanza, for engineers and highly skilled purchasing people, etc. Bad for the guy who used to fill and stack boxes by hand. There’s a lot of this going on in US manufacturing.
Unionization will do nothing to solve this problem, unless we want to adopt protectionism.
“..our interests as consumers are at odds with our interests as workers.” Absolutely correct. See: Wal-Mart.
That’s exactly the sort of advice I’ve been giving over the period of the last 30 years. I wonder if you have any idea of how depressing it is to make a presentation on cutting costs by such means only to be informed by top management that their preferred strategy was to keep jobs as skill-free as possible so that they could avoid hiring anything other than minimum wage workers?
That might work for a while but there’s no future for the country in it.
What I’m suggesting, Maxwell James, is that our interests as consumers are at odds with our interests as workers.
OK, sure. As consumers we want lower prices, as workers we want higher wages. I agree our policies have done a poor job navigating this conflict of interest over the long term.
But as you’ve so often pointed out, industries and regions vary in their dynamics and should be looked at for what they are. Over the past several decades the primary drivers of inflation have been healthcare, education, and government services. Considering the advent of new technologies, inflation has probably been negative in manufacturing over the same time period. It’s not hard to imagine a future with considerable inflation in manufacturing, food processing, hospitality, and retail, but significant deflation in healthcare, education, and government, where everyone was better off.
It’s impossible to imagine. We can’t have the scenario you’ve described and have healthcare providers, government workers, and education workers better off. Nearly all of the expenses in all three of those sectors are wages and all three sectors are resisting efficiencies like mad. Mind you, I think something of the sort is what’s necessary.
Additionally, what in current policy or policy that’s on the table do you see heading in that direction? I certainly don’t see it. Note that the sectors you’ve highlighted, government and its handmaiden industries, all have in common that they are nominally self-policing, are labor intensive, and can’t be off-shored (at least not under current work rules).
With regards to Drew’s example, great. I’m all for disruptive technology in any sector.
But if new technology is leading to hundreds of thousands of structurally unemployed people, or millions with flatlining wages, then as a society we need to make some decisions. We either have to figure out how to train the unemployed and underemployed into the new, higher-tech and higher-pay positions that are being created; or we have to learn how to live with a permanent class of unemployed or underemployed people.
Personally, I’m not very enthusiastic about living in the latter world. But if we do have to live there, then I’d like to see that those people have healthcare insurance and some level of guaranteed income.
We can’t have the scenario you’ve described and have healthcare providers, government workers, and education workers better off
OK, let me rephrase that: where most people are better off. I can accept perfectly well that this would cause members of some (mostly well-off) groups some pain. But I think sometimes we could all use a little more enlightened self-interest, if you get my drift.
Additionally, what in current policy or policy that’s on the table do you see heading in that direction? I certainly don’t see it.
I don’t see much (but I didn’t claim I did). I am less negative about the cost-saving elements of the ACA than you are, but please don’t take that as a full-throated endorsement. I merely think some elements might work better than expected. The decision to eliminate middlemen lenders for federal student loans was a very small step in the right direction. But frankly, I think the most powerful force for curbing costs in all three sectors is economic anxiety, and we’ve got plenty of that for the foreseeable future.
“Unionization will do nothing to solve this problem, unless we want to adopt protectionism.”
It may be one of the few ways to stop such a high percentage of corporate income from going to upper management.
Steve
Evidence? Jeff Immelt’s compensation is about $10 million per year. That’s on revenue at GE of $150 billion and operating income of $10 billion. $10 million is .1% of $10 billion. I haven’t been able to nail down total payroll at GE but it’s easily a couple of billion. Sounds like you’re objecting to high pay not high percentage to me.
The CEO of Wal-Mart makes $26 million. Total revenues at Wal-Mart are$408 billion and operating income is $24 billion. Again, a tiny percentage goes to the CEO. These are big companies.
I think you’re talking about financial companies. You might have a point WRT financial companies.
In discussions of executive compensation, I think far too much attention is lavished on the CEO salaries, which for all but the smallest companies can never be more than a tiny fraction of corporate income.
To me the bigger distinction is between hourly workers & salaried workers (excepting of course lawyers & other high-paid hourly earners). For instance, Walmart has 1.8 million employees, of whom 1.4 million it defines as “associates.” According to an article a few years back Walmart’s associates make an average of $10.50/hr or $21,840/yr (I am going to presume zero wage inflation given the times we live in). Let’s be generous & assume with payroll taxes & benefits their total cost of employment is 50% more, or $32,670. That would suggest a total “associate” compensation level of $45.7 billion.
Walmart’s total SGA expenses are roughly $80 billion. Some significant portion of that is going to be indirect overhead – let’s assume 25%. So $60 billion is left for 400,000 salaried workers. That’s an average compensation package of $150K. Recognize there’s a lot more spread here, from the CEO’s $26 mill to some receptionists $30K or thereabouts.
What would happen if Walmart decided to cut higher-level salaries until the SGA average was $125K instead? That would free up $10 billion, or a little over $7000 per associate. Not a huge amount of money, but a sizable difference for a low-income person, and Walmart would shoot towards the top for entry-level retail compensation.
I think that’s what a union – a smart union – at Walmart could accomplish.
I don’t have enough hard figures to respond to that, Maxwell James. My sources tell me that a store manager at Wal-Mart makes around $90,000-—$100,000 and an assistant manager about half that. There are about 4,300 Wal-Mart stores in the U. S.
$100,000 X 4,300 is $430,000,000. Assume a total of two or three times that for assistant managers and that much again for district and regional managers. We’re starting to get into the $2-3 billion territory for low-level line managers for positions that are positions of responsibility but don’t seem to be receiving riches beyond the dreams of avarice to me.
I don’t have any direct experience or knowledge of Wal-Mart. However, if their staff (as opposed to line) situation is what I’m familiar with from dealing with other large firms they could cut it in half and nobody would really notice that they were gone. The problem is plain old bureaucracy. The mid-level managers need to have a certain (and growing) number of people reporting to them.
So, basically given this:
“Simply put we can have policies that benefit American consumers in an egalitarian fashion or we can have policies that help American workers”
and the fact that the vast majority of American consumers are American workers, we’re fucked, or have I missed something?
“That’s exactly the sort of advice I’ve been giving over the period of the last 30 years. I wonder if you have any idea of how depressing it is to make a presentation on cutting costs by such means only to be informed by top management that their preferred strategy was to keep jobs as skill-free as possible so that they could avoid hiring anything other than minimum wage workers?”
Oh, baby! You and I need to have a sit down. This is exactly why I exited large corporate, and am where I am today! I couldn’t take the idiocy! Do I know the depression? I sincerely, really mean it, “feel your pain.”
The beauty of where I am today is that I am an owner, sit on the Boards, and can “can” people with such attitudes. But execution is still a tremendous challenge.
But I don’t want to be too cavalier. We invest on behalf of teachers, retirees of all sorts, research institutions doing cutting edge work…..etc. The proverbial widows and orphans. Serious responsibility.
And so we don’t suffer fools well (in case you haven’t noticed), or idiot government issues, ignorant pols or idiot commentators (in case you haven’t noticed) because we have a very serious obligation to steward assets entrusted to us at a rate of return expected by our investors. Its a bitch. Its a very hard business.
So getting back to the original point. Its hard for me to imagine, Dave, at your life and accomplishment stage, working your proverbial balls off on legitimate productivity enhancing recommendations……..only to have some large corporate “god” enter the room and say………”nevermind.”
At least in my world I could listen to your pitch, evaluate it, and then the corporate “god’s” rebuttal, and then say (if I agreed with you)…….”listen, either you do this, or you are an ex-corporate god.” “Think about it, and report to me your decision in 1 week.”
We PE guys may be illiquid investments……….but we generally make the right calls because we have experience, the right motives, and have total autonomy. All hail Ceasar!!!!…er, uh, PE!!!!
@Dave
“I wonder if you have any idea of how depressing it is to make a presentation on cutting costs by such means only to be informed by top management that their preferred strategy was to keep jobs as skill-free as possible so that they could avoid hiring anything other than minimum wage workers?â€
Years ago, in one of my other lives, I edited law books. I was assigned a manuscript on international trade law. The author worked for a bigtime DC law firm, and had been on mucho international trade delegations for the government. This was in the 70s. We had a lot of conversations on shaping the book — my input, of course, was purely editorial, “Let’s put this chapter here, that one there” etc. But you pick up stuff as an editor. I remember one conversation we had during which he predicted all this labor turmoil we’re having. He’d just come back from China, and told me that if there was a sleeping giant, it was the Chinese economy. Once China got its act together, he said, the downward pressure on American wages would be irresistible . I remember him saying it’s going to be a big problem for us down the road. This was in the 70s, and down the road looked like it was far, far away. Not so much now.
BTW, Dave, if you were to ask, say, Milton Friedman, if the top management you’d spoken to was making a mistake, I think he’d say, no. I know he told me point blank that the only job of management, the only job, is to maximize value for the shareholders. He didn’t say this to me, but I think it follows that if such maximization results in beggaring the workers, well….
The problem is plain old bureaucracy.
I’m actually not in disagreement with you. The problem with high CEO salaries, in my opinion, is really that they set the highest rung in the ladder that everyone else in the bureaucracy is scaling. It’s not as if the CEO is their only million-dollar employee.