For those of you unfamiliar with his work, Steven Roach of Morgan Stanley Dean Witter is one of the foremost economic commentators on Wall Street. His current article is titled “The Big Squeeze” and its focus is the lack of income growth in the current US recovery: “America’s income-short, consumer-led recovery is the aberration — not the norm — in this Brave New World. It is all about ever-declining personal saving rates, ever-widening current account deficits, mounting debt burdens, and increasingly wealth-dependent consumers.”
“…even in the US, growth in hourly worker pay averaged only 3.3% over the past four years. [But] With consumer inflation averaging 2.1% over the 2001-04 period, real compensation per hour in the US business sector expanded at a 1.2% rate over this four-year interval.
“…real compensation per hour in the US business sector expanded at a 1.2% rate over this four-year interval [this is the inflation adjusted figure]. But that needs to be put in the context of America’s productivity performance — average gains of 3% during 2001-04. Economics teaches us that trends in worker rewards and productivity go hand in hand over time. That most assuredly has not been the case in the United States in the early 2000s, with growth in real compensation per hour averaging only about one-third the pace of underlying productivity growth.”
Let me stop right here and decode Mr. Roach’s ecotalk. Inflation is just a fancy way of saying how much less a dollar is worth on an annual basis. For example Mr. Roach notes the US’ average inflation number of 2.1% for the last four years. So $1 in 2000 would be worth $97.9 in 2001 and so on.
Productivity is simply a measure of how much more of product X a person, company or economy can make in a specific time frame. It stands to reason that if an entity can make more of X in the same amount of time it will make more money. Suppose a company originally make 5 units per hour and improves productivity to 10 units per hour. The company has effectively doubled its profit per hour of production. As a result, the company should reward its employees with higher wages to compensate them for their performance.
This is where the rub with the current situation comes in. Although the US is more productive, it’s employees are not being compensated for their improved performance.
This helps to explain the pathetically low-savings rates and record high debt levels of the US consumer. The US worker sees more of X being made, but he is not receiving his fair share of the increase in productivity. As a result, he participates in the expansion by going into debt.
However, it is important to explain why the US worker is not receiving his share of increased productivity. As Mr. Roach explains:
“My vote for the explanation continues to go for the “global labor arbitrage” — a critical outgrowth of globalization and the concomitant integration of cross-border labor markets. The pace of cross-border integration has now reached hyper speed. Global trade surged to a record 28% of world GDP in 2004 — up dramatically from a 19% share as recently as 1991; over the 1987 to 2004 interval, our estimates reveal that the expansion of global trade accounted for fully 35% of the cumulative increase in world GDP growth — essentially double the 17% share over the 1974-86 period.”
Let me decode all this ecotalk. “Cross-border integration” simply means that geographic borders don’t mean much to business. A company can move money to a new location at the click of a button and set-up a manufacturing facility. As a result, the company does not have to increase US worker’s pay at US rates, but at the rates of other countries. In effect, the US worker is competing against all a companies employees – national an international. This puts the US worker at a competitive disadvantage when negotiating wages.
What can the US do? The answer is simple. The US needs to develop jobs and skills that cannot be outsourced to other countries. Let me explain this by way of contrast with a current example. In January, the US lowered textile quotas on Chinese textiles. Within several months, Chinese textiles flooded the US market. US textile workers were up in arms for very legitimate reasons. But they have very little real power to deal with the situation. If they work for a multi-national company, the company can simply close the US plant and move it to a country where labor costs are cheaper. If the company only has domestic operations, a pay increase is less likely because of the increased competition in the textile industry. In short (and regrettably) the textile workers will in all likelihood have to simply take it if they want to keep their jobs.
Now, suppose the workers made a product that had a unique skill set – one that could not be easily outsourced. This would give the workers a stronger negotiating position for wage increase. This situation would also imply the workers were making higher wages because of the rarer nature of their product. <
This is where the real long-term answer to the US’ low wage growth lies. Building a job base that requires skills not available in other parts of the world.
This is what the Democrats have to push as their economic platform.
Thanks for making this easier to understand. Early on, iirc, Wes Clark said something to this effect: Let them outsource; we’ll develop and export products for alternative energy. I only heard it once, because apparently it was impolitic.
Could this be a unique skill set to which you refer? Or might you have other examples?
A small correction, really a nit, but important since you did take the time to explain it in $ and cents.
I bet you switched from 97.9 cents to $ in the example, but didn’t update the $1, right?
Another great article, Bonddad.
I’m a bit worried by the conclusion, tho. In an economic world where all the new development is based on high-tech, is there such a thing as a job that can’t be done elsewhere. All high-tech work is by its nature portable and unconnected to a physical locale.
Nations have been dealing with these issues for centuries. I’m not convinced that a race to the bottom or diversifying into local arts and crafts, or even hoping the next new thing will be able to employ 200 million Americans are our best strategies.
A nation exists to protect its citizens. That includes their economic well being. Any nation that doesn’t simply isn’t worth the support of its people. I’m not suggesting the answers down that path are any less difficult than the ones down the “build irreproducible products” one. But its a bit silly do discount exploring that area.
The primary reason I’ve heard for not thinking that way is “it hurts the global economy”. Well, that’s interesting. We don’t expect corporations to take actions against their own economic interests. Wall Street applauds companies that dump their pensions and slash benefits and act as close to monopolistic as is allowed. Why is it that America is expected (mostly by these same folks on Wall Street) to facilitate the global economy to the detriment of its citizens? We already know that if we didn’t rein in Wall Street with laws they would be destructive to the nation. So why do we defer to them with little question on how to run this “global economy”?
I really don’t see growing out of this mess. Worldwide Universities are every bit the equal of American ones for the most part. Anything that can be taught in America can be taught globally. I don’t doubt that Americans are bright and creative, and can invent wondrous things.
But mostly they’re wondrous to Wall Street. Amazon and Google are great. They impact everyone, directly or indirectly. But they employ all of 0.00878% of non-government America. (fine, I actually did look it up: Google had 3021 as of December 31, 2004, Amazon had 9400 as of their Q1 2005 SEC filing, US Civilian total employment 141,475,000 in May 2005).
That’s the magic of these tech jobs, so few can impact so many. There’s simply not room to absorb everyone directly into high-tech. Now, delivery will stay local for a long while (excluding Mexican and Canadian trucking), but we’ve already seen manufacturing is global.
Even research is global. So you’ve got local management, local delivery, local sales, global R&D, global manufacturing. No matter what magic gadget is invented, its subject to those conditions. Non-gadgets like services (medical, personal, food) and placed structures (housing, roads, infrastructure) have a brighter future.
So, color me a skeptic when it comes to claims that we can just “move up” the economic food chain. I don’t see enough development at the top, and the development I have seen doesn’t require much of a workforce, numerically.
So where does that leave our kids?
You raise a very important point — that “is there a job that can’t be outsourced.” The answer to that is I really don’t know. But what I do know is I think it is the only way to deal with the problem long-term — to have an economy that can constantly change and morph as the world’s economic climate changes.
Another great diary, bonddad. I follow these with interest not only because they’re so informative and well-written, but also because, like you, I’m absolutely convinced that the economic issues are not only important, but the key to winning elections.
With this one, though, I’ll have to echo the reservations already stated, both as to the practicality and the use as a tactic. Don’t get me wrong, I think innovating is an excellent plan and should be a key component in both the platform and reality, with the benefits as you describe them.
In reality, I think yaright covered most of my reservations. From a strategy standpoint, I think it could actually backfire if it was too heavily promoted. It’s been my experience that the poor and working classes have already been told too often that the solutions to their problems are education and training. There’s quite a bit of resentment out there about this.
So talking about making jobs is good, but when you start bringing in developing new technologies and skill sets, people tend to translate this as “imaginary future jobs” and “going back to school.”
I’m not saying that’s what you’re promoting, I don’t think it is, just that that’s a sort of pitfall with the message part of it. The “elite” label is quite effective for a reason. People, workers, don’t really understand why honest labor isn’t valued.
On the other hand, I think it’s a great component in a platform — especially if directed to the small business community. There was another diary (I don’t have the link right now) about small business being pretty damned disgruntled with the Republicans. Perhaps these two ideas can complement each other.
Isn’t this what Toffler discussed 35 years ago in Future Shock? If I remember right, his thesis was that society must become more adaptable, flexible and responsive to ever faster changes in the workplace. That is perhaps the one area where the U.S. excels. Our capacity to rapidly adapt and change.
I think that’s what the platform should focus on. Not necessarily unique skills sets, but the ability to provide any skillsets needed. And yes, that goes back to providing our children with a solid education, and our workforce with access to tools and training. That is a huge investment long overdue.