The offshoring of the American Dream

By all accounts, Americans continue to experience the worst economy since the Great Depression. Unemployment remains unacceptably high, many of the jobs that produce real income have been offshored and the middle-class earnings are stagnant. Looking ahead, it’s likely to get worse before it gets better.

Yet corporate profits are doing just fine, thank you. Today they make up about 12.5 percent of  America’s gross domestic product. Just two years ago, they reached their largest percentage of GDP since the 1950s. On the other hand, wages and salaries, which accounted for 47 percent of GDP in 1985, are currently at around 42 percent.

Among the reasons for the combination of lower wages and high corporate profits in a weak economy is that American firms have discovered the advantages of exporting manufacturing and service jobs to countries with an abundance of productive, low-wage workers. Firms substitute cheap foreign labor for American workers. All the while, those Americans are told that offshoring is part of free trade and globalization.

Early offshoring was focused on manufacturing, but in recent years, U.S. firms have taken advantage of modem communication technology to outsource service activities. This trend cuts across all industries and occupations, ranging from lower-skilled manufacturing jobs to those requiring more skill and education, including those in the information technology sector. Put bluntly, they are exporting jobs to countries where wage rates are low, causing higher unemployment and lower living standards in the U.S.

Cheerleaders for offshoring argue that the money companies save will, in the long term, create new and better domestic jobs. These jobs must be disguised in the employment statistics; very well disguised, indeed. Moreover, they argue that when firms save money, consumers benefit from lower prices. So while free trade causes some dislocation, the benefits outweigh the costs. This pitch has become a totem of belief among free-trade advocates but it’s cold comfort for those whose jobs have been exported.

It was reported last month that IBM now employs more people in India than it does in the U.S. Its Indian workforce has grown from 3,000 in 2002 to about 112,000 last year. The reason is simple: The cost of labor in India is only a fraction of what it costs to employ the equivalent workers in the U.S. The average annual salary for an IBM employee in India is $17,000 compared with $100,000 for a senior American IT specialist.

Given such wage differentials, it’s not surprising that we are now witnessing the great migration of white-collar American service jobs. While India is the largest destination, the jobs have also gone to Eastern Europe, the Philippines, China and Mexico.

The offshoring of jobs may be one of the underlying reasons why Great Recession job losses look quite different from those of past recessions. American unemployment is becoming structural rather than cyclical and may worsen over time no matter how much public stimulus is provided.

So we have finally figured out how to make income redistribution happen on a global scale: American workers have to be less rich so their overseas counterparts can be less poor. Offshoring increases income levels in developing countries and the theory is that with greater wealth, those people will be able to demand and receive better treatment. The question is whether these interests should outweigh the interests of American workers.

Maybe jobs will return when American wages are as low as those of our foreign competitors and corporations decide to come home to exploit cheap labor. But it seems they first have to impoverish domestic workers so those workers can become rich again in the future.

originally published: November 6, 2013

Reasons for hope in Detroit’s bankruptcy

Once the symbol of American industrial power, Detroit filed for bankruptcy last month. The causes of the largest municipal bankruptcy in American history are clear, but there are also reasons for hope.

The federal government is unlikely to bail the city out, as it did for financial institutions and the big three automakers, because the fallout from Detroit’s bankruptcy is not expected to affect other cities and states. Detroit, unlike American banks, is not too big to fail. But bankruptcy offers the city an opportunity to nullify ridiculous labor contracts and reform pension and health care agreements.

Detroit was once the center of an economic miracle. In the 1950s it was one ofthe nation’s wealthiest cities and by the early 1960s automobile manufacturing accounted for half of Michigan’s gross domestic product.

But by 2008, automobile manufacturing’s share of Michigan’s GDP had declined to less than 5 percent. Detroit, the cradle of the automobile industry, developed with its expansion and also suffered as a result ofthe industry’s  decline.

The scale of the city’s decline is amazing. Detroit, which had 1.8 million residents in 1950, currently has about 700,000. The property tax base has been gutted. Large parts of the city consist of abandoned residential buildings and industrial sections that resemble war zones. Many of the remaining residents are essentially deprived of many basic public services like police and fire protection.

What set Detroit on the path to extinction? By the late 1960s, management at the big three automakers had become insulated and more interested in maximizing their own value than delivering value to customers. The 1973 OPEC oil embargo resulted in increased fuel prices and provided an opening for Japanese automakers to flood the American car market with cheaper, fuel-efficient alternatives. Many Americans soon became convinced that Toyota, Honda, and other Asian-based manufacturers offered better quality for their dollar than did domestic vehicles.

In an effort to preserve profitability in the face of a dramatic loss of market share, the big three’s lessĀ­ than-sure-footed managers evolved defensive business models that emphasized selling fewer vehicles at higher profit margins. This increased their dependence on SUVs, high-performance cars, light trucks, and similar gas-guzzlers that faced less Asian competition. As long as gas prices remained relatively stable, as they did through the 1980s and 90s, their strategy seemed viable.

But beginning in 2001, rising gas prices again cut the legs out from under the big three’s business models. Demand for fuel-gulping vehicles plummeted and sales started falling. This trend was compounded by the financial crisis in the fall of 2008. When the global recession took hold that fall, sales plunged, including a 32 percent drop in October alone, to the lowest level in 25 years. The big three had to depend on multibillion dollar taxpayer assistance to survive.

But it was not just the auto industry’s collapse that killed Detroit. Decades of mismanagement, fiscal and political ineptitude, municipal corruption and racial tensions exacerbated middle class flight, sending the city into a death spiral. Anyone who could get out did; since 2000, Detroit has lost a quarter of its inhabitants.

Detroit has also long been governed by a Democratic machine controlled by the city’s powerful labor unions, which mustered voting blocks big enough to ensure that only Democrats got elected. The result is that almost half of the city’s $18 billion in debt consists of unfunded pension obligations and retiree health benefits.

But there are hopeful signs. The automobile industry is again profitable. Businesses are slowly moving in and the city is becoming more attractive to entrepreneurs. Young people are returning to live downtown. Developers are buying office buildings and large tracts of land and turning them into living, office and retail spaces. The downtown sports teams sell out and firms such as Blue Cross/Blue Shield, Quicken Loans and others have recently arrived.

Building on these signs will require both city and big three leaders to resist the temptations they succumbed to in the past. Instead of quick profits and machine politics, the focus must now be on giving middle-class families a reason to return.

originally published: August 17, 2013