The theme is based, in part, on one of America's proudest foundation myths: that Yankee ingenuity combined with hard work and determination are justly overcoming an 'unfair' foreign labor advantage.
There is some truth to the bit about ingenuity. Technological advances applied to manufacturing have reduced the labor cost advantage enjoyed by companies using developing nations and their workers as an export platform.
But recent analyses by accounting and consulting firms that were some of outsourcing and offshoring most enthusiastic cheerleaders suggest that there are other factors at work whose impact is far more compelling from an economic standpoint.
The reality is that China and other Asian entrepots no longer enjoy much of a labor cost advantage - if they have one at all. The galloping inflation that usually accompanies unbridled growth was bound to erase that advantage eventually. And eventually is now. In addition, Chinese workers have a much better sense of their value. They are demanding - and receiving - wage increases consistent with their skill and knowledge. In other words, politicians and Chamber of Commerce types can no longer blame 'the other' for causing declining US wages.
As the Pogo cartoon was wont to say, 'we have met the enemy and he is us.'
The implication is that US industrial policy has, for the past decade or so - and especially since the financial crisis, been designed to protect capital. Variable costs, like employees, were considered expendable because, it was wrongly believed, the only significant US competitive advantage remaining was in financial services. The data have now illuminated how myopic that vision was.
The US workforce has accepted lower wages and the declining standard of living that goes with it because it believed it had little choice. China was a convenient scapegoat, in large measure, because its frequent heavy-handed totalitarian enabled it to play the role of bad guy so well. But technology and communications enhance learning and adaptation. Policies will have to change as the evidence of their costs and benefits becomes more widely disseminated. JL
Yves Smith comments in Naked Capitalism:
For some time, we’ve argued that outsourcing and offshoring were overdone. For manufactured goods, direct factory labor is typically only 10% to 15% of final product costs. Even if you get significant savings there, the offsets are increased shipping, inventory, and managerial/coordination costs (which serves as an excuse to transfer savings on factory workers to the top brass). In addition, extended supply chains also entail higher risks. I’ve had executives and senior managers in various industries tell me that there internal estimates of the savings from outsourcing weren’t compelling, but senior management went ahead on the (typically correct) assumption that investors would approve.
But even in the cases where the outsourcing cost savings were significant, the idea that American wages were way out of line with Chinese wages and the only future for American workers was grinding wages lower and lower to compete with China has been oversold. Various writers, including yours truly, pointed out that China’s wage advantage would not hold indefinitely even if it managed to keep its currency peg (which, separately, it hasn’t; the change to a currency basket has over time resulted in appreciation against the dollar).
The reason? China’s much higher inflation rate would over time reprice labor in nominal terms at home, which with a currency peg (or the current dirty float) would translate into real increases to foreign buyers. To put it more simply, double digit inflation over time would be tantamount to a currency revaluation.
Despite popular (and worse, pundit and media) perceptions otherwise, China no longer enjoys a labor cost advantage in many areas. In recent years, China has seen some manufacturers move to lower-cost countries like Vietnam and Bangladesh, but the smaller size of their workforces has limited the impact on Chinese wages. Ambrose Evans-Pritchard takes note of this peculiarly underreported trend in his latest article, “The End of China’s Easy Growth“:
A new report by PricewaterhouseCoopers entitled “A Homecoming for US Manufacturing” claims it is now cheaper for whole clusters of US industry to produce at home, close to their markets. Firms are “re-shoring” — to use the vogue term — to cut transport and inventory costs and take advantage of cheap shale gas. The weaker dollar has iced the cake.
PwC said the US has clawed back a cost advantage of 2pc in steel output against China, at least for the North American market. Its “heat map” gives the US the edge in chemicals, primary metals, electrical products, machinery, paper, transport equipment, and wood, in that order…
Google is building its Nexus Q Music and video player in the US. General Electric and Ford are switching to plants at home. So is Caterpillar, which is interesting since its chief Chinese rival Sany Heavy Industry is in trouble. It has just asked creditors to waive a $510m financial covenant.
Boston Consulting Group has been banging on this homecoming drum for some time, arguing that wage inflation of 16pc annually for a decade has eroded China’s lead. The gap in “productivity-adjusted wages” was 22pc of US levels in 2005. It will be 43pc (61pc for the US South) by 2015.
Despite the fact that this trend is well under way, we’re certain to hear a steady diet of haranguing from neoliberal economists about how American workers have to suck it up and accept even lower wages. What’s driving falling real wages is poor domestic economic policies, namely, the mismanagement of the post crisis period. Japan warned the US early on that the biggest mistake it had made was not forcing its banks to recognize losses. But we ignored their lesson and are in the process of suffering what may turn out to be a lost decade. Time to blame the real perps, our bank enablers, rather than the poster bad guy, the Chinese wage slave.
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