Blaming the wrong people

Yves Smith at Nekkid Capitalism:

The Decline of Manufacturing in America: A Case Study

One frequent and frustrating line that often crops up in the comments section of this blog is that American labor has no hope, it should just accept Chinese wages, since price is all that matters. That line of thinking is wrongheaded on multiple levels. It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost (and increased coordination costs of much more expensive managers are a significant offset to any savings achieved by using cheaper factory workers in faraway locations). It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany? Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains.

This argument is sorely misguided because it serves to exculpate diseased, greedy, and incompetent American managers and executives. In the overwhelming majority of places where I lived in my childhood, a manufacturing plant was the biggest employer in the community. And when I went to business school, manufacturing was still seen as important. Indeed, the rise of Germany and Japan was then seen as due to sclerotic American management not being able to keep up with their innovations in product design and factory management.

But if you were to ask most people, they’d now blame the fall of American manufacturing on our workers. That scapegoating serves to shift focus from the top of the food chain at a time when executives have managed to greatly widen the gap between their pay and that of the folks reporting to them.

As I asked before:

Could part of the reason our economy has been flatlining so long have something to do with the fact the we don’t make anything any more?

Seriously – what industry exactly is gonna generate a recovery? Food service jobs? Tech support? Government employees? I kinda doubt it will be the home construction industry.

We have lots of people who grow stuff, sell stuff, transport stuff, insure stuff, fix stuff and/or install stuff, but nobody in this country MAKES stuff.

We sent all our manufacturing jobs elsewhere and now everything is cheaper but nobody has any money to buy it.

Did the housing/credit bubble hide the fact that we fucked ourselves?


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62 Responses to Blaming the wrong people

  1. 1539days says:

    I think the mid 90s was when the concept of an information economy really sprung up. It was the idea that America could function solely on innovation and that we could extract all the wealth and productivity from lesser countries who just performed labor. One of the problems is that we buy more things than ever and they are mass produced overseas. No one wants to put an addition on a house that’s having trouble selling, but a new iPad is something you can take with you.

    The article hits on one point and misses another. The average Chinese worker makes something like $3000 a year, but the savings from outsourcing are relatively small. This isn’t about outsourcing a few line workers or your production floor. What you get overseas is a black box. You tell them what you want and they bend over backwards to give it to you. They give you the grand total. You don’t have to worry about how much a worker gets paid or how much time off they have. You don’t have to worry about maintenance bills or OSHA or insurance.

    Most big companies are publicly owned. The CEO isn’t making all the decisions. The shareholders don’t even dictate policy. Those fund managers who move money from one company to another based on the stock price during a day drive what are seen as cost reduction measures. It’s what eventually led to ValueJet being such a fund manager’s dream while being a safety nightmare. And those guys are using people’s 401K money to do this.

    • ralphb says:

      You tell them what you want and they bend over backwards to give it to you.

      Right. You only have to make sure it’s not a staggering piece of shit (in the case of software) or it’s not made from a toxic material (which can ruin your reputation and your market) or some other mistake (tab A won’t fit into slot B). Then you have to fix those problems or pay fines or lose customers because you are now functionally a piece of shit.

      Brilliant management and just short sighted enough to be a major problem for the US economy. Oh yeah, offshoring is just fucking great.

      • 1539days says:

        That’s the other thing. You have to TELL them you don’t want lead in your products. You have to require documentation for software. You have to spell everything out. And you’re going to need to check your product. But they won’t tell you their employees need a cost of living increase.

        By and large, companies just accept there will be a certain amount of junk and compensate with liberal warranty processes.

        • Three Wickets says:

          Guess that would explain why our cars are marginally less reliable these days than the imported ones. 🙂

        • 1539days says:

          That’s where the KIA 10 year warranty came from. People didn’t trust a Korean car, so they gave a large amount of coverage. They learned how to make them better and people eventually chose them for reliability.

        • ralphb says:

          Have you actually done this? Worked with foreign development teams in disparate locations to pull together an enterprise application?

          You can send very rigidly specified design documents which could be used by developers in the US with no problem whatsoever and, when you get the modules back, they still don’t meet quality requirements. They don’t ever meet requirements and, unless you are really lucky, various modules don’t function well together. Frequent communication with the disparate teams doesn’t help much either. The problems, which everyone denies having, usually show up in the verification process.

          You can never release anything like that so engineers in the US wind up going through it and fixing enough bugs that it can be released, but not at the same quality level as in times past. Then, once it’s out, the bugs get reported and the maintenance costs come into play. Over the life of a large enterprise app, that more than makes up for any dev savings and then some. It’s a loser in the long run.

          Like cars, I assume this will get better with time but I did it for years and it showed little sign of it when I finally said “fuck it” and retired.

        • 1539days says:

          No, I’m not on the software side. I just have to deal with the results. I have to deal with the hardware with 50% failure rates that have to be fully inspected and repaired. At this point, our 10% margin of savings usually disappears. Our software and firmware developers are pretty terrible. We’re not quite big enough to put in the sales figures to warrant competence. But that’s a whole other problem since nothing can be done when it’s released.

        • ralphb says:

          I know exactly what you mean. Size and a demanding customer base can be a developers best friend, when you’re concerned about quality. It’s also very important to have good competition or you can get really sloppy. That was important to me and our competition just wasn’t good enough to push us, after we kept buying the good ones out.

          With China, it’s not just labor costs and lax laws, they also insist on a certain amount of work being done in China for good access to their markets. They will subsidize buildings and other costs for Chinese locations so it makes it hard not to use Chinese employees. I think that should be addressed at the government level.

  2. WMCB says:

    OT, but as much as I hate disasters, I love seeing stuff like this – local people just helping their neighbors. A few posts on the TX fire community that has rapidly formed on facebook:

    Ashley Imel Waller
    We have trucks and trailers to move any size animal as well as shelter if needed for any size @ Buckle Bunnies Saloon Bastrop please call 512-308-0977. Repost and spread the word!
    29 minutes ago

    Karen Higgins Judy Benson-Boren: I’m following ya’lls feeds on here , if you need anywhere to take horses we are south of Houston and have 20 acres of fenced pasture. I can come get them if needed
    22 minutes ago

    The facebook group is full of this, because a lot of the area affected is rural, which means the people there have animals. It’s a lot easier to evacuate yourself than horses and livestock. There are offers of trailers, and labor to load them, and safe pastures and barns to take them to.

    • myiq2xu says:

      In May 1940 the British, French and Belgian armies were defeated and surrounded at Dunkirk. Even before the British government asked for assistance, British citizens began to cross the Channel in small boats and evacuate the troops.

      By the ninth day a total of 338,226 soldiers were rescued.

  3. Three Wickets says:

    US economy today is about the same size as Germany, China and Japan combined. In 1980 manufacturing was 21% of our economy, today it’s down to 12%. Manufacturing in Japan and Germany are around 20% of their economies. Manufacturing in China today is 32% of its economy. (On my mobile, not easy to link right now.) In terms of actual manufacturing output, China will probably pass us next year, but today we still make more stuff than they do. Guess the point is we are a very big economy with many different sectors. Some sectors are fading while others are growing. But the overriding theme of our current economic situation is that we are in a recession. The private sector is deleveraging from the housing and financial asset bubble. When we climb out of this deep recession, things will look relatively better across all sectors. Economists seem to debate a lot about the structural versus cyclical reasons for the recession. If one believes that the FIRE sector (finance, insurance, realestate) is the main driver of the current contraction, then the recession is probably more about deep cyclical factors more than structural ones.

    • 1539days says:

      The structural economic problem kind of assumes we have to have a certain amount of activity in a certain sector. Before industrialization, 90% of Americans either owned a farm, worked on a farm, or grew a significant amount of food. Most of the stuff in a modern home didn’t exist in the 1800s. I think the percentages of activity in a sector are indicative of a problem. We don’t manufacture half of what other countries do, but that’s only true domestically. We may actually have 25% of our industry in manufacturing, but much of it is in another country.

      It’s not that we’ve stopped relying on manufactured goods, it’s that the value added is going directly overseas. Besides the trillion dollars we’re borrowing from China, we’re also leaving $500 billion in value in China every year.

  4. Dario says:

    Did the housing/credit bubble hide the fact that we fucked ourselves?

    Yes. There’s no way to get out of our predicament also without changing fundamentally our trade model. Obama, the Democrats and the Republicans won’t do it. We’re fucked.

  5. votermom says:

    Assessing Palin Nation

    After it was over, Palin left the stage to sign autographs. 20 minutes later, she was still signing autographs. When it looked like she was going to finish, she turned back to sign more books, more t-shirts, more bumper stickers She didn’t stop. She signed, she smiled, she talked, she listened. All the while, the crowd pushed towards her, beckoning her, begging her for a few seconds of her time. At one moment, a young man approached, looking for Palin to sign his t-shirt. After signing the shirt, Palin gave the man a hug. He then put his hand to his mouth, and began to cry.
    It was like watching a Justin Beiber fan win front row seats. It’s a reaction that you do not see at Bachmann rallies, and you will never see at a Perry rally….nor a Romney rally.

    video of at the link

    • 1539days says:

      She has Clinton-level magnetism. Bill can even tell that.

    • ralphb says:

      Many looked to Palin’s speech as proof that she is going to announce, or not announce, her run for President. Those people miss the point. To understand what is happening, one needs to be on the ground with the people. You need to look into their eyes, listen to them speak, watch them react.

      In Iowa, Palin has more than just love and admiration on her side. She also has a constituency. While Rep. Michele Bachmann and Governor Rick Perry both occupy the same space – the fiscal agenda that the Tea Party approves of, along with strong leanings to the social conservative side – that space is not fully explained or understood without Palin. Never mind any polling that includes Palin now, that is polling of a “maybe” Palin. Those numbers will be far different when people choose on a “candidate” Palin.
      If Palin gets into the race, Bachmann will face huge challenges in Iowa. If Palin gets into the race, Perry will face challenges nationwide. More than Iowa was represented in Indianola. People came from California, Nebraska, Illinois and Missouri to name a few states. They also came from Texas. While Perry is a three-term governor, his vetting has only come from the Texas press. People on the ground feel that Palin has already been vetted by America. For more than three years, she has suffered through the whimsical and the wicked attacks. She has been called every name, used in every uninspired analogy and, simply, they see her as the stronger candidate.
      It is anyone’s guess as to whether or not Palin announces a run for the presidency. But it is clear that the decision is all hers. Yes, she needs to have the fundamentals in place in Iowa, and nationwide, to move forward with a Presidential run. But, as Robinson and Bila point out, she has made a case – and has politically differentiated herself from the field. If she should decide, Iowa, and Palin Nation, will follow. They will campaign relentlessly. They will fundraise constantly. They will stand in the rain, in the blazing sun, in the bitter cold. They will make Obama supporters of ’08 look like chumps compared to the work they are willing to do. Palin Nation, from every indication, will not rest until their Grizzly is in the White Den. It is an authentic intangible that no other candidate, including President Obama, can engage. And it may make all the difference.

      • imustprotest says:

        This is spot on. I went to a Palin rally (well it was a McCain/Palin rally) but he wasn’t there 😉 and you could feel what that commenter said. People were so inspired and so happy, they couldn’t get enough of her! They felt like they “knew” her….like she was a friend. As someone said above…..Bill Clinton was like this too. I went to several rallies of his and I always came away feeling like….”Why were all those other people there when Bill was clearly there to speak to me?!”

        • ralphb says:

          I went to a little rally in Austin during the ’08 primaries where Bill spoke from the back of a pickup truck in a parking lot. He met everyone in the crowd I think afterward. He made everyone feel as if they were the only person there. That kind of charisma is kind of magic and it looks like she has it, in spades!

      • Valhalla says:

        This is really interesting. I don’t agree with Palin on anything policy-wise (well, I agree we’re at the mercy of selfish, narcissistic crony capitalists but I don’t agree with her on what to do about it), but I’m simply fascinated with how Palin just bypasses all the political gatekeepers and power brokers and goes straight to the people. She just doesn’t let anyone “handle” her or “manage” her.

        I’m not sure it matters if she runs, or she does run, whether she wins. She’s building a right-wing populist movement and moving the political conversation in the direction she wants it to go. Losing in ’08 didn’t stop her, it barely slowed her down.

  6. Dario says:

    What stopped him from doing it these past three years?
    The more he talks, the more I want to get rid of him.

    (CNN) — President Barack Obama told a Labor Day crowd in Detroit that he’s prepared to fight for a new job growth plan, defend organized labor and take steps to “restore the middle class in America,” while five Republican candidates hoping to defeat him next year all called for repealing the major legislation passed so far in Obama’s presidency.

  7. insanelysane says:

    O/T but always appropriate.
    John Smart has a link to a poll from a west coast paper/blog asking :
    Obama fading, Hillary rising, primary challenge looming? Go and vote.

    • Cool, just voted. Hillary has 395 votes, Obama has 12.

    • Dario says:

      A comment from the vote link

      Demonrat says:
      September 3, 2011 at 7:50 am

      I would vote for Hillary this time around. But it’s not going to happen. She has made it very clear she has no intention of running in such strong statements I don’t see how she could walk those statements back.

      I supported Obama over Hillary last time and I think it was a mistake. She would have bitch-slapped those Republicans so hard, Eric Cantor would be cowering in a corner somewhere right now.

      • Erica says:

        There are also comments about the May 31, 2008 RBC meeting, the theft of the primary by the DNC on 0’s behalf–calling it a “travesty.” Didn’t recognize the poster from any blogs.

        We are not the only ones who remember.

  8. myiq2xu says:

    I’m to blog too drunk. Y’all behave till I get back.

  9. lurker says:

    does “most favoured nation” status for China have anything to do with the loss of manufacturing?

    • myiq2xu says:

      My most favorite nation is Germany.

      They have beer fests, where people sit in big tents and drink beer.

      • DandyTiger says:

        Octoberfest in September of course 🙂 is a way crazy blast. I’m told I’ve been to several of them. Wish I could go this year. I really need it. Might have to create my own at the DT ranch.

    • Dario says:

      Yes. A most favored nation means that there almost no import tax on goods coming from China. With its low labor cost and most important little environmental and worker safety regulations, makes manufacturing in China much more profitable than manufacturing in the U.S.

    • The toughest trade barrier against Chinese imports would be to let the yuan double its current value against the dollar back to its level during the mid 80s. It was under Reagan when the yuan was allowed to depreciate three fold over the course of ten years into Bill first term. It was finally unpegged into a dirty float in 2005 turning the devaluing back into revaluing, and it’s risen about 25% since. Think the Fed is trying to pressure the yuan up further and the QEs have had that side effect. Yuan value is almost back to where it was at the start of Bill’s first term, but it needs to go further. Inflation in China has been forcing their central bank lately to raise interest rates, so that’s been helping.

      • Dario says:

        That would be another way to skin that cat. But since China is not allowing the Yuan to rise or fall to its true value, then the only other alternative is to take the country out of the most favored nation group until China’s environment is protected from degradation by companies that put profit above the health of people, and also demand that workers are protected from harmful chemicals and work under safe conditions like the rest of us.

        Right now we’re not competing on a level playing field.

        • Three Wickets says:

          Favored nation status has become so ubiquitous that it’s simply termed normalized trade relations these days. If we don’t want normalized trade relations with China, we should significantly cut back trade with them. Just complaining or demanding things will not necessarily have any impact. They may actually be ahead of us in green technology development and in aggregate we still throw up more greenhouse gases than they do. Anyway the fastest most efficient way to significantly cut back trade with China across all sectors is to manage capital flows to double the yuan’s value while the dollar is still the predominant global reserve currency. That won’t always be the case in the future. This battle is already underway btw, as China is trying to diversify out of its two trillion in US treasury holdings while they ramp up their military and naval presence in the region from Japan to the South China Sea.

        • Dario says:

          You make excellent points. Tnx.

  10. Dario says:

    Europe’s markets crashed today,

    Europe closes the books on a near-crash of a day. Stoxx 50 -4.9%, Germany -5.3%, France -4.5%, Italy -4.5%, Spain -4.8%, U.K. -3.5%.

    The S&P futures are pointing to a 2.5% drop tomorrow.

    • DandyTiger says:

      They must have heard Obama’s speech.

      • Dario says:

        European banks were hit the most because of their sovereign debt. Italy and Greece are the most troubled debts right now, but it’s all about the euro, the banks, the slowing world economy. It’s a huge mess and there’s no leadership in this country. Europe and Asia depend on the U.S. economy to grow.

        Obama needs to deliver another speech from some sacred mountain top, like Mount Olympus.

  11. ralphb says:

    Giant crocodile captured alive in Philippines


    MANILA, Philippines (AP) — Villagers and veteran hunters have captured a one-ton saltwater crocodile which they plan to make the star of a planned ecotourism park in a southern Philippine town, an official said Monday.

    Mayor Edwin Cox Elorde said dozens of villagers and experts ensnared the 21-foot (6.4-meter) male crocodile along a creek in Bunawan township in Agusan del Sur province after a three-week hunt. It could be one of the largest crocodiles to be captured alive in recent years, he said, quoting local crocodile experts.

  12. Dario says:

    It’s a consensus. Obama stinks.

    Obama ratings sink to new lows as hope fades

    Public pessimism about the direction of the country has jumped to its highest level in nearly three years, erasing the sense of hope that followed President Obama’s inauguration and pushing his approval ratings to a record low, according to a new Washington Post-ABC News poll.

    More than 60 percent of those surveyed say they disapprove of the way the president is handling the economy and, what has become issue No. 1, the stagnant jobs situation. Just 43 percent now approve of the job he is doing overall, a new career low; 53 percent disapprove, a new high.

    more at link

    • Dario says:

      and he’s lost Democrats, same poll:

      The sense of deflation is particularly apparent among Democrats, with nearly two-thirds saying things are pretty seriously off on the wrong track. The percentage of Democrats saying things are headed in the right direction has cratered from 60 percent at the start of the year to 32 percent now.

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