Knight Of The Mind

I'll do my best to present a philosophical and generally conservative look at current events and life, the universe and everything. Readers are invited to take all that's posted herein with a grain of salt. or if they prefer, a grain of salt, a slice of lime and a shot of tequila.

Location: Alexandria, Virginia, United States

Greetings and welcome. My name is Steve, I'm 35 years old and I work for the US Army as an Operations Research Analyst. Hence my blog title Knight Of The Mind.

Wednesday, March 16, 2005

Change Or Die

Starting as far back as the mid 1980's, Mike Westfall and other union activists have noticed a change in how business gets done. Westfall begins one of his recent sermons against corporate America witht he following paragraph.

"The working American today faces a more complex and changing employ­ment situation than has ever existed before in history. In many segments, for a variety of reasons, available work is shrinking while the number of those seeking work is increasing. Women, out of economic necessity, have been joining the labor market in record numbers. The baby boom generation has been swelling the workforce and a yearly new crop of inexperienced and unskilled high school graduates are demanding the availability of meaningful employment opportunities where they can make a contribution to the system and their own economic well being.

Presently this country has many alienated and demoralized young people who are at the peak of their health, energy and idealism, but are being lost to society forever because they can only find unstable, low paying, part-time jobs with little opportunity for advancement.

What really is at stake today isn't economics - it is the future of large segments of an entire generation of Americans."

A fairly typical set of opinions that you'll presently hear from leaders of labor and from political leaders from "Progressive" organizations. This could easily have come from Ralph Nader, with whom Mike Westfall has collaborated in the past.

That being said, the statement has an element of truth to it. A lot of young people who believed there would be a manufacturing job waiting for them upon entry into the workforce received a very rude shock upon graduation. This is not how the US economy works anymore.

In part, Caldwell acknowledges this himself in the statement below.

"But walk into any plant and you'll consistently find that direct labor represents only about 10% of total manufacturing costs. From studies in hundreds of U.S. plants, we know on average that 35% of costs are presently due to manufacturing overhead and 55% to purchase materials. ". We're approaching the point in our work when I don't even want to hear the term, "direct labor," on a project anymore. It just doesn't count-It's 10% of manufacturing costs and that's all the attention it's worth."

This statement attempts to cast aspersion on the business practice known as outsourcing. It attempts to minimalize the potential savings enjoyed by people who move corporate operations outside the US. What that very simple breakdown misses is two items.

First, when I buy someone else's materials, I'm paying for the direct labor used in processing them as a part of the price. When GM buys ready-made parts, it's paying for the labor involved in building them. Also, if the US has more expensive regulatory compliance fees than perhaps China or Mexico, GM also pays those fees everytime it buys an American material. So to say 55% of the money spent goes to materials is an innacuracy. 55% of the money goes to the price of materials which is adjusted upwards to account for the labor costs and fees of the part producer.

"It really does pit country against- country and worker against worker in a competitive effort to reduce all workers to the lowest common denominator. Many social scientists, in fact, are now condemning some of our American based multi-nationals for their treatment of foreign workers with low wages and poor working conditions, without really contributing to the economic well-being of these workers."

So what's new? American workers used to hold a monopoly on the skill sets required for heavy industry. This used to be the only country where the skills and capitol could easily meet up and form an organization. This is no longer true, so now workers compete to offer labor at the most affordable price.

They compete the way everyone who drives wishes oil producers had to compete. Corporations are now able to pay someone what the labor involved in heavy production is actually worth. The union premium and the scarcity premium are both eliminated.

So all of this puts an American Corporations in a bind. They can change or they can die. They can change in three ways.

  1. They can ditch overpriced American labor and overly constrictive laws. This would make them pariahs and somewhat deservedly so. Being a pariah is not something Bernie Ebbers worries a whole lot about, so the outsourcing practice will continue until American and foreign labor rates are close enough to justify saving the transactions costs and risk premiums involved in outsourcing by relocating these factories back in the US.
  2. They can stop wasting piles of money on perks and benefits. Ken Lay loses the jet, and all the programming nerds can forget their stock options, which are good things. You and I get screwed out of our pensions, which is not. If a corporation can hire enough competant workers to do the job without offering the benefits package, guess what action they will take?
  3. They can apply for political relief in the forms of bans, tariffs and import quotas. If I don't have to use what happens to be banned, tariffed or limited by quota, this is pretty cool. If I don't sell any of the above, this is even more cool, because I don't lose my job. The second I do need anything on the banned, or tariffed list, I'm screwed. The second Bernie Ebbers or someone of his moral character wants something off this list, we'll have the same problems with our tariff laws that we now have with our War On Drugs. It will be totally unenforceable, and the rest of the world will hate us and laugh at us for trying.

In conclusion, we are all somewhat screwed and will all have to get by on less for the following reasons.

  1. The rest of the world is now a heck of a lot more productive than it used to be, so we have lost our monopoly on productive industrial assets. The US will only remain the center of industrial production when it pays economically to leave it there.
  2. The rest of the world sees our lifestyle and pretty much hates us for it. Don't expect a whole lot of sympathy from a bunch of Koreans earning $2.50 an hour when we gripe about losing factory jobs that pay $25.00 an hour.
  3. The ability of corporations to offer generous benefits and meet prior obligations on workers' benefits is directly tied to the ability of these same corporations to continue their economic dominance in their field of endeavor. Strip away the dominance and the benefits go bye-bye. That pension you were promised back in the 1970's when most Koreans, Thais and Chinese were too illiterate to work in a factory is now financially unsupportable for the corporation or government entity that promised it to you. You will not receive most of it. Plan accordingly.

So there you have it. The new reality is not a particularly good one for the US economy. We will suck it up and deal with it, or we will die. It's not rocket science and its not anyone's fault any more than the law of gravity is someone's fault. We cannot expect the rest of the world to politely roll over and let us dominate industrial production so that we can continue to get paid upper middle class wages for what has traditionally always been working class work. As I said before, we have to change both our expectations and our ways of doing business or we will go the way of Bethlehem Steel. It's very simple, change or die.


As you may or may not already be aware, members of the Watcher's Council hold a vote every week on what they consider to be the most link-worthy pieces of writing around... per the Watcher's instructions, I am submitting one of my own posts for consideration in the upcoming nominations process.
Here is the most recent winning council post, here is the most recent winning non-council post, here is the list of results for the latest vote, and here is the initial posting of all the nominees that were voted on.

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