I received an interesting Email last week from Minyan “MC” who is concerned about globalization’s effect on jobs and wages. Let’s tune in to his thoughts:

There is a mania in this country to slash wages to a subsistence level (or worse). This is a symptom of the greed and corporate cronyism that is killing the country.

The powers-that-be that run the US are determined to crush wages, even when they realize that people are doing without food, health insurance, etc. We keep hearing news stories that about 10% of our population doesn’t have sufficient food? The root cause is the mania to cut wages and lay off workers.

I was born into a country that emphasized hard work, loyalty, stability, and “if you get educated and skilled, work hard, work smart, and behave yourself, you will do all right.” I no longer believe that lie.

The article MC was referring to when he emailed was GM buys out 1/4 of wage earners.

General Motors Corp. said Thursday that a quarter of its U.S. hourly workers will take the company’s latest buyout and early retirement offers, opening the door for new hires who will make less money.

Under a new labor agreement reached last fall with the United Auto Workers union, GM may hire up to 16,000 non-assembly workers at half the old wage of $28 per hour. Detroit-based GM conducted its last round of buyouts in 2006, when 34,410 workers left the company.

GM’s largest supplier, American Axle and Manufacturing Holdings Inc., said Wednesday it will cut more than half of its U.S. hourly work force, or 2,000 jobs, through early retirement and buyout offers, plant closures and layoffs.

Problems At GM Deep And Many

MC, the problems at GM are deep and many. I am no fan of GM. However, had they not taken these measures GM would not be in business today. Frankly I am surprised they still are in business given they have been behind the curve in production costs, they have a mess on their hands with GMAC financing, Ditech Mortgages, and are still hooked on a business model that is producing trucks and SUVs that are waning in popularity.

GM has been losing money on every car they make, more often than not, quarter after quarter. I believe the only reason GM is still in existence is that it has been able to go to the bond markets repeatedly to get financing.

GM Monthly Chart

click on chart for sharper image

Source Of Frustration

Looking beyond GM, the frustration MC expresses stems from four sources.

1) Globalization
2) A sinking US dollar
3) Misguided policies
4) Waning US influence in a world economy

Globalization

The internet has literally been a productivity miracle. Information is available in seconds that might have taken weeks or longer to find before. This has made the outsourcing of tech jobs, call center jobs, and other service jobs much easier. The trend to outsource service jobs is just beginning. It is going to spread to various accounting jobs, and even medical jobs. For example, an X-Ray can be taken here, sent over the internet to India, diagnosed in India, and only the treatment needs to happen here. Also, large corporations like banks can outsource accounting functions en masse. It’s going to happen.

On the manufacturing side, we have been losing jobs to Mexico and China for quite some time. Outsourcing of manufacturing is more mature, but it is still causing the wage pressures you speak of. But what’s the alternative? As mentioned above, if GM continues to pay workers what they have been paying them, GM will go bankrupt sooner rather than later. The union had no real choice other than to go along.

Sinking US Dollar

The sinking US dollar is something we can and should address. After all, it’s not how much one makes that is important, it’s how far what one makes goes. Sadly, the US has been seriously debasing the dollar ever since Nixon closed the gold window. Credit has been running rampant, and at times (but not now) there has been runaway monetary printing.

Bernanke supports targeted inflation. My belief is that positive inflation is positively theft. Rising prices increases property taxes, sales taxes, etc, conveniently without legislation. Inflation also benefits those with first access to money (banks, brokers, and the already wealthy). By the time credit is extended to those lower on the economic ladder, the party is about over. The subprime and liar loan mortgage fiasco is a clear example of this principle in action.

Treasury Secretary Paulson talks about a “strong dollar” policy but that is nothing more than lip service. Instead, there has been what appears to be purposeful debasement of the US dollar on the misguided idea that it will increase exports. The unwanted side effect is that few jobs are created while everyone pays through the nose in higher import prices and gasoline.

Misguided Policies

Part of the rise in oil prices is due to the falling dollar, but that is not the only factor. Another part of the equation is geopolitics, and a third factor is misguided policies on ethanol. At the top of the list in poor policy decisions is our attempt to be the world’s policeman. We can no longer afford that luxury.

Congress spends money it does not have on all kinds of silly programs. Both parties go along with it.

And instead of addressing real problems, Congress is looking into commodities speculation and threatening the oil producers. See Commodities Speculation Symptom Of Larger Problem and Congressional Insanity: Sue OPEC over Oil Prices.

Inquiring minds may also wish to consider Bankruptcy Reform Act Finally Blows Sky High.

Finally, the city of Vallejo, California went bankrupt and that symptomatic of the fact that cities and municipalities have been promising government workers more in salaries and pension benefits than cannot possibly be met. The few (primarily union workers in Vallejo’s case) have benefited at the expense of the many (the taxpayers). During the calendar year 2007, there were 292 City of Vallejo employees who had total gross wages of $100,000 or more.

I am sorry but that is simply insane. Please see Hardball In Vallejo, No Balls In D.C. for a discussion of this topic.

Waning US influence in a world economy

The US went from being the largest creditor nation to the world’s largest debtor. We are spending ourselves into oblivion, and at the same time rising economies in China, India, Brazil, and other emerging markets means the US can no longer call all the shots.

Most importantly, a rising world economy means the US has to compete for resources, especially energy, which is something we have not had to do before.

In regards to education, having a degree is no longer a guarantee of getting a high paying job. The rest of the world is catching up or even passing up the US in education while we argue over school prayer and creationism. The latter makes us the laughingstock of the scientific world. Education, while important, ignores the fact that China, India and other places are turning out more doctors, engineers, etc than we are. On the other hand, we are turning out more lawyers than anyone else. Is this a good tradeoff?

For the first time in history, the standard of living in the US is about to fall. It has to fall because we have lived beyond our means for too many years.

The Big Lie?

Let’s now take another look at MC’s statement “I was born into a country that emphasized hard work, loyalty, stability, and ‘if you get educated and skilled, work hard, work smart, and behave yourself, you will do all right.’ I no longer believe that lie.

For the US to remain competitive wages must come down and spending must come down. Like it or not, those are simply the facts. If that doesn’t happen, we are going to see more bankruptcies at the personal, corporate, city, and perhaps even state level. California itself is a prime bankruptcy candidate in my opinion. But less services means fewer jobs or lower wages. Otherwise taxes have to rise or the US dollar will continue to sink.

We are in this mess because we tried to spend our way to prosperity. In addition, too many people have houses, SUVs, boats and other toys they cannot afford, all egged on by “the ownership society” and other misguided policies.

Living Wage

One repeatedly hears the phrase “we need a living wage”. One problem with “living wages” is that regardless of what anyone is making, there has been willingness for nearly everyone to spend every penny and then some. Part of this is no doubt related to policies at the Fed that encourage both consumption and speculation.

Another problem is people seem to believe they need things they clearly don’t, SUVs for example. I grew up in a family of 6. We did not have an SUV (they did not even exist then). Nor did we have a large house. I think the square footage of our house was something like 700 square feet, if that. It had one bathroom. At the time, I thought it was perfectly normal.

Now it seems that not having a SUV (or two), huge TVs, cell phones for everyone in the family, and a large McMansion to live in is an act of deprivation.

Courage To Choose

Let’s now consider a timeless post by Minyan Peter. It’s called The Courage To Choose.

I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted. Where, thanks to 0% down debt and a seemingly robust economy, we could own bigger homes, fancier cars, and more lavish vacations – where our bounty was limited only by the boldness of our wants.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

But I would suggest that few of us are prepared for this challenge. Why? Because abundance relieves each of us from having to prioritize what is important. When anything is possible, everything is possible. Few of us have really had to choose.

As I look ahead to 2008, though, I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained. And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past 20 years: “I can’t afford that.”

So as we approach 2008, I wish the Minyanville community the wisdom to prioritize well, the courage to make the hard, and often painful, choices, and, most of all, the strength and conviction to follow through.

The Right Choice

Given that it’s impossible to stop the forces of globalization , impossible to roll back the hands of time, and impossible to halt the waning influence of the US in a world economy, we need leaders now more than ever to choose wisely on policy decisions, to stop spending money we do not have, and to stop the debasement of the US dollar.

My choice was Ron Paul. My choice is not going to win. My second choice is anyone who will get us out of Iraq and stop squandering trillions on a war against a faceless enemy. I believe that is the single best choice we can make about anything. But that’s my choice, it may not be yours.

Those who are in favor of this war at least ought to have the courage to fund it. That means higher taxes. Presented in that fashion: higher taxes and stay in Iraq vs. lower taxes and leave, I think 85% of the population would vote to leave.

Instead, there is the free lunch policy in Congress and by this administration that allows us to keep spending money we do not have being the world’s policeman, that subsidizes ethanol producers, subsidizes housing, and funds all sorts of other programs that have no business being funded. The waste in our medical programs is a particular outrage.

Someone is benefiting from this madness but it sure is not the consumer.

The rest of the world is financing those excesses and it is showing up in a dollar that continues to slide. The few (those being subsidized) benefit at the expense of everyone else even as the economic distortions ripple through the rest of the economy. To stop the madness, it’s time to have the courage to opt for a balanced budget and it’s time to have the courage to abolish the Fed.

I believe the final analysis will show that it’s not subsistence wages that are killing the country, rather it’s poor policy decisions at the personal, corporate, municipal, and Federal level that are killing the economy.

Returning one more time to a point I made earlier “It’s not how much one makes that is important, it’s how far what one makes goes.” That is indeed something Congress and the next administration can address, if only they have the courage to do so.

Mike “Mish” Shedlock
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