Why Employment in the U.S. Isn't Coming Back

Of Two Minds ^ | 01/29/2013 | Charles Hugh Smith

[SeekAndFind]

If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

It is impossible to understand job creation without understanding value creation and labor/overhead costs. People hire other people when their labor creates more value than it costs to hire them.

When labor costs are high, the value created must also be high; it makes no sense to hire someone if doing so generates a loss.

When labor is cheap, the bar of value creation is lowered, and so the risk of hiring a worker is also lower: they don't have to add much value to be worth their wage.

This is why you see many low-value jobs in developing-world countries. There are night watchmen on duty in virtually every parking lot and building in urban Thailand, for example; these workers are providing a fundamental value, "eyes on the street," but it is a low-value proposition: no special skill is required other than being a light sleeper. The cost of their labor is equivalently low, but in a low-cost basis economy such as Thailand's, a very low wage is still a living wage.

In a self-employment example, many vendors in urban Thailand set up their informal food stall (a cart or a tent) for a few hours a day. Their net income is low, because what they provide--readymade food and snacks--is available in abundance, i.e. there are many competitors.

Nonetheless, because the cost basis of life is relatively low, modest earnings from a low cost, low-profit enterprise make the enterprise worthwhile.

Compare that with the typical government job in the U.S. or Europe. It is difficult to measure the true cost of government pension costs, as local governments do their best to mask their pension costs and inflate their pension funds' projected returns. But a back-of-the-envelope calculation yields about a 100% direct labor overhead cost for the typical government job with full healthcare, pension and vacation benefits. So an employee earning $50,000 a year costs $100,000 in total compensation expenses.

Many local government employees on the left and right coasts earn close to $100,000, so their total compensation costs are roughly $200,000 per worker.

How much value must be created by each employee to justify that compensation? Government needn't bother itself with that calculation, as the compensation is not set by market forces and the revenue stream can be increased via higher taxes, junk fees, tuition, licences, permits, etc.

As the legacy costs of healthcare and pensions for retirees become due, local government operating budgets are being gutted to pay these ballooning legacy costs.

As a result, it is now impossible for many local municipalities to fill potholes: it makes no sense to have $100,000/year employees performing low-value work like filling potholes. Put another way, there is a labor shortage in high-overhead government bureaucracies because after paying for legacy pension costs, there is no money left to hire more people at $100,000 a year in total compensation to fill potholes, a job that might be worth $35,000 in total compensation.

The value created by government employees filling potholes is completely out of alignment with the cost of their wages/benefits. If employees cost $100,000 (recall that their annual earnings may be $50,000--we must always use total compensation, not wages as reflected on pay stubs), then in effect all work that generates less than $100,000 in value can no longer be done.

This is why cities and infrastructure are falling apart. Once you raise the cost of compensation far above the value being created by the labor, then most lower-value but nonetheless essential work (e.g. filling potholes) becomes unaffordable to accomplish.

We can understand this dynamic very clearly in a private-sector example. Let's say a high-tech start-up pays its programmers $90,000 a year, with minimal benefits. The total compensation costs of each programmer are thus around $125,000 annually.

Now let's say that the owners are very egalitarian and they pay everyone they hire $90,000 a year ($125,000 in total compensation costs) regardless of their skills or how much value their labor creates. Does it make sense to pay someone $125,000 a year to empty the trash cans in the office? No, it does not. So the trash doesn't get emptied. Does it make sense to have a $125K/year worker being a go-fer, typing correspondence and making copies? No, it does not.

Those menial tasks are pushed down to the programmers and managers, who must do those tasks themselves on a need-only basis.

The new hire is expected to create $200,000 of value annually (the minimum output of value needed to keep the company afloat) or they must be let go, or the firm will lose so much money it goes belly-up.

Now let's say that the local minimum wage law sets the minimum total compensation costs of any employee at $40,000 annually. For example, $25,000 in wages and $15,000 in direct labor overhead (healthcare, disability, workers comp, vacation, 401K pension contributions, etc.)

What is the value created by an administrative assistant who makes copies and empties the trash cans? Let's say the value added is $20,000 a year. At $40,000 per year minimum cost, it makes no sense to hire a "low-cost" worker because the value created by that worker is not even close to their total compensation costs.

As a result, the job of administrative assistant is not just unfilled--it vanishes. It makes no sense to hire workers when the value they create is less than their compensation costs.

How do we measure value created? The most accurate way is to let the market discover the value of the work performed by raising the price of our goods and services to reflect the value added.

Does our product or service become more valuable if the trash in our office is emptied? No; so the trash is not emptied, as the labor cost only raises the cost-basis and lowers gross profit, thus increasing the risk of insolvency.

The same can be said of all sorts of overhead: from healthcare costs that rise far faster than the company's revenues, expansive offices, higher junk fees and taxes, higher energy costs, and so on.

In a global economy, the value added by labor is measured on a global scale. As the overhead costs of healthcare, energy, office rent, local government junk fees, etc. keep rising, each worker in the company must produce more value just for the firm to generate enough gross margins to pay overhead costs and stay solvent.

If overhead costs--the cost-basis of doing business in the U.S.--keep rising faster than gross profits (out of which overhead is paid), then the owners have little choice: they can either close the business before they are personally bankrupted, cut everyone's pay or lay off some employees and somehow raise the productivity of the remaining workers to maintain enough value creation to survive.

This is the U.S. economy in a nutshell. If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

---

[P.O.E.]

Let’s not bring race into this. /s

[Soul of the South]

“It always amazes me that the tariff/protectionist crowd what to the fix the problem that was caused by the government instituting useless regulations and high taxes by having the government create more useless regulations and even higher taxes.”

Facts are facts. The standard of living and average household income of the average American in inflation adjusted dollars is below 1990 levels when the “free trade” experiment began under GHW Bush. The consumer products industrial infrastructure is gone. Empty factories do not employ people nor do they buy component parts and raw materials from other producers. Entire supply chains have disappeared and with it our industrial infrastructure to fight another major war on the scale of WWII.

If free trade is so good, who benefited from the last 20 years of free trade and deindustrialization? The Chinese, Wall Street, and the top 1%. Not the average American worker and certainly not the middle class.

For those who blame loss of American competitiveness on unions, spend some time driving around NC, SC, Georgia, and Alabama looking at all of the empty non-union factories in decimated small towns.

I’d rather have the prosperity of the Reagan years when we had higher tariffs and US made products, than the jobless misery of today’s economy and cheap Chinese goods.

[Born to Conserve]

“If protectionism is needed, then do it.”

That would be “more government” — bad.

Protectionism is not needed.

Relief from taxes and regulation on domestic production is needed.

That would be “less government” — good.

[MrEdd]

Therein lies the epitome of stupid.

If there is no food at all, you get food. If the only way to get food is government, you get food. If you don't, you die.

If you are drooling idiot stupid with your own Olympics held for you, you say "more Government" - bad" even as your own stupidity kills you. And few people sympathize with your well earned fate.

The minimum infrastructure - economic and agricultural - to sustain a country in war is just as important to the survival of its citizenry as food in the grocery store.

Many of them are too stupid to realize it.

They get angry when someone tries to explain simple realities to them.

[Mad Dawgg]

"The consumer products industrial infrastructure is gone."

So basically it is your contention that because a so-called "free trade" agreement was enacted in the late 80s/early 90s that it is responsible for empty factories in the USA.

It wasn't excessive taxation and ridiculous over regulation by the government with things like EPA regs that say you can't build somewhere that might be a wetlands without massive amounts of litigation and haggling when the EPA can declare any mud puddle a wetland?

Or OSHA standards that say every workstation in your plant must be wheel chair accessible even though the work required would be impossible for someone in a wheel chair due to the need of leverage only a set of human legs can provide, but that doesn't matter so you still have to pay for the infrastructure to comply with this idiotic rule?

Or the need to have 2 or 3 people (Or more) dedicated solely to administering and instituting a Health Plan that the Union has forced through because they have that power given to them by the Federal Government not to mention the huge cost of paying for a plan.

Or having to employ countless lawyers accountants and book keepers to comply with the endless tax regulations forced on a business located in the USA by the Federal Government the State and the Municipality?

Or Dealing with a Union that the Government sez has the right to strike because they want to and must submit to Government run negotiations and even when the government sez they are in the wrong they still have the right to continue the strike and send the business into receivership? (See the Hostess strike for details)

But none of these things are the real culprit instead in your mind it is a Trade deal that reduces the red and promotes trade between Nations?

Do you understand why most people who have run businesses look at you union loving protectionist yahoos as "useful idiots" for furthering the leftist/progressive cause?

[sand88]

But none of these things are the real culprit instead in your mind it is a Trade deal that reduces the red and promotes trade between Nations?

Very well stated. It is astounding how some people solely latch onto the Free Trade angle.

The singular cause of businesses leaving and shrinking is the increasing number of sadistic parasite workers at all levels of government fanning out across our land seeking to destroy capitalism.

They are indeed sadistic; they truly enjoy bringing misery to those just trying to earn an honest dollar.

Government IS the problem.

[Soul of the South]

“Do you understand why most people who have run businesses look at you union loving protectionist yahoos as “useful idiots” for furthering the leftist/progressive cause?”

Name calling is an immature response, particularly when you don’t know anything about the person you are addressing. Sorry to bust your bubble but I was a Fortune 500 corporate executive who ran large corporate divisions and was highly involved in outsourcing and offshoring in the 1990’s. For me it wasn’t academic theories and free trader talking points.

I worked in an industry targeted by the Chinese government. Government controlled banks loaned the money at zero interest for 20 years to build the factories in China. The Chinese government paid the factories 15% of the value of goods shipped for export. The work day for labor was 10 hours at $1.00 per day. Effluent was pumped into the streams outside the factories, including heavy metals and toxic chemicals. Once our proprietary manufacturing processes were put into our “partner” factories, they suddenly appeared in the factories of our competitors because there is no respect for intellectual property.

There are always two sides to every story. Have you ever been to a Chinese factory? Have you ever pulled a Chinese worker from the production line who looks like a 10 year old child and then reviewed the government identity information that says the child is 19 years old? Have you ever stood outside a Chinese factory and smelled the raw sewage in the river behind the factory or looked at red color of the water because the dye house next door is dumping its untreated chemicals into the water? Have you ever made the decision to close a factory? Ever sat in a boardroom with consultants from McKinsey and young Harvard MBA’s from Goldman Sachs telling the board of directors they can pop the stock price immediately when they announce a major offshoring no matter what the economics? Have you stood in front of a board of directors and showed them their US factories could be competitive if given the same capital investment dollars as Goldman Sachs proposed putting into China and then seen the board vote to go to China because the announcemnt would pop the stock price? Have you ever stood in front of 2000 nonunion, highly productive, factory workers in a small southern US town and told them their jobs are going offshore, knowing the entire economy of the town will be destroyed? Have you ever introduced a proprietary new product, produced in a Chinese factory, and had your competition ship a knock-off within weeks knowing the only way the competition would have gotten to market so quickly is to obtain the specs from your Chinese factory?

When you’ve actually done all of the above you are not a “union loving protectionist yahoo.” My real experience came from actually overseeing manufacturing operations around the world and being responsible for delivering P&L’s. Now, tell me about your real life experience that makes you an authority on this issue.

[central_va]

Virtually ever founding “father” believed in tariffs.

[central_va]

It is possible to want govt reform and less regulations and also be in favor of protective tariffs. The two thing s are not mutually exclusive.

Your contentions are false, big corporations LOVE regulations because it keeps the little guys out. Govt regs don't hinder production, only add costs. So widget A made in 1990 in the USA with regulations cost 5.00. Now widget A is made in China and costs 4.75 retail MSRP. So we "saved" 25 cents. But at what social cost? Free Traitors are the most myopic of all. Intentionally so.

[Mad Dawgg]

"Sorry to bust your bubble but I was a Fortune 500 corporate executive who ran large corporate divisions and was highly involved in outsourcing and offshoring in the 1990’s."

Ahh I see so your one of the nimrods who made fat stacks offshoring good for you but now since you are retired its all "we need to stop not what made me a nice living..."

"Have you ever (fill in lengthy blather about the horrors Soul of the South witnessed, engaged in and profited from.)

I can honestly say I haven't and it because I was taught to never participate in such a thing that would stain my soul. Apparently you missed the part of your upbringing.

See I've been in business since I was 17. The First large ticket Item I bought wasn't a car or a motorcycle it was Music Equipment to open a traveling disc jockey service. In my first year I paid off everything including the car and van I bought after I got rolling. I was making more on 2 and 3 day weekends then My Mom and Dad were making combined at their jobs. I run that business 8 years and check a large sum of cash away. And went into sales I went from a entry level salesman to store manager to part owner in 7 years. We came up with a several electronics gadgets that we could market to the people we were selling home entertainment systems to. But when we started to look for places to set up manufacturing we would run into environmental roadblocks some of which required site studies that we had to pay for. We could buy the building cheap but to actually manufacture anything in it to do with electronics there were pages and pages of environmental rules that had to be adhered to and if you violate just one and are caught the fines could knock you out of business. Further one of the Buildings had at one time asbestos in it. Now it had been removed according to regs and there was even documentation BUT the people we were talking to involved with the State said if they do an inspection and found any trace we would be shut down and we would have to hire another certified asbestos removal team to come in and remove the asbestos that the government already certified was removed properly.

Needless to say we gave up because every time we would take one step forward the Gub'ment would shove us back three with regulations and threats of fines. The business would have probably added about 50-100 jobs to the local community (We had interest in our prototypes from several large distributors) and that would have been welcome in our town but it just was not worth the risk the government put on the deal.

After that I joined my Dad's business. He is in his 57th year of running a Flooring Operation He ran it for many years while he worked at a local plant and got injured and still worked his Flooring biz with a cast on his leg. Decided he had enough of plant work and opened up in our downtown business section.

I immediately went to work on our Commerical part of the Business and started to streamline the bidding process we did especially with Gub'ment contracts. I did this 5 years and was astonished at the waste and contract padding tactics in the system. Kickbacks and bribes (we never were involved in such because we were subcontractors) by the Job Contractors were standard.

I kept telling Dad that I hated it because it was wrong we were involved in wasting taxpayer money and he said its just the way it is. Finally we had a job at a University airport we had to put in tile on the floors and in the bathrooms on the walls as well in a new annex that was being added to the main building.

We had all the materials delivered to the site, tens of thousands of dollars of tile and grout and mortar and schluter bar. Before we were to start on the project we got called down to the job site. The Government stooge and the Contractor was there and the people who poured the concrete in the new annex. Apparently the concrete guys and poured the floor about an inch too low and thus the thresholds were uneven. Dad spoke up and said its not a problem we could feather the mortar out from the doors and do so in about 10 feet and you wouldn't even notice it. All the doors were in 6 foot hallways so it would be easy.

The government stooge told us nope it had to be replaced and the job would have to be rebid. We told him it wasn't necessary for us to rebid since we hadn't even started yet and he said yes it was and we would be paid for whatever we had already done including materials. Apparently a relative of his who worked at an insurance company had done the policy for the contractor and they had worked up a scheme to double charge the job but only work once. The Contractor told us we could keep 50% of the price we rebid the materials at but we had to remove the materials we had from the site and take them away and bring them back later with a new bill of lading.

I told Dad we weren't doing it and he agreed it was wrong We did not re-bill or rebid and we told the Government stooge that we would do our job and be done with it. We told the Contractor we were done with him as well and we never bid another Government job again. I contacted the State AG's office but nothing ever came of it.

See I've been there and done that. Recently I tried to help a friend get a Custom Guitar Amp manufacturing business underway but the Government Roadblocks i experienced in the 90s are now nothing compared to what is currently underway.

See the reason manufacturing is not happening much in the USA is because the Government is doing everything it can to stop it. There was a move to build high priced SUVs in our area and the only thing stopping the deal was a need for Heavy Duty Electric in the plant (3 and 4 phase wiring) Well some trees and a few wetlands (literally 3 wet areas smaller than the average swimming pool) and they couldn't get the State and the Fed Gov to let them go ahead telling them they had to buy out some homeowners to run the lines. They gave up and moved elsewhere.

Corporations had nothing to do with it. The government is the culprit they created this anti-business landscape and then everyone is surprised when the businesses leave our shores. I'm not and I don't fault a single one of them. Why beg and plead to do business in the USA when you are called evil by every Gub'ment lackey that sucks off the Taxpayer Funded Gub'ment tit?

[Mad Dawgg]

"It is possible to want govt reform and less regulations and also be in favor of protective tariffs. The two thing s are not mutually exclusive."

Protective tariffs are by definition Government regulations. And Government Regulations is what got us in this mess in the first place. The way EPA regs and OSHA regs and TAXes are set up you need full time workers to constantly review each to make sure you don't accidently violate any of them because the cost in dollars and lost production time can put you out of business.

Whereas overseas they say build your shit over there and we could care what you do just pay us x number of dollars a year.

Any sane person would take the later deal. Why? Because the first rule of business is that you must control costs and in the USA it is near impossible to do so because the government has set it up to constantly squeeze money out of any business operation at any time.

After the Democrats took over the State of Ohio all of the sudden State auditors showed up at all the businesses around our town. They demanded to see our books informing us they had evidence we owed them money and if we didn't immediately allow them access we would be fined harshly. My wife was alone in the office that day and let the woman have our books.

She went into my Dad's office without asking permission and started taking notes.I arrived after she had been there about and hour and my wife told me what was happening. I walked into the office smiled and asked her who she was she said she would talk with me in a few minutes after she finished her work. I took our books off the desk and handed them to my wife and told her she should vacate my Dad's office. She got angry and said she had the authority to be here and I told her not without a warrant.

In the meantime my wife had called our accountant he told her that this bitch would end up asking for 200-500 bucks because there was some obscure State regulation on the books they were using that some stupid ass form had to be filed by such and such a date but had never been enforced. The accountant told my wife that if we refused payment they could fine us several times more than the fee they would ask for.

My wife wrote the check for and I walked her to the door and tossed the check on the ground outside and informed her she was never to come back here again.

See these are the people who are destroying America. Its not businesses who flee these shores. Its because idiots like yourself want even more foolishness that will cause even more jobs to leave.

[Soul of the South]

“Ahh I see so your one of the nimrods who made fat stacks offshoring good for you but now since you are retired its all “we need to stop not what made me a nice living...””

You seem to have a knack for disparaging people you don’t know by calling them names. Was this part of your conservative upbringing or did you develop this talent through life experience?

I spent 20 years working for a major corporation fighting to keep the US factories. Based on your account, your business was adversely impacted by government regulation. I accept what you say is true and understand how your perception of reality was formed by that experience. My experience was different. I found that with investment in modern equipment the US factories could be competitive, even with government interference. It was the corporate office staff, financial MBA’s who had never worked in a factory or faced a customer, who were persuaded by Wall Street banks and management consultants they could drive the stock price by announcing a big migration to Asia. The loss of US jobs was not due to the oppressive hand of government. It was due to executives who were disconnected from the operations making short term decisions to drive earnings and maximize their bonus payouts taking what they thought was the easy path.

With respect to me making “fat stacks” offshoring, I’m afraid I didn’t. I performed the due diligence on offshoring as part of my job by visiting the Chinese factories where I saw the working conditions. I strongly opposed the move and lobbied hard to modernize US factories instead of sending the work offshore. When the decision was made to send production offshore, I stood in front of the employees and announced the decision since the people who actually made the decision didn’t have the guts to do so because they never visited factories or talked to customers. Once the dirty work of telling the people was done I was told my services were no longer needed because my vision wasn’t aligned with the future direction. It didn’t matter that the divisions I headed were the most profitable in the corporation and had grown profitability at twice the rate of the rest of the corporation for seven straight years. As an operating executive I was not yet at the corporate staff level that qualified for golden parachutes so I left with a modest severance payment. I easily found another job with a competitor (never applied for unemployment so don’t accuse me of living off the government) and enjoyed watching my former employer spiral down when they found the economics of offshoring weren’t as attractive as the smart Harvard MBA consultants and Wall Street bankers promised. My former company no longer exists but it was managed by some really smart Harvard educated financial MBA’s until it was broken up and sold off by some equally brilliant Wall Street bankers. Millions of dollars were made on the breakup by the executives and their Wall Street banker friends. Too bad for the thousands of employees who lost their jobs and did not share in the fees and bonuses paid to the decision makers who destroyed the company. In my mind it is also unfortunate the millions spent lining the pockets of the executives and the bankers weren’t invested in the operations so the domestic factories could have competed.

I beat you in starting to work. My first paid job was at age 6 working for a local farmer. Since then I’ve done everything from cleaning toilets, to throwing newspapers, to running a deli, to working for several companies. I’ve turned around failing businesses and I’ve developed and grown new business concepts in a corporate environment. I’m semi-retired today but I still do some consulting work with the few US manufacturers in my industry still surviving. Let you think I’m anti-education I do hold an MBA from a leading business school. However, I can assure you I learned much more sweeping the floor of a factory and making sales calls as I climbed the letter than I learned in any classroom.

Let me offer you another perspective on the business world since your experience is not with large business. Up to the 1960’s US companies were headed by executives who worked their way up through manufacturing or sales. One thing they had in common is knowledge of the products the company made, how to make the products, and the knowledge of what their customers wanted. Companies invested in developing innovative new products and invested in maintaing their manufacturing operations with modern equipment in order to ensure low cost and high quality. Up to that time Wall Street was primarily concerned providing long term financing, either equity or debt, for corporations making long term investments in new products and production facilities. Wall Street was not the casino it is today where stocks are flipped in nanoseconds and the investment horizon is measured in minutes, not decades.

In the 1960’s the financial executives, many educated with MBA’s from top business schools, wrested control of corporations from the operating managers. These financial managers (who had no direct understanding of customers, products, or production) viewed business very differently. They partnered with other bright young MBA’s entering business on Wall Street to develop a new operating model for American business. The old model was about making money over the long term by developing great products customers wanted to buy and then producing them efficiently. Capital was used to invest in growth and the growth horizon was long term. A business would take a short term reduction in earnings to invest in a major new product to drive even higher growth in the future. This philosophy made the US economy the most innovative and productive in the world. Under this model CEO’s were paid decent, but not obscene salaries, and businesses made long term investments in employees and the communities where they operated as well as the capital required to be competitive.

Under the new model developed in the 1970’s, the focus of business began to be the efficient use of capital and maintaing predictable earnings. The financial executives now running companies stopped investing in the continuous modernization of their factories. They stopped replacing old equipment with more productive modern equipment and pumped up earnings by deferring or eliminating investment in the operations. Product development budgets were slashed and innovation suffered. Companies lost intimacy with consumers and customers. Foreign competitors, observed the absence of innovation and customer service, and began making inroads into the US market, despite the tariffs and quotas in place at the time.

In the 1980’s the Wall Street driving leveraged buyout boom began. US companies were bought by Wall Street investment firms, loaded with debt, and stripped of cash and assets. There was no cash in the business to keep equipment maintained. Quality and productivity declined as a result. I lived through those times where we cannibalized machines to get spare parts because our budgets for replacement parts were eliminated so the cash could be diverted to the pockets of the private equity partners and Wall Street banks. At the same time, the senior executives of American companies began ratcheting their compensation to obscene levels. The average earning of a CEO in the 1950’s was 10 to 15 times that of the average blue collar laborer. Today it is 100 times or more. Plus they introduced the “golden parachute” allowing them to depart their jobs with huge payouts instead of being put on the street with nothing (like the average laborer) for poor performance. Excessive executive compensation is another factor limiting capital investment today.

By the early 1990’s the US manufacturing infrastructure had decayed from 20 years of underinvestment and mismanagement by CEO’s with little understanding of the business but great relationships with Wall Street. Corporations reached the point where their costs were uncompetitive globally despite tariffs. There were two options. The first was to invest in modernizing US factories. Essentially this meant giving US employees the state of the art equipment needed to be competitive with modern foreign factories. The second option was to lobby to drop tariffs and quotas to lower the cost of foreign products. The corporations would then invest overseas and take advantage of incentives from foreign countries seeking to attract the capital to build their industrial capability. We know which option US companies chose. The only government involvement in this major shift was to negotiate the trade deals (WTO, NAFTA, CAFTA, etc). Unfortunately for US labor, and the US economy, the US completely opened up its market with virtually no restrictions and no incentives for US factories. In the meantime our trading partners in “free trade” were allowed to maintain tariff and non-tarrif barriers as well as subsidize their own exports.

It may or may not be of interest to know that the financial models prepared in the 1990’s when the offshoring decisions were made showed that US factories, if given updated equipment, modern lean manufacturing processes, and a truly level playing field could realize production costs within 10% of offshore factories, despite higher US labor costs and higher government regulation. Lower transportation costs and the higher productivity of US labor using modern equipment offset the much lower hourly labor costs overseas. However, the goal of corporations and Wall Street was not a level playing field for the US worker. The goal was to gain a cost advantage which was realized though foreign governments directly subsidizing capital investment and exports. The US government acquiesced and signed these one sided trade deals. Investment flowed to Asia instead of into modernizing US factories.

By my definition it is not free trade when foreigners have open access to the US market but do not reciprocate. It is not free trade when US factories compete in our home market with foreign factories who can undercut US factories in our home market because their capital and operating costs are subsidized by foreign governments. It is not free trade when China deliberately manipulates its currency to keep the cost of its exports lower than the cost of products produced in the country to which it is exporting.

I fully understand the problems small businesses face with government. One of my friends operates a small manufacturing business and we’ve discussed many times the oppression of state, city and federal government he faces everyday. In my consulting work I’ve worked with businesses who have to fight state, federal and local regulators and politicians. These politicians and local bureaucrats view a business struggling to keep its doors open as having unlimited resources to be harvested.

With respect to unions most of my experience, thank goodness, has been with nonunion shops. I have been involved in the decertification of one union in a US factory. I’ve also been responsible for one union operation where my managers were able to explain the economics of the business to a reasonable local shop steward who negotiated a reasonable contract that permitted the flexibility of work rules and level of compensation needed to be competitive. While I do not favor unions, I can understand why they exist. I have sat in senior management meetings where financial executives proposed extracting millions of dollars from the retirement plan of non-union employees and then canceling the plan, paying off the employees at cents on the dollar. If it weren’t for government laws and regulations prohibiting this financial move, it would have happened. In this case government regulation was good.

The reality is, free trade is not free trade when it comes to China and most Asian countries. You can have your cheap Chinese goods but like it or not they were produced by slave labor in factories where the working conditions are much worse than you would allow any of your family members to experience. These imported products are also subsidized by the host country government through direct payments to the factory, no cost loans for capital investment, and manipulation of currency. If this is free trade, I want no part of it.

I agree with you that much government regulation is unnecessary and bad for business and the economy. However, corporations are to blame for many of the problems we face economically as well. If you look at the last 40 years, the senior executives of many corporations have been feathering their nests while squeezing employees through offshoring, downsizing, and wage/benefit compression in the name of being competitive. Wall Street raiders have purchased once great companies, stripped them of their cash and productive assets, and then run them through bankruptcy to push the pension plan obligations on the taxpayer. The Wall Street bankers have made billions stripping companies, creating financial instruments no one understands, and skimming funds from individual savers and pension plans through speculation and excessive fees. When they faced bankruptcy in 2008, the Wall Street institutions were bailed out by the government and a year later were shamelessly paying billions in executive bonuses while going back to their same games. I’ve seen all of this from the inside and it isn’t a pretty picture.

You said, “I can honestly say I haven’t and it because I was taught to never participate in such a thing that would stain my soul. Apparently you missed the part of your upbringing.” Again you are wrong. I fought the battle and lost. I delivered for the shareholders and customers while protecting my employees from the games at the corporate office. It cost me my job and the opportunity to benefit personally from the ultimately bad decisions that were made after I departed. I did not retire a wealthy man but I did retire knowing I did the right thing. Those who made the decisions did retire extremely wealthy even though the company went down. They took care of themselves first. Not unlike the current president of the US who says he despises the wealthy yet lives as though he is a king. This is the outcome of “free market” capitalism and has nothing to do with the heavy hand of government.

My last comment to you is you will never win a debate by defaming your opponent. If you truly walk the higher road, you gain nothing from disparaging other people. I suspect you and I are much closer in our core beliefs than you might imagine. I’m not a free trader because in my experience there is no free trade. It is a concept, not a reality and it has been my experience the pursuit of free trade has hurt the US economy and the US worker while enriching our enemies and a subset of the 1% in this country. My opinion does not make me a bad person just as your opinion does not make you a lesser being.

Defamation of character is one of the powerful and frequently used tools in the arsenal of the leftist statists who run the government today. For conservatives to use this tool when engaging in free speech only serves to undermine the moral and intellectual superiority of our belief in individual liberty. If you have the superior argument, how is it enhanced by disparaging the other person? Perhaps this is why the left successfully portrays conservatives as mean spirited.

[JustSayNoToNannies]

corporations are to blame for many of the problems we face economically as well. If you look at the last 40 years, the senior executives of many corporations have been feathering their nests while squeezing employees through offshoring, downsizing, and wage/benefit compression in the name of being competitive. Wall Street raiders have purchased once great companies, stripped them of their cash and productive assets, and then run them through bankruptcy to push the pension plan obligations on the taxpayer. The Wall Street bankers have made billions stripping companies, creating financial instruments no one understands, and skimming funds from individual savers and pension plans through speculation and excessive fees. When they faced bankruptcy in 2008, the Wall Street institutions were bailed out by the government and a year later were shamelessly paying billions in executive bonuses while going back to their same games. I’ve seen all of this from the inside and it isn’t a pretty picture.

Commie! </sarcasm>

[Mad Dawgg]

"It was the corporate office staff, financial MBA’s who had never worked in a factory or faced a customer, who were persuaded by Wall Street banks and management consultants they could drive the stock price by announcing a big migration to Asia."

Maybe you missed that part in Business training but the job of the CEOs and other Corporate officers is to increase shareholder value. Its not to provide jobs for people.

See the idea of starting a business is to make a profit. The idea behind a business that incorporates is to run it in a way that the Stock Price increases while making a profit. You are upset that the Corporate officers did their job and increased Shareholder Value. The Gub'ment created an environment wherein once container ships were designed and made super efficient it was cheaper to build many things overseas and ship them back here then deal with the hurdles Gub'ment throw up in front of business.

When you are a business owner your major concern is not if somebody has a job or not. Your major concern is if you can make enough of a profit to make it worth your while. Free Markets work in Labor as well as goods. But the government has removed the Free Market in labor and instead mandated minimum wages, disability payments and now Healthcare costs. The Pacific Rim doesn't do this. These costs alone making hiring American workers a losing proposition when compared to workers on most foreign shores. Before long mandatory retirement plans will be instituted being that Social Security is officially bankrupt. Add into the mix that the Fed Devalues the dollar daily and you have a no win situation for doing business in America.

When the Govern'ment decides they really what business to prosper in the USA then they will cut the bullshit out and let Business get back to doing business. Until that happens it will continue as it is now.

BTW you claim I disparage you by pointing out you are a union lover. Every other paragraph you bemoan that the workers aren't treated properly because their jobs were taken away. Which is right out of the Union Manifesto. Guess what its not their job they didn't create it or take any risks to provide it. That was all on the business owners shoulder. See if the business fails the Owners can lose everything the put into it. The workers lose a paycheck. When you figure that out and understand that it is NOT the job of a business to provide jobs you will have a better understanding of how business works.

[central_va]

You are right only if you don’t care about the social costs of high unemployment. For me the kicker is the USA’s means of production ARE IN A COMMUNIST COUNTRY. I couldn’t care less if manufacturing is 100% automated as long as it is physically done in the USA. Call me old fashioned but I believe in America first. If I were President I would give a 1 year moratorium to bring manufacturing home then I would start tariffs, low at first but increasing every year.

[Mad Dawgg]

"If I were President I would give a 1 year moratorium to bring manufacturing home then I would start tariffs, low at first but increasing every year."

Yes exactly what we need. Another idiot who thinks he is an Imperial President.

Seriously do any of your Socialists/Protectionists understand the powers delegated to the President of the United States?

Good God it amazes me how many so-called Conservatives on this site haven't a clue about how this Country is supposed to work. Read the Fucking Constitution!

[central_va]

You are Marxist.

Jefferson, Madison, Washington and ME are patriots. FREE TRAITORS SUCK.

[central_va]

Article 1 - The Legislative Branch

Section 8 - Powers of Congress The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Tariffs in United States history have played important roles in trade policy, political debates and the nation's economic history. The 1st United States Congress, wanting a straightforward tax that was not too onerous and easy to collect, passed the Tariff of 1790. Like all subsequent tariffs it taxed imported goods at their Ports of entry to raise revenue for the federal government. Treasury agents collected the tariff before goods could be landed, and what became the Coast Guard prevented smuggling. Tariffs were the largest (approaching 95% at times) source of federal revenue until the Federal income tax began after 1913. For well over a century the federal government was largely financed by tariffs averaging about 20% on foreign imports. There are no tariffs for imports or shipments from other states. Since the 1940s foreign trade policies have focused more on reciprocal tariffs and low tariff rates rather than using tariffs as a significant source of Federal tax revenue. The goal of using higher tariffs to promote industrialization was urged by the first Secretary of the Treasury, Alexander Hamilton, and after him the Whig Party. They generally failed because Jeffersonian and Jacksonian Democrats said the tariff should be only high enough to pay the government's bills. The Republicans, however, made high tariffs the centerpiece of their economic policy beginning in 1861, and as late as 1930. Since 1930 tariffs have not been a major political issue.

Of course tariffs need congressional approval. I never said they didn't. As President in my hypothetical I would encourage the congress to act, and would make it clear I would sign such legislation.

[Soul of the South]

I agree the job of the business is to create shareholder value. It can be created with a long term growth strategy. It can also be created in the short term by limiting investment and stripping assets required for growth out of the company.

The first strategy is difficult to implement. It requires leadership with creative thinking, the courage to take calculated risk, a long term strategic vision, and strong execution. When it works it can both create jobs and create tremendous shareholder value. Apple under Steve Jobs is an example.

The other strategy is that employed by thousands of US companies since the 1980’s. Instead of focusing on customers and product innovation, the CEO’s reduced investment, cut headcount, and dropped the savings to the bottom line. In the short term the strategy improved the return to shareholders. Longer term, by not investing in the human capital and equipment required to realize growth, much less serving customers, the performance of the companies faltered and in many cases the company went away.

Both strategies increase shareholder value. Both strategies potentially reward CEOs and executives with large bonuses. The former creates jobs and long term economic prosperity for the shareholders and the nation. The latter ultimately destroys jobs and shareholder value.

At my former company I once sat in a one day strategy meeting with the top executives at the corporate office. I was invited because my companies were the exception inside the corporation, they were growing sales and earnings while the others were seeing declining performance despite aggressive cost cutting.

At the end of the day I shared my observation with the CEO. In told him we had spent the entire day talking about internal issues — plant closings, offshoring, headcount reduction, selling off divisions, and executive bonus plans. All of the internal discussions were about cutting back, not one minute was spent talking about growth. During the day no time was devoted to talking about customers, products, or competitors. I suggested to the CEO the company should become less focused on cost reduction and more focused on growth. To accomplish this the company would have become externally aggressive, not internally focused. I suggested a need to become intimate with customers, focus on product innovation to grow market share and enter new markets, and invest in modernizing existing capital to reduce production costs instead of offshoring. After that conversation I was told my vision was not in alignment with the organization and my service would no longer be required. I was replaced in my role by another corporate suit. Two years later the profit reported by the divisions I previously managed had dropped $200 million due to loss of market share and leadership in product innovation. I did receive some pleasure in contributing to that deterioration by working to help a competitor, my new employer, grow its business.

I agree companies have no obligation to provide employment. However, it has been my observation that success in business requires the ability to successfully employ human capital as well as financial capital. I’ve seen too many instances when companies lost their competitive edge by firing the creative people because they didn’t “fit”. Many entrepreneurs I’ve known were extremely creative people who could never have survived in most corporations controlled by bean counters. I suspect if Steve Jobs had joined HP for 30 years HP would still be the same failing company it is today while Jobs would have been a highly frustrated middle manager or have been fired for being a flake.

Let me address specifically one of your comments. You said to me, “You are upset that the Corporate officers did their job and increased Shareholder Value. “ The truth is I am upset because the corporate officers stripped my growing companies of investment in order to fund ill advised and failed acquisitions or stock buybacks brought to them by their buddies at Wall Street banks. My operating group consistently earned a 50% return on invested capital while delivering an 18% EBIT and profit growth rate of 12% annually on a billion dollar sales base. The other companies in the corporation averaged a 25% ROIC, EBIT of less than 10%, and growth rate of 2%. To goose performance, my capital spending was reduced and the corporation borrowed $2 billion to fund the acquisition of a company with a 50% ROIC but only a reported 5% growth rate at the time of acquisition. The newly acquired company imploded the year after purchase because the market for the product dropped 20% due to changing consumer tastes. The financial wizards at the corporate office looked only at the numbers when making the decision to buy. No one did the due diligence of talking to customers, employees, competitors, or reviewing the market segmentation data to understand the business they were buying. Given the collapse in earnings of the acquisition (it recorded a large operating loss), the financial wizards at corporate executed a $3 billion dollar stock buyback, a $32 per share with borrowed money. The buyback reduced the number of shares outstanding so the corporate officers could hit their EPS bonus goals (corporate staff was paid bonus on EPS, those of us working in operating units were paid on the performance of our companies). A year later the stock price had fallen to $18, due to the declining operating performance of most divisions, so the focus at corporate became even stronger on internal cost cutting and restricting investment as a way to drive reported performance and shareholder value. Those of us in the operating division were told we would have to increase earnings through massive downsizing to offset the losses at the failed acquisition. It is ironic that several years later the acquisition, which never made money, was divested to a private equity firm. After payments to private equity company to fully fund the pension plan, the corporation netted nothing on the sale and incurred a huge write-off. So much for improving shareholder value.

It has been my experience very few financial executives understand what drives growth in a company. They do not understand product product innovation or the management of the creative thinking of human capital to create innovation. They do not understand customers or how to align the product development capabilities of the company to create proprietary high margin products that capture market share because they create value for the customer. Like many politicians in Congress they look for the quick fix. Few understand the numbers are created by hard work and investment over decades, not a single promotion to load the trade or across the board headcount reduction to reduce expenses.

I infer from your comments that you do not believe companies have obligations to workers other than a paycheck. Here’s another real world example. A corporation I once worked for had a defined benefit pension plan which the founders had instituted. The company was over 80 years old and had a large base of retirees. While the founders were alive the company prospered and faithfully funded the pension plan to ensure the benefits promised to the workers would be paid. About 20 years after the last founder died, professional management ended the defined benefit pension plan. I have no issue with the decision to terminate the plan. Compensation should be up to the discretion of management and management should have the freedom and flexibility to change the plan when warranted by the marketplace.

By law the company was required to keep the plan funded for existing beneficiaries. You may disagree with the law. I agree with it. In my opinion when an employee joins a company, is told he has a pension if he meets the requirements of the job and the plan, and then works for the company faithfully for decades and retires, the company owes the employee the pension. It was a contract between the employee and the company. The pension was effectively part of the employee’s compensation and the company should be legally and morally obligated to fulfill its obligation no matter the current business conditions.

Over the next decade, the financial gurus at the top of the company began draining what was a fully funded pension plan of assets in order to improve the reported bottom line of the company. Then the stock market dropped, further drawing down the assets to the the point the plan was only 60% funded and unless the company began infusing funds into the plan, the plan would in the not too distant future not be able to pay promised benefits (very similar to the situation the country faces with Social Security). To rebuild the plan assets the company would have to infuse several million dollars a year into the plan, reducing its reported earnings and potentially taking a hit on the stock price as a result. The CFO working with the legal department and some Wall Street investment firms looked in vain for a way to rework the plan so it could be spun out without the company infusing more money. Any spinout scheme the could devise would have involved the retired beneficiaries of the plan seeing an immediate reduction in their benefits of 40%. The only reason the restructuring of the pension plan did not occur is federal and state law prevented it. Would you argue that this is government meddling and the corporate officers who raided the pension plan over a decade to benefit the company’s bottom line should have the discretion to take promised benefits from retirees who served the company for decades and contributed to its prosperity? If like me you agree the pension plan assets of the retirees should be protected, without government regulation how would you suggest it be done?

[Mad Dawgg]

"Of course tariffs need congressional approval."

Sorry but you are still wrong. READ THE CONSTITUTION!