(December 27, 2010)
Hollowing out small business and lower value-added enterprises has hollowed
out America's job-creation machinery.
The conventional wisdom is that boosting consumer borrowing and spending
(same old, same old) will magically create millions of new jobs. As usual,
the conventional wisdom is dead-wrong: America's job-creation machinery
is hollowed out.
Questioning the quasi-religion of "free trade" always brings down the wrath
of true believers, but I don't see rigid ideologies as shedding much light
on the complex interlocking crises we find ourselves tangled in.
I have long held that a mono-maniacal obsession with "low prices" is one factor
which has hollowed out the U.S. economy:
The Wal-Mart Model of Self-Destruction: Lowest Prices, Always (January 24, 2010)
In sum: the corporate globalization model of maximizing profits, efficiencies
and long supply chains saves "consumers" $300 a year on goods that have declined
in quality as well as price, while hollowing out the industries that once offered
"citizens" $30,000 a year jobs.
The "free market" ideology holds that there is an either-or choice: either
you pursue the corporate globalization model ("free trade") which supposedly
benefits all while maximizing corporate political power and profits, or you
choose by default "bad" "trade restrictions," which supposedly hurt everybody by
making domestic "consumers" subsidize horribly inefficient domestic manufacturers.
Meanwhile, in the real world, both Germany and Japan have pursued a middle path
for decades. As correspondent Dr. David D. has often noted, despite its
well-publicized financial/fiscal woes, Japan remains
a remarkably stable, wealthy society in which the domestic economy is 89% of GDP--yes,
exports/imports are a mere 11% of Japan's GDP.
Japan has restricted "free trade" for decades, and has pursued a "low unemployment"
policy that has little to do with restricting imports and everything to do with
policies which enable hiring marginal workers. The "social contract" between
citizens/consumers and the government is different than in the U.S. Is it "better"
or "worse"? That sort of judgment cannot be made, as the criteria are cultural
The same can be said of Germany, where workers shift to part-time when business is
slow, as opposed to the American model in which workers are fired and more work is
piled on the survivors--again, to maximize those all-important corporate profits.
In other words, the "free trade" ideologists claim it's all dollars and cents,
but "soft" cultural values play a critical role in the "social contract" which
controls the role of trade and imports in an economy.
America is in thrall to a specific cultural and financial ideology which claims
that all good things flow from corporate profits, and the maximization of those
profits is the foundation of a "growing economy" (if debt is rising faster than
GDP, is it still "growth"?) and more jobs.
Too bad there is no evidence to support this narrow faith. Rather, maximizing
profits requires that the Federal government and the private sector both
borrow trillions to prop up fading
"consumer spending" because corporate profits don't require jobs, they only
require consumption. If it's funded by debt rather than producing wealth, no problem.
The unholy alliance of global corporate interests and the Central State has pursued
a specific strategy which emphasizes borrowing and consumption over production
and savings, and the massive expansion of debt in all sectors of the economy is
the consequence of this policy.
Corporate interests can play both sides of the "free trade" game. When it
suyits their purposes to move production overseas, then they are hearty proponents
of "free trade," But if their profits are being pinched by other global interests,
then suddenly a defense of "free trade" requires restricting imports.
The net result is that the high end of the value-adding chain remains in the U.S.
but the bulk of the chain is now global. Free trade apologists claim that the
"solution" for the U.S. is to compete globally for the high-end value-adding chain:
the design, marketing, research and development, etc.
There is certainly some truth to the idea that
global products demand global competition, but this idealized view of the economy
overlooks the inconvenient fact that the vast majority of mere mortals do not have
the brainpower or drive to become research scientists, top-level designers, etc.
So by shipping everything below the top level of R&D, design and marketing overseas,
then you've also shipped most of the employment in the lower value-added chain.
Even if the U.S. were to pump out 10 million PhD-level researchers, there wouldn't be
10 million new jobs waiting for them. The ugly truth is the number of positions
available for high-end researchers, designers, etc. is intrinsically small. Post-doctorate
researchers from the top research universities in the world still have to fight to
secure a job.
In other words, there are very few $50 to $100 an hour jobs in the value chain, and
many $10 an hour jobs. While it may well be possible to tax the $100/hour workers
enough to pay for food stamps and other welfare so 100 million people can sit at home
watching TV, borrowing trillions of dollars to prop up the current status quo
is simply a criminal theft from future taxpayers to fund our current consumption.
While Washington pursues CEOs, they snub U.S., Robert Reich
notes that much of the value chain in Apple products goes elsewhere. In the simplistic
view, that's wonderful as long as Apple pumps out fat profits.
But the social contract is larger than corporate profits--though that is obscured
by the "solution" America has chosen: borrow trillions from future taxpayers
and global players to fund current consumption and a growing army of unemployed
with few prospects.
America's job-creation machinery has been hollowed out by the
"globalization-debt-consumption" model. There are no simple, ideological pure
"solutions" to the complexities of globalization, fostering entrepreneurship and small
business and the often-unexamined "social contract" between citizens and their
I am reprinting a post by author Chris Sullins which illustrates how the
hollowing out has occurred over the past few decades. Real life does not lend
itself to simplistic ideological straitjackets; the "solutions" cannot be purely
financial or ideologically driven. Any "solution" has to balance the needs of
the citizenry against corporate interests and a cultural and governmental obsession
with propping up consumption.
Here is Chris's entry:
The Lesser Evil is Still Evil:
There was a sequence of events that I observed over the last 25 years culminating in
the destruction of one private business. This was a small corporation owned by an
American family who had started off using local talent to make a quality product
and took great pride in the “Made in USA” label.
Early to Mid 1980s: Company is born, grows, and does well. Moves from a mom and
pop shop to hiring non-family members. A lot of hard work and growth during this
time pays off. To help facilitate growth, investment, etc., company takes on partners
with expertise in specialized areas.
* Late 1980s: Company continues to do well, but growth plateaus. Original owner does
not want to do a public offering of the business. Internal triangulation and
disagreements on how to proceed leads to moves by newer partners to break-up/sell
the business. Original owner/family takes out loan to buy their company back from
the newer partners. This takes a significant amount of money out of reinvestment in
the business and improving health/retirement plans for all workers (including the
Early 1990s: Owners continue to use American parts and labor as other companies
begin to outsource some production of parts to Mexico. The company survives the
regional recession of the early 90s and the owners are able to make their payments
to the bank for the buyout and are also able to do a large expansion.
Mid 1990s: Due to increased domestic competition due in large part to changes under
NAFTA, owner begins to buy some of their parts from Mexico, but the majority of
products are still made in the USA and assembled by American workers –local people
who have lived in the area for generations. At this time, similar completed products
begin arriving from China. Owner expands production facility again and contracts out
labor for some parts and completed products to other American-owned businesses.
Under the traditional business model in a fair and uncorrupted market, this expansion
should lower costs over the long-term while still providing a quality product to
customers. The plan looks good to the bank, too.
Mid to Late 1990s: The cost of parts from Mexico begins to rise and the completed
products are now no less in retail price than similar products from China. Despite
production in a low-tax, low-wage state (as in not much above the minimum wage!),
both the company and subcontractors have difficulty making any kind of profit against
the rising tide of Chinese imports. By the late 1990s, they can’t figure out how
the Chinese products can sell at a retail price which is still less than the
combined wholesale prices of many of their parts. There are also times when the
raw materials alone cost very close to the wholesale price of the Chinese goods.
Retail outlets sell both the Chinese and American goods and the difference in price
is apparent on the shelf. Although the loan to former partners has been paid off,
the owner begins to struggle financially at times to meet the loan for the expansion
as sales drop. The owner has to get some short-term loans to cover operational costs.
At this point in time, he has no idea how GATT, WTO, and MFN are impacting his
business and changing the playing field. In fact, the American company owner thinks
tariffs are still on the books and enforceable, that his elected representatives
will protect the local community, that the Constitution still means something
outside of the town he lives in, and that multinational corporations haven’t been
bribing…sorry, I digress…
Late 1990s to Early 2000s: Continued importation of Chinese goods which cost less
than American raw materials pushes company owner to focus on a niche market by
offering “Made in USA” products to consumers who have higher standards, i.e., quality
over price. Catering to this high-end consumer seems to work for a while, but the
company takes a major hit when one of their biggest wholesale customers (a
retailer in that high-end niche market) declares bankruptcy. The timing is
“unfortunate” since it happens right after the company had delivered one of its
biggest orders ever to the retailer before the Christmas shopping season.
bankrupt retail chain is a big player and has many creditors and suppliers. The
company finds itself to be one of many small fish in a big ocean inhabited by
larger fish, whales, and sharks. Nevertheless, the company demands their unpaid
products be returned. The big retailer responds: Those goods have all been sold
and there’s nothing to return to inventory.
A couple years later a federal judge
from another district orders: All small companies to be awarded new stock cut
by the big retailer. The stock “paid” to the company is literally worth pennies
on the dollar against the products originally delivered, but never paid for,
by the retail chain. Big retailer never changes the name on their storefronts,
re-organizes on paper (board members play musical chairs), has a record year and
is still in business to this day. (BTW, during the entire history I’m describing
today the top value ever reached by this stock was 1/10th of the sum originally
owed to the company for the products that the retailer ripped off…er, supposedly
unable to pay for).
During this same time period, the bank which loaned the company money for the
expansion demands larger monthly payments. Owner/family members sometimes defer
their own pay, but the company is at least able to pay the bank and not go into
a forced sale. Upon a review with the bank months later, the banks representative
makes a comment to the effect of “I can’t believe you guys were able to make your
payments” before raising the monthly payments even more. Negotiations for readjusting
payments, rates, frank talk on how the company won’t be able to survive and local
workers will be thrown into the unemployment line quickly go nowhere with the bank.
Owner has to go to another bank to get short-term loans to cover payroll for
non-family workers as owner/family members go without compensation for health,
retirement, etc. At least the workers understand the company is going through a
rough time and do NOT demand raises or other increases in benefits. Many years of
life in the community together, shared hardships and reciprocated loyalty still
mean something at this point.
Mid 2000s: Owner can’t meet bank terms and is on the brink of losing
personal/non-business property. They haven’t been able to put aside any money for
retirement (I need to interject here that owner lived modestly and frugally as well).
Open and honest discussions with workers about future of the company and tough
changes ahead. Owner sells company, all contents, and product line and only retains
ownership of the building.
New owner is able to get a better deal from another bank
to buy the same company that the old owner couldn’t get a loan to maintain. New
owner believes he can continue to focus on the well-heeled consumers in the niche
market. New owner soon learns that Americans of all shoes would rather save a buck
than buy “Made in USA” products. Production is curtailed and majority of workers
are laid off. Repackaging of imported goods with very few finishing touches by
American hands becomes the new norm just to survive.
The company’s base of buyers
shrinks –they’ve either turned to suppliers representing the Chinese or have gone
out of business themselves. Old customers aren’t happy about the change in
leadership at the company and soon notice the lower quality of goods and services
they receive. More customers begin dealing directly with importers/distributors
rather than the company which appears more and more like an unnecessary middleman.
No one looks at labels to see where products are made or even asks about quality
anymore –the bottom line is cost. The new owner sells to yet another person.
This transaction still includes leasing the facility from the original business owner.
Mid to Late 2000s: The third and soon to be last owner quickly shrinks to a mom
and pop operation. The company becomes a part-time operation in only a small portion
of the original facility. The company’s products are no longer offered in retail
catalogs. The last owner stops making payments on the building and the original
owner has to get a short-term loan to cover the building (a debt leftover from the
last expansion). A year later production stops altogether and the company closes.
The building goes into disrepair and is put on the real estate market, but it’s
already past the bubble and there are no buyers.
In the meantime, the original owner
and last owner end up in court over the breached agreement on the building. Rather
than cutting some stock for a company which no longer has any sales or apparent
residual worth (nor was ever publicly offered), the last owner has to pay some real
cash to the original owner. A settlement is reached for far less than what was owed.
Late 2010: Everyone involved with ownership of the company at some point in its
history has debt. They’re all working for someone else now. But, at least they’re
working. Unofficial unemployment is 20% in their area.
It’s easy to blame China for what happened, but it was only possible with the willing
connivance of people who sit in D.C.
Thank you, Chris. If I had to summarize the point being made here, I would
say that small business has been hollowed out by specific policies which just so
happen to favor corporate profits and thus corporate political power above all other
considerations in the social contract.
The Central State has papered over this hollowing out of small business by borrowing
and spending trillions of dollars to prop up consumption. That "solution"
has consequences which few are willing to face--yet.
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wishes to me: thank you for your kind thoughts.
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