It is true that as economies mature, labor intensive manufacturing becomes uneconomical _as mass primary employers_. One sees this in the UK, in Deutschland, in Japan, in Hong Kong. There is enough of this dynamic, the ceding of labor-intensive, low value-added manufacturing to more peripheral economies, to demonstrate a real vector. So yes, the US was certain to lose some labor-intensive manufacturing over the 1950-2000 period. This did not have to be to E Asia; it could have been to Latin America, for example, and in fact significant production migration _has_ occured there, to Mexico, Brazil, and even Colombia, Peru, and Salvador.

It was not necessary for the US to cede all of its chip plants to East Asia. It was not necessary for the US to cede all of its finished textile plants to other locations. It was not necessary for the US to lose as much of the machine tool industry as it has. It was not necessary for the US to let both its rail freight lines and the manufacturing capacity to retain them severely erode. We didn't have to cede all of our mobile phone manufacturing to other countries.

. . . But it would have taken an explicit industrial policy to support training, wages, and market share for onshore concerns. Something else also missing from the 'We can't compete' line is that quality and sourcing of products really _do_ count, but is was exactly in quality in many of the above areas that American industrial management FLOPPED MISERABLY in the 1960-90 period. We had the ability; we did not have the execution. We were late on inventory controls, for example. There was a lot of talk about how we would maintain the [white collar] engineering and software design shops, and so control the process. The counterargument, which is completely winning the game, now, is that you can’t control the soft engineering if you don’t control the hard engineering: we are losing gradually in the areas where we thought we had a multi-generation advantage, to become no more than comeptitive at best. And etc., and etc., but look, a national policy to retain some of this capacity together with pressure for the firms to actually excel at production could have been made BUT WASN’T.

Instead, we got increased advertising, increased financial manipulation, and increased union-busting, i.e. efforts to wring profits from _non-production_ parameters. THIS has been the American way for two generations. It deserved to fail, has failed, and has left us in a much worse position than if we had built down core production rather than ceded competition.

If you want to lever up the firm to pay out dividends and conduct sharebuy backs…the resulting equity in the firm is going to be that much more risky!

Love the blog, Yves. Keep up the good work!

I would guess that will be the next thing to watch, i.e, increased option grants across the board, to help the poor insiders, during this extended downturn.

Too many of the “professionals” and their attorneys were in one these scams against the public and genuine investment.

As for banks, will take the long term steady interest rate on savings accounts of past years.

independent

How is this behavior stopped? Where are the consequences? Where is the rule of law?

Why is there not rioting in the streets over this? When will there be?

Agree, and with interest rates so low over the last few years, equity funding has been relatively unattractive. The capital reconfiguration you describe can look rational.

However, paying a dividend is (modulo shareholder pressure) optional. In the bad times, you can cut dividend payouts. Debt repayment isn’t so optional.

Secondly, you don’t need to roll equity funding.

I suppose if I was an insider who’d cashed out over the years via option schemes I might be able to contemplate a revenue drop and seized up capital markets in a relaxed manner.

Less congenial for other types of shareholder, methinks.

I get your point about “firms doing real business had to compete with firms riding bubble-boosted market parabolics” squeezed them senseless if they did not behaviorally respond.

But it just underscores the incredible difficulty of competing on the same playing field when the damn wage gap between developing and developed countries are so wide and widening. Reversing the trajectory of that wage gap will go along way towards reducing global trade imbalances and disequilibrium and increasing consumer demand in the rest of the world (where consumer demand needs to grow most while our own consumer demand shrinks).

and yes, conventional economic reasoning does not intersect with that reality. Conventional economic reasoning is too busy pursuing mistaken goals, hence they are busy ensuring undesirable outcomes. I would argue however, that the actual outcomes of these policies are not in conflict with the intended outcomes. Since we can see the possible actual outcomes and risks of these policies are not unforeseeable, they can not be said to be unintended. And that is galling.

“there are structurally very few projects and investments in the U.S. economy that have a sufficiently positive return(a very low number, at this point) that they’ll be undertaken. That structural pressure means deflationary forces will be stronger and investment will be low for a long time to come.”

That is precisely how to read between the lines. There were no more positive return investments to be made in the past decade! It is amazing to ponder that statement for a moment. Every investment project to be made suitable for connecting with the global engine of growth (the US consumer) over the past 30 years had already been made. All of that investment to tap US consumer demand had gone towards increasing overseas production in developing countries. The overinvestment in overseas production guaranteed excess production/overcapacity, thereby ensuring deflationary/lower prices for years to come for the US consumer.

Seeing no other engine of growth out there to pursue, what were the multinationals to do but to let the deflationary forces kick in and game the financial statements till the inevitable recession/depression set in.

The deflationary horizon must stretch as far as the eye can see if the captains of industry could find no positive return investments to make this past decade. Until a new engine of growth is in place, here we will sit in our deflationary squallor.