The Decline of Manufacturing in America: A Case Study

One frequent and frustrating line that often crops up in the comments section of this blog is that American labor has no hope, it should just accept Chinese wages, since price is all that matters. That line of thinking is wrongheaded on multiple levels. It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost (and increased coordination costs of much more expensive managers are a significant offset to any savings achieved by using cheaper factory workers in faraway locations). It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany? Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains.

This argument is sorely misguided because it serves to exculpate diseased, greedy, and incompetent American managers and executives. In the overwhelming majority of places where I lived in my childhood, a manufacturing plant was the biggest employer in the community. And when I went to business school, manufacturing was still seen as important. Indeed, the rise of Germany and Japan was then seen as due to sclerotic American management not being able to keep up with their innovations in product design and factory management.

But if you were to ask most people, they’d now blame the fall of American manufacturing on our workers. That scapegoating serves to shift focus from the top of the food chain at a time when executives have managed to greatly widen the gap between their pay and that of the folks reporting to them.

Let me give you an all too typical example of how American management has contributed to the demise of our industrial competitiveness, namely, the former Mead Corporation paper mill in Escanaba, Michigan, which is now part of NewPage, owned by Cerberus.

The Escanaba mill makes coated paper. Coated paper is shiny paper, the sort you find in most magazines, catalogues, and art books. Coated paper is fussy to manufacture, which makes it daunting in a continuous process setting like a mill. In a highly-capital intensive continuous process business, downtime is hugely expensive.

In 1969, Mead added a #3 machine in Escanaba. Paper machines are very long-lived; you’ll find machines over 100 years old in use, since older, well maintained, well-located machines (as in with access to comparatively cheap power and pulp) can be competitive on grades of paper which are made in small runs (as in the slow speed of the machine is not a negative). The #3 machine was world class at the time of its installation. There was no reason to think it could not be highly competitive through 2020 or 2030 if properly maintained.

Starting up a new machine, however, is not an easy process, and the #3 machine was not operating at the expected efficiency level. Management nevertheless pressed forward with a further mill expansion in 1970-1971, of a kraft-recovery system. The best workers on the #1 machine were moved to the #3 machine which did not solve the problems on #3 and worsened the results of the #1 machine. It took an over two year turnaround effort to get the mill operations up to a good level of productivity.

By the mid 1970s, the Escanaba mill had gone from being the dog to the star. Mead had reorganized to be decentralized, so the Escanaba mill had its own sales force and a true stand-alone P&L Escanaba was one of 40 divisions yet produced the majority of Mead’s free cash flow. Mead added added a #4 machine in Escanaba in 1982. The mill was recognized as one of the best coated paper makers in the US, and demanding publishers such as National Geographic, Smithsonian, and Playboy sought out its product

Mead has also had troubled period with its unions, in particular a bad strike in 1975-6. But a real turn came in the later 1980s. Mead had had a series of record-breaking profit years, each higher than the last, yet sought to squeeze the unions in 1989.

The 1980s were the heyday for papermakers. By the later 1990s, Mead had started scrimping on shutdowns, which is when the plant’s equipment gets maintenance and repairs. Twice a year shutdowns were replaced by annual shutdowns.

In 2002, Mead merged with WestVaco to form MeadWestVaco. The shallow dot-bomb era recession led to further reductions in reinvestment. A $5 million shutdown budget for Escanaba was reduced to under $2 million, even as the departing Mead CEO received a $30+ million golden parachute.

Cerberus acquired the Escanaba mill along with four other MeadWestVaco mills in 2005, forming the company now known as NewPage. Cerberus set return on invested capital targets that were, to put it politely, audacious for the paper industry, which led it to scrimp even more on keeping the plant operations up to snuff.

Cerberus also, in a remarkably bone headed move, bought some troubled mills from Stora Enso, apparently on the hope that it would be able to corner the coated paper market. Consistent with that strategy, Cerberus prefers to shutter mills that don’t meet its return targets rather than sell them, apparently out of the misguided view that it can remove enough capacity to affect its pricing power (this logic is questionable for a second reason: paper grades are specific, and the mills sold may not wind up being competitors of remaining NewPage operations). From CapeCod Today:

Some revealing statistics: NewPage shut down six mills in 2008. It closed its paper mill in Niagara, Wisconsin, the only major source of employment in a city of 1,800. The mill provided 319 jobs, with workers averaging $60,000-a-year. According to local officials, the plant had two potential buyers, but NewPage let the mill sit idle. Wrote newspaper columnist Ed Lowe at the time, “The hardship of the mill closure here parallels that of Kimberly (Wis.), where 600 well-paying paper mill jobs were scuttled as part of the evolving business plan of NewPage…Both mill closures devastated their communities…Some lifelong residents of Niagara worry that their city’s future ended with the production at the mill.”

In Kimberly, NewPage refused to sell to two buyers and declined the support of the Governor to keep the plant open. “This is a case of a corporation taking a productive, profitable plant and closing it, and refusing to sell it to anyone else,” Andy Nirchl, president of the United Steel Workers local, said at the time.

It tried putting through a 60% price increase in 2009, and was forced to roll it most of the way back as its competitors implemented only modest price hikes. This took place when the standing of the mills was falling. Escanaba was shipping product that had breakage problems; its quality had gone from being among the best to middling to low. In 2010, NewPage has had three CEOs, including the notorious Bob Nardelli, who has been named one of the worst CEOs of the 2000s and the worst CEO of all time by CNBC. Paper industry incumbents have not thought much of Cerberus’s management acumen. From Paper and Other Absolute Truths:

President and CEO, E. Thomas Curley, had barely learned the most efficient traffic routes to the office, when he was handed a check for $1.265 million, told not to come back, and, by the way, “don’t forget that you ‘resigned’”. Not a bad four month gig – I doubt that Lady Gaga does that well.

I believe that Mark Suwyn, Chairman and company Director, had been with NewPage from the “Cerberus” beginning. NewPage lost money every year under Suwyn, and was the worst managed company in the business. For that performance, Suwyn will walk away with a cool $2 million.

As an aside, it was reported that Suwyn engaged his son’s consulting firm in 2009, at a cost of $747,000, to provide training for “improving communications skills, consensus building and problem solving abilities.” (NewPage 2009 SEC Form 10-K, at 117). That is so disappointing, and in such bad taste. The program apparently didn’t work either.

The very good news is that there is no upper level management of NewPage. There is no Chairman. There is no President. There is no CEO. If this were allowed to continue for a few years, some real progress could be made.

Robert Nardelli, who has a big Cerberus title, is responsible for the NewPage performance, and is now the non-executive chairman of NewPage. That non-executive title is very important. It means he shouldn’t be in a position to make any decisions.

This entire mess was created, of course, by Cerberus mismanagement. They hired the wrong people, gave them impossible marching instructions, and have continue to play an expensive game of musical chairs at the highest levels of the company. The initial strategy of “pump and dump” didn’t work, and now Cerberus is relegated to actually operating a company. This is not their strength. But then, what is their strength?

If you think this criticism sounds overly harsh, read some earlier posts on NewPage (see here and here). Independent of the bad management, the paper industry is a poor candidate for an LBO, since it has high operating leverage, high ongoing reinvestment needs, is cyclical, and does not offer high returns even at the best of times. Unless you are confident you’ve bought at the bottom of a cycle, it’s one of the worst conceivable industries for a private equity investment.

NewPage lost $88 million in the first quarter 2011, which is an improvement over the $175 million loss for the same quarter in 2010. Its second quarter loss widened to $132 million. NewPage has held up payments to contractors, apparently to preserve dwindling cash.

Cerberus is negotiating a restructuring of the NewPage debt and may file for bankruptcy. The financiers will all get their cut and will move on to the next deal. Yet the workers at these mills and the communities they anchor, like Chillicothe, Ohio and Luke, Maryland (two other places I lived when I was growing up) will suffer the consequences of this rent extraction.

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195 comments

  1. Paul Jonker-Hoffrén

    Dear Yves,

    I am very happy about your post on the paper industry, as it is my research topic for my PhD. In Finland, there is a rather strong union counter-acting the employers, but recent changes in collective agreements have weakened this power. Also in the Finnish case there have been incompetent employers, like StoraEnso’s which bought American firms expensively and sold them cheaply. Furthermore, currently the Finnish (and European) paper industry is reeling from the euro’s high value and as a result the units that are oldest or least competitive (due to capacity restraints in combination with the currency rate)get closed at an alarming rate. I would be happy to discuss this more Currently I have two papers related to this:

    Jonker, P. J. (2009), The Finnish Paper Workers’ Union: Becoming a Paper Tiger? Collective bargaining, Wage developments and Union Density between 1980 and 2005, Theory in Action, Vol. 2, No. 1.

    and

    Jonker-Hoffrén (2011) Whose constituency? Representativeness of the Finnish Paper Workers’ Union, innovation strategies, and outsourcing in the Finnish paper industry between 1980 and 2008, Industrial relations Journal, vol. 42, no. 4, pp. 375–391

    I have a very relevant manuscript in review with Work, Society and Employment. If you are interested I can send you the draft manuscript.

    1. Courtney Kerns

      Hello Paul. I live in a small town in northern Minnesota that would probably shrivel up and die if our paper mill closed. Our mill makes the glossy paper too. It’s owned by UPM- do you know anything about that company and how they are doing? My husband and I are not employed by them but often wonder what the long-term prospects for the mill are. Thanks!

  2. Fraud Guy

    Sounds very much like a local charity, where the PR firm running the major fund raiser “earns” about 85% of the proceeds. Oh, and is run by the son of the chief executive of the charity.

  3. nilys

    Hi Yves,

    There was a similar discussion a couple of years back. Then you argued that it is possible to make T-shorts profitably in the US, and you used American Apparel (APP) as the prime example. I just would like to put up an update on this company. According to a recent article in Bloomberg (http://www.bloomberg.com/news/2011-09-01/american-apparel-said-to-be-in-talks-to-raise-160-million.html ), APP is in a debt restructuring, because it lost $86 millions after an audit found that 25% of their workforce were illegal immigrants. It has emerged that APP is avidly anti-union and naturally pro-immigration. Admittedly, the company is still in business.

    1. Anonymous Jones

      It has also come out that the founder/CEO of APP is almost certainly crazy and quite possibly a sociopath; so I wouldn’t necessarily use them as a test case for what could happen in the US with good management.

      1. optimader

        Yves
        source this please. “..It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost”

        Are you referring to an Argonne National Labs (ANL) white paper study disassembling automotive manufacturing cost, or is this reference to another source?

        Incidentally, currently by my (domestic) manufacturing experience, the % labor cost component cited (10-15%) range is skewed to the heavy side.

        Admittedly we don’t produce Tchotchke, rather more technical intermediate products, but clearly the corporate offshoring motivation appears more rational considered through a lens of tax deferral -a substantially larger motivation than a marginal savinngs, for applications where 10-15% labor content applies.

        In any case, when important considerations to whole cost analysis include quality control, responsive, flexibility in supply rates (and composition), the manufacturing model that includes long supply lines is a very fragile one indeed.

        Consider War as a metaphor for a Manufacturing organization’s “perpetuation”. Ultimately it’s fate in inextricably linked to all underlying risks related to logistics:(see files: Hannibal and the Carthaginians, later in kind the Romans, Napoleon’s empire and the Nazis attempt at one. What they all had in common was ill considered logistic risk exposure to fragile and inflexible overextended supply lines. So goes the over generalized application of an offshore manufacturing model rationalized by legislated competitive tax advantages.

    2. Yves Smith Post author

      You are rather conveniently extracting what I said and are making my comments broader than they were. I said that American Apparel ran a good factory and was competitive while still paying workers $11 to $12 an hour. The fact that they many were illegals does not change the fact that the operation was paying above minimum wage.

      American Apparel was not was well run in other aspects of the operation (a journalist who studied them in some depth commented on how poorly run some parts of their business were). My approving comments were limited to its ability to manufacture in the textile business (one commonly cited as the prime candidate to sending offshore) in the US.

      1. They Got Paid!

        Should be about 15.00 per hour to be above a slave wage. They’d have to eat of dumpsters where you live, for example, if they make the rent.

        1. jerry 101

          Seems to me she didn’t say above a living wage, but above the minimum wage. $11 to $12 an hour is not that great a wage in many parts of the country, and I believe APP does its manufacturing in Los Angeles, where I’m sure that kind of pay does not go far. So, its not a great wage, but there are plenty of places in the country where they could operate a factory and pay $11 to $12 an hour, and have that be above the living wage level.

          That said, I believe that the stories that I read about APP’s downfall all said that the manufacturing end of the business remains quite profitable. They produce a lot of wholesale t-shirts that other businesses buy and then use for their own ends (I’ve never set foot in an APP store, yet I have at least 2 APP t-shirts).

          The problem is with their retail outlets, and expanding too rapidly into marginal markets, and losing a lot of money in the process.

          That, and the crazy founder/CEO.

        2. Ray Phenicie

          $30,000 is good if:
          Salary includes paid holidays and paid vacations because if not time off for those holidays and say two weeks for vacation per year will cost about 10 days pay for the holidays and another 10 for vacation or one months pay.
          Salary includes health insurance because if not then the cost is anywhere from $185/mo for someone under 25 yrs of age to $850/mo for someone over 61.
          other benefits should be included or if not additional salary included to make it above poverty level.
          Poverty being defined when income is exactly equal to or less than monthly totals for rent, utilities transportation and groceries.

  4. Daniel de Paris

    The word Manufacturing is unacceptable.

    The first time I bumped into it was when “promoted” to a headquarters position of an “international corporation” (sic). The wording conveyed a lot of silly subliminal images. Including it stinks, it’s stupid, it’s handwork, “it belongs to those who failed at academia”. Might even, in some districts, projects even more in terms of ethnical background…

    Do not expect to get Porsche-type of products when production is delivered is labelled “manufacturing”

    Back when I was working in “industry”, and proud of it, the distinction between production and developement was way thinner. Sure that would make it difficult to send to China or Vietnam.

    We need a change on attitudes on those issues. Production is no more stinking than a work at Mc Donalds. Especially on Saturday nights. That will only happen when people will be broke to the bones. Not earlier alas.

  5. jake chase

    Well, here you have naked capitalism- recapitalization, leverage, union busting, community abandonment, asset stripping, executive looting. This reads like a vignette from JR, by William Gaddis. Those hoping to understand “what America’s all about” should spend a few months (or years) reading his four novels. Wall Street orchestrates this fandano, and at the epicenter is the Fed with its clown conductors.

    1. tomk

      Gaddis, yes. His reputation for difficulty is undeserved. His novels are immensely entertaining and profound. The trick is to not get hung up on trying figure out exactly what’s happening.

    2. Susan the other

      We are the only country/nation besides tiny extra-legal islands devoted to extra-legal financial operations that does not protect its citizens, workers, and industries. In fact the islands do a much better job of it than we do. When the last drop of easy money is squeezed out of America the last capitalist who is willing to take on an obligation for a predictable gain will be gone. There won’t be one to be found. We will be defacto a socially responsible country, but only by default. There is no goodness in America. There is only greed.

    3. SV6719

      Gaddis is a far superior writer to the over-hyped Jonathan Frantzen.

      Here’s what John Dolan had to say about Jonathan Frantzen’s “Corrections”:

      “Jonathan Franzen’s novel The Corrections, billed as a masterpiece, is a worthless fraud, a hopelessly trite story gaudied up with tedious overwriting. The overwriting is meant to conceal the fact that this novel is a simple mix of three of the most hackneyed storylines in American fiction:

      The picaresque adventures of a feckless male academic, borrowed from DeLillo;
      The sentimental tale of the decay and death of one’s parents as in Dave Eggers’s “masterpiece”;
      The old, old plot device of the family Christmas reunion to bring the centrifugal parents and kids back together again against all odds, as in every sentimental John Hughes movie ever made and about a thousand more before him.
      That, folks, is all there is to this mess: National Lampoon’s Christmas Vacation meets dying-parents memoir meets Manhattanite satire Lite. God help me, but that’s it!”
      – John Dolan

  6. bmeisen

    Here in Germany, Chevrolet was recently described on the radio as a “Korean automobile manufacturer”.

    In case you were wondering, the Muskego Manifesto is obsolete in Norway as well as in Germany. European labor markets are no longer the playthings of aristocracy. They haven’t been since labor organized and recovered from its birthing pains, e.g. King Lud. Major German labor markets are more regulated than in the US – but they are not regulated to hold an ignorant mass of poor on the land. They continue to be regulated to defend the hard won gains of the labor movement from the socially destabilizing predatory games of rent extractors!

    You can make money for a while under the table in Germany and if you make a lot of money you’ll get calls from various ministries and be asked to explain your activities. You need qualifications, formal education and certification of your abilities, if you want to make an honest living over a long period. Access to the qualifications is a public responsibility, a national priority. Therefore, education is overwhelmingly public, i.e. it’s virtually free, and living costs for students are subsidized.

    As a commentator once wrote on this site, there are private schools and universities in Germany. They play an modest role in the continuing education marekt. A couple of private “universities” offer MBA and/or business law programs at Ivy League prices. The impact of these programs in the overall German labor market is utterly insignificant. Demanding programs at public universities in Germany continue to attract top German students. They deserve to attract top students from around the world.

    Once you have qualification and a job you have a high degree of job security, with German law notoriously pro-labor. For example many German corporations are required by law to balance the influence of labor and capital in their oversight boards. Imagine labor representatives holding 5 of 10 seats on your oversight board. Insane, an American might think but IMO it’s insane that the American model of corporate governance hasn’t been the torn to pieces yet.

    1. alex

      “Imagine labor representatives holding 5 of 10 seats on your oversight board. Insane …”

      Of course its insane. The only thing those German industrial companies ever do is make money exporting top-notch products. But how many mansions and yachts does the typical German CEO have? Keep your priorities straight.

    2. Eric

      Does United Airlines ring any bells? Germans are highly disciplined and their culture has driven egoism – which is just as tremendous in German industrial management as it is here – into channels that amplify social cohesion and social benefits. German CEO get bragging rights on measures that leave American exectutives scratching their heads. America is much less unified and you tend to end up with United Airlines experiences….I refer to the United of a decade ago, not today’s.

    3. Blissex

      «You can make money for a while under the table in Germany and if you make a lot of money you’ll get calls from various ministries and be asked to explain your activities. You need qualifications, formal education and certification of your abilities, if you want to make an honest living over a long period.»

      Newt Gingrich described the cultural differences between the USA and Germany as follows:

      http://classwebs.SPEA.Indiana.edu/bakerr/v600/a_new_look_at_environmental_poli.htm>
      «In Germany on the Autobahn there is no speed limit. If tomorrow the Bundestag adopted a 100km, or 62-mph speed limit, virtually every German would obey it. Until, that is, the next election when they would wipe out the current politicians and they would elect the “No Speed-Limit” Party.

      Now this is a significant insight that American reformers have neglected for 30 years, and is the great mistake of the Great Society and everything that followed it.

      And I don’t want to offend anybody, but let me suggest to you that the American cultural response to the challenge of speed limits has been dramatically different than [sic] the German one.

      For most Americans speed limit is a benchmark of opportunity. This is not a light insight.

      If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter-murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?

      The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!” Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him. America is the most incentive-driven society on the planet.»

      1. bmeisen

        Kissinger was big-time impressed by him but I’m still holding out: Gingrich produces gobbledy-goo, not genius.

        “Speed is a benchmark…” Ummm, no.

        The fact that young political parties can have substantial legislative impact is not a feature of German culture. It is a feature of the system of proportional democracy put in place by the founders of the BRD in 1948. They could have chosen an American-style system featuring first-past-the-post elections and a strong president. German culture could have dealt with it. I bet a lot of CDU and SPD members would have gone for it in 1948. Their rejection of it proves that the BRD’s founders were able to learn from their mistakes and from the mistakes of others, including ours. Above all they knew that the success of any system of democracy depended on education, free well-funded, universal public education.

      2. nikhil

        This is silly.

        Gingrich has no idea how people in Germany would act if a speed limit was imposed. I bet some would obey and others would go a little bit over it much like people do in the US.

        He starts with some BS assumption that he purports to be obvious fact and uses that to make sweeping proclamations about the character of US citizens. This is why Gingrich is a blowhard.

    4. Blissex

      «You can make money for a while under the table in Germany and if you make a lot of money you’ll get calls from various ministries and be asked to explain your activities. You need qualifications, formal education and certification of your abilities, if you want to make an honest living over a long period.»

      And this what de Tocqueville wrote on a similar subject about USA culture:

      http://xroads.virginia.edu/~HYPER/DETOC/1_ch13.htm

      «Consequently, in the United States the law favors those classes that elsewhere are most interested in evading it. It may therefore be supposed that an offensive law of which the majority should not see the immediate utility would either not be enacted or not be obeyed.

      In America there is no law against fraudulent bankruptcies, not because they are few, but because they are many. The dread of being prosecuted as a bankrupt is greater in the minds of the majority than the fear of being ruined by the bankruptcy of others; and a sort of guilty tolerance is extended by the public conscience to an offense which everyone condemns in his individual capacity.»

      A fraudulent bankruptcy is a favourite tool of USA managers and investors even today (heavily leveraged buyouts are sometimes a thinly veiled form of it), it is a particular type of control fraud called take out fraud, and it is yet another form of tunnelling, usually masked by some form of under-depreciation as usual.

      1. SidFinster

        Except there are US laws against bankruptcy fraud, and their English predecessors (such as the law against fraudulent conveyances) were in place before there was a United States.

        Working for a German law firm, the biggest practical difference in the treatment of bankruptcy in Germany is cultural.

        In Germany, top management of a bankrupt company can never be trusted again. For better or worse, the United States is more willing to give entrepreneurs multiple second chances.

        1. alex

          “For better or worse, the United States is more willing to give entrepreneurs multiple second chances.”

          In the case of genuine entrepreneurs, and hence known high risk (but potentially very high return) ventures, it’s for the better.

          What galls me is the way that “top people” who run established business and supposedly low/moderate risk ventures into the ground through bad management are given second, third, etc. chances. It’s as though having made it into the anointed class one cannot possibly screw up and therefore all failures are the result of external circumstances. WTF?

    5. SidFinster

      If the Chevrolet-branded automobiles sold in Germany are anything like the Chevrolet-branded autos sold in CEE, then they are in fact made in Korea.

      The only thing “Chevrolet” about these cars is the badge.

  7. neohelvetian

    Thanks for this post, Yves. I’ve had the luck to work in declining industrial communities my entire career and have seen up close the management thinking you outlined.

    On the other hand, I have family and friends in Switzerland and see how Swiss management, labor, finance and government (including education) work together very differently and get vastly superior results.

    The Swiss are not perfect and their management class can often be as pig-headed and short-term minded as the worst of their American counterparts. Just look at what happened to Swiss Air. Yet, overall, Swiss industry faces high labor costs, very strict environmental regulations, conservative bankers, highly limited natural resources all in a landlocked location and yet they are an industrial and export powerhouse.

    Funny how our focus is on emulating cheap labor, low quality, low regulation economies in the east rather than on smart labor, high quality markets of the “old world.” You are right, this lets the idiots at the top of American business, government and education off the hook.

    Thanks again for this post. I wish there was a happier ending to the story.

    1. Hans Suter

      Swissair was run in the ground by McKinsey and don’t get me started on “conservative” Swiss bankers.

      1. neohelvetian

        Swissair brought the Americans in as their saviors hoping to implement American style shareholder gains through expansion and acquisitions. That didn’t work out too well post 9/11, did it? I didn’t say the Swiss were perfect and, frankly, they are at their worst when they think they have to out-American the Americans.

  8. macstibs

    Flippin company is named after the dog that guards the gates of hell… what could one possibly expect the outcome set to look like?

    1. issacread

      Extraordinarily apt insert. I watched this series of documentaries years ago but without the hindsight of the current predicament. Thank you.

    2. Carla

      But of course. Where do you think we got it from? We move in lockstep with the Brits, except they suffered enough in WWII to decide they needed to rebuild their population with the National Health Service. Of course, having see the American light, they are busily dismantling it now.

  9. Dave of Maryland

    On the one hand you link to a story about pampered students. If their education had any value, if the students had any interest in it, they would not need to be drugged and/or bribed to get through it.

    On the other, this story, which sounds a lot like what happened when college educations were required for management positions. College kids are idiots. For the most part, they were trained by professors to become professors, and that was before the pampering.

    The best managers, the best journalists, the best CEO’s, the best generals, the best anything, are talented, self-motivated guys who were initially hired at age 18 who came up through the ranks. But that has not happened in America for a long time. Middle and upper levels of management have been closed to high school graduates for many decades. Look at the results. It’s the 18 year olds with union daddies who know the shop floor and who, by the way, believe in unions. Not non-unionized degree-holders who think their lessors are lazy and inferior.

    The more crushing student loans get, the less likely graduates can afford jobs with corporations, but that still means we have 30+ years to go before the existing college idiots purge themselves from the system. By that time who knows what will be left of American manufacturing.

    Georges Gurdjieff notably said education was like salt. Excessively applied, or scattered to the winds, and its effect was lost. Education is a skill like any other. America is a land of oppressive education, which has resulted in vast numbers of the most highly unskilled managers.

    A convincing case can be made for reducing mandatory schooling to age 12, but I digress. And yes, I’ve got a bunch of those useless scraps of paper in my personal collection. I went down that road.

    1. alex

      “The best managers, the best journalists, the best CEO’s, the best generals, the best anything, are talented, self-motivated guys who were initially hired at age 18 who came up through the ranks. … A convincing case can be made for reducing mandatory schooling to age 12”

      You’re going way overboard. I too am suspicious of the credentialism that requires a college degree (in whatever) for positions that used to be successfully filled by HS graduates. However, Germany also has a high college graduation rate and has long been known for a high quality educational system.

      Moreover, there are some fields where specific post-secondary education is clearly useful. For example in my own field of engineering. A lot of those classes I took, that I worried were just academic nonsense, turned out to be very useful. Education is no substitute for talent and experience, but it’s not a hindrance either.

    2. Jib

      Yes, what Alex said. The hard sciences can not be learned on the job. The NC machines on the plant floor will not be designed by apprentice workers. You dont want bridges built by self taught engineers, hell the educated ones have enough problems building them. Not to mention M.D.’s

      That said, it is a very small number of positions that actually require extensive formal education above the high school level. We live in a culture that expects every ‘above average’ child to get a college education. And of course all children are above average. People are not that much smarter than they were 100 years ago (there is some increase in average IQ but their are issues with IQ scores so who really knows) yet we put a much larger number through college now. Most really should not be there.

      Back in the day when you could get a college degree and not go into debt, who cared if a 18 year old wanted to spend some time drinking beer and going to parties. They might even learn something. Now kids are getting degrees in poetry and graduating with 50k to 100k in debt. They start off life with more debt than my first 2 mortgages. This is going to be a problem for the economy going forward which makes it a problem for all of us.

      1. Dave of Maryland

        Machines are designed by the qualified few but used by the masses. You could make the same argument for computer programmers, or the mixed race & gender folks who designed this blog. These creators are the self-motivated few who belong in school and who end up with useful skills thereby.

        But otherwise, we’ve got too many people in jail, and too many in post-secondary education. Do you suppose all those happily employed Chinese have college degrees? Do you suppose all the newly employed Chinese managers have advanced degrees? Why do we?

        1. alex

          “Machines are designed by the qualified few … You could make the same argument for computer programmers”

          Guess you don’t work with many engineers or programmers :)

          1. John

            Alex I think what he meant is that those people who are interested in such subject areas will be bound to pursue college, which I think holds some merit. This is probably how college should be rather than the credentialism that plagues our society now.

            Perfect example: I’m studying at on of the top 5 schools for computer science. I recently tried to get a job with the university to help pay some of my tuition off. I tried first to work as a secretary, and when I spoke on of the hr secretaries she immediately replied “what skills do I have?” which I told her I worked for some years with the school as a secretary (student work). She answered that didn’t count as continued to ask me for credentials. Since when does working in a profession not count as experience in that profession?

            I noticed the same attitude as I began to look at other jobs with the school as well. They have this “testing” they do for basic jobs like janitors. What test shows a person’s aptitude to clean bathrooms and hallways? The only thing I’ve seen as a result of this is that it creates perceptions of entitlement among people who really don’t deserve it. That somehow, because you got though such a process that you are smarter or better than others who didn’t.

            I see the same thing in many corporations now. What are credentialism has done is in a way demeaned hard work and created perceptions of entitlement in those who become executives. Somehow because you are CEO, you have some natural talent above others that deserves much higher pay, and when you screw up, you get huge compensation and go on to another CEO position elsewhere. Managers aren’t really seen as being developed so much as natural ability (i.e. because you went to a top mba school you have better natural talent than others).

            Back to the credentials issue. Most jobs don’t require a degree, and to say that college is for everybody does a disservice to many people who attempt to go and leave because they don’t know why they’re there or those who don’t go at all. What’s worse is the school loan situation that exists. People are being set up to be in debt their whole lives to purse this american dream, but that leads almost to a completely different problem. This frustrates me as I have such a strong appreciation to what institutional education can offer those who have the interest, but here it’s just not being made available in a financially feasible way to everyone.

        2. fajensen

          Do you suppose all those happily employed Chinese have college degrees?
          They are “The Ant Army”. People with degrees and without connections who end up selling noodles on 100% commision and cannot go home because their family pawned everything to put their single child through college.

          Do you suppose all the newly employed Chinese managers have advanced degrees? Why do we?

          Why, because I sometimes have to work with them. They do have advanced degrees, they are in the top 99% of the grades, which is quite good considering the competition. Yet, the majority of the “up and coming class” seem to have adopted the very worst “best practices” from America and behave like retarded children in front of people.

          The reason that the Chinese take our IPR and our jobs is that *we* – our government really – give it away to them!

    3. Carla

      Dave of Maryland, you say: “And yes, I’ve got a bunch of those useless scraps of paper in my personal collection. I went down that road.”

      That’s obvious. Because you don’t have to earn multiple degrees to know that “the best” in every field is not necessarily a guy.

      Amazing that in 2011, some guys still have to have this pointed out to them.

    4. DSP

      Well said.
      And there is also the Moses Effect of education.God has passed on His knowledge and anointed me.This makes the recipient less likely to listen to the un-anointed or learn anything from reality.

  10. Unsympathetic

    I’m not sure mandating a change of composition of all BoD’s would have any substantive shift.. then you’d just see the same people nominated as “representing labor.” Witness the statements of the NYC Fed woman who’s supposedly representing “The People” : “Wall Street is our Main Street.” With friends like that, who needs enemies?

    Also, Yves, this story highlights the reason why aggregate demand is falling — loss of jobs, simple.

    1. Graveltongue

      You also have to consider, when looking at the fall in demand for manufactured products and services, the numbing of large sectors of us consumers to the tools and techniques used by marketing and the like. Eddie Bernays’ magic is losing some of its glitter, the old tricks aren’t working so well and folks consumptive behaviours are changing, nay, have to change. Avarice is so last century.

  11. Dan Duncan

    Happy paper mills are all alike; every unhappy paper mill is unhappy in its own way.

    No doubt the Mead/New Page example is abysmal, but do you have any paper mill success stories over the past decade? [Other than, of course, Koch Industries. Perhaps you could enlist Koch’s Georgia-Pacific as a counter-example for the way paper companies should be managed.]

    It seems a bit myopic to indict US Manufacturing on the basis of a paper mill.

    And what of the German Export Powerhouse reference? Reading any Naked Cap post on the Euro crisis, it is “obvious” that the only reason Germans achieved success in this regard is by forcing PIIGS to go into debt while importing German products. Now I read that German Manufacturing prowess is the result of sound, pro-labor management policies. Gosh, who’da thunkit?

    1. alex

      “It seems a bit myopic to indict US Manufacturing on the basis of a paper mill.”

      It would be, but that’s obviously not what Yves’ is doing. Note her subtitle “A Case Study”. An example for illustration, not a single data point from which all general conclusions are reached via induction.

      “And what of the German Export Powerhouse reference? Reading any Naked Cap post on the Euro crisis, it is “obvious” that the only reason Germans achieved success in this regard is by forcing PIIGS to go into debt while importing German products. Now I read that German Manufacturing prowess is the result of sound, pro-labor management policies. Gosh, who’da thunkit?”

      Two different things. While Germany is obviously successful in manufacturing, that doesn’t mean it was a good idea for them to run a large and ongoing trade surplus. While such a policy seems good at the time, history shows it always leads to serious problems. Germany’s problem was not being successful in manufacturing, but importing too little from its trade partners.

      1. Typing Monkey

        “Germany’s problem was not being successful in manufacturing, but importing too little from its trade partners.”

        Alternatively, you could say that the trade partners’ problem was in not producing anything that the Germans considered worth buying.

        1. SidFinster

          German manufacturers also typically focus on high-value added and specialty products, products in which purchase price is not the biggest consideration.

          When what matters are reliability, applicability, total cost of ownership, quality, or uniqueness, then a manufacturer can and probably should use expensive skilled German labor for production. Things like industrial machinery, luxury or commercial autos, specialty chemicals and pharmaceuticals.

          By the same token, once a product becomes a commodity that can be produced anywhere, a German manufacturer often chooses to exit that business line. Siemens and its decision to sell many of its telecommunications lines comes to mind; until recently, that had been a core Siemens business.

          Something similar can probably be said for Sweden, Austria, the Netherlands, etc..

    2. Philip Pilkington

      That’s on the demand side, genius.

      Germany requires export markets for the products produced by it’s highly productive indus… nah, I’m not going to bother.

  12. Anonymous Jones

    This was an absolutely fantastic post. It would be great if someone would assemble stories like these and publish them together.

    1. JTFaraday

      I agree. I find the “finance boyz deliberately destroy productive business in order to use it as a vehicle for looting” story fascinating and under covered.

      Perfect topic for questioning contemporary articles of faith about the viability of real economy businesses and exposing the real nature of “the talent.”

  13. petridish

    Perhaps this is naive, but why couldn’t eminent domain have been used to seize the plants that Cerberus refused to sell in order to keep them open?

    1. alex

      I don’t see how eminent domain could reasonably be used, but I’d love to see laws which require such plants to be sold to the former workers if they can raise the financing.

    2. propertius

      I was wondering this myself – the courts have recently held that eminent domain seizures for private redevelopment are legal, so why wouldn’t the seizure of an abandoned, apparently valueless, and no doubt hazardous facility be legally justifiable?

  14. DrDick

    Further evidence of the widely ignored fact that most of our supposed MOTU are not really all that bright and are not very innovative or creative thinkers. They have run the economy into the ground and are passing the buck to the workers.

    1. alex

      “most of our supposed MOTU are not really all that bright and are not very innovative or creative thinkers”

      Depends on what their goals are. In terms of self-enrichment, they do a hell of a job. Of course that’s largely done in ways that are socially destructive and harmful to our economy in the long run. Think organized crime increasing profits by illegally dumping toxic wastes. It’s beneficial to the mob bosses.

      Of course a quaint theory holds that there should be laws against such activities, and they should be enforced. At the very least government policy and actions shouldn’t encourage such activity. But I won’t bore readers with tales of yore.

      1. DrDick

        They are effective in that area, but not very original or creative about it, instead relying on the same old tried and true featherbedding techniques that have been around for over a century. You do not have to be terribly bright to do what they do, though they are not mostly actually stupid, just greedy and amoral.

  15. Philip Pilkington

    Very good. Yes, those folks that claim its all about wages and the like always ignore the Japanese model. In Japan, as you are fond of noting, income is better distributed and yet they remain highly productive and competitive. Magic, I guess.

    Seriously though, the ‘China take jobs’ argument is ideological. The two groups that use it are the elites — whose motive is to forever cut wages and justify incompetence — and the Marxists — whose motive is to point out that the elites are forever cutting wages and are incompetent.

    Yawn-fest.

    1. Paul Tioxon

      Perhaps David Harvey can rouse you from yr narcoleptic state of mind. Here is another point of view, about the crisis of we are in, and what is a theoretical model for understanding it. Unfortunately for some, it comes with a phobia or two arising from the discomfort of being called a commie pinko, but then, there are some great pills for that these days. Without further ado, a great animation of David Harvey’s analysis of Neo-Liberal current problem:

      http://vimeo.com/13300662

    2. Juan

      In the U.S.,so-called elites have not been cutting [real] wages all the time, only most of the time since 1972.

  16. Metal Fatigure

    PRS in Maryland manufactures art work, musical instruments which are world reknowned. It ain’t no union shop, but in a honest moment, taxes and regulations aren’t hurting that business such as the screams from the ministry of propoganda would have us believe.
    Benton Harbor Michigan, on the other hand, home of Whirlpool, tweaked their reliability so you’ll have to buy more. Nothing shows the decline of quality of world wide manufacturing then does the refrigerator. An absolute luxury item still in some parts of the world, but one where consumers are expected to buy and replace units like they were disposable. Bad for the enviroment, bad for the consumer, bad for the workers: better engineered profits.

    1. Courtney Kerns

      I’m new to this blog and these issues in general, but can you point me to evidence of companies (such as Maytag) deliberately decreasing their products’ reliability? That’s something I’ve wondered about before and would be fascinated to know what cases have been documented. Curious when and how that happened, exactly- because obviously it did! Thanks!

  17. linda amick

    The details maybe different but the overall progression of the paper mill history you relate is the same as applied to Nortel Networks; a Telecommunications Equipment Manufacturer. I worked there for 25 years. They went into Chapter 11 bankruptcy in Jan, 2009.
    Beginning in the late 90’s upper management became enamored with the “Best in Class” philosophy: a company should only do what it is best in as compared to competitors. As such Nortel began to divest operations..Shipping and Transportation, Installation, Manufacturing etc. The end goal apparently was to perform governance of all the outsourced corporations and to only keep creation of Intellectual properties as the core competence.
    Nortel became a virtual corporation. The employee population went from 106,000 to 28,000 at time of bankruptcy. As a witness to all of this I was struck by many things: 1)there was an underlying desire to stop needing experienced personnel..ie, any management type can do governance. 2) there was an underlying desire to make results seem better..ie, it was much more difficult if not impossible to determine true cost of sales and therefore easier to do creative financing. 3) this new arrangement made it possible to bring in upper management (GE for ex) who knew nothing about the Telecommunications Industry.
    In short, I believe a component of the elimination of manufacturing IS the desire on the part of Executives who parachute in and out of Corporations with no accountability to perpetuate this model. If nobody knows anything because the structure defies knowledge then charlatans can prosper.
    Sad but true.

    1. Altoid

      I’ve seen close-up a precursor to this kind of flim-flam that was promoted as “if it ain’t broke, break it.” This was the head of a small college, about 15 years ago. He spent six months scoping the place out then systematically broke apart the areas where people knew what they were doing, got rid of about half a dozen people and replaced them with his own acolytes, made sure they were in charge of the non-academic areas (actual academic stuff intimidated him).

      My conclusion was that it was the old divide-and-conquer, set up so that only he could know what was going on, and intended to stop people from talking to each other. It worked until he left for greener pastures.

      1. Jeff

        That’s why the State University system in California has put the groundskeepers and the cops in the same union.
        No common interests except the name of the employer.

    2. fciei

      Funny thing is, while you guys were demolishing your core competence Lucent was running an elaborate industrial espionage operation with moles, turncoat retirees and internal cutouts to boost the productivity of their reverse engineering.

  18. Peace Don't Sell

    Where would we be without the DOD, manufacturing spread out all over US congressional districts. You think all the tonnage the US has pumped into Libya manufactures itself?
    One of Obush’s achievements, in addition to the illegal, undeclared war in Libya, was to sell Lockheed’s goodies to those who could come up with the scrip.

  19. Ron

    Besides the fact that coated paper use is in serious decline due to internet/computer/technology along with the entire printing industry we need to move the manufacturing discussion beyond the labor vs management and for good measure imports. Instead Americans need to be educated on the impact of automation on the manufacturing process which is able to generate greater volume output with little or no traditional floor labor.

    The key word is volume output since most people understand that automation reduces labor inputs but few have realized that as volume increases in these facilities we need fewer companies to mass produce similar products and the ability of the economy to adsorb the higher volume outputs becomes doubtful. This also will become clear on an export basis as more countries gear up there manufacturing base with intensive automation looking to foreign markets to absorb the output.

    1. JTFaraday

      There’s really (at least) 3 issues here:

      1). Yes, businesses including but mot exclusively manufacturing businesses, will become obsolete, become more productive and require fewer employees, etc.

      2). Many businesses operate on slender profit margins. This was/ is true for most of the publishing industry that you reference, for example, whether paper based or virtual. Nevertheless, people made and continue to make livings in these businesses and some people even work in these businesses because (gasp!) they want to.

      3). A group of predatory business managers and finance boyz do not want to make decent livings “running” #2 companies. They believe they are entitled to compensation that #2 companies are unlikely to produce for them, and so when they gain control of a #2 company, they start manipulating it under the PRETENSE of making it more productive or more profitable, but what they’re really doing is manipulating it so as to extract payouts to themselves until it collapses and they order their golden parachutes. This personal wealth extraction is their only real aim.

      The only thing #1 has to do with #3– which is what this article is really about– is that #1 provides a good cover story for #3.

      So, you’ve conveniently changed the subject. Unless you work for Cerberus Capital “Management,” and not #1 or #2, you might want to stop.

      1. Seth

        ” … predatory business managers and finance boyz [whose] personal wealth extraction is their only real aim …”

        Precisely. All you need to know about them is encoded in their corporate identity: Cerberos is the 3-headed dog guarding the gates of hell — to keep the damned from escaping.

  20. John Zelnicker

    Yves — Thanks for putting the responsibility where it belongs: on management. Here in Alabama, we have experienced the same thing with the paper industry as well as the garment industry. Small towns have been turned into ghost towns, industrial property has been bounced around and left unused, etc. These companies had good, dedicated workers who just got screwed.

    1. tech98

      These companies had good, dedicated workers who just got screwed.

      And yet, Alabamans continue to vote overwhelmingly for the political party that seals the deal on their economic impoverishment.

      1. Lord Koos

        Kind of like the Stockholm Syndrome. As long as the American public can continue to be dumbed-down and vote for the same people that are fleecing them, nothing is going to change. It’s a truly excellent con.

  21. jwpegler

    The real cause of the decline in manufacturing is government taxes and regulations.

    We have an 78,000 page convoluted tax code. It costs corporations over $400 billion a year just to figure out how to pay the taxes. Corporations only paid $147 billion in taxes in 2010. So, it costs corporations in America almost 3 times as much money to figure out what taxes they owe than the taxes they actually owe. The SYSTEM IS INSANE.

    There are more than 50 regulatory agencies in the federal government. 50. Every year, these agencies pump out thousands of pages of new regulations, on top of the old ones that have been piling up since the 1930s. There are about 170,000 pages of regulations total. Complying with Federal regulations costs businesses over $1 trillion a year.

    The regulatory burden on business has skyrocketed during the Obama administration, especially coming from the EPA. Obama just postponed an EPA regulation that would have effectively shut down building construction in the U.S. next year. On tap is a new regulation that will close 8% of the coal- fired electrical plants next year.

    No cost benefit analysis is done for any of this. And the Congress doesn’t have to approve any of these new rules.

    These are among the primary reason why manufacturers are fleeing overseas.

    40 or 50 years ago, there was no where to flee to.

    Over the last few decades, countries have reformed their economies, lowered their tax rates, and put their “open for business” signs out. We have slowly gone in the opposite direction. As a result, America is no longer competitive in the world economy.

    This is something that the left just isn’t smart enough to understand.

    1. alex

      Thankfully Germany has no taxes and no environmental or worker safety regulations. By contrast Somalia’s economy is strangled by such things.

      1. Art Eclectic

        Thank you for the perfect retort to that line of garbage.

        Not to say that our tax code isn’t its own circle of hell and needs to be binned, but anyone blaming economic decline on it is just an idiot. As for environmental regulation, if you can’t figure out how to run your business profitably without poisoning the air and water that we all breathe and drink, you don’t deserve to be in business.

      2. John Spiers

        Well, hang on… bad comparison… compare USA and Germany to Hong Kong, where worker safety and the environment are secured, without govt rules and regulations. Property rights and contract law provide those public goods, without 87,000 pages of rules and labor unions.

        Somalia suffers from excess government, what with the Soviets, the capitalists, Islamicists all imposing their will on an unwilling people. Somalia needs freedom not regulation.

        As an importer by profession, I can tell you USA imports almost nothing it could not produce better itself, except for execrable management. Yes, we go overseas to take advantage of stupid government policies, grounded in the FED and its cartel.

        Although I advocate free markets (which necessarily makes me anti-capitalist and anti-communist), I’d recommend two books by Marxists that go a long way to explaining “how come” … Jud Suss (also entltled “Jew Suess” and “Power” in some printings) by Leon Feuchtwanger, and The Transformation of American Law, from 1789 to 1860, by Morton Horwitz.

        Property rights checks pollution and freedom to contract checks exploitation. In places like Hong Kong, the bad guys are kept in check by far simpler means.

        1. tech98

          Property rights checks pollution

          Have you been to Hong Kong lately?
          If so, did you happen to breathe air or get a look at the condition of the harbor?

        2. SidFinster

          “Somalia suffers excess government”?!?

          Sayasaywhat? Long as you pay your street tax and don’t tork off the Ummah, there is not a worker safety or ennvironmental regulation in sight there.

          In Somalia, the market takes care of those things.

    2. YankeeFrank

      Nope. Wrong. The real reason is as Yves points out. Nobody is suggesting that the tax code can’t be simplified, but regulation of management/labor and environment in Europe is much more rigorous than in the US, yet somehow they manage.

      My wife’s uncle worked as a consultant to John Major’s government after many years fixing troubled manufacturing companies across the world. These were companies that were soon to close and without fail the problem was always upper management. In fact, he would only take a job if he had carte blanche to chop anyone, not just floor workers. Of course management would welcome him and begin complaining about the floor workers and how poor their work was. He would invariably ignore them, and spend weeks to months on the floor of a plant learning the business and how the work was done. Inevitably, and with much shock and disbelief, the management would get canned and the company quickly brought back to profitability. Management is always the problem at sick plants. They are paid too much, are lazy and pompous. I guess its just human nature but I don’t think so. People are taught this stuff. They are taught to think of themselves as better than others. Unfortunately we no longer have the luxury for such silly ideas, if we ever did. Why did Japan overtake us in manufacturing quality? Because they were humble enough to allow “lowly” floor workers to have a say in process and actually stop the line when things go wrong. Treat workers like fungible garbage and what do you get? Garbage. America worked when we didn’t talk of “elites” and “little people”, just “Americans” working together for a common goal. It was a short run I’ll admit, but that’s probably due to the youth and lack of depth in our culture. If we can find that truth again — the one where the pointy-heads and the no-nonsense workers come together with mutual respect for each others’ strengths we can be the best again. Its all a matter of putting aside hubris and arrogance, and greed, for the common good. Realistically its not going to happen until we have a great shock, which for some reason I think is not far off. We will be devastated by war, or plague, or economic collapse, or all three, and hopefully people will then sober up and the sane voices will start to be listened to again. Why does it always take catastrophe for human beings to wake the fuck up?

      1. Blissex

        «Management is always the problem at sick plants. They are paid too much, are lazy and pompous. I guess its just human nature but I don’t think so. [ … ] Why does it always take catastrophe for human beings to wake the fuck up?»

        The issue is always vested interests embezzling whatever they can for as long as they can. Never underestimate the power structures supporting vested interests, and how common little “hydraulic empires” are.

    3. eclair

      “…America is no longer competitive in the world economy.”

      Oh, for heaven’s sake, that phrase is just code for “the USA no longer has the requisite number of properly cowed workers who can be coerced into chattel-like labor conditions of 12 hour days and 6 day weeks and spend the 7th day recovering on their bunk bed in fetid company housing all for a wage that provides them with just enough food to prevent outright starvation. And, management has paid off the local governing class to look the other way while our manufacturing facility pumps carcinogens into the air and water, thereby saving us the cost of actually mitigating the poisonous effluvia that results from our manufacturing process.”

      And, as a corollary: “But we are working on reducing the current American workforce to comparable states of desperation as well as gutting the current, albeit feeble, environmental regulations in existence in the US, so that we might be able to consider, in a decade or so, moving some of our operations back to the US, thus realizing a savings on our not-inconsiderable transportation costs.”

    4. bigtalk

      Pegler. Now there’s a guy who never had to meet a payroll,
      never had a P&L, never got chips in his shoes, guaranteed. Watches Fox, that’s how he knows.

    5. Sleeper

      The tax code is determined by Congress not the executive branch.

      The real problem with the tax code is that each congressman has te ability to sell tax code “adjustments” to paying clients “contributors”.

      While Oboma (or any other president may proprose Congress holds the purse strings as it always has.

      Should any congressman begin to whine about taxes they are cryong about their own mess.

    6. gs_runsthiscountry

      Your regurgitated talking point didn’t need to be that elaborate, “Cut corporate taxes, it is the cause of everything wrong with the economy!!” would have sufficed.

      Let me ask a question, if we cut corporate taxes to zero on Tues Morning Sept 6, 2011 what would be the impact to the economy on over he next month, 6 months, 3 years, 5 years, and 10 years?

      Cant wait for your answer…and version of utopia.

      gs_

    7. Paul Tioxon

      Corporations pay no taxes a lot of the time, and very little most of the time. Tax rates are about as insightful as speed limits on roads for describing what is going on the world. Right wing kooks are taking them selves so seriously they actually believe the agit prop coming from their self appointed “”insitutes””. No, there is no evolution, we have 2 eyes, can’t you see that disproves it? No, there is no global warming, don’t you remember the blizzard in last Winter? No, big labor is destroying America, one pay check at a time with it’s fancy opulence and corrupt leaders who soak them for union dues that they used to save the entire auto industry and 100,000s of jobs. What a con, keeping GM and Chrysler afloat, let the Germans and Koreans and Japanese do what they do best and let the “workers’ retrain. They can do IT work, no wait, that has gone to India. Oh Well.

    8. Charles Lemos

      Your facts are off. U.S. taxes are low relative to those in other developed countries. U.S. taxes at all levels of government claim 28 percent of GDP, compared with an average of 36 percent of GDP for the 34 member countries of the Organization for Economic Co-operation and Development. Among OECD countries, only Japan, Korea, Mexico and Turkey have a lower percentage. It is a GOP myth that US is a high tax country.

      Yves, this is a great post.

    9. Lord Koos

      Yes, it costs corporations a lot of money to hire people to avoid paying their fair share of taxes.

      I don’t know how corporations made any money at all in the 50s and 60s when taxes and wages were high and unions were strong, yet somehow they managed.

  22. F. Beard

    Imagine if US corporations were owned to a large degree by their workers. Then:

    1) US workers would share in the profits of outsourcing and automation
    and/or
    2) US workers would be able to vote their shares against said outsourcing and automation.

    So why don’t US workers have a large share in corporations? Basically because the existing corporate owners find it cheaper to steal the purchasing power of their workers and the general population via so-called “credit” from the banking cartel.

    1. Art Eclectic

      I think what is really going on is the same elitist worship of wealth that you see crop up in Tea Party commentary and Bush family members: you get what you deserve in our meritocracy. If you are poor, it’s because you are lazy. If you are unemployed, it’s because you lack worthwhile skills and won’t work for lower wages.

      Time and time again, I see comments from Tea Party types that the wealthy deserve to keep more money because “they deserve it.” Since when has wealth meant merit? Only in Republican fantasies.

      1. F. Beard

        If you are poor, it’s because you are lazy. Art Eclectic

        That statement is not Biblical: One hand full of rest is better than two fists full of labor and striving after wind. Ecclesiastes 4:6

        Furthermore, many people do work hard all their lives without achieving great wealth. That seems to require (in most cases) the use of leverage – borrowing from the counterfeiting cartel – or being a member of it.

        1. Art Eclectic

          It may not be biblical, but it is right from the mouth of GWB and a representation of the low view which his class takes of dirty labor. Another favorite of mine is Barbara Bush “it’s good enough for the poor.”

          The disdain that the elite class has for labor and particularly the poor is what drives them to reward themselves (the wealthy) as being the rightful recipients of wealth.

          And then there was Leona Helmsley “taxes are for the little people.”

          1. Blunt

            The idea isn’t biblical, but it is Calvinistic and two of the building foundations of USA were 1) Dutch merchant princes & 2) Leveller/Puritan merchants (they’d adjure principality in favor of decapitating the princes.) The notion in very smart order became established by [i]force majeure[/i] and, in the same way, ignoring the power of [i]casus fortuitus[/i].

            Thus, what is often, probably most often, attributable to sheer chance and good fortune is instead attributed to the “will of god”, “hard work”, “self-made manhood”, “cream rising to the top” or some other execrable mythology invented and established by those with the guns and the talers who were recipients of said good fortune or, as Molly Ivins cogently remarked of Dubya, “He was born of third base and thought he’d hit a triple.”

            As ever the MOTU try to use the power of deity to invest themselves with the trappings of power and to fasten in the minds of the many minions the notion that the MOTU are both chosen of deity and invincibly brilliant.

            We really must start educating our children to recognize men (or women) parading about naked while said men (or women) claim to have the finest and most expensive robes imaginable covering themselves.

        2. justanobserver

          well said.

          and many people are very intelligent and work hard all their life and don’t become wealthy.

          many people during the dot-com bacchanalia on the other hand, worked hard for a couple of years, many times were simply in the right place at the right time, and became very wealthy.

    2. John

      Very interesting point. This is something that I’m trying to get a lot of my friends to see. Whether or not what’s happening in these corporations is good or bad there is no doubt that a lot of the wealth that used to go back to workers in wages or benefits is being reallocated to shareholders (and executives to some degree).

      What this requires is that workers invest some of their money into the company( usually there are packages where you can get discounted shares) among other things. I’d even go as far as to say that you have to use investment to supplement you regular purchases. Case example Netflix. For anyone who likes movies Netflix is a no-brainer at $100 a year. But say you took about that same amount of money and put it in Netflix stock you would have seen a 5x gain. That would be five years worth of netflix for the price of one year. Unfortunately, the problem I see with this is it puts a tremendous amount of financial pressure and risk on many already financially strained people. But alas, that is the nature of things right now. It is also an interesting topic that I’m working with some of my professors on researching.

  23. sticks

    Hollowing out US manufacturing has been our ruling class’s industrial policy (I know…there is no such thing; it’s all “market forces”. But let’s be empirical for a moment.)for over 30 years. That policy relies upon a general public anathema to labor, which is pretty astonishing considering the vast majority of Americans have to rent their labor in order to make a living. Small wonder H. Thompson seized on the idea of fear and loathing as the twin pillars of American civilization. I suspect President Perry, with the support of Congress, will abolish Labor Day, after repealing the 14th Amendment, and in its stead create a new national holiday: Slave & Convict Labor Day.

    1. Blissex

      «general public anathema to labor, which is pretty astonishing considering the vast majority of Americans have to rent their labor in order to make a living»

      You may unaware that what matters is voters (people who actually vote), 70% of which are property owners, and campaign donors (people who actually give money to candidates) and 95% of those are property owners (“property” here means real estate and shares).

      Voters and campaign donors have been driving the two main policies of the past 30 years, which are for low tax or tax free capital gains for winners and lower wages for losers.

      Because if you are a middle aged or retiring property owner capital gains are what will make your retirement luxurious, and losers’ wages are your costs. Cheaper cleaners, maids, nurses, gardeners, waiters, … make your hard earned capital gains go further in giving the lifestyle you deserve.

      The definition of the American Dream is “F*ck YOU! I am fully vested”.

      1. sticks

        Put another way: the American Dream..you have to be asleep to believe it (G. Carlin). I disagree: voters don’t matter. Donors, of course, do. Lobbyists matter more. U.S. industrial policy is driven, to my knowledge, not so much by the capital preservation desires of wealthy individuals, but by labor arbitrage goals of U.S. transnational corporations. U.S. firms by now have pretty much written off the United States for investment, having of course been instrumental in wage suppression, job outsourcing, the wholesale failure of the feds to enforce labor laws, etc. and so on, factors which contributed mightily to our current generally dismal state of economic affairs. Couple wage suppression with regressive taxation policies –one may say that the US has regressed to mean, the progressive policies of the 1st 40 years of the 20th century being an aberration– and you have the very effective wealth transfer from labor to the rich investor class. So, your analysis holds better for tax policies. Happy Capital Day….Marx is Dead, Long Live Engels.

  24. molecule

    This is not right, It’s not even wrong.

    I have it on good authority that Western industrial companies are building factories in Asia at the behest of their customers. These customers want local supply. If you can’t guaranty local supply they’ll look elsewhere.

    My employer reluctantly opened a chemical plant in Shanghai for this very same reason. A cousin of mine, a sales manager for a German manufacturer of gears, relayed the same story. They had to build a plant in Suzhou, China or lose business. It’s a snowball effect and Germany is not exempted. Once the first level suppliers are pressured to build there, they will pressure their own suppliers, and on and on.

    As for the paper industry story, can you find an example industry that is not under tremendous stress caused by technological change? Paper is going out of style. Google, Amazon, P2P, .. saved more trees than GreenPeace ever did.

    Notice I didn’t even use the words “labor”, “wages”, “unions” or “greed” until now.

    1. YankeeFrank

      You are putting the cart before the horse here. The manufacturers want local supply, but if the manufacturers were in the US, then local supply would be where? And the products of said manufacturers in China, where are they bought? Not in China, so your argument is wrong on several levels. While I’m not denying the truth of your experience, I’m saying that the reason your experience is such is that the US has allowed its manufacturing base to move to China in a tragic and bone-headed move that is as treasonous as it is catastrophic.

      1. molecule

        All I’m saying is that Asian supply chains of intermediate goods are shortening and will continue to shorten. If finished goods are “finished” there, how can it be otherwise? This argument about “fragile supply chains” is mostly nonsense. It might be true at the finished goods level, however these goods will get here sooner or later.

        Notice how very little US manufacturing was impacted by the tsunami in Japan. Japan’s customers are in Asia. Apple IPads might get here later than planned, but they will get here. We’ll experience “disruptions of consumption”©, manufacturing disruptions will happen elsewhere.

        1. Jeff

          What this country needs is a Consumer’s Union.

          “If we are not good enough to make it, then
          we are not good enough to buy it”

          1. Blissex

            But a large number of influential USA consumers are rentier property owners, and for them the lower the wages and thus the prices of the products and services they buy the better a lifestyle they get.

    2. alex

      “Western industrial companies are building factories in Asia at the behest of their customers. These customers want local supply.”

      Which customers? And why don’t the comparable customers in the US also demand local supply?

      1. molecule

        By “customers” here is meant “other industrial companies”. Actual individual consumers are not going to buy a turbine, gearbox or a transformer, an industrial company will.

        1. alex

          I understand that, but still leaves my question of why don’t the comparable customers in the US also demand local supply?

          1. molecule

            Those industrial companies that still have operations here, do demand local supply.

            Interestingly, had my employer not opened a plant in China, they would have lost that part of the business. Whatever demand was still there in the US for that product line, completely disappeared. I guess when it goes the entire industry goes. Once the TV industry left, it never came back. The entire ecosystem also left. Same goes for laptops, smartphones, apparel, toys, etc, etc. You couldn’t manufacture any of these things in short order in the US. There are no suppliers.

    3. fajensen

      Asia at the behest of their customers. These customers want local supply.

      Not “customers” in the way we understand the term.

      Those “customers” are basically The Chinese Government. When one sets up shop in China one must have a “partner”, a Chinese national who by law gets to own 51% of the “joint” venture.

      Of course the Chinese want more 51% “joint” ventures to create more wealth for their family and crony friends – as well as gaining free access to more intellectual property to steal as well as the opportunity for running parallel production lines for knock-off products.

      Eventually, the Maoist branch of the Chinese government will gain power from the nationalists and “reformists”, dispense with the 51% rule and nationalize everything directly – which will be biblical justice, IMO.

      China fights for the Chinese – “The West” fight for everyone else *but* the westerners. No wonder we lose.

  25. Blissex

    «It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany?»

    Germany rewards capital less generously, hostile takeovers are much more difficult making ROI on capital much less important, and anyhow they are also exporting jobs.

    The driver of labor arbitrage is corporate ROI spreadsheets and internal politics in the short term and power politics (put down worker leverage) in the long term.

    As to the short term, if the spreadsheet says that locating a plant in the USA gives a 21% (twenty one) ROI and locating the same plant in China gives a 22% (twenty two) ROI, that 1% (one) of advantage means that the project will be located in China, and the internal champion of the China option will get a promotion and bonus, and the internal champion of the USA option will report to her and get no bonus.

    That’s how it works, and the Chinese government, who are very astute, try to trick the exchange rate etc. in any way they can so that the ROI spreadsheets will always tell USA companies and careerist managers within them to relocate their operations to China, even if the margin of advantage is fairly small, because the Chinese government knows that the key to higher employment and incomes is productive capital.

    The USA (and Japan) central banks and politicians help to drive every ROI decision the way of China by their ZIRP, as nugatory interest rates when put into ROI spreadsheets show that getting rid of existing capital goods and investing in new ones is practically free.

    ZIRP also helps drive up asset prices, delivering low or zero tax capital gains to the propertied classes who make most of campaign donations, and are the overwhelming majority of voters.

    Also, the USA/UK/… industrial policy in the past 30 years has been to export as many jobs in heavily unionized industries as possible, to break the power of unions, and in particular the power of union to buy politicians in competition with business and property owners; and at the same time to massively subsidize both with free money and regulatory advantage the least unionized industries(notably finance, entertainment, software, …). With the singular exception of the defence related sectors.

    «Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains.»

    Nobody except the military gives a damn about such long term issues, as the number one goal is low or no tax capital gains, and the military accordingly keep immense strategic reserves of spare parts as they are acutely aware of the problem.

    If you are an internal company politician, mentioning the potential cost of supply chain disruptions and making costly provisions against them will make you very unpopular and an outcast when all your colleagues and executives just want to squeeze the cash cow as fast as they can to cash in their options and retire in luxury.

    1. avgJohn

      When are Americans going to wake up? The centrally planned economy in China is predatory and is going after industry in developed countries industry by industry with a preconceived, methodical, long-term plan. And it’s working!

      I have nothing against the average person in China, but I do have problems setting idly by, while industry by industry, job after job leaves this country destined for China and other “so-called” developing nations. All the while our middle class and this country’s economic future continues to wither and die.

      Do you believe that China’s meteoric rise over the last 30 years from a impoverished, starving third world country to a world economic powerhouse at the same time that America’s labor force has experienced stagnant wages, loss of benefits, extraordinary high unemployment, and huge trade and budget deficits are some sort of coincidence?

      Yes, poor management, bloated executive compensation, planning based on short-term quarterly payoffs and the like are part of the problem. But I’ve got to believe that global labor arbitrage is part of the problem as well.

      I can’t attest to the accuracy of this linked article(http://www.huffingtonpost.com/dave-johnson/chinese-paper-subsidies-b_b_631184.html), but the author claims that China subsidizes their paper industry to the tune of 30 billion dollars a year. That folks would be patient, methodical planning and execution of a centrally planned economy to capture an industry. And they think about the big picture. For example, why wouldn’t they press for the compression of their supply chain with ever more vertical expansion and integration, unlike the U.S., they do not have benefit of our transportation infra-structure, so there are tremendous benefits in locating raw material sourcing.

      And I downloaded the company financial statements. This company is operating on gross margins of around 3%. That’s 3% of sales dollars left to cover interest expense, executive compensation, sales and admin salaries. In addition, over half of their sales are to a handful of customers(about 10), experiencing razor thin margins themselves, thus desperate for low-ball pricing as opposed to long-term vendor-supplier relationships.

      Folks, this has to stop and stop soon or there will be Hades to pay!

      1. Paul Tioxon

        Unions should obtain financing directly from China. They can set up and run as non-profit mutual corporations, with surplus returned to investors and used to fund other like minded people. China is not burying America, it is burying capitalists. The people of America will do just fine running business on a human scale, as does most of China outside of the Enterprise
        Export Zones.

  26. Jeff

    Wonderfully informative post Yves. Part of the decline is in retail too.
    For example, Craftsman Tools. Sears sold these moderately priced tools “Made in The USA” to generations of Americans who knew that they could return them, no questions asked, for a refund or replacement without a receipt to any Sears.

    When you needed a tool set or a one tool you headed to your nearest Sears.
    As a result, a Craftsman tool box with a few basic tools was a normal birthday or Christmas present for a boy who then could add to it and have his own tools when he got his own place.

    About five years ago I returned a Craftsman tool that had worn out to Sears. The befuddled clerk spent ten minutes typing on a keyboard and then asked
    “where’s your receipt?”. I felt like I had to explain gravity to this fool.
    “This is a Craftsman tool. Satisfaction guaranteed, I get my money back…the sign says so right there…..” The sign was gone.

    Now the quality of Craftsman tools has dropped. In addition, Sears is selling a line of cheap Chinese pot metal junk tools called Companion next to Craftsman and according to the sad old guy, the last American working at our local Sears, soon will begin eliminating the Craftsman line of tools.

    After hours spent trying to return items and being handed a blank plastic credit card with a magnetic strip in leu of cash…often with too little or sometimes way too much money on it to my delight, I questioned a manager as to why the change? “We can’t afford to hire anyone who can do basic arithmetic anymore” was his reply.

    Further investigation—news to me and my friends—probably not to Wall Street people– revealed that Sears is now Sears Holdings. Some guy named Lambert has strip-mined the goodwill and value from Sears and is basically cannibalizing it. It now is a store for Hispanic immigrants, in hiring, language and service levels. I rarely set foot in it anymore.

    Like many American citizens, I have been blindsided by the economic carpet being pulled out from under us. Your wonderfully informative site has been a great education tool for me and the folks that I refer to it.

    1. Patriot

      That’s awful. For two generations or more Craftsman tools have been a fundamental part of America. I can’t blame Hispanics for wanting to find a job, but I can blame Sears for likely cutting wages and conditions to the point where working in the tool department at Sears is a lowest common denominator position.

    2. SidFinster

      I have not lived in the United States for years, but I remember Craftsman quality and service.

      As a kid, I *lost* a socket from a Craftsman set, and when I went to Sears to buy a replacement, they gave a new one to me for free, no receipt, no questions.

  27. Blissex

    «The 1980s were the heyday for papermakers. By the later 1990s, Mead had started scrimping on shutdowns, which is when the plant’s equipment gets maintenance and repairs. Twice a year shutdowns were replaced by annual shutdowns. In 2002, Mead merged with WestVaco to from MeadWestVaco. The shallow dot-bomb era recession led to further reductions in reinvestment. A $5 million shutdown budget for Escanaba was reduced to under $2 million,»

    What I wish were called “Blissex’ law” is that essentially all financial frauds are thinly veiled form of under-depreciation like this, because under-depreciation allows reclassifying capital into profits.

    This has applied to nearly every case I have seen so far, including the 2008 banking crisis (the debt and ratings bubble was based on under-depreciating for risk).

    The other type of financial malfeasance is just ordinary theft or forgery, where funds are blithely stolen and the books are crudely forged to hide that.

    «even as the departing Mead CEO received a $30+ million golden parachute.»

    That shows that the company had their priorities straight: under-depreciate the plant assets to free the cash flow for rewarding the productive assets of the company, its executives.

    In general under-depreciation is the most common form of “tunnelling” (what is sometimes less colorfully described as “control fraud”).

    Consider the financial sector, especially most banks: Taleb pointed out that over the cycle they generate negative net profits, as every 10-20 years the financial sector losses soar above the total net profits collected in the previous 10-20 years, and wipe out the financial sector capital.

    Obviously then most banks woefully underdepreciate their assets, reserving too little against risks, in order to pay out of capital phantom bonuses and profits. Insurance companies (and retail banks) used to do the same for enough centuries that eventually rigorous restraints were put on their ability to underdepreciate risk, with the result that insurance executives did not get the fabulous bonuses of banking ones.

    But various governments have enabled the systematic tunnelling of bank (and in recent times insurer) capital to their management by donating massive amounts of free capital to the banks every 10-20 years to replace that tunnelled by those managers.

  28. Blissex

    «Sears is now Sears Holdings. Some guy named Lambert has strip-mined the goodwill and value from Sears and is basically cannibalizing it.»

    Asset stripping like this is just a form of under-depreciation, as per my previous post, and indeed of tunnelling.

    Basically the USA elites, in part blinded by their spreadsheets, are deinvesting from (most of) the USA as fast as they can, supported by a gigantic pump-and-dump Federal Reserve sponsored operation (ZIRP), as it is no longer a growth area (the USA has been stagnating or in a recession since 1980 or so), to invest high growth areas.

    1. Jeff

      The idea was that their tools were guaranteed to not break or wear out. Other companies sold tools without that guarantee. That purchased customer loyalty and more than offset the cost of replacing a few tools. Like your
      Law. It explains a lot.

  29. Blissex

    «returned a Craftsman tool that had worn out to Sears. [ … ] “This is a Craftsman tool. Satisfaction guaranteed, I get my money back…the sign says so right there…..” The sign was gone.»

    Probably also because too many people like yourself were gaming that promise; “potlatch” works both ways: Craftsman will not argue about refunding your money if you are not satisfied with the tool, and you don’t return worn out tools for a full refund in exchange.

  30. Blissex

    «hostile takeovers are much more difficult making ROI on capital much less important,»

    As to this I think it is one of the very big changes that have depressed the share of GNP going to wages.

    In the old times even in the USA hostile takeovers were difficult and rare, and CEOs cared less whether ROI was 21% or 22%, as long as their empires grew in total size (rather than earnings) and profits happened in some measure, as then their tenure was guaranteed.

    But at some point the USA and other governments decided to change the rules to make hostile takeovers much easier, as a way as they argued at the time to incentivize CEOs to make their companies “leaner” and unlock more shareholder value.

    But governments at the time did not really care much for shareholder value, and nearly never do. That was really aimed at giving CEOs incentives to squeeze employees harder and negotiate harder with unions and try harder to get rid of them instead of sharing the spoils with them (because at the time unions had too much political power, and politicians are used to taking orders from businessmen but not from unions).

    For those who don’t get the connection, in a hostile takeover the winning company management team fires the losing one, and the winning team is that which has the highest ROI driving the highest share price, because most hostile takeovers are funded with shares (directly or indirectly).

    So screwing employees and in particular unions, under-depreciating (and even outright cooking the books) means job security and a longer stream of bigger bonuses for the executives getting away with it.

  31. Sleeper

    Great Post Yves !!!

    I do think that there is a important piece missing however – This is how it works at a mill nearby –

    The operation makes a variety of products and specializes in papers used for tapes. It uses a mix of old and new machinery.

    The trick is that the bales of pulp for the paper making process are purchased from a wholly owned pulp mill located offshore at inflated pricing so the offshore mill makes a profit while the stateside mill losses money.
    This type of transaction is called a giveback, or is some times called “the european way of doing business”.
    The givebacks allow the manufacturer to “tune” their profits and expenses to keep taxes to a minimum. This is the standard operating proceedure for much of the automotive industry.

    Of course this is money laundering but if you ask the IRS “its legal”‘

  32. Ep3

    But yves, you forget all those intangibles that workers cost. They demand health benefits. They get sick and want paid time off. Then on the job they want break time and lunches. Also they start complaining about how the managers are doing their jobs. And lowly manual labor persons shouldn’t question what the smart managers are doing.

    1. Blissex

      But some of those, like health insurance, sick time, and let me add maternity time and unemployment insurance, are materially expensive.

      And I think that companies should not have to provide them, because they are all unfunded mandates that legislators have imposed on the nearest deep pocket.

      If there is a collective will (and there should be for efficiency reasons) to provide free health insurance, paid sick days, maternity time off, unemployment insurance, these should be paid by the state (almost entirely, I would leave something like 20-30% to employer and employee to discourage abuse) from general tax funds.

      Because otherwise employers asked to pay for an unfunded mandate would try every underhanded means to avoid them, and this indeed happens.

      It is just too easy for legislators eager to deliver goodies to their voters by enacting unfunded mandates charging them to the nearest sucker (another example is child support) to keep general taxes low.

  33. FeelingGrumpierEveryday

    Mark Suwyn was previously with LPX, another water treading inside looting organization. May be a good one to track for short sellers.

    1. Blissex

      «water treading inside looting»

      I really like “tunnelling” as a metaphor as it is so evocative.

      For example when an economic system has been tunnelled extensively, it may look still fine on the surface for a while, but eventually the tunnels collapse and the surface becomes a series of chasms (ready to be filled by the Fed from Ben’s helicopter :->).

  34. Sam Adam1234

    Concrete example: bought an American made Whirlpool owned JennAir premium dual fuel stove. The oven key pad broke twice. Twice I’ve had a repairman come first to diagnose the problem. They return a second time – two weeks later to replace the defective part instead of carrying the part on thier trucks. A week ago, the key pad broke — again. The third time, the repair man says to me; “this is a design defect they’ve known about for years and I’ve been replacing the parts regularly. Each time the ‘brains’ tell me that the defective part was fixed so there will be no more problems. I try to tell them that when the customer opens the oven door, it heats the plastic keypad. You can insulate the oven all you want but the oven door has to open up. You know what, this year’s model has more insulation and the same plastic keypad.” And American manufacturing ic oming back?

    1. justanobserver

      I decided many years ago that the primary cause of mfg decline in the US was poor engineering and not poor manufacturing. I see it all the time in things I buy for my home. They are clearly not thought out, plastic is used where it has a high probability of breaking, and you can tell nobody is using the things they are designing.

      but we don’t need good engineers we just need more mba’s and lawyers, dontcha know ?

      and don’t get me started on the hypocritical f*ckers in american high tech who lament the lack of engineers all the while using h1-b’s to depress wages and moving the design overseas.

      see also andy grove (lying hypocritical bastard) and TI. TI is on it’s way to becoming a completely foreign company with the majority of their design and mfg done overseas with just american management.

      1. tech98

        In the vast majority of cases you will find the engineers designed it properly, then a bean counter looking to shave costs and boost margins came along and ‘value engineered’ the cost down using cheaper parts.

        And no-one gave a crap about unreliability or loss of reputation, just goosing next quarter’s earnings.

        Short-term greed rules corporate America.

  35. Blissex

    «American labor has no hope, it should just accept Chinese wages, since price is all that matters.»

    The line is a bit more complicated than this. The end result will probably be similarity of productivity-adjusted wages between China and the USA, at a level nearer that of current Chinese wages than that of USA wages.

    The main driver of this is that wages depends principally on two things, the labor/capital intensity ratios, and labor supplier leverage, and:

    * USA capital is flooding into China because it is more mobile than labor, and there is a giant scarcity of capital in China, making capital relatively scarcer in the USA. This is also because the second world has gone from enemy territory to reserve army of trained labor, and the third world has gone from battlefield to reserve army of untrained labor.

    * There is strong and enduring political pressure by rentier property owners to push labor leverage down in the USA. This is because the irish/jewish/italian working classes driving the New Deal have largely joined the establishment as property owning rentiers and now see the poor as their class enemy instead of business owners.

    «direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost»

    Sure, but that still matters because (also repeating some arguments above):

    * Lower wage costs are a small part of total costs, but a much larger part of profits. Suppose that you can reduce labor costs from 15% to 12% of total costs, on a product with a net margin of 8%: that’s a 30-35% boost in profits.

    * Decisions to invest capital are taken by multinationals at the margin and based on flimsy spreadsheets driven by internal company politics, where winner-takes-all, so even a 1% difference in overall cost can mean the difference between victory and defeat for a project and the bonus or career of its advocate, and a hard but stupid number based on direct and visible labor arbitrage numbers as a rule wins over a call of judgement based on invisible and indirect coordination cost or supply chain risk estimates.

  36. frank revelo

    These things go in cycles. Wait until the stock market crashes again and this time stays down, and the dollar falls and interest rates go up so that bonds also fall, so that the top 10% of the income/wealth distribution, exclusive of the top .1% involved in lotting, is finally materially affected. THEN we’ll finally see reform. There are plenty of ultrawealthy heirs to great fortunes who aren’t involved in looting or “tunneling”, who have a powerful personal incentive to stop the looting, given that their wealth is mostly in stocks.

  37. in this industry

    Great post, since I’ve recently begun working in the paper converting industry and watch the folks trying to source material. NewPage is one we buy from.

    Here’s my anecdote: I worked for 20 years for a small start up. Went from 0 $ sales to 20 mil/yr and then the owner sold it to a large med device mfr. The new owner brought in a new GM, (an MBA) In order to cut costs he wanted to outsource a particular item to China. It was a pad that was sewn by a woman in a factory in Erie, PA. For a few hundred bucks and a good quarterly performance review he was going to put her out of work. pathetic

    1. frank revelo

      What’s so pathetic? No different from a consumer deciding to buy an imported product rather than a domestically produced product to save a small amount. Capitalism is harsh. The problem is looting and bad governance, not creative destruction or the inevitable leveling of wages between developed and developing countries (closer to the latter level than the former, as Blissex correctly predicts). American workers must indeed suck it up and accept lower wages, but that doesn’t mean their living standards must necessarily fall. There are incredible inefficiencies in our system. Why do we commute to jobs instead of living close enough to our jobs to walk to work? Why do we have to appear in person for things like arranging a bank loan, instead of doing everything by video-conferencing and email? Why do we have jury trials for patent suits and why can’t these trials, like the bank loans, be handled by video-conferencing and email? On and on it goes. Plenty of room for Americans to have a very nice standard of living at $5/hour wages (2011 dollars), which is where the world standard will probably settle down in the future.

  38. Blissex

    ««American labor has no hope, it should just accept Chinese wages, since price is all that matters.»

    The line is a bit more complicated than this. The end result will probably be similarity of productivity-adjusted wages between China and the USA, at a level nearer that of current Chinese wages than that of USA wages.»

    The alternative is to avoid capital flight (in some way) from the USA, thus both depriving the Chinese of advanced productive capital with which to build an industrial economy, and depressing returns on capital in the USA boosting those to labor.

    But this is very very difficult to achieve because there is a three-way alliance between the Chinese government, who want modern plants and more jobs for China, and the USA property owning classes and the USA managerial classes, whom are delighted by the capital gains that the Chinese subsidize by lending colossal amounts to the USA at very very low cost (a strategy also used by Japan).

    In effect the USA elites are being bribed to export plants and associated jobs to China in exchange for indirect Chinese ROI subsidies and access to Chinese markets, and they are very enthusiastically going along.

    Just as once the Bank of Japan was called the Republican re-election committee, it has been the Chinese government’s lending on amazingly generous terms that has funded GWB’s re-election by underwriting his tax cuts and the Iraq war (or else the Iraq war is the first in history financed by tax cuts instead of higher taxes); and also the biggest paper capital gains boom in recent history.

    So politics won’t help.

    So managing the decline of the leverage of USA workers is the paramount objective if one feels pro-labor.

    And the principal aspect of that is to ensure that the cost base of american labor goes down at least as fast as their income, so that their living standards don’t collapse either.

    Because the difference in productivity adjusted labor cost between China and the USA is not as huge as the difference in absolute cost, and a lot of that difference is that cost of living in China can be much lower than in the USA (except Bejing and Shanghai and similar places).

    IMPORTANT NOTE: I am talking about “middle class” jobs here. Jobs in making low cost shoes, textiles, etc. already disappeared to Japan, Korea, Taiwan decades ago and all that has changed is that they are moving again to China (or Indonesia or Vietnam), so the impact on USA employment is muted.

    Take for example a Chinese electronics engineer vs. a USA based engineer: the difference in salaries may be a factor of 8, but the difference in living standards may be only a factor of 1.5, because the vast mass of very poor chinese drags down the general price level for the engineer too (unless he lives in an area with many other engineers).

    One way to describe this is to remember the description I once read of Brazil as Belgium (S. Paolo state) with Sudan (the nordeste) attached to it.

    China and India could be described in the same way: there is a relatively small layer of perhaps a few dozen million people there who can run a first or second world style industrial economy, including iPod and chip plants, and hundreds of millions of very poor people who provide a very low cost based (food, rent, services, …) to the first.

    Because otherwise it is difficult to explain why China and India are exporting to the USA just about anything, from computers to software, when at their overall level of development they should be exporting just plastic toys and flipflops and perhaps at most poor quality bicycles and mopeds like Taiwan was doing at the same stage of their development.

    The explanation is that the small 1st-2nd world subset of China and India can do whatever, and the very poor vast rest of the country provides the price ballast that allows that subset to underprice their peers in the 1st-2nd world.

    So if a USA engineer costs 80,000 and an entirely equivalent chinese or indian one 10,000, the reason why the equivalent is happy with the much lower compensation for doing the same job is that it supports a nearly equivalent lifestyle.

    This is why there is no rush of USA companies exporting “middle class” jobs to France or the UK or Germany because the cost bases of those countries are similar enough to those of the USA that costs like engineer salaries are close enough (factor of 2) that it is mostly not worth bothering.

    Therefore the solution for USA labor would be to ensure that if USA wages drop down towards China or India levels, the cost base also drops down, e.g. house prices go down dramatically, maintaining living standards. Instead only manufactured goods prices are going down, and more slowly than median hourly compensation, leading overall to a large cut in working class standards of living in the USA.

    Which is unnatural because if USA workers are much more productive than those in China or India, or have the same productivity, prices should equalize after a while to give both the same standard of living. E.g. if real wages go down, then the prices of everything bought with wages, like flat rents and low end houses, should go down too.

    But political forces ensure that there is both an insatiable demand for higher asset prices to generate low tax or tax free capital gains, and that other margins be fattened by labor costs dropping much faster than sale prices (thus the capture by businesses of almost all GNP growth).

    1. frank revelo

      Housing has already fallen parts of the country far enough to allow for a high standard of living at $20,000 income. For example, near where I live in Reno, Nevada, it is possible to buy nice 3 bedroom houses on 1/4 acre lots, within walking distance of downtown (an easy non-stressful walk, no problems with automobiles I do this walk all the time myself) for $60,000. This is a city with a fairly mild climate, so utility costs are low, assuming you insulate the house properly for the 2 months of really cold nights in winter. A house like that is borderline affordable to a single person making $20,000 a year pre-tax and easily affordable to two people making $20K each. There is nothing wrong with this neighborhood. No crime wave, no toxic waste dumps. Just a typical blue-collar neighborhood that used to have a very high proportion of hispanic construction workers. When the construction boom went bust, they all lost their jobs, then their houses went into foreclosure and now prices have fallen by 75%.

      So I think you are wrong that the political forces for higher asset prices are overwhelmingly strong. They didn’t keep housing prices up here in Reno, they didn’t keep them up in Detroit, they won’t keep them up in the San Francisco area in the future.

      1. Blissex

        «they all lost their jobs, then their houses went into foreclosure and now prices have fallen by 75%.

        So I think you are wrong that the political forces for higher asset prices are overwhelmingly strong. They didn’t keep housing prices up here in Reno, they didn’t keep them up in Detroit, they won’t keep them up in the San Francisco area in the future.»

        Well, the stock market has been going up and up fueled by literally trillions of free money from the Fed, and there are endless proposals to do the same for the real estate market. Actually it has already happened: trillions of bust real estate related securities have been swapped close to par by the Fed too. So the lender side of the real estate story has been taken care of.

        Sure, some physical inventory has gone down a lot in price, but there is enormous pressure to sort that out too.

        When Boomers realize that they can no longer retire in comfort by HELOing their properties again, the votes will be there for whatever it takes, especially from the older female property owners (who live longer and are crucial swing voters, and perhaps have a stronger sense of entitlement).

        Alternatively the borrower side of the real estate market does get screwed, and then a large part of the deflation of asset prices happens, and USA workers will not be totally screwed, as real asset prices fall as their real earnings fall (but things like food will cost more).

        But I suspect that at some point the scenario will be more Argentina in the 1990s than Ireland in the 2000s.

        1. frank revelo

          Stock market is not up and up. On the contrary, it is still well below its 2007 highs and heading down sharply as of today. Yes, at some point all those trillions of new dollars should create inflation, but then again, the Japanese “printed” even more money, over a period of 20 years and counting, and they have yet to see inflation. And yes, high inflation would bail out homedebtors, but it would simultaneously hurt small savers and pensioners, especially if the inflation figures were underestimated ala Argentina. The big winner from inflation would be the politically disorganized middle-age middle-class who overpaid for houses during the bubble and are now underwater, not the elderly. Most of the elderly own their houses free and clear and have no intention of HELOCing nor of selling and cashing in on capital gains, but rather plan to stay where they are until they die. When those plans go awry and they are forced into a nursing home, the house is sold for whatever the market will bear and the government confiscates the proceeds to pay for the nursing home.

          That isn’t to say we won’t get the Argentine scenario eventually of a collapsing dollar, high inflation, deliberately underestimated inflation figures so as to screw people with inflation-adjusted pensions, collapsing stock and bond prices, soaring gold and commodity prices. But it could be many, many years before voters tire of deflation and demand the inflationary route.

          1. Because

            Sorry, I disagree. Younger voters would demand the inflation route, damn their parents. Once the deflation got so bad, that even their parents, struggling along, the parents would demand the “inflation” route.

            Deflation taxes savers as well, by forcing to expend those meager savings while the wealthy only get benefits from their vast holdings. Eventually for the middle class, those savings run out.

        2. Because

          Your way wrong as well. The stock market is well below its 2000 real high. It is probably about at 5500 in today’s prices compared to that same time.

          Typical secular bear, slowly but surely sending it back to its baseline.

    2. frank revelo

      Note that the hispanic construction workers who lost their jobs benefit just as much from the collapse in housing prices as everyone else. Yes, they lost whatever equity they had in the house, but they didn’t become debt peons (unlike the white middle-class student loan scam victims). Once these hispanice worker regain jobs in low-wage manufacturing or distribution or perhaps even construction again (of solar and wind power facilities this time around, not McMansions), they can buy those $60K houses back. Better to lose say 10% or $25K equity in a $250K house during foreclosure, then buy back at $60K, than to continue paying on the $250K house.

    3. frank revelo

      One other thing. There is a substantial group of Republicans, perhaps even the majority of those from the rural districts, whose arguments are similar to those of Blissex. High wage and high living costs allow for huge amounts of rent-seeking embedded in the high living costs (including taxes). If wages and living costs are both reduced, it is the rent-seekers who suffer most. Perhaps this is all talk by these Republicans, and they are relying on never being forced to convert this talk to action. Same as with the bailouts in 2008. The Republicans voted against the bailouts initially, knowing full well their vote wouldn’t matter. If their votes had mattered, then they would have been faced with a conflict: please the pluocrats (who can easily run the average politician in a non-safe district out of office by financing an opponent in the next election) by voting for bailouts, or please their working class voters (who understand that low wages and low costs is better than high wages and high costs) by voting against.

    4. Typing Monkey

      Therefore the solution for USA labor would be to ensure that if USA wages drop down towards China or India levels, the cost base also drops down, e.g. house prices go down dramatically, maintaining living standards. Instead only manufactured goods prices are going down, and more slowly than median hourly compensation, leading overall to a large cut in working class standards of living in the USA.

      I look at this from the Income Statement perspective:

      Net Revenue (Retained Earnings) ~= Sales – operating expenses – Interest – taxes – dividends

      The two things that everybody focuses on are taxes and the salaries component of operating expenses.

      However, there’s far more to this issue.

      If people were willing to pay up for locally produced goods, then companies would be more wiling to produce locally (actually, they would probably lobby to change how “Made in the USA” is defined, but that’s a different argument). So the consumer has some choice in the matter.

      Operating expenses include overhead such as medical insurance. Reducing these costs sufficiently would be equivalent (from a business perspective) to reducing wages. Moreover, more people would benefit, as not everybody works and therefore not everybody benefits from the insurance to begin with. This is probably where the bulk of effort should go (and not that this isn’t a “labour Vs Management Vs owner issue–almost everybody should be on the same side of this issue, provided that they don’t work in the medical industry).

      Operating expenses also include suppliers’ costs (+ transport, etc). Thus, when looking at supply chains,

      Interest rate is interesting–because it’s basically zero, management doesn’t have to worry about creditors. It also doesn’t have to worry too much about owners, because owners can’t go buy bonds to compensate for the crappy div. yields of stocks.

      So there are other things you can look at to change profitability. I think simply focusing on salaries is a little pointless…

      As a side note, Sales pits managers&owners (who want to sell at the highest price) Vs consumers (who want to buy at the lowest price). Operating expenses pits managers Vs labour and suppliers. Interest pits managers Vs owners. Taxes pits managers and owners Vs gov’ts.

      Due to free trade, high unemployment, relatively low and widely available commodity prices, easy credit and low interest rates, management has the upper hand in virtually all of these areas. However, except for perhaps high unemployment, all of these things are going to change dramatically relatively soon. In other words, management is **never** going to have things better than they do now. This is a very temporary situation…

    5. decora

      the other political force:

      China could have raised worker’s wages. If workers had actual unions in China, they might have fought and won for higher wages. Instead, the Chinese government took the producivity gains / labor arbitrage profit / whatever you want to call “surplus money”… and bought Fannie and Freddie bonds and Treasury debt.

      Thus, China’s wages are kept low, which pushes US wages lower…. meanwhile while the wages the Chinese should have gotten were sent directly into the US housing bubble (which helped inflate ‘asset prices’ you talk about).

      Now. Consider the bank bailouts in the US. They transferred taxpayers money into the banks. Why? The banks held too many of those inflated assets from the housing bubble.

      What we have here is both countries, the US and China, both taking money from the poor and giving it to the rich. Call it communism, capitalism, cronyism, kleptocracy, whatever. It is all one system, run by one small group of people, all with a very similar philosophy. I can’t provide any better proof than Henry Paulson’s own words, in “On the Brink”.

  39. Sean

    I’m a regular reader of this blog, and wow Blissex, your comments on this thread are some of the most interesting I’ve ever read here. Thanks!

  40. avgJohn

    When are Americans going to wake up? The centrally planned economy in China is predatory and is going after industry in developed countries industry by industry with a preconceived, methodical, long-term plan. And it’s working!

    I have nothing against the average person in China, but I do have problems setting idly by, while industry by industry, job after job leaves this country destined for China and other “so-called” developing nations. All the while our middle class and this country’s economic future continues to wither and die.

    Do you believe that China’s meteoric rise over the last 30 years from a impoverished, starving third world country to a world economic powerhouse at the same time that America’s labor force has experienced stagnant wages, loss of benefits, extraordinary high unemployment, and huge trade and budget deficits are some sort of coincidence?

    Yes, poor management, bloated executive compensation, planning based on short-term quarterly payoffs and the like are part of the problem. But I’ve got to believe that global labor arbitrage is part of the problem as well.

    I can’t attest to the accuracy of this linked article(http://www.huffingtonpost.com/dave-johnson/chinese-paper-subsidies-b_b_631184.html), but the author claims that China subsidizes their paper industry to the tune of 30 billion dollars a year. Patient, methodical planning and execution of a centrally planned economy. And why wouldn’t they press for the compression of their supply chain, unlike the U.S., they do not have benefit of our transportation infra-structure.

    And I downloaded the company financial statements. This company is operating on gross margins of around 3%. That’s 3% to cover interest, executive compensation, sales and admin salaries. In addition, over half of their sales are to a handful of customers(about 10), experiencing razor thin margins as themselves and are desperate for low-ball pricing as opposed to long-term supplier relationships.

    Folks, this has to stop and stop soon or there will be Hades to pay!

    1. Observer

      Corporations must continue to show growth in order to appease investors. In the US, the easiest way to grow is to purchase competition in order to control the market for a given product or service. This is allowed in the US because regulatory controls designed to prevent monopolization and therefore increase competition have been relaxed, repealed, or uninforced over the past 30 years. During that time, this practice has been facilitated by a handful of investment banks that have also seen regulatory controls lapse. During the same time frame, the Fed has supported the process by maintaining overnight rates that favor the banking industry. What used to be the military-industrial complex is now a corporate-financial complex, resulting in the corporatization of everything. Hence, you can now travel from Maine to California and see the same strip mall tenants, motel chains, gas stations, restaurants, retailers, coffee houses, etc., selling the same soft drinks, bread, eggs, meat, produce, and drugs, all run by the same giant, multi-national corporations. Look closer and you will also notice that the same corporations run the jails, schools, employment agencies, media, and healthcare. Economic globalization just means you can also see the same trends in other countries, and not just the westernized ones. Giant corporations like Wal Mart, for example, are so large that they’re able to control distribution channels, dictate what they’re willing to pay to manufacturers, set rates for labor, and dictate governmental policy decisions through PACs and campaign contributions.

    2. Loatian Wood n' Aluminum

      What makes you think ‘Muricans don’t have a piece of that action? When Immelt was on the Charlie Rose show a fortyear, he nearly began to masturbate when he discussed the Communist country. As Naomi Klein whimsically mentioned, it is also the most successful Capitalist state. Back to Immelt’s profit seeking, what stimulated him is the following – low regulation, free reign once the state apparatus is bought off, slave labor, and fuck the environment. It’s all murky out thar – but some ‘Muricans will help rape the natural resouces of other countries to ship in and feed the Machine for a buck or two.

      1. Colder Asians

        The idea too, then – is to evaluate how profitable it is to tap into military manufacturing might. Ergo, China is dangerous. Not the Wall Mart China, just the guns n’ bombs China.
        It’s an old vintage, enjoyed by royalty in each nation, it goes smooth like this: ‘Oh dear, they have an aircraft carrier, oh my, they are pushy in the South China Sea, and hell!, grab your ‘Merican flags, they have jet fighters and missles! ”
        Back and forth like a spectral washing machine, while the populations groan in disgust.

      2. avgJohn

        Just because it is aided and abetted by shorted-sighted executives of multi-nationals that can’t see past next quarters bottom line does not alter the fact that global labor arbitrage is killing our economy. Nor the fact that is has played directly into China’s hands.

        We’ve lost the electronics, apparel, steel and soon the automotive industries amongst others. How far must it go before we admit that China has a competitive advantage in cheap labor?

        By insisting that manufactured products sold in the U.S. be made in the U.S., we will have some chance of bringing these large corporations to heel.

        I’m not against sensible policies for free trade. Let’s trade raw materials and commodities freely. But let’s make sure that the trading of finished goods and services are balanced against a policy of full employment in the U.S. If that means tariffs, so be it.

        I’m sure you are as aware as I am that over the last twenty years, global management consulting firms have made presentations in one board room after another, offering access to deep pockets and political connections, as well as turn key operations, including tax planning opportunities, for shifting production to off shore facilities. Some companies have jumped at the opportunity and some have been dragged kicking and screaming, but the fact is America is full of formerly profitable but now abandoned factories and mills.

        If we want to bring multi-national corporations to heel with intelligently designed tax and business regulation, including anti-trust suits, the first place to start is to shut off consumer markets for their slave labor operations. It’s bad enough that businesses play local and state taxing authorities off against one another when locating and maintaining production facilities, but doing so on a global scale is even worse. And of course, you are correct, we are shrugging a moral responsibility to protect the environment from detrimental manufacturing and mining operations. But there is little we can do to influence environmental and labor policy in China and other developing nations.

        Let’s have a sensible trade policy for all Americans, not one designed to enrich just the elites of the U.S. and China.

        1. decora

          personally, i think that US workers and Chinese workers should join together against their common enemy – the multinational state-corporate complex.

          nationalism is a quaint and obsolete notion. corporations stopped belonging to a single country in the 20th century.

          when did the labor movement abandon the idea of global labor solidarity? where did all this ‘rah rah america’ bullshit come from? who is more like you, the Chinese guy working in a factory, or the corporate CEO who was educated in a Swiss boarding school, an Oxford college, and spends 80% of his time jetting around the world doing deals with other mulationational rich guys?

          Which one of those two people seems like a better alliance? The Chinese guy sitting in his 10×10 room after an 80 hour week building ipods, or some big labor boss who spends his weekends at the golf course?

  41. Scott

    According to this study from IBISWorld, “mills” is identified as one of the top 10 declining industries in the U.S. IBISWorld research shows the mill industry’s revenues have declined by over 50% in the ten year period from 2000-2010.

    While the executive payouts you cited are reprehensible given the horrible performance of NewPage, if the IBISWorld research is accurate, then NewPage is unlikely to perform acceptably no matter who the executives are.

    http://www.ibisworld.com/Common/MediaCenter/Dying%20Industries.pdf

  42. Scott

    You also might find this press release, based on a study by Boston Consolting Group, interesting. It is titled:

    “Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring

    Reinvestment During the Next Five Years Could Usher in a ‘Manufacturing Renaissance’ as the U.S. Becomes a Low-Cost Country Among Developed Nations, According to Analysis by The Boston Consulting Group”

    http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-75973

    If Europe doesn’t implode and the negativity bubble bursts, we have the potential to auger in a new, long era of prosperity, if policymakers don’t muck it up.

  43. bjk

    “high operating leverage, high ongoing reinvestment needs, is cyclical, and does not offer high returns even at the best of times.”

    That’s your problem right there.

  44. gs_runsthiscountry

    Yves,

    Your intro paragraph articulated things well, thank you for that.

    As I expressed in another post a few days ago, it is rather frustrating when rhetoric is repeated over and over. I believe many Americans are conned into believing labor costs comprise way more than what is actually contained in a products costs.

    American workers vs their foreign supplier counter parts, its not even a fair comparison. The rules of engagement are apples and oranges. Here, internally, we have to justify product costs using visual management, JIT, small lot runs and with zero WHIP inventory. On the other hand, overseas suppliers are allowed skirt quality, and deliver in huge quantities and that are many times not delivered on time, all of which is not tolerated internally. Manufacturing managers and personnel have been battling this double standard nonsense of years. When you make internal employees live under one set of rules and allow your suppliers to live under another, it is no wonder why they can cut the domestic internal employee off at the knees, as far as cost.

    As to your first sentence I don’t know how to feel, Management now seems to think anything that is not labor is a fixed cost, and thus, we must focus on that small slice of the pie chart. The parallels that could be drawn with the Federal budget are startling. This is why I agree with the notion that American corporations will continue to chase cheap labor. However, no I don’t agree it is advantageous to do so, nor does it have to be that way.

    And, yes there are other ways to have a competitive and successfully company, but that would require management to have a long term strategy, invest in research & development, and take actual risks in area of product development. None of these things are going to take place in this country with the current incentive structure of executives and boards of directors. It is much too easy to grab the low hanging fruit and focus on the next quarter, vs. say having a true vision of say 5-10-15 years out.

    I can sum up my 20 years of experience in manufacturing and American Corporate culture as “lazy upper management.” Unable, unwilling and too incompetent to take on the core issues head on, or even think of having a proactive vs. reactive management style that addresses where the ship is headed. Instead of CEO’s and CFO’s standing in the wheelhouse and setting a course for the ship, they are down in the captain’s quarters sipping bourbon, as it were.

    A great example of this is the Mining Equipment Industry, of which there are two major manufacturers in my city. One was just purchased by Caterpillar [Bucyrus], and the other shall go nameless. The [nameless] one has clawed its way back out of bankruptcy a decade ago and rides the commodities boom in sympathy. I have been through the plant of this company on more than one occasion [interviews] IT IS A DISASTER and a LARGER disaster waiting to happen, processes stuck in the 70’s, entrenched management, subpar equipment, OSHA hazards that I lost count of within 10 mins. of being in the plant. The management, for no good reason, does not reside on campus, but instead, in an ivory tower 4 miles away, in leased space atop one of the largest buildings in the city. WRONG ANSWER – that is no way to manage a company as an executive.

    So, the contrasts between these two companies could not be starker, but yet, Wall Street has these companies trading in tandem, and analyst/traders jump on the MSM and tell investors what a great company it is. These companies make similar equipment, but are by no means the same type or quality of company. There is a reason the other company just sold off one of it’s assets last week – Caterpillar/Bucyrus is going to eat their lunch, and I think it is already too late. (Note to investors, this is why you don’t listen to some analyst sitting in NY when they recommend companies, they, only knowing a company’s balance sheet or current momentum move of the week).

    In any event, with executive pay scales such as they are, there is no carrot per say to dangle in front of a manager to earn his keep. Thus, we get the Robert Narllies’ and Al Dunlaps’ of the world running the show, which, by the way, there are many.

    1. Typing Monkey

      I believe many Americans are conned into believing labor costs comprise way more than what is actually contained in a products costs.

      1. Labour costs are a very significant portion of overall costs. Looking at any balance sheet can tell you this.

      2. Labour costs are one of the few variable costs available to increase productivity (for example, selling plant and equipment is usually a non-starter…) As a result, labour costs are always going to be a main focus when it comes to cost reductions.

      Incidentally, trying to increase China’s costs isnt’ going to help very much. The choice isn’t US labour Vs Chinese labour–it’s Chinese labour Vs other cheap labour Vs automation.

      1. gs_runsthiscountry

        First, you are speaking of productivity with the forked tongue of an economist not as someone in industry. Also, accounting is art not science, in reference to your balance sheet comment.

        Further, I worked with products for which labor costs were less than 11% of the products cost [this from internal data, not a line item on a balance sheet. Hence it is X-all those BS rolled in costs. If we were to use labor hour costs we would NOT build anything here domestically. For example, last I remember at my last employer labor hour cost was 146 dollars an hour], and made domestically, with a large % of supplier parts made domestically. I know, I was the guy trying to squeeze out more efficiency from processes and labor.

        How many times are we going to juice the lemon [direct labor], before we look in other areas that may bear fruit?

        Re-read what I wrote, and read my post of a few days ago. It is lazy management style, companies are not competitive because management many times has no vision short of 3 months, profits are getting creamed because of commodity input costs (which are variable) not because labor cost is too high or efficiency is to low.

        And, I would add, foreign supply is only advantageous when the costs and efficiency (quality of on time delivery) of shipping will allow.

        1. Typing Monkey

          First, you are speaking of productivity with the forked tongue of an economist not as someone in industry. Also, accounting is art not science, in reference to your balance sheet comment.

          1. I am not an economist–I am an engineer. And I too worked in an industrial plant for a few years (a job that I enjoyed immensely and only left because I could get more pay, better job security, and deal with much less bullshit from idiots in management by switching, incidentally).

          2. Yes, accounting is an art. Yet there is a consistently high % of expenses that goes to labour. This may be inconvenient, but that’s life.

          Further, I worked with products for which labor costs were less than 11% of the products cost [this from internal data, not a line item on a balance sheet. Hence it is X-all those BS rolled in costs.

          Perhaps, but what other part of the product’s cost can you cut? Labour (if it is non-unionized) is one of the few variable costs, and therefore it will suffer the bulk of the “managing”. If you have a concrete alternative, I’d like to hear it (just vaguely saying “management comprises idiots”, while perhaps accurate, doesn’t solve much)

          If we were to use labor hour costs we would NOT build anything here domestically. For example, last I remember at my last employer labor hour cost was 146 dollars an hour], and made domestically, with a large % of supplier parts made domestically.

          Look at my reply to Blissex below. But your point is valid–this is why so few things are now built domestically!!!

          How many times are we going to juice the lemon [direct labor], before we look in other areas that may bear fruit?

          Until other areas bear more fruit than this one.

          Re-read what I wrote, and read my post of a few days ago.

          Link?

          It is lazy management style, companies are not competitive because management many times has no vision short of 3 months, profits are getting creamed because of commodity input costs (which are variable) not because labor cost is too high or efficiency is to low.

          1. Commodity input costs are variable, but for the most part not controllable. Non-unionized labour is controllable. You can partially thank the idiots at the Federal Reserve for those commodity prices, btw.

          2. If management is a problem, then the owners or competitors will eventually take care of that.

          And, I would add, foreign supply is only advantageous when the costs and efficiency (quality of on time delivery) of shipping will allow.

          I agree. That is likely why the current situation won’t last forever. Having said that, if this continues much longer, all the expertise will be there, not here, so the training costs become another barrier.

          In the end, much of the labour in either country will be automated anyway, btw. I think people are missing this…

        2. John F. Opie

          Hey, not every economist is a Keynesian True Believer. There are some of us out there who work in the real world and understand industry.

          There are very few manufacturing sectors where personnel costs are in excess of 20%; the vast majority are under 15% (not wages, but personnel costs, including employee benefits, etc!). There are quite a few where they are under 10% (the lowest is the oil industry, where wages are extremely high, but remain under 5% of total sales).

          The construction sector is generally between 25% and 35% (the latter for installation); energy production and transportation is under 10% (gas pipelines under 5%); wholesale is rarely over 15%; even retail sales, traditionally heavy on sales personnel, is under 30%; you have to go to the hotel and gastronomy industry to find personnel costs in the direction of 40%. The cost of personnel in the personal services industry (haircutting, etc: duh) is between 40%-50% of sales.

          This is true for the US and most European and Asian industrialized economies. On top of that, you have to be really, really careful comparing personnel costs per worker without taking into account actual productivity: US workers remain largely the most productive on the planet, despite costing more, making it very attractive for foreign companies to open up plants here to manufacture for the US market.

          I have, in more than 20 years of working as an industrial economist, failed to find an industry that failed because personnel costs were too high: they fail for many other reasons, but it is invariably a function of management really screwing things up.

          My take on this: in the 1970s, into the 1980s, any decent sized company had a staff economist that would work on long-term strategic planning, usually with the aim of increasing real market share and plotting out a growth path for the company. They started disappearing as the lawyers and accountants were able to fool management into believing that they were more important, and few companies can survive when lawyers and accountants are in charge for any length of time.

          It’s destroyed more good companies out there than any other fundamental cause: equity is diluted by granting themselves large bonuses for being scarcely anything more than trained monkeys; obsession with the bottom line without understanding how important organic growth and innovation are (and killing these off because they can’t be successfully controlled or forced); crony capitalism means making bad deals that enrich management at the cost of efficiency and workers; corporate infighting with lawyers in charge means profits are spent on lawyer fees rather than reinvested; and finally, the legal system is rigged via the tort system such that it takes very good management to avoid being taken over by the lawyers (especially in terms of actual business decisions).

          Anyone who obsesses about personnel costs is, at best, a low-level manager who doesn’t understand how their business works. Of course, they may have the CEO title, but it doesn’t change that fact…

          1. Because

            Give me a break. You don’t live in the real world or understand “industry”. You live in a globalized world where the capital owning elite control the forces of capital to their every whim. That is not natural or substainable. It has crashed in the past and is crashing now.

            You better hope your enemies are far nicer than I am.

          2. fajensen

            … making it very attractive for foreign companies to open up plants here to manufacture for the US market.

            The US tax code and the US legal system absolutely pulls in the other direction. Viewed from Europe, he US is not seen at a “safe” place to set up business. There is basically too much arcane legislation with arbitrarily draconian enforcement in the US for a European to be comfortable with:

            You sack some lazy bint, the very next day you are sued for millions in sexual harassment and discrimination costing you millions in legal fees even when the case is later dismissed. Some fool decides to eat an inedible product manufactured by you – a hearing aid – again you get sued for millions because you should obviously have designed it in the shape of a house-brick so nobody can eat it – and written “Do Not EAT” in the manual. Similar stories are legion here.

            Your closest competitor is found to embezzle millions, you are happy to be rid of that guy, until you read in the papers that a settlement was made. Conclusion: The crime was not the issue here, the issue was that the government wanted its piece of the action.

            Then there is the whole Homeland Security thing and the TSA goons roughing people up at the airport. Most people here, that are old enough to be decision makers, knows by personal experience what both the DDR and the USSR looked like in the 1980’s – todays USA looks disturbingly similar, only with nicer cars!

            IOW: USA does not look like such a happy place to be setting up shoppe when compared to to the straight-up communist dictatorship China, where the rules are more predictable, or especially the local former communist dictatorships where one can keep the IPR, own the whole business, and even export profits.

            , and few companies can survive when lawyers and accountants are in charge for any length of time.

            Hehe – Professional liars and frauds – the new winning formulation ;-)

  45. Juan

    Published in ’82 I believe and worth a read –

    Deindustrialization of America: Plant Closings, Community Abandonment and the Dismantling of Basic Industry
    [Bluestone and Harrison]

    1. They Got Paid!

      That’s my thought – Yves’s splooch sounds like 1979 or something. A UAW strike reported by Frank Reynolds, then morning with bonzo in the recession ripped early 80s.

  46. avgJohn

    Why do people keep claiming labor costs are not a major cost in products and services? I don’t get it.

    Start with raw materials in, I don’t know, say the paper mill industry. Isn’t there labor cost rolled into the lumber and wood shavings used as raw materials(example: cutting and shredding operations). Labor cost for creating the solvents, inks and finishes used in the paper milling process. Wages paid to railway and truck workers for transporting the raw materials. Wages paid to build the machinery, and so on and so forth. Labor costs attaching to each step in the process of moving from raw material to finished goods?

    If you add up the all of the labor costs rolled into almost any finished good, it seems to me you are bound to find it is a significant cost.

    1. Jane Doe

      She’s discussing the labor cost within an individual firm, which is how that firm would weigh its business decisions regarding its labor. The cost of the supplies is not the labor cost to the companies that supplied it. Its the cost of the supply itself. That’s the only thing that firms cares about when calculating its own cost.

    2. gs_runsthiscountry

      avgjohn,

      All costs contain, or more accurately, are labor, in one form or another. It is just where we choose to draw the line to form an argument. It is why I love this quote and it is valid.

      “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.” – Abraham Lincoln, 3 Dec, 1861

      So, yes, labor cost is contained within input costs also. Myself and most others that have posted in this thread have drawn the line at [direct labor], so as to not muddy the waters of the argument.

      1. Yves Smith Post author

        You both are wrong on this one.

        This post started by discussing FACTORY labor. From the standpoint of a manufacturing firm, none of the costs below are direct labor:

        1. Materials costs (generally considerable)

        2. Factory overheads (this includes capital costs, supervisors, management)

        3. Sales costs (salesmen, advertising, packaging)

        4. Shipping

        .5 Financing

        Direct labor is a small percentage of this total.

        1. John F. Opie

          Absolutely correct. The classic measurement of EBITDA (earnings before interest, taxes, depreciation and amortization) is: Sales minus COGS (cost of goods and (external) services) equals gross value added; subtract personnel costs from that and you have net value added or EBITDA. You can (and most microeconomists do) make it more complex than this, but this is really all you need to understand how companies make money.

          This is basic microeconomics. Ignore at your peril…

          1. Right Back At Ya

            Excellent – give them all a big fat raise, since labor costs don’t matter. I’m talking real money, the kind that buys clean water, good food and about 80 years of life.

  47. William

    Yves,

    This article is very enlightening about NewPage’s activities in other parts of North America. In my local community (Port Hawkesbury, Nova Scotia) they are indefinitely shutting down the mill and laying 1000 people off in two weeks. It’s going to be devastating to an already poor regional economy.

    Thanks.

    1. Yves Smith Post author

      Yes, I saw that, and thought it was awful.

      For other readers, of the 9 mills NewPage bought from Stora Enso, it has closed 3 and is “indefinitely” shutting this one.

  48. TrangleC

    Yet this isn’t just a problem in the USA. It is basically the same in Germany. German wages and benefits are shrinking since 20 years now. When the big crisis hit in 2008 most Germans hardly noticed it and it had little effect on their private spending and consumption. Corporate managers, politicians and the media had cried “wulf” since 20 years at that time and average people just asked “What’s new?” when the real crisis started. Even though the heavy industry and everything export oriented had pretty much boomed for decades, with average 6 to 9% annual growth rates, still everybody in the country was acting as if Germany would just go down the drain. One “reform” chased the other and people were told they had to take pay cuts and forget their benefits while corporations stopped paying any taxes, because the Chinese would eat us all alive otherwise.
    For some reason the international media (BBC, CNN aso.) was all too happy to join in on the bullshitting, calling Germany “the sick man of Europe” while German companies steadily gobbled up more and more world wide market shares in their segments and German wages shrunk by 5 to 10% while growing 20% in the rest of Europe.

    Manufacturing stuff was so “yesterday” according to pundits on the international economy TV shows. Juggling money to somehow make more money was the way to go and everybody laughed at the retarded Germans for trying to challenge the Chinese and keep up with them instead of shedding the industrial cocoon and becoming a beatiful finance business butterfly like the USA, Great Brittain and Ireland.

    Nobody learned anything from the 2008 mess. The banksters make more money than ever and certainly more money than even the best running industrial manufacturers.

    That is probably the only reason why Russian, Arab and Asian oligarchs haven’t bought up every single manufactoring corporation in the west yet. They make 100 times more money just by sucking oil or natural gas out of the ground than any western industrial high tech company that sells highly complicated products that run on this oil or gas, like cars or power plant turbines.

    I think we’re pretty much fu**ed. The only hope for the western worker is that the Asian worker will earn enough money to level the playing field again and at the same time create more consumers for everybody’s products, but according to scientists this planet would not be able to handle that and we’re all screwed anyways.

  49. Alan

    Dear Yves,
    Thank you for this excellent post. I have long argued to those who would listen that the “manufacturing” problem is not labor. This is especially clear in the case of high tech manufacturing, e.g., computer chips, batteries, etc., which is manufactured mostly through automated processes, and is not labor intensive at all. Why are most wafer foundries in Asia? The basic cost of land, equipment and labor is roughly the same (and in some cases cheaper here.) One thing is clear, the cost of management in the US is far greater than anywhere else in the world.
    A

  50. J.R. Wirth

    Bad executives don’t act in a vacuum. For every bad CEO there were several shareholders who didn’t clean house. The CEO has always been a steward of the shareholder.

    Bad CEO’s are nothing new. What is new, at least in size and scope, is the type of shareholder. The new type of shareholder is not a person at all, but very large, dark capital pools owned by hedge funds. These hedge fund managers are not thinking about tomorrow, all they think about is today, and next quarter’s profit.

    So in an environment like this, is it any wonder that CEO’s like the one mentioned above are thriving?

    This environment will all be reversed in time, as there is nothing left for these hedge funds to consume.

  51. Paul Stanton

    The single largest reason U.S. corporations have moved manufacturing overseas is tax avoidance. I’ve been involved in several Fortune 500 manufacturing site location decisions, and each time the overwhelming issue was tax rates. Ireland, Singapore, and other off-shore locations normally offer a 0% tax holiday for up to 10 years.

  52. Schofield

    “The single largest reason U.S. corporations have moved manufacturing overseas is tax avoidance. I’ve been involved in several Fortune 500 manufacturing site location decisions, and each time the overwhelming issue was tax rates. Ireland, Singapore, and other off-shore locations normally offer a 0% tax holiday for up to 10 years.”

    The absence of an ethical and fully functioning democratic system that allows capital to escape the control of any democratic decision that manages to get made.

  53. Erik Smith

    Thou Shall Not Destroy the source of wealth. Value is added at the point of manufacturing, then the sales force tries to get the best possible price.

    Cerberus deserves to be bankrupt. Their managers deserve the vengeance of discharged Marine Scout Sniper teams, nephews and sons of unemployed good-plant workers. Enjoy that failure bonus!

  54. John

    Yves a very interesting post. However I’m not fully convinced of your argument on labor costs, especially as so many businesses (both small and corporations) talk about labor costs. I’m more of the belief that labor is seen as a floating cost that can always be cut more. Regardless it has been going on for some time now, which may contribute to the percent you mentioned. It would’ve helped if you provided some sources…..

    I do however distinctly remember one ceo a year ago saying that the future of the american companies competing with american workers is less workers working more efficiently, which is short for doing more work. It’s clear that corporations won’t be changing their methods anytime soon.

    But what bothers me is how so many people are going to get hurt from this. What we’ve been seeing in the past few years that as businesses change and move, large amounts of our societies get left behind. What are those people suppose to do? Many would argue that it’s their own responsibility but nonetheless this labor is a huge resource we are letting sit idle.

    I can help but to think of a paper I read some time ago when seeing this: http://herd.typepad.com/files/mintzberg-beyondselfishness.pdf

    There may have been a time when ceos cared about their workers, and respected their contributions. Where workers could work for a company and be financially successful. Now, shafting your workers and the perception of executive entitlement seem to be the norm, partially because it is necessary to justify the exorbitant executive pay.

    1. Yves Smith Post author

      It might help if you boned up on continuous process operations like steel plants and paper mills. They are massively capital intensive, and raw materials are the ohter big input cost. Profits are a function of run time and product quality.

  55. decora

    Why does this remind me of Andrei Sakharov’s book “My Country And the World”? But he was writing about the corrupt, ineffective, ideologically obsessed managers in the old Soviet Union……

  56. Ray Phenicie

    There are actually many subjects rolled up here-thanks Yves for pushing this up as the topic of supporting workers in the workplace is the main issue that we should all be talking about. Workers may be paid $300/hr or $7.25/hr but across the board, with few notable exceptions, we are clawing at each other’s throats like animals about issues that are really on the peripheral of the main topic.

    1. Since most working people spend 40-60 hours in the workplace it should be elevated to very best world that it can be; up to date methods in management, the latest and greatest in tools. That includes moral and cultural support for the well being of everyone. That includes proper lighting, heating, cooling. That includes facilities at work that support the worker (like day care).

    2. To clear the decks discussion wise, on pay could we define three basic levels?:
    Poverty level, sufficient and a third category of added value for merit (you were born smart, educated yourself, worked hard so you deserve more-I know it’s fudgey but that’s all I have time for right now)

    Poverty level should be defined as the level to just meet living expenses at a Spartan level that allows one to pay for rent, utilities, food, clothing and transportation-nothing left over. In the Detroit area sufficient pay to meet those requirements is about $23,0000/yr for one person household. Add 45-65% for each person to these numbers for additional household members.

    A living wage should be defined as having the income listed above with additional amounts to meet emergencies and to support lifelong savings. A realistic number, again for metro Detroit is around $30-34,000/yr.; again for a one person household, again added amounts needed for additional members in the household.

    What I’ll call meritorious reward pay then starts at around $36,000/yr.

    However, we really need to take heed of the warning about workers pay that was issued by Fyodor M Dostoevsky in Chapter five of The Brothers Karamazov, commonly known as The Grand Inquisitor. The Inquisitor draws a scenario where the hungry masses are willing to sell off their souls and their freedom for security, food, and ‘peace of mind’ but more importantly, the responsibility to make decisions about their own future is sold off for the putative freedom from responsibility for deciding what the truth is.
    http://www.mtholyoke.edu/acad/intrel/pol116/grand.htm

    Lastly there are a host of issues that surround this topic and really need to be discussed.
    Why is there no mass transit in this country? If %50 of the workers are at poverty level as defined above, this is an absolute necessity.

    The cost of doing business is being driven sky high because of the escalating cost of working in a toxic environment.
    End of story.

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