Steve Rattner, Card Carrying Member of Top 1%, Tells Us We Should Lie Back and Enjoy Much Lower Wages Resulting From Globalization

A corollary to Upton Sinclair’s famous saying, “It is difficult to get a man to understand something if his salary depends on his not understanding it” is “People promote ideas that help them secure or preserve a privileged position on the totem pole.”

A glaring example of these observations came in an op ed in the Sunday New York Times by Steve Rattner, former Lazard mergers & acquisition partner, later head of the private equity firm, Quadrangle Partners. He is best known as the chief negotiator in the auto bailouts (and he was criticized for not involving any auto industry experts). He paid $10 million to settle a kickbacks investigation and agreed not to work for a public pension fund in any role for five years. I happened to see Rattner on a panel at a Financial Times conference earlier this week and he elaborated on some of the themes in this piece, “Let’s Admit It: Globalization Has Losers,” which reader Brett asked me to debunk line by line. I’ll spare you and focus just on the most critical and bald-facedly dishonest bits.

Let’s start at the top:

For the typical American, the past decade has been economically brutal: the first time since the 1930s, according to some calculations, that inflation-adjusted incomes declined. By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.

Apparently the NYT fact checkers give guys at Rattner’s level a free pass. This is false. Where was Rattner in 2007 and 2008? Real median income peaked in 2007, and that was modestly higher than in the last cyclical peak, in 1999. The decline in income (nominal, not just inflation adjusted) is the direct result of the global financial crisis, not inflation. So his entire piece is based on an inaccurate claim which has the effect of diverting blame from bankers like him.

This next bit is sneaky but worth pointing out:

The phenomenon that free traders like me adore has created a nation of winners (think of those low-priced imported goods) but also many losers.

We don’t have a system of free trade. It’s managed trade. As William Greider has pointed out, most other countries play the game in a way to produce better national outcomes (fewer lost jobs and trade surpluses). We seem to be running our trade policy not to optimize our national interest, but that of large international corporations, which is far from the same thing.

The next bit is pure reductivism:

A typical General Motors worker costs the company about $56 per hour, which includes benefits. In Mexico, a worker costs the company $7 per hour; in China, $4.50 an hour, and in India, $1 per hour. While G.M. doesn’t (yet) achieve United States-level productivity in China and India, its Mexican plants are today at least as efficient as those in the United States.

American management is also more expensive than management in Mexico or China or India. And I think you’d be hard pressed to say American management is better than management, say, from Sweden or Australia, where CEOs are vastly less well paid than here. So shouldn’t we expect CEO and upper management wages also to fall?

And remember, as we have said in other posts, the evidence is overwhelming that not only is CEO pay in the US not correlated with performance, it is negatively correlated with performance. The best paid CEOs deliver the worst results, and the leaders of Jim Collin’s stellar performers in Good to Great all paid themselves modestly.

We need to peel back several layers to debunk this notion that labor costs trump everything. First is that Rattner is implicitly arguing that the world is frictionless. But that is misleading. The US is a big market, and there are advantages in being close to the customer, in terms of rapid response, carrying smaller inventories (and thus having smaller losses when you get it wrong), lower shipping and financing costs. IKEA, which is in a low end manufacturing business, has its manufacturing for the US located in the US.

Second, he is also assuming that all products are more or less commodities. But the job of management is to find a way to gain competitive advantage, and being a low cost competitor is one of many options. I’m sure you’ve paid a big premium to buy food or a drink at a convenience store now and again. They are competing on location, not cost. Similarly, I’m always amused at techies who hector Apple product users in comments. They seem angry that consumers will pay a big premium for ease of use or maybe just sheer coolness (and I have to say, as a Manhattan person, being able to see a live person at 3 AM and get something diagnosed and fixed is worth a lot to me). So a fixation on costs too often reveals a management lacking in imagination and gumption facing increasingly competitive and mature markets.

Third, his focus on direct factory labor is disingenuous. Direct factory labor is typically just north of 10% of the cost of most manufactured goods; for cars, we are told it’s 13%. Even if you can extract meaningful savings there, you have significant offsets: the upfront cost of re-orgainzing production (which in the outsourcing scenario include hiring costly outsourcing “consultants” and paying attorneys to paper up the deals), higher ongoing managerial costs, higher shipping and related inventory financing expenses. Yes, there are cases where outsourcing and offshoring have been a big success, but there are also others where the benefits have been underwhelming and have come at considerable costs to US workers, communities, and the economy (see a very good long form discussion by Leo Hindery).

And in many cases where big multinationals come out ahead, it isn’t due solely to labor cost savings. As Greider pointed out:

At IBM back in the 1980s, [Ralph] Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.

And this sort of thing continues. I discussed long form the fate of a world class coated paper mill in Escanaba, Michigan. The main culprit in its demise was overleveraging and excessive compensation to executives who knew bupkis about the paper industry. But another factor I did not include in my getting-to-be-too-long post and was pointed out by readers in comments were the considerable subsidies given by the Chinese and Indonesian governments to their papermakers.

Consider the implications: if the only factor at work were factory labor, as Rattner implies, you’d see far fewer jobs ceded to foreign markets (put it another way: if the labor cost differential were a sufficient inducement, foreign governments wouldn’t need to offer such generous subsidies).

To put it another way, the argument that Rattner is making is basically that of the Stopler-Samuelson theorem. Let’s turn the mike over to development economist Dani Rodrik:

The Stolper-Samuelson theorem is a remarkable theorem: it says that in a world with two goods and two factors of production, where specialization remains incomplete (plus a few more technical assumptions), one of the two factors–the one that is “scarce”–must end up worse off as a result of opening up to international trade. Not in relative terms, but in absolute terms. But the theorem is also quite limited in its applicability. It applies only to a case with two goods and two factors, and so its real world relevance is always in question.

But there is a version of the theorem that is remarkably general and powerful. It says that regardless of the number of goods and factors, at least one factor of production must experience a decline in real income from trade as long as trade induces the relative price of some domestically produced good(s) to fall (and as long as the productivity benefits from trade are restricted to the traditional, inter-sectoral allocative efficiency improvements, about which more later). All that this result requires is a very mild assumption, namely that goods be produced with varying factor intensities (i.e., use different combination of factors). The stark implication is that someone will lose, even if the nation as a whole becomes richer.

So to give an example: Let’s say that as a result of globalization, the wholesale price of a car falls from $20,000 to $15,000. Let’s further assume that materials costs were $6000, direct factory labor was $3000, factory overheads were $2000, shipping is $1000, marketing is $2500, other management costs (top brass, IT, legal, accounting) were $2000, interest cost are $1000, and $1500 is for capital investment (as in repairs and replacements), with a target profit of $1000. Per Stopler-Samuelson, something has gotta give to get the manufacturing price down to $15,000.

But it does not have to be worker wages. For instance, over the years, we’ve seen manufacturers of all sorts get smarter (and in some cases, just stingier) in their use of raw materials. And all bets are off if you increase productivity. That means you can use fewer workers, but maintain their pay levels. As Rodrik continues by discussing a paper by Broda and Romalis that found that trade with China reduced income inequality in the US. Huh? Per Rodrik:

The puzzle here, at least on the face of it, is that one would expect China’s trade to have had the largest price impact on labor-intensive goods. And if so, wages of unskilled workers must have fallen even more, along the lines of the Stolper-Samuelson logic sketched out above. Can we still say that trade with China has helped reduce U.S. inequality?

The first thought that comes to mind is that Broda and Romalis are talking about consumer prices, and Stolper-Samuelson effects depend on changes in producer prices–i.e., prices of goods that are actually produced in the U.S. If nobody in the U.S. produces the garments and toys that China exports to the U.S., then it is conceivable that the relative price of labor-intensive goods will fall without hurting real wages.

But then this is unlikely, given substitutability between Chinese- and U.S.-made goods. And indeed another paper, by Raphael Auer and Andreas Fischer, employs a clever technique to document a sizable negative impact on U.S. producer prices from trade with China and other labor-abundant countries. So the benign effect of Chinese exports, if any, is not due to the fact that the U.S. no longer competes head-to-head with that country in similar products.

What gives? The Auer and Fischer paper underlines another important result. What lies behind the decline in U.S. producer prices in trade-affected sectors is not wage or other input price reductions but mostly increases in total factor productivity. So perhaps what is going is that the Stolper-Samuelson logic is defeated by increases in sectoral productivity induced by import competition. The mechanical link between prices and factor costs–which I appealed to above in the proof of the generalized S-S theorem–breaks down whenever there is productivity change. After all, if TFP increases, employers can afford to pay unchanged wages even if the prices they face decline.

So this is where the misdirection by Rattner is crucial. Until the 2000s, in every economic expansion, labor got the bulk of the increase in GDP, typically over 60%, via more jobs and increased pay. Post 2000, there was an astonishing change, a shift from labor share, which fell to below 30%, and a massive increase in corporate profits. In other words, there was huge shift away from labor to capital. This has little to do with globalization and much to do with the weakened bargaining power of US workers. As much as it has become fashionable to look down on unions (and their corruption and short-sightedness hasn’t helped), having well paid blue collar workers helped the negotiating position of non-unionized white collar employees.

Rattner also conveniently fails to discuss how the rapacious tendencies of private equity firms made matters worse. An unduly candid investor described the business model in Confidence Men: pile debt on the acquisitions, and if only one of ten made it (meaning survived!) you still made a good return for investors. So many companies in Europe have gone bankrupt thanks to the tender ministrations of PE pirates that the officialdom has read them the riot act. PE firms have to register, and they cannot either buy companies or raise money in the Eurozone unless the conform to regulations, which include strict limits on leverage.

Rattner argues in his piece that we should imitate Germany and focus on high skill manufacturing. But Germany’s population is roughly 1/4 ours and they already dominate certain niches. Rattner at the FT conference called for the US to start producing more engineers, which readers will laugh out of the room. Engineers don’t get paid enough for more people to want to seek out that career path; many of you have told me the only way to make a good living was to get another degree, like law, and go into another line of work.

And even if copying Germany might be a viable approach, it would take something like industrial policy to get there. Note the US already has industrial policy by default, with banks, the mortgage-industrial complex, military contractors, agriculture, and Big Pharma among the favored groups. But no, Rattner pooh-poohs the whole idea. Better to have industrial policy determined by lobbying effectiveness than a more thoughtful process:

The prospect of Washington lurching into the private sector is terrifying, as illustrated by the debacle of Solyndra, the solar energy company that failed with $535 million of taxpayer loans. While countries like China have put large resources behind industries they want to nurture, we should resist the temptation to plunge deeply into industrial policy.

I wish I had the space to discuss Solyndra in depth, but the sort form is that the failure of that deal is not an indictment of the overall program. If you are a VC investor, you expect a certain percentage (actually a pretty high percentage) to come a cropper. Solyndra was only a bit over 1% of the portfolio, and it appears to be the only loss. This looks like a classic “shit happens” deal failure: the investment looked sensible at the time, silicon prices collapsed, which had a direct, negative impact on competitiveness. Even so, a later-stage independent investor provided funding, which further confirms the original investment was not misguided (you’d get no rescue investors coming in if it looked like a hopeless turkey).

Rattner apparently missed a different Rodrik article, a Financial Times op ed, in which he warned:

If there is one lesson from the collapse of the 19th century version of globalisation, it is that we cannot leave national governments powerless to respond to their citizens.

Yet an unfettered system is precisely what Rattner is promoting, no doubt because it works to his and his fellow rentiers’s advantage.

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  1. larry

    This is brilliant. What I think of RATner is unprintable. I didn’t think it possible but the content of this post has pushed me to sputtering point. He thinks Washington is frightening. His ideas are frightening. What Washington can do is nothing compared to what his can accomplish – in willing hands, of which there seem to be many.

          1. JTFaraday

            Well, there are even some little comments dotted throughout there to that effect, which is more awareness than you’ll get on most days. Although mostly about the loans, (which is an easy one). Not so much about the intellectual failure(s) which, in my opinion, are spectacular.

      1. patricia

        So on the one hand, Occupiers are accused of being uninformed while on the other hand they are accused of garnering advice from people who have expertise in particular fields.

        They are accused of being dirty at the same time they are criticized for using the only bathrooms available to them.

        They are accused of living idly in their parents’ basements and criticized for disturbing the locals by trying to do something useful.

        They are gathering in the public in complete peace while being accused for costing the public too much money in genuinely unnecessary policing costs.

        There is no way the Occupiers will be approved by those who think like you. They will do what they deem best. If you have something in which you are expert, on which they need help, I’ll bet they’d be willing to listen. It is obvious by now that they’ll take any advice and come to their own conclusions.

        1. patricia

          One further comment. You wrote: “No one is clean.”

          Part of the brilliance of the Occupy movement is that its constituents understand that the best work/ideas regarding society emerge from the group. This flies against the good ole American ideal of rugged individualism.

          But we all live from the ideas/work of others, from generations back, and as near as the last tv show you watched. We are generally better for hearing others. Of course, it depends on who the “other” is.

          But I suspect you mean “no one is not bought”. If you have found that to be true, you are hanging around in the wrong neighborhood.

      2. Yves Smith Post author

        You are off base.

        The people contacted already had indicated they were sympathetic to OWS. If you don’t think all sorts of people (politicians, executives, etc) ask people they know from the media for input, you are pretty naive. This is a common, daily occurrence.

        Second, most of these people were giving advice to OWS already on their various outlets. Or did you miss that?

        Third, there is no indication that OWS took any of this advice.

    1. arby

      The former State Comptroller of New York is in jail for accepting bribes from Mr. Rattner to hand Mr. Rattner government pension funds to manage so that he could make money for himself. It is not globalization that made Mr. Rattner wealthy, it is corruption. One can ask: if the guy taking the bribe is in jail, why is the guy paying the bribe looked to for wisdom on economic policy by the elite media corporations?

    2. whatsup

      Don’t worry, these folks know what they’re doing. Just for example, Lloyd Blankfein’s wife Laura Jacobs Blankfein is the co-chair of the Executive Committee of the Ethical Culture Fieldston School, dedicated to the ideal of “exploring what it means to be an ethical and responsible member of society…” Ha!

  2. John Merryman

    Top heavy management is another form of legacy cost to be shed by the demise of the system on which it feeds. Nature doesn’t take prisoners.

    1. bmeisen

      How about going farther than asking a few aimless managers to try something new;

      Farther than attempting to restore the notion of responsibility and accountability to management by banning contractual rewards for failure at the top;

      Prevent CEOs from turning boards into circle jerks! Restore integrity to American corporate oversight! Mandate equal representation for capital, labor, and the ecosystem.

      1. sgt_doom

        ” Restore integrity to American corporate oversight!”

        No offense, but I think you’re reaching here.

        Observe Intel’s failed multi-billion dollar chip development project in India not too long ago.

        Observe the failings of Palm, when they decided to save on labor by replacing almost all their American development people with those from India.

        Now, I’m not purposely picking on India and Indians, but the two above examples perfectly illustrate the chronic shortsightedness of Corporate America today: save money and optimize profits at all costs by (1) peddling junk paper, (2) offshoring jobs (labor arbitrage), and (3) importing foreign visa workers (more labor arbitrage.

        I’m familiar with the innovation process: all my innovations, along with my last 17 jobs (at least those I’m aware of) have been offshored!

  3. Peter Roller Doors

    When I saw the title of this post that really made me laugh. Lie back and enjoy, really? And as written in the post, to cut down the manufacturing costs, the worker’s wages don’t have to go down, there are various ways to save, other than cutting wages. I would love to see the faces of the higher management, when their salary would be cut really down to save costs, I wonder if they would lie back and enjoy!

  4. yoganmahew

    You are assuming a couple of things:
    1. That what we’ve had since globalisation kicked off in a big way really has been an expansion.
    2. That the expansion has had a basis in, for example, manufacturing rather than FIRE.
    3. That there is an incentive for management or shareholders to maintain labour’s share in the short run…

    1. tech98

      3. That there is an incentive for management or shareholders to maintain labour’s share in the short run…

      You introduce a much-denied but real factor in today’s arrogant-MBA enthusiasm for offshoring as an ideology: “Sticking it to labor because we can and we want to, while manipulating the numbers to make it look like an economic decision.”

  5. Moopheus

    “IKEA, which is in a low end manufacturing business, has its manufacturing for the US located in the US.”

    And pays its US workers less than its Swedish workers. IKEA does manufacture here in part because labor costs are lower.

  6. bmeisen

    Rattner cites Visa/Mastercard as a model of service industry success based on “high intellectual content”. Their success has more to do with regulatory favor than with content, intellectual or otherwise. There has been little true innovation in the credit card utility since its birth. They could still be doing it with imprints.

    At home MC and VISA rake in the dough because they’ve bought legislators and gamed the system so that they win with retailers as well as with card holders. Dutiful card holders get the shaft as much as chronic debtors, even more so during recessions, great or otherwise.

    Where the empire has found amenable regulatory frameworks, MC and Visa have flourished. Where the locals have been more critical it stagnates. See Germany.

    Also so Germany for a country that emphasizes engineering and technical training in ways that Rattner might not be able to stomach: free public education! An explicit rejection of models of elite education like the one that currently ruins the earnings potential of millions of talented young Americans. And a robust systems of formal qualification that goes farther than a few semesters at the community college.

    1. Yves Smith Post author

      Frankly, I’d go further. They are a duopoly with serious network effects, basically dividing a natural monopoly (Amex is for the most part not disciplining them effectively; Amex has a lock on a separate business, corporate travel, and is a non-player in debit cards). They don’t compete on price. Amex won a big anti-trust suit, but they’d be a classic target for a straight up anti trust action except Eric Holder is permanently missing in action. Their pricing is so out of line with their costs that it amounts to monopoly profits.

      1. bmeisen

        Their greatest coup was that they engineered themselves in the eyes of Americans beyond desirable into indispensible. Checking was the key.

        Using credit to make purchases became the easiest option to paying cash because Visa/MC could argue that their “service” was more convenient than checking and their were no debit cards. And then they locked consumers in with credit rating terror (“I’ll be homeless if I can’t get a mortgage!”) and suddenly you had to have a credit card. Now they’re rigging debit cards to preserve their kill.

        Get rid of checking and credit cards are barely rational, debit cards are payment transfer optimizers. The notion that credit should be seen as a harmless means of payment transfer is a loan shark’s wet dream.

  7. Middle Seaman

    Ratner didn’t look at himself in the mirror. The American finance industry has the most expensive workers in the world. As opposed to auto manufacturing that produces cars we drive, the finance industry produces exactly nothing and it is an order of magnitude larger than it needs to be. Since Ratner produces nothing, he is paid by money transferred to him by the government. This money is either our taxes or the taxes our kids will pay. In essence, we didn’t lose money to globalization, we lost it to Ratner. That can be easily fixed.

    1. sgt_doom

      Sir, while I agree with the gist of your remarks, I strongly disagree with the following:

      “..the finance industry produces exactly nothing ..”

      The cornering of the chocolate market some time back, and a few months later violent political upheaval in Ivory Coast, the major chocolate-producing country.

      Such global financial transactions result in many deaths, and much destruction of innocent lives.

      Other than that, we are in full agreement.

  8. jh

    Let’s Admit It: Globalization Has Bloviating Apologists

    “The phenomenon that free traders like me adore has created a nation of winners (think of those low-priced imported goods) but also many losers.”

    Perhaps one of the more banal observations uttered in
    defense of globalization to date. The paragraph on
    American exports is simply embarrasing.

    Ah well, there are better debunkers around here, but
    if one intends to count the true cost of globalization
    and makes no mention of the toll on the planet and its’
    inhabitants then what’s the point. Upton Sinclair was
    right. Once again.

  9. wunsacon

    >> the leaders of Jim Collin’s stellar performers in Good to Great all paid themselves modestly.

    – People who demand a king’s ransom before they deliver results are people we least want to contribute.
    – Progressive taxation would hurt the poor performers more than the good performers. It would actually demotivate the jerks and open up their positions for real contributors.

  10. F. Beard

    How were American workers’ jobs automated and outsourced away? Ans: With their own stolen purchasing power via loans from the counterfeiting cartel, the government backed banking system, to the corporations.

    Without that counterfeiting cartel, it is likely that corporations would have had to pay their workers with equity, “shares” in the corporations. Then outsourcing and automation would benefit the workers too since they would be co-owners of the corporations.

    Usury has been widely condemned throughout history. And counterfeiting has been universally condemned throughout history. Yet our money system, the life-blood of the economy is based on both.

    Well now the chickens are coming home to roost.

    1. sgt_doom

      Outstanding points! What few Americans still realize is how much “foreign aid” (OPIC, USAID, etc.) was targeted at building factories, processing facilities, R&D labs, call centers, etc., in foreign countries so that American-based multinationals could offshore their jobs there, and more easily create new ones offshore.

      And now they have further refined the processing of using “Other People’s Money” by convincing them their money money is being used in an opposite manner to reality — whether it’s foreign aid on behalf of the corporations, or donations for Wall Street’s latest shadow banking extension, cap-and-trade, convincing easily duped low-information democrats thay it will reduce pollution, when in reality it is nothing more than yet another artificial money creation scheme benefitting Wall Street and the oil corporations (carbon derivatives, carbon permits, global climate exchanges, etc.).

  11. voislav

    It’s hilarious how far the blinders will go. I was watching this feature on CNN over the weekend where they were going with the standard “there are jobs out there for people who want them”. They listed top five jobs available and #3 was “energy field auditor”. I guess you can’t outsource those

  12. Patrick

    Thank you Yves for an excellent take down of this nonsense. It is amazing how bankrupt the commentariat are. This post by Ratner and another by Friedman this week demonstrate the absolute dishonesty of those defending the status quo.

  13. Zack

    The increase in productivity is certainly a boon, but not if it leads to the laying off of workers in favoring preserving wages. The reason is, increases in productivity along side more (unemployed) people that can’t afford to buy anything leads to overproduction. Overproduction leads to all this talk of deficit spending and thus we have the federal gov’t buying military airplanes that melt in the rain just to increase aggregate demand.
    But there is another way. A reduction in working hours, while preserving both employment and how much those employees are paid (that is, 30 hours work for 40 hours pay) will allow all of us to share in the fruit of increased productivity. If we can make more stuff in less time, why should the only people to benefit from that are the economic elites?

    1. LifelongLib

      Good idea. It would probably also help if the government took over paying for medical care and retirement pensions (actual livable ones rather than the current SS pittance).

  14. LeeAnne

    We respond as if these robbers have standing to air their views in public.

    Just who are these people: Rattner and our NYC royal Mayor Bloomberg?

    The Rattner story of pay-to-play and a slap on the wrist is here

    and our royal Mayor Bloomberg’s response was

    “Steve Rattner is my friend. Of course I’d keep him on. Why would you not? I value his advice -you stick by your friends.”

    For a video comment on the royal Mayor of the City of New York, plesae see this video. It is priceless; colorful, brief and accurate:

    1. JTFaraday

      Well, since Journolist 2.0 looks to be vast improvement over Journolist 1.0, I can see why you’re upset.

      (Ezra, is that you?)

    2. LucyLulu

      Which part of Ratigan’s or Taibbi’s “Nazi/Communist” agenda do you object to? Is it their desire to root out corruption in Congress and the influence of money in politics? Is it the offshoring of our workforce? Is it the move away from production of real assets to financialization as a basis of our economy? Is it denying students the right to declare bankruptcy while providing financial institutions the funds needed to prevent the need to declare bankruptcy? Or is it their desire to prosecute criminal behavior and have regulatory agencies that aren’t captured by the entities they regulate? Or is it raising taxes on the sector of society that is seeing their wealth growing at record rates when everyone else’s wealth is declining, and the overall economy is also declining, and we have record deficits?

      Proud Nazi and Communist

      1. sgt_doom

        I suspect he’s just jealous he isn’t being paid a six-figure salary over at the SEC to view quality Internet porn all day long……….

    3. Yves Smith Post author

      First, what exactly is wrong with OWS? And tell me what it has to do with Nazis? Is OWS into ethnic purity and exterminating millions, fighting a war with its neighbors, or all tied up with Big Business (which the Nazis were, the English aristocracy loved them because they famously made the trains run on time). You’ve revealed ignorance and dishonesty (well, calling something both Nazi and Communist at once was a major tell).

      Second, I got an series of e-mails (I don’t filter e-mails and did not solicit this contact) and I told everyone I thought OWS listing demands at this juncture was off base. OWS wanted help in dealing with media pressure to come up with demands (which did not necessarily mean taking the bait and responding with demands). So contrary to your broad brush attack, I did not provide messaging.

      And how is this any different, pray tell, than the various ways journalists and commentators have told OWS what to do in public? I didn’t follow the thread closely because I didn’t agree with the direction the discussion took, but in most if not all cases, the partiicpants said nothing different from what they’ve said in public. ‘

      Your tactic is basically no different than the McCarthyite red-baring strategies of the 1950s. You are acting as if OWS is some sort of destructive force when it has been very positive, and then trying guilt by association, that someone who has had any contact is an active participant and therefore is presumed to have done something wrong. I’ve been clear I’m sympathetic with OWS, so there is nothing suspect about my responding to an inquiry from someone involved with OWS. I’ve ALSO responded to and even taken meetings with the US Treasury Department. Are you, by the same logic, going to use that to argue that I’m in cahoots with the Obama Administration?

  15. ReaderOfTeaLeaves

    Great post.
    Special thanks for the link to Hindrey’s piece, which calls out theft of intellectual property as a key factor in this mess.

    Ranter exhibits no awareness of intellectual property theft, which IMVO is a symptom of systemic denial of the real problems with globalization among the FIRE-worshipping 1%.

  16. lbcyclist

    There are a few more things the US can learn from Germany:
    1. Strong social safety net
    2. Free public education including university degrees
    3. Strong union membership
    4. Employee representation in the company board

    1. LeeAnne

      sounds like California prior to Proposition 13 (officially named the People’s Initiative to Limit Property Taxation) Wiki
      that got ALL commercial property off the hook.

      And before open borders with Mexico.

  17. readerOfTeaLeaves

    More links relevant to this post:

    Who are the 1% and What Do They Do for a Living?

    stock market returns drive much of the manager’s income. This is related to a process of financialization… The “dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves,” and this is done by paying out more in dividends that is earned in profits. Think of it as our-real-economy-as-ATM-machine, cashing out wealth during the good times and then leaving workers and the rest of the real economy to deal with the aftermath.

    Funny, Ratner never mentions this point. Hmmm…?

    Meanwhile, today’s headlines at Financial Times: Citi’s earnings jump 74% to $3.8 bn (no mention of the number of tax havens required to produce the earnings, but hey… details, details…)

  18. ftm

    How can you stand to even read Ratner drivel?

    It as if he thinks the point of an economy is to provide high incomes to the Ratners of the world — people who sell out the economic interests of their fellow citizens for their own benefit. In this the US excels, woohoo we are number one!

  19. Billygoat

    How come no one has demanded that corporations outsource management ie CEO CFO etc? think of the savings.

    There are literally millions of potential applicants out there, and since they will be somewhat less experienced, they will be less able to game the system.

    Oh well, just wondering

  20. tz


    Private equity should be like student loans, or there should be claw-backs for 4+ years back to prevent the looter’s dividend.

    I disagree on Solyndra – When government wastes my hard earned taxed dollars, it isn’t s*** happens. You’re whole econned is how about government ought to know better or be more prudent than ordinary. Making excuses is stooping.

    1. KnotRP

      > the investment looked sensible at the time

      That’s hilarious. At the time the investment was
      made, the Silly Valley rumor mill had already
      established that Solyndra was running a scam
      and that the money would vaporize.
      Only a fool, or someone with something to sell,
      would now claim it looked sensible at the time.
      It was a valley joke at the time it was made…

      1. Yves Smith Post author

        I don’t know where you got this from, but there is a lot of evidence on the ground otherwise.

        It wasn’t a “scam”, this was a fab, and the fab is still operating. And new investors came in after silicon prices fell. As I indicated, the later stage investors did independent due diligence.

  21. A Good Bankster

    Stephen Rattner is frustrated because he cares about the small people, just like the NY Times cares about the small people.

    I was with him once when we passed a homeless man wearing a torn and filthy bold striped shirt. Rather than turning up his nose, Rattner pretended not to see the dirt or smell the stench; instead he gave the pitiful wretch a lesson on the dos and don’ts of wearing a bold striped shirt. That it calls for a solid colored or discreetly patterned suit or tie.

    I was so moved by this charitable act of compassion that I gave the bum $1 out of my own pocket.

  22. Hugh

    Rattner is just blowing obfuscating smoke. It’s standard class warfare distraction. It’s not our looting elites. It’s big historical processes at work. If you want to blame anybody, blame history, blah, blah, blah. It is a curious thing but kleptocrats like Rattner probably believe what they are saying. It’s just that they don’t really care if it makes sense or not. That’s not its purpose. The goal is to keep the 99% divided, confused, and most importantly away from gathering with their torches and pitchforks.

    Yves does a great job listing the factors that make outsourcing economically problematic. If no one else has mentioned it, I would just add China’s peg to the dollar. It keeps all the inputs on the Chinese side artificially low.

  23. Susan the other

    Thank you Yves, really informative. Rattner again – that fuzzball. The quote I will remember is Rodrik (who is? anyway good quote): “We cannot leave national governments powerless to repond to citizens.” The only export international corporations have is labor arbitrage. And we always suspected China and indonesia were subsidizing with their good cheap cost of living. Duh! You cannot impose low wages in a high cost of living country. (So they just eliminated the jobs altogether… evil genius.)

    So not even taking into account all the Management Fantasia, we should value exchange, that is “money”, second…. and things first. Things first things.

    “Globalization has losers.” Like the progeny of Rattner and his ilk.

    And one comment: Because it is such a fratricidal jungle out there, we do need good law: Hello Congress. Are you there?

    1. Yves Smith Post author

      Rodrik is a Harvard econ professor teaching at the Kennedy School of Government. He’s a pretty serious development economist.

  24. EP3

    Hey Yves, something I thought about a little later after reading this. And I don’t know if it necessarily is related but I believe it does in regards to wages being cut.
    Anyway, a lot of small business clients I see or work with are very cash tight. And they like to control expenses of course, with wages being the “most obvious” and “easiest” to constrain. Yet, what has confused me while watching them run their businesses is that they will nearly blindly accept rates of utilities (lights, etc. but also tech stuff) to increases and that these costs are just “what they are”. But when it comes to wages, they will preemptively move to contain those to great lengths. Anything they can do to stop filings for unemployment, which increases their unemployment tax rates, or limiting any other slight increases in wages (increases in company profitability versus comparable businesses), or increases in productivity are just rolled back into the company profits because “things are tough right now and even tho the company is growing, bad times might happen to us so we can’t risk the finances of the company by rewarding those savings with wage increases. but great idea”.
    So why does an employer say ‘well the electric bill is up $25 this month, no big deal’, but ‘wages were up $2 this month, we have to cut costs’?
    Yves, i wish someone would come out to Lansing Michigan and do an economic societal study of the area (include Detroit and Grand Rapids for their complete opposites). We have this terrible dichotomy in our communities. One group, baby boomers and above, think that the economic situation for those that “want to work hard” is limitless. Most of them have either direct auto worker retirement benefits or the same in different sectors of the economy. They mock us that are the other generation. They say “we can’t afford for you guys to have health care, retirement, higher wages. But don’t dare touch ours. And you all shouldn’t complain. We worked hard and got ours. You will too.” but it’s not there. There are no factories to establish a wage floor. Now it’s a push to the bottom.

  25. gs_runsthiscountry

    “having well paid blue collar workers helped the negotiating position of non-unionized white collar employees.”

    Bold, italicize and underline that statement, it can’t be stressed enough. I just had that very discussion last Friday in an impromptu meeting on my weekly trip to the DWD in my area. 75% of the people working at the Dept. of Workforce Development are former vets in the manufacturing industry white and blue collar. They know this all too well, as does everyone else that is running, not walking, from the manufacturing industry.

    “Rattner at the FT conference called for the US to start producing more engineers, which readers will laugh out of the room. Engineers don’t get paid enough for more people to want to seek out that career path; many of you have told me the only way to make a good living was to get another degree, like law, and go into another line of work.”

    Yes, the fact of the matter is, because of the breakdown bargaining power of blue production worker, the white collar support staff, including manufacturing and product engineers, has suffered the same fate stagnate wages.

    Engineering wages hover at or slightly above the median wages discussed in this article, some areas higher. By today’s standards that is a decent wage/salary. However, that is hardly enough to draw the younger set into taking on the rigorous course of study such as engineering. Why would you, when you can pursue many other career paths that will produce close to the same, or better salaries. *Enter finance and health sector here*

    I have watched over the last 2 years the constant barrage of statements that “we can’t find enough engineers.” I watched as the CEO of the Carlyle group made such statements on national television. After hearing this nonsense, within 5 min I was scurrying the internet, looking at every possible national job posting site one could think of. Guess what folks, there was not ONE, NOT ONE posting for an engineer. Now, admittedly this could be due to the fact their search went underground, to the realm of the “headhunters.” However, if you really cannot find engineers, I find it hard to believe you would not be posting everywhere you could. That is just one example of many I continue to find.

    The decision of parents and children in the past decade is not to pursue manufacturing or product engineering (I cannot speak to other areas of engineering biotech etc.). Parents of these children have been on the short end of the decline over the last couple decades. They know the flight to the right to work states will continue unabated. Further, you have an experienced generation of engineers that are retiring, or lost their job during the crisis, and are not coming back.

    What you see in the media about lack of engineers happens for a reason – corporations are panicking. They know the writing is on the wall, they have destroyed an industry with their behavior and decision making over the last 30 years. They also know there will be a shortage in the future (not now). There is no shortage now; their intent is to get that pipeline of new labor going to cover the gap in the labor force they created. If they don’t attack this with the propaganda “we can’t find engineers”, they are facing a huge wage push 10 years out. And, so we see their attempt to create a saturated market to support lower wages. This is also why there is so much chatter, less so in manufacturing, about H1B visas.

    There is no shortage of engineers – there is, however, fear and panic in the industry of the shortage that is on the horizon, a shortage that will force salaries to rise.

    1. readerOfTeaLeaves

      The smartest, most creative young engineers of my acquaintance are now working for privately held companies with creative environments. This is partly because in an early (first) phase of their careers at a publicly traded company, there were so many market predators who wanted to take down their company in order to get control of patents (and talent) that the business was not able to function in the predatory, unregulated environment.

      If you were a young engineer, would you really want to place your creative future in the hands of a bean-counting exec who was out to squeeze you for quarterly earnings? Probably not.

      But then again, there are so many sub-fields within engineering (from civil to mechanical to chemical to software to… et cetera) that my comment really doesn’t reflect the differing employment dynamics within specific subfields.

      However, there’s no sign in Ratner’s piece that he really understands or respects the processes involved in engineering complex projects.

      1. gs_runsthiscountry

        Yes, when speaking of engineering without attaching which field, it can be misleading. Although, I hinted at that in my post.

        At the time looked, 6 months, maybe ayear ago, I did that cursory search on Caryle’s subsidiary companies, and for engineering job postings, it was specifically industrial companies, not chem, bio and O&G.


        I have been talking with people, as well as reading about the disconnect between employers and jobs seekers at the moment. Put simply, employers will stop being picky and holding out for “perfect fit” employees, as soon as we have real demand and not until then.

        Also, the stories of employers pursuing those that are employed vs unemployed are real. To thwart the DoL stance against this discrimination recently, HR managers are simply kicking out resumes that have gaps in employment. If you have been unemployed for a year or more, in some instances, your resume never even makes it to a hiring mangers desk.

        Structural unemployment has been way over blown, because there is not a real effort to hire available talent, which is simply a function of not needing someone bad enough to fill positions.

        Amazingly, 4 years ago you didn’t hear as much barking about not being able to find employees, or structural employment issues for that matter (heath care the exception). They did, however, magically appear when we have the most available talent at any time in our history, go figure.

  26. rotter

    RATTY: “The phenomenon that free traders like me adore has created a nation of winners (think of those low-priced imported goods) but also many losers. ”

    I try to “think of all those low priced imported good” as little as possible. But its hard when they are litterally laying out in the streets, and blowing around the alleys, having flowed over and out of the landfills they are overwhelming. Ive always thought of Trash as a nasty but unavoidable side effect of living. I must confess ive never thought of it as the wonderful benefit of globalization. I will agree with ratty tho. many many many more of us need to think very very hard about all those low priced imported goods, and whether or not we want or need them, or if we couldnt do much better here at home, again.

  27. Siggy

    I am familiar with the Escanaba paper mill as well as what happened to Boise Cascade and the Minnesota & Ontario Paper Mill.

    The financial difficulties of these plants began with the arrival of private equity, a lot of debt and then asian government mercantilist subsidies. There is also a modest asian labor cost arbitrage. The effect has been to reduce US production and its share of the global market.

    Rattner is talking some book he either has or intends to have. Don’t think he did the auto workers any good either.

    Keep kicking on his dog, he deserves it.

    1. rotter

      Ive always thought rattner and tom freidman should start a “think” tank. Of course neither one of them thinks,they just assemble the different pieces of manufactured received consensus floating around then regurgitate it. Freidman can handle the foreign policy side and rattner can handle the economic and domestic policy. or maybe they should just get married. oh god i wish i hadnt written that.going to throw up now.

  28. Brett

    Yves, thanks. I very much enjoyed that. I’m glad to read different view points on his column as there was more wrong with it than I initially recognized. I posted what I thought was wrong with it on Dean Baker’s blog (see top post, by Brett (me))

    Also, Yves you should check out 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang — it’s a short read but very interesting. He does quite a bit of dismantling of conventional economic wisdom, and he knows quite a bit about how corporations and business function (especially the large car companies).

  29. Jon

    I do so love the idea of someone telling senior management: “We’ve decided that your labour costs are out of line with international norms. Consequently, we will be out-sourcing management to India and retaining American workers who demonstrate an ability to produce on a quality basis.” Ah, to be a fly on the wall then!

  30. Ray Phenicie

    The movement towards increasing inequality in income and wealth (they are two different concepts or ‘things’), parallels a movement in the struggle for preserving individual liberties and civil freedoms. Turning back the pages of history to watch the rising tide of oligarchical forces strip our freedoms away (begun in the early 1950’s by the search for the holy grail of ‘national security’ and then carried over into the ‘war on terror’) we see an increasing rise in financial poverty as well. I would point out however that in understanding this complex issue, there is definitely a need, in order to gain understanding, of which came first. I am saying, it is definitely the case ( at least in the short term from around 1930-1950) that the loss of individual freedoms and liberties came first and this enabled the power mongers in this country to reduce the vast majority to peonage.

    Political managers (like Mayor Bloomburg) have had a Sunday morning conversion on the subject of the freedom of assembly.

    During Martin Luther King’s marches and in the subsequent refocusing of national ethics (legally one cannot subject a person to inequities at law no matter what one’s opinion is about the moral status of that person) southern law enforcement choked on their tobaccy chaws as they were forced to watch minorities walk with more freedom throughout society. Gradually that freedom was worn dull in the marketplace as economic tides swept over the country. But, and this is the key, another larger aspect of freedom gradually wore down to nothing.

    Since the 1970’s the lawmaking processes in this country have increasingly been taken over by the combined machinery of big political parties and big money interests -those money interests were housed in the arena of Big Paper, Big Lumber, Big Mining Big Oil, Big Metal, Big Auto, Big Manufacturers, Big Finance and Big . . .Combined, these forces successfully captured the government of this country in total with the election of Ronald Reagan. Not that this was a new phenomena, I’m pointing to the totality of the lockdown, the tie to ideology with the Christian right chanting ‘Jesus saves all others must die . .’
    The tie to ‘Markets saves us all, all who don’t believe are doomed to the nether realms of poverty or intellectual insignificance.’
    ‘The creation of huge amounts of private debt will lead to creation of wealth’-well that’s an oxymoron right on the face of it, the absurdity of that belief is self evident, even to Alan Greenspan who was the financial overseer of the new financial form of slavery.

    Now the forging of the chains are complete. We struggle in a frozen morass of incompetency, evil designs, open hypocrisy and cruelty in all public offices right up to the very Oval Office and are reduced to a form ad hoc community government that meets in local parks. Well, maybe that is progress after all.

    The message here though is simple.

    Until we regain our civil liberties, until we regain our representation in our local, state and national legislatures, until we regain our personal integrity that is found only in strictly enforced moments of deep privacy (quick, let me go and erase all of those tracking cookies from this computer), in short until we truly value Life, Liberty and Equality, until we can really say and mean it “Give me liberty or give me death”

    Until then, the chains of economic servitude will remain in place.

  31. EP3

    yves, here’s another thing i see with clients and financial issues that they blame on payroll. There will be an increase or addition of high cost labor (maybe a small doctor’s practice adds a second doctor to do backup work). Yet, the additional doctor doesn’t do things that make for high profit work. The new doctor is doing paperwork for the president/doctor. Things that the main doctor would do if he wasn’t trying to spend more of his time on patients. but what happens is labor costs skyrocket while revenues only marginally improve. So those on the lower end of the pay scale in the office suffer because now the company has less cash to operate and pay wage increases with.
    just an observation. one main problem i see is rent extraction. owners pay themselves “rent” as another way to lower the company’s taxable income and reward owners for their successful business

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