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Living Wages and the Protectionist Train Crackdown


Purposely or not, the US is recklessly accumulating debt at every level: government debt, corporate debt (in stock buybacks and LBOs), and personal debt.


Maryland stepped up to the plate on May 9th and passed legislation that would make any protectionist fan want to stand up and salute. The headline was Maryland to make contractors pay 'living wage:

Gov. Martin O'Malley signed the nation's first statewide "living wage" law, requiring state contractors to pay at least $8.50 per hour, more in urban areas. The bill, which O'Malley said was designed to strengthen the middle class, was one of 203 signed by the Democratic governor on Tuesday.

"It's the right thing to do," O'Malley said.

The bill was cheered by labor and civil rights groups, but the National Federation of Independent Business had argued against it, saying it could hurt small companies. It is modeled on local laws across the country, but advocacy groups say it is the first statewide one.

It affects state contracts worth at least $100,000 and includes exemptions for state universities, the lottery and some other agencies.

Besides the basic $8.50 pay rate, it mandates a wage of $11.30 in urban areas where it is more expensive to live. The measure does allow employers to reduce the rate if they pay for health insurance.

A similar measure passed the Democratic-controlled legislature in 2004 but was vetoed by then-Gov. Robert Ehrlich, a Republican. Instead the legislature, over another veto, raised the state's minimum wage by $1, to $6.15.

Among the other measures signed Tuesday was a bill in which Maryland apologized for slavery.

It's the right thing to do? For who? Certainly not for small businesses. And why of all things should the state lottery be exempt if it is the right thing to do? Seems to me there is a double standard somewhere. Sad to say, this is exactly the wrong thing to do and it is guaranteed to cost jobs at a time the US can ill afford to lose jobs.

In Congress Targets China on Currency Manipulation I was wondering just how silly Congress might get with protectionist legislation. If the Living Wage legislation is any indication, we are now starting to see the answer.

The Protectionist Train Has Left The Station

Steve Roach is writing we are Past the Point of No Return:

Even the old timers in the Congress had never seen anything like it. On May 9, the US House of Representatives held what was billed as a tripartite hearing of three subcommittees on "Currency Manipulation and Its Effects on US Businesses and Workers." I was one of the "expert witnesses" at this hearing – invited to submit a written statement and then, along with the other six members of the witness panel, to present a five-minute oral summary in front of the assembled legislators (my written statement, "A Slippery Slope," was published as a Morgan Stanley Special Economic Study on May 9). The hearing concluded with an extensive question and answer session. It was an experience I will never forget. My worst fears were realized. At the end of over three hours of grueling give and take, I left Capitol Hill more convinced than ever that the protectionist train has left the station.

In terms of the substance of the debate, three things surprised me about this hearing: First, while the bulk of the discussion was about China, anti-Japan sentiment was formally brought into the picture for the first time. The issue was the yen – characterized by the Congress as the world's most undervalued major currency. While the absence of explicit intervention by Japanese authorities over the past three years was duly noted, many representatives took the position that there has been unmistakable "implicit manipulation" of the yen. Second, the case against China was framed mainly around the concept of the "illegal subsidy" – WTO-compliant jargon that frees up Congress to impose sweeping countervailing duties on Chinese exporters. Third, the congressmen present at this hearing were highly critical of the US Treasury's bi-annual foreign exchange review process and its failure to cite China for currency manipulation. This puts the House on a similar track as the Senate.

Contrary to what most believe, this is not a case of anti-trade Democrats now taking over Congress. I continue to stress that there is broad bipartisan support for anti-China "remedies." While the Democrats are now in charge of the Congress, on matters of trade policy they have been joined by many Republicans in their crusade.
I didn't go to this hearing with the naïve expectation that I would be able to change any minds. And there was no surprise on that count. There was little sympathy on the part of the Congress for linking trade deficits to domestic saving shortfalls.

The consensus of congressman at the hearing was that China was the problem – even though the non-Chinese piece of the overall US trade deficit slightly exceeded $600 billion in 2006, over two and a half times the size of the Chinese bilateral deficit with the US. Many congressmen were especially upset with my characterization of "China bashing." One gentleman asked me to strike any such references from my testimony, claiming that, "We're not China bashers. We are just trying to seek the truth." At the same time, literally no once responded to the concerns I voiced over the unintended consequences of protectionism – namely that China bashing could backfire in the US, the rest of Asia, and the broader global economy. The bottom line here is very clear: The US Congress just doesn't do macro.

On the basis of everything I have heard over the past several months, I remain more convinced than ever that Congress has finally thrown down the gauntlet. The May 9 tripartite hearing hammered that point home with disturbing clarity. As Barney Frank, Chairman of the House Financial Services Committee, said, "This problem is not going away. We are going to have to act." If Congress changes its mind and backs away, it fears it will lose all credibility on this key issue with American workers. With respect to China, I am afraid that means the US Congress has now gone past the point of no return.

Crackdown on India

BusinessWeek is reporting a Crackdown on Indian Outsourcing Firms:

Two senators are probing how Indian outsourcing firms use U.S. work visas, with an eye on new restrictions. Concerns about foreign companies that benefit from a visa program designed to make the U.S. more competitive are taking center stage in Washington, with two senators demanding explanations from overseas users of the system. Senators Chuck Grassley (R-Iowa) and Richard Durbin (D-Ill.) on May 14 sent letters to nine foreign outsourcing companies requesting detailed information on how they use temporary work visas, known as H-1Bs, to bring foreign workers into the U.S.

Durbin said in a statement. "The reality is that too many H-1B visas are being used to facilitate the outsourcing of American jobs to other countries." Until recently, the discussion over high-skill immigration has centered largely on how to bring in more foreign workers adept at such jobs as software development.

While Durbin and Grassley's investigation is focused on Indian outsourcing firms, U.S. companies may very well be using the visas for much the same thing. Among the most active applicants for H-1B visas are Accenture (ACN) and Cognizant Technology Solutions (CTSH). Both are officially headquartered in the U.S., but they have extensive outsourcing operations in India.

Looking ahead to the next election I was initially wondering if there was going to be a distinction between Republicans and Democrats on protectionism. With Roach's Congressional report, with Living Wage legislation in Maryland, and with recent bipartisan concerns over H-1B visas, it may be a case of damned if you do and damned on the protectionist front regardless of who wins (unless by some miracle it's Ron Paul). I guess we can all hope.

In the meantime, the odds of more rhetoric (and eventually action) against China, Japan, and now India can be expected to grow as the US economy further slows and unemployment starts to rise. Scapegoats will be needed and scapegoats will be found, most likely by members of both parties. With that in mind, it is increasingly likely we see action before the next election. If not, look for protectionism and isolationism to be at the forefront of campaign issues.

I suppose it would never dawn on anyone in Congress in a million years what the real problem facing the US is, so let me spell it out: The primary reason workers are distressed is not because wages are too low but because of the purposeful debasement of the US dollar, horrid economic policies from Congress, this Administration and the Fed, all compounded by reckless consumer spending habits.

Politics aside, the US simply cannot afford to be the world's policeman. The US has now blown close to a trillion dollars in Iraq with what appears to be negative benefits. Over expansion has sunk every empire in history. If the US keeps on the same pace that alone will sink us and from where I sit the public finally seems to be catching on.

Look at the irony. The US wants tariffs to force import prices higher and living wage bills to keep wages up with prices. Is this insanity or what?

Wage and Price Controls (In Reverse)

What the US is doing is exactly the opposite of Nixon's Wage and Price Controls:

August 15, 1971. In a move widely applauded by the public and a fair number of (but by no means all) economists, President Nixon imposed wage and price controls. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Inflation had been raging, exceeding 6% briefly in 1970 and persisting above 4% in 1971. By the prevailing historical standards, such inflation rates were thought to be completely intolerable.

The 90 day freeze turned into nearly 1,000 days of measures known as Phases One, Two, Three, and Four.

While there were skeptics in August, 1971, there were a great many who thought "temporary" wage and price controls could cure inflation. By 1974, this notion was thoroughly discredited, and attention gradually turned toward a monetary approach to inflation.

Well, Nixon's approach didn't work so now the US is trying the opposite? Once again it seems clear that forcing either wages or prices up smack in the face of a weakening economy is exactly the wrong cure. Besides, the US already tried protectionism once before on a massive scale, and it failed miserably. Unfortunately it's hard to stop politicians from doing damage once they get silly ideas in their heads.

The last time the US tried this course of action with vigor was at the onset of the Great Depression. Does anyone remember a history lesson about the Smoot-Hawley Tariff Act?

Legislation that would put 15%-25% tariffs on goods from Asia (damn near everything) would have the same effect that Smoot-Hawley had in exacerbating the Great Depression. I guess that brings up a second irony about this situation: For all this talk about inflation, it sure seems like the US is fighting something else.

Purposely or not, the US is recklessly accumulating debt at every level: government debt, corporate debt (in stock buybacks and LBOs), and personal debt. The answer is not tariffs to keep prices high, or living wage bills to keep wages up with prices. The solution is to admit that we are living far beyond our means and take corrective action.

No positions in stocks mentioned.
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