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Are Subsistence Wages Killing U.S.?

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Globalization not the only factor.

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I received an interesting email last week from Minyan "MC," who is concerned about globalization's effect on jobs and wages. Let's tune in to his thoughts:

There is a mania in this country to slash wages to a subsistence level (or worse). This is a symptom of the greed and corporate cronyism that is killing the country.

The powers-that-be that run the US are determined to crush wages, even when they realize that people are doing without food, health insurance, etc. We keep hearing news stories that about 10% of our population doesn't have sufficient food? The root cause is the mania to cut wages and lay off workers.

I was born into a country that emphasized hard work, loyalty, stability, and "if you get educated and skilled, work hard, work smart, and behave yourself, you will do all right." I no longer believe that lie.


The article MC was referring to when he emailed was GM buys out 1/4 of wage earners.

General Motors Corp. (GM) said Thursday that a quarter of its U.S. hourly workers will take the company's latest buyout and early retirement offers, opening the door for new hires who will make less money.

Under a new labor agreement reached last fall with the United Auto Workers union, GM may hire up to 16,000 non-assembly workers at half the old wage of $28 per hour. Detroit-based GM conducted its last round of buyouts in 2006, when 34,410 workers left the company.

GM's largest supplier, American Axle and Manufacturing Holdings Inc., said Wednesday it will cut more than half of its U.S. hourly work force, or 2,000 jobs, through early retirement and buyout offers, plant closures and layoffs.


Problems At GM Deep And Many

MC, the problems at GM are deep and many. I'm no fan of GM. However, had it not taken these measures GM would not be in business today. Frankly, I'm surprised it's still in business, given that they've been behind the curve in production costs, it has a mess on its hands with GMAC financing, Ditech Mortgages, and is still hooked on a business model that is producing trucks and SUVs, which are waning in popularity.

GM has been losing money on every car it makes, more often than not, quarter after quarter. I believe the only reason GM is still in existence is that it has been able to go to the bond markets repeatedly to get financing.

GM Monthly Chart

Click to enlarge


Source Of Frustration

Looking beyond GM, the frustration MC expresses stems from four sources.

1) Globalization
2) A sinking U.S. dollar
3) Misguided policies
4) Waning U.S. influence in a world economy

Globalization

The Internet has literally been a productivity miracle. Information is available in seconds that might have taken weeks or longer to find before. This has made the outsourcing of tech jobs, call center jobs, and other service jobs much easier. The trend to outsource service jobs is just beginning. It's going to spread to various accounting jobs, and even medical jobs. For example, an X-ray can be taken in the U.S., sent over the Internet to India, diagnosed in India, and only the treatment needs to happen in the U.S. Also, large corporations like banks can outsource accounting functions en masse. It's going to happen.

On the manufacturing side, the U.S. has been losing jobs to Mexico and China for quite some time. Outsourcing of manufacturing is more mature, but it's still causing the wage pressures you speak of. But what's the alternative? As mentioned above, if GM continues to pay workers what it's been paying them, GM will go bankrupt sooner rather than later. The union had no real choice other than to go along.

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Sinking U.S. Dollar

The sinking U.S. dollar is something we can and should address. After all, it's not how much one makes that is important, it's how far what one makes goes. Sadly, the U.S. has been seriously debasing the dollar ever since Nixon closed the gold window. Credit has been running rampant, and at times (but not now) there has been runaway monetary printing.

Bernanke supports targeted inflation. My belief is that positive inflation is positively theft. Rising prices increases property taxes, sales taxes, etc, conveniently without legislation. Inflation also benefits those with first access to money (banks, brokers, and the already wealthy). By the time credit is extended to those lower on the economic ladder, the party is about over. The subprime and "liar loan" mortgage fiasco is a clear example of this principle in action.

Treasury Secretary Paulson talks about a "strong dollar" policy but that is nothing more than lip service. Instead, there has been what appears to be purposeful debasement of the U.S. dollar on the misguided idea that it will increase exports. The unwanted side effect is that few jobs are created while everyone pays through the nose in higher import prices and gasoline.

Misguided Policies

Part of the rise in oil prices is due to the falling dollar, but that is not the only factor. Another part of the equation is geopolitics, and a third factor is misguided policies on ethanol. At the top of the list in poor policy decisions is our attempt to be the world's policeman. We can no longer afford that luxury.

Congress spends money it does not have on all kinds of silly programs. Both parties go along with it.

And instead of addressing real problems, Congress is looking into commodities speculation and threatening the oil producers. See Commodities Speculation Symptom Of Larger Problem and Congressional Insanity: Sue OPEC over Oil Prices.

Inquiring minds may also wish to consider Bankruptcy Reform Act Finally Blows Sky High.

Finally, the city of Vallejo, California went bankrupt and that symptomatic of the fact that cities and municipalities have been promising government workers more in salaries and pension benefits than cannot possibly be met. The few (primarily union workers in Vallejo's case) have benefited at the expense of the many (the taxpayers). During the calendar year 2007, there were 292 City of Vallejo employees who had total gross wages of $100,000 or more.

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