The current US economic situation is very unusual. Large numbers of Americans are unemployed (over 9% as of April), and a similar number are working part time when they would prefer full time work [Marlar]. These figures do not include unemployed people who have given up on finding jobs, and those working at jobs not appropriate for their skills, e.g., computer programmers working as retail clerks. Many families are being ejected from their homes by mortgage foreclosures. But, while large numbers of Americans are in deep financial trouble, profits of US corporations, particularly the largest ones, are surging at or near record levels.
In the past, economic hard times in the US followed a simple pattern. When production got too far ahead of consumption, manufacturing plants were idled and workers laid off. Since unemployed people consume less, sales fall off further, increasing the gap between production and consumption, so more people get laid off, and the downward spiral continues. When a company's sales fall, their profits fall, as do their stock values. So a recession traditionally meant unemployment and falling profits and stock values.
What has changed? Why are corporations prospering while huge numbers of people are struggling? I believe there are two basic factors at work here. The first involves a new corporate attitude toward workers.
At least since WW II, most American companies, both large and small, considered their employees as integral parts of their organizations. They expected at least a modicum of loyalty to the company, and, in return, provided fairly steady employment under generally decent conditions. Of course, there were many exceptions. Especially where unions were involved, there were occasional bitter battles over wages and benefits, sometimes leading to strikes. Some bosses were nasty, there were efforts to break unions, and some union leadership was corrupt. During economic hard times, unemployment was a problem affecting roughly 10% percent of all workers. But, most of the time, workers of all kinds were usually able to find reasonable jobs.
Increasingly, over the past decade or two, companies have changed the way they think about their employees. In a sense, they now think of them, not as assets, but as costly burdens. They look for alternatives to hiring people. Various functions are contracted out wherever feasible, For example, rather than hire people as janitors, they might engage an outside firm to supply the needed services. Rather than maintain a full engineering staff, it is a common practice to hire engineers on a temporary basis to perform specific tasks, or to engage outside firms to solve particular engineering problems. If on-site engineers are needed, they often replace Americans with workers from low-pay countries who come here with, for example, H-1B visas, willingly accept lower pay, and work longer hours [Unger-1]. This process is also employed in other areas such as nursing.
Another way to cut payrolls is via automation. While often a sensible approach that can lead to real reductions in production costs, it is also used simply to cut payrolls at the expense of other people. A good example of this is the widespread practice of automating the handling of phone calls, eliminating the traditional human responders. Callers must navigate thru often complex networks by pressing keys or uttering key words. There is no telling the extent to which frustration associated with this innovation has elevated the average American blood pressure.
The ultimate in payroll cutting is achieved by shutting down US-based production facilities and setting up new factories in other countries, or by contracting with foreign companies to have them produce the product abroad. (China and Mexico are often the countries selected.) The motivation here is to replace American workers with people paid a fraction of prevailing US rates. In addition to cutting costs by cutting wages, additional "savings" are accrued by abusing the environment and subjecting workers to unsafe conditions [Bloomberg].
This approach is not confined to the manufacturing level. A number of large US companies (such as GE, GM, IBM, Microsoft) have set up major facilities for research, development, and design in China, India, and elsewhere, further reducing the need to employ Americans.
The phasing out of American workers has gone very far in agriculture. One method is to import produce from low-pay countries, such as Mexico. The other principal approach is to employ as workers on US farms people brought in from south of our borders, primarily Mexico. Somewhat over half of hired US farm workers are illegal immigrants, and about a quarter are here legally on temporary visas. So only about one out of four hired farm workers is a US citizen [Kandel].
While US corporations generally find outsourcing profitable, it is problematic in some cases. Some small businesses have encountered quality control problems resulting in unusable products. There can be communications problems that make it difficult to implement modifications of products. Variations in shipping delays often lead to the need for larger inventories. Some companies have responded to these problems by resuming production in the US [Koerner].
Certainly Americans are superb consumers. But a large proportion of the US population is experiencing hard times, many are unemployed or under-employed. There has been a significant shift in income with the proportion going to the top 1% increasing greatly over the past one or two decades. This means that even the most enthusiastic working and middle class consumers cannot perform as in the past. On the other hand, consumption by the people of the two most populous nations, China and India, particularly the former, is clearly on the rise. So US corporations are zeroing in on this market.
Since it is hard to find anything made-in-USA in an American department store, it would be strange indeed if a consumer item made in this country could be sold in China. This is another motivation for US companies to set up factories in China. One example is GM, which is now deriving a significant part of its profits from sales in China of automobiles produced in its factories located there [Barboza]. Another is the computer company, Dell, which invested about 25 billion dollars in Chinese facilities this past year and plans further expansion of its Chinese operations [Soh]. Asia now accounts for 17% of Dell's sales, and the plan is to increase this number substantially. (Of course many items manufactured in American-owned Chinese factories are sold in the US.)
As sketched above, corporate America is minimizing its dependence on Americans as workers or customers. It follows that whatever concern they ever had for the American people is correspondingly diminishing. One manifestation of this attitude is the lengths to which they are going to avoid paying taxes. An extreme example is the fact that, while GE profits last year were about 14 billion dollars, they managed to pay no taxes at all [Kocieniewski]! (It is interesting that, as corporate contributions to American society are fading, their political influence, thru campaign contributions, lobbying, and advertising, is increasing.)
As it becomes more and more difficult for Americans to find jobs, their expectations shrink and they become willing to work harder, for less. The few remaining unions are forced to make concessions regarding wages, working conditions, and benefits. This effect is most pronounced in the South, where the bargaining position of workers has always been weaker than elsewhere in the country. (This dates back to when they had to compete with slave labor.)
At the same time, wages in China are increasing—they will soon exceed $100/month for factory workers. If we consider the costs involved in outsourcing to Asia, such as transportation of goods, and higher energy rates, there are advantages to resuming manufacturing in the US. GE, for example, is expanding its appliance manufacturing plant in Louisville, Kentucky [Somheil]. This move was the result of wage and benefit concessions from the union involved, and subsidies from the city and state. It will add about 400 jobs. The current number of employees at that site, is about a fifth of the 25,000 working there a few decades ago. The same factors cited above have induced some Chinese companies to purchase or construct factories in the US [Ng].
It is hard to say where this is all going. If pay for Chinese workers continues to increase, a point may be reached where it will become profitable to diversify manufacturing to other low-pay countries such as India, Indonesia, Thailand, and Vietnam. But, since China is far from being a democracy, it is possible that wages will not be permitted to increase to that extent.
As US wage levels fall, there will be increased incentives to build or re-open some US factories. Due to the enormous military expenditures required to finance endless wars, and great political pressure to minimize taxes on corporations and the wealthy, "safety net" items in the US budget, as well as expenditures on education, and environmental protection, will probably be slashed in order to control the deficit.
It seems likely that the gap between the wealthy elite in the US and the bulk of the population will continue to increase with the middle class shrinking, and the remnants of the labor union movement becoming even weaker. If we continue along this path, the social structure of the US will increasingly resemble that of a third world country, such as Mexico. There are few, if any, visible signs of strong political opposition to this trend [Unger-2].
David Barboza and Nick Bunkley, "G.M., Eclipsed at Home, Soars to Top in China", NY Times, July 21, 2010
Bloomberg, "Secrets, Lies, And Sweatshops", Bloomberg Business Week, Nov. 22, 2006
William Kandel , "Hired Farmworkers a Major Input For Some U.S. Farm Sectors", Amber Waves April 2008
David Kocieniewski, "G.E.'s Strategies Let It Avoid Taxes Altogether", NY Times, March 24, 2011
Brendan I. Koerner, "Made in America: small businesses buck the offshoring trend", ARS Technica,
Jenny Marlar, "Underemployment Rises to 20.3% in March", GallupPoll, April 1, 2010
Dominic Ng, "Dominic Ng on American-Made, Chinese-Owned", Future of US China Trade.com, April 27, 2011
Kelvin Soh and Don Durfee, "Dell aims for bigger sales in China market", China Daily, December 20, 2010
Tim Somheil, "A new lease on life for GE's Appliance Park", Appliance Talk, June 4, 2009
Stephen H. Unger-1, "Jobs", Ends and Means, August 4, 2007
Stephen H. Unger-2, "Heads They Win, Tails We Lose: Our Fake Two-Party System", Ends and Means, January 5, 2011
Comments can be sent to me at unger(at)cs(dot)columbia(dot)edu
Don't forget to replace (at) with @ and (dot) with .