The Daily Mail is reporting that more than 1,000 female employees are working 15-hour shifts, six days a week inside a factory at Dongguan, China. While the official employer is KYE Systems, the products (computer mice and webcams) are built for Microsoft. In addition to Microsoft, which accounts for approximately 30% of the factory's work, KYE also produces orders for Hewlett-Packard, Samsung, Foxconn, Acer, Logitech, and Asus. It seems everyone is using the Walmart model. Without overtime, the worker is paid the the equivalent of about $0.70 per hour. The end result is cheaper products for consumers in America and elsewhere, and higher profits for corporations. How do workers survive?
The workers also sleep on site, in factory dormitories, with 14 workers to a room. They must buy their own mattresses and bedding, or else sleep on 28in-wide plywood boards. They 'shower' with a sponge and a bucket.
For at least two decades, globalization has pushed production of goods formerly done inside the United States into developing countries. Underwear is made in Honduras, steel is made in China, customer service outsourced to India, and computer parts made all over southeast Asia. The cost of closing old factories and constructing new facilities, in addition to shipping goods around the globe are high, but the savings in labor more than makes up for the expenses. The positive result for consumers has been lower prices than would otherwise be the case. Corporations have seen their bottom line grow, and compensation for executives is multiples higher than it has ever been.
But there is an enormous downside to globalization. Ignoring the moral aspect for a moment, the financial impact of globalization is devastating to the United States. In exchange for lower consumer prices, America has lost millions of high paying jobs. Dollars that once circulated throughout the economy now end up overseas. Many of the dollars which wind up overseas are used to purchase US Treasury bonds (government debt) which enable the government to finance entitlement and defense spending which now grows at a far greater rate than does our gross domestic product.
A sobering look at the mathematics behind the globalization that underpins both our economy and finances much of our national budget reveals that the current system is unsustainable. Much of the consumer spending over the past decade was accomplished on credit. Credit simply means receiving something now in exchange for paying later. With America's equity (property values) having fallen greatly and high paying jobs gone for good, there is no possibility that Americans will be able to afford to purchase goods at the same rate as before. The standard of living must fall.
With a falling standing of living caused by lower wages, Americans were temporarily able to get by as a result of drawing on credit. This is what occurred from the end of the tech bubble until the housing collapse. Now, the government is making up the difference for the American citizen by increasing spending in areas such as unemployment compensation, increased tax credits such as the earned income credit, food stamps (now over 39 million recipients), and stimulus bills which pass money to the states in order to fund public schools and other services.
To oversimplify the transformation that is occurring, here is the sequence of what fueled our economy since World War II:
Phase 1
From the end of the war to somewhere in the 1970s, the economy thrived because of capital and production. Credit standards were high and for the most part people purchased only what they had saved up for or could afford. Products were made within the United States and the country was a net exporter. During the decade of the 1970s, the United States experienced peak oil production and increasingly looked to oil imports to fuel the economy. The United States was running large deficits and Richard Nixon took the dollar off of the gold standard. This move, coupled with the fact that the dollar as the world's reserve currency, enabled the United States to continue running large deficits. The rest of the world, having recovered from World War II began to catch up in terms of industrial production. Japanese cars are an example.
Phase 2
Beginning in the 1980s, large oil discoveries in the North Sea and Alaska brought down the price of oil. This was a boom for western economies. Corporations, looking to maximize profits, realized that the supply of a global workforce would reduce labor costs and the push for globalization was on. Granting "most favored nation" status to China, NAFTA, and the lack of enforcement of immigration laws ended up lowering labor costs and transferring employment from American citizens to other countries are non-citizens within the United States. The 1990s saw an erosion of lending standards - anyone breathing could receive a credit card - and people began to run up debt. The technology innovations of the 1990s was the last industrial boom for the country. The boom ended with the bursting of the NASDAQ stock market and then the outsourcing of technology jobs overseas. The article referenced above is indicative of this phenomena.
To overcome the bursting of the NASDAQ, the outsourcing of technology and other industries, and finally the attack of 9-11, the Federal Reserve lowered interest rates far lower and far longer than had ever been done. Wall Street managed to force Congress to change laws making it possible to market gigantic securities based on lending of homes, student loans, auto loans, and virtually every kind of credit. As a result of low interest rates, low or zero lending standards, very few regulations, and zero enforcement of the remaining regulations, the American standard of living managed to hold course and even rise in the 2000s but unlike in the decades of the mid 1900s, this time the standard of living was based on credit and fraud. Finally, beginning in 2008, the credit had maxed out.
Phase 3
With the end of cheap credit in the fall of 2008, Americans saw asset values plummet. With a diminished industrial base, and capacity to draw on credit, the economy would collapse and the lifestyle Americans have become accustomed to would evaporate. Government has now come to the rescue. Government cannot create productive jobs but, at least for the time being, can provide credit. Trillion dollar deficits are now the means for funding public sector functions such as schools, maintaining roads and bridges, law enforcement, and sewage. These are public services normally provided for by states and municipalities, but increasingly these services must be funded by the national government.
In addition to services, entitlement spending such as social security and medicare, pensions, and defense spending must be funded. The production of the United States economy cannot even come close to funding these obligations, hence the government must run exponentially increasing deficits to honor these obligations. Of course, this is not sustainable, and over time, there will be drastic reductions and probably default. Along the way, the governments at all levels (local, state, federal) will increase fees and taxes in order to pay for some of the expenses as well as protecting the various fiefdoms within each level of government.
No comments:
Post a Comment