Tuesday, January 3, 2017
The issue currently on the table is the off-shoring of manufacturing jobs. Many people believe that corporate managers do this out of greed and the desire to increase profits so that they can line their own pockets. They believe these things because they have no understanding of, or desire for the understanding of economics, or business management, and because they’ve been taught to believe it by a news media hungry to push heart breaking human interest stories and politicians eager to advance their own careers by pushing the narrative of income inequality and class envy.
To illustrate the situation, I’ve created a model. In the model there are four companies. The companies operate in the United States, Mexico, China, and India. They all buy the same raw material from a global market, and they all sell the same product into a global market.
It’s easy to see from the countries involved that the US might be at a competitive disadvantage due to cost of labor, but at the beginning of the model, the playing field is dead even with the higher wages of US workers being compensated for by a much more highly skilled labor force and more modern facilities and the US is able to dominate the market and hold a higher market share. Also, because of its market share dominance, the US also attracts disproportionate share of the investment capital.
However, the situation is not static and over time things change. The work force in the off-shore facilities becomes more skilled. Their US educated business managers and engineers return home with new ideas and ways to innovate. The foreign governments see a benefit to their economies to keep their corporate tax rates low. At the same time the corporate tax rate in the US remains the highest of any major manufacturing country, union contracts increase wages and benefits incrementally, and the government continues to impose increasing amounts of regulation. As this happens, the US company starts to see it’s costs of production increase relative to those of its competitors and it starts to lose market share and the profit to pay dividends to stock holders decreases which results in a reduction of investment capital. This reduction in investment capital results in a reduced ability to replace and update worn out machinery and processes, again resulting in reductions of efficiency. It’s costs of production increase again, and again the foreign companies increase their market share.
It is a slippery slope that manufacturing firms operate on. The model shows a company caught in an ever tightening spin. They know that they have the superior process, and the knowledge of how to run it, but given costs and regulation they simply cannot. So at one point they will have to choose. They have already pushed the unions for all the concessions that there are to give, and their lobbyists have gotten every break from the government that there is to get. There was one last hope, and that was the large donation to the Clinton Foundation, but they watched that dribble away like sands through the hour glass the evening of November the 8th, 2016.
Now there are only two choices; move all, or a significant part of the manufacturing operation off shore, perhaps maintain design and R&D in the States, or watch the company continue to lose market share until finally there is nothing left to do but shut company down completely.
If a company is unable to compete in its market, it will fail. What was the bit of dialog after the Titanic had hit the berg and was taking on water? J. Bruce Ismay, who was the managing director of the White Star Line, is said to have commented to Thomas Andrews who was the head of the drafting department at Harland and Wolf (the firm that built the Titanic) “But this ship can't sink”! to which Andrews replied, “She's made of iron, sir! I assure you, she can... and she will. It is a mathematical certainty”.
So it can be seen from this marvelously simple model, that if a company is not allowed to compete in its own best interests that it will fail and there’s no action, no amount of government intervention that can prevent it. What the government CAN do is to help companies hold down their costs of production by keeping corporate taxes low enough to be internationally competitive and by eliminating cumbersome regulation.
But that’s just what an average guy thinks.