Are Subsistence Wages Killing the US?

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. 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 am no fan of GM. However, had they not taken these measures GM would not be in business today. Frankly I am surprised they still are in business given they have been behind the curve in production costs, they have a mess on their hands with GMAC financing, Ditech Mortgages, and are still hooked on a business model that is producing trucks and SUVs that are waning in popularity.

GM has been losing money on every car they make, 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 on chart for sharper image

Source Of Frustration

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

1) Globalization
2) A sinking US dollar
3) Misguided policies
4) Waning US 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 is going to spread to various accounting jobs, and even medical jobs. For example, an X-Ray can be taken here, sent over the internet to India, diagnosed in India, and only the treatment needs to happen here. Also, large corporations like banks can outsource accounting functions en masse. It's going to happen.

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

Sinking US Dollar

The sinking US 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 US 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 US 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.

I am sorry but that is simply insane. Please see Hardball In Vallejo, No Balls In D.C. for a discussion of this topic.

Waning US influence in a world economy

The US went from being the largest creditor nation to the world's largest debtor. We are spending ourselves into oblivion, and at the same time rising economies in China, India, Brazil, and other emerging markets means the US can no longer call all the shots.

Most importantly, a rising world economy means the US has to compete for resources, especially energy, which is something we have not had to do before.

In regards to education, having a degree is no longer a guarantee of getting a high paying job. The rest of the world is catching up or even passing up the US in education while we argue over school prayer and creationism. The latter makes us the laughingstock of the scientific world. Education, while important, ignores the fact that China, India and other places are turning out more doctors, engineers, etc than we are. On the other hand, we are turning out more lawyers than anyone else. Is this a good tradeoff?

For the first time in history, the standard of living in the US is about to fall. It has to fall because we have lived beyond our means for too many years.

The Big Lie?

Let's now take another look at MC's statement "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."

For the US to remain competitive wages must come down and spending must come down. Like it or not, those are simply the facts. If that doesn't happen, we are going to see more bankruptcies at the personal, corporate, city, and perhaps even state level. California itself is a prime bankruptcy candidate in my opinion. But less services means fewer jobs or lower wages. Otherwise taxes have to rise or the US dollar will continue to sink.

We are in this mess because we tried to spend our way to prosperity. In addition, too many people have houses, SUVs, boats and other toys they cannot afford, all egged on by "the ownership society" and other misguided policies.

Living Wage

One repeatedly hears the phrase "we need a living wage". One problem with "living wages" is that regardless of what anyone is making, there has been willingness for nearly everyone to spend every penny and then some. Part of this is no doubt related to policies at the Fed that encourage both consumption and speculation.

Another problem is people seem to believe they need things they clearly don't, SUVs for example. I grew up in a family of 6. We did not have an SUV (they did not even exist then). Nor did we have a large house. I think the square footage of our house was something like 700 square feet, if that. It had one bathroom. At the time, I thought it was perfectly normal.

Now it seems that not having a SUV (or two), huge TVs, cell phones for everyone in the family, and a large McMansion to live in is an act of deprivation.

Courage To Choose

Let's now consider a timeless post by Minyan Peter. It's called The Courage To Choose.

I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted. Where, thanks to 0% down debt and a seemingly robust economy, we could own bigger homes, fancier cars, and more lavish vacations – where our bounty was limited only by the boldness of our wants.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

But I would suggest that few of us are prepared for this challenge. Why? Because abundance relieves each of us from having to prioritize what is important. When anything is possible, everything is possible. Few of us have really had to choose.

As I look ahead to 2008, though, I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained. And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past 20 years: “I can’t afford that.”

So as we approach 2008, I wish the Minyanville community the wisdom to prioritize well, the courage to make the hard, and often painful, choices, and, most of all, the strength and conviction to follow through.

The Right Choice

Given that it's impossible to stop the forces of globalization , impossible to roll back the hands of time, and impossible to halt the waning influence of the US in a world economy, we need leaders now more than ever to choose wisely on policy decisions, to stop spending money we do not have, and to stop the debasement of the US dollar.

My choice was Ron Paul. My choice is not going to win. My second choice is anyone who will get us out of Iraq and stop squandering trillions on a war against a faceless enemy. I believe that is the single best choice we can make about anything. But that's my choice, it may not be yours.

Those who are in favor of this war at least ought to have the courage to fund it. That means higher taxes. Presented in that fashion: higher taxes and stay in Iraq vs. lower taxes and leave, I think 85% of the population would vote to leave.

Instead, there is the free lunch policy in Congress and by this administration that allows us to keep spending money we do not have being the world's policeman, that subsidizes ethanol producers, subsidizes housing, and funds all sorts of other programs that have no business being funded. The waste in our medical programs is a particular outrage.

Someone is benefiting from this madness but it sure is not the consumer.

The rest of the world is financing those excesses and it is showing up in a dollar that continues to slide. The few (those being subsidized) benefit at the expense of everyone else even as the economic distortions ripple through the rest of the economy. To stop the madness, it's time to have the courage to opt for a balanced budget and it's time to have the courage to abolish the Fed.

I believe the final analysis will show that it's not subsistence wages that are killing the country, rather it's poor policy decisions at the personal, corporate, municipal, and Federal level that are killing the economy.

Returning one more time to a point I made earlier "It's not how much one makes that is important, it's how far what one makes goes." That is indeed something Congress and the next administration can address, if only they have the courage to do so.

Comments

[Matt75:]

Here is a question I'd like to know your answer to. Exactly how do unskilled, uneducated laborers who do a job that a monkey could be trained to do on an assembly line all day deserve to be paid $28/hr while educated, skilled managerial workers get paid about $15-16/hr?

If anything is ruining the country its the fact that people who do unskilled work get paid lots of money while skilled workers get less, due to unions that somehow convince companies simple jobs are worth $28/hr.

Unfortunately what these workers are now realizing is that companies are growing tired of paying these kinds of workers a lot of money, when any other non-union company would be paying the same workers $10-12/hr or less to do the same job.

Sorry, I don't see anything wrong with paying people a fair price for the job they do. Apparently you have a problem that these companies refuse to pay 2-3 times more than what a worker is worth.

2008 Jun 03 11:33 PM

[Panskeptic:]

I have no sympathy with the argument that it's the unions' fault. The unions represent a small sliver of the workforce and it's diminishing all the time. They get no positive press, not even from unionized news sources, and they're a convenient whipping boy for the greed and poor decisions of their employers.

In fact, the real villains of the piece are Reagan and Friedman and Greenspan, who presided over a massive redistribution of wealth upwards. The numbers are irrefutable: a small clique of oligarchs at the top of our pyramid hold ever-increasing wealth subsidized by transfers from below. As long as we narcotize ourselves with economic royalism and false, meaningless slogans like "the magic of the market," we'll be unable to do anything at all for the majority of Americans whose prospects are diminishing day by day.

The Golden Rule is "them's with the gold, makes the rules," and I for one am disgusted with their whining, faulty judgment and irresponsibility.

2008 Jun 04 02:22 AM

[fxtrader07:]

nice article, but it is missing out ona few very important aspects that i would like to briefly mention.
first: outsourcing is an absolutely overrated source of "productivity growth". In many cases, it drives up costs and makes things less efficient. It is a short-sighted measure that more often than not destroys corporate structures, cuts highly valuable employees from the payroll only to save a few bucks in wage costs. these costs are rising rapidly, though and the costs associated with bad communication, incompatible work ethics, incompatible work structures and standards are already forcing many rims to insource a lot of stuff that was outsourced only a few years ago. i have seen a lot of it over here in europe. this is real. therefore, a lot of the "outsourcing" argument is a myth.
second, unregulated markets tend to go to extremes to the point of self destruction. that has always been the case in history. the same holds true for labour markets. as long as employers have almost unlimited powers to set wages, they will undercut and supress wages as long and as hard as possible (some notworthy, far-sighted exemptions notwithstanding). that this in turn undermines consumption and the markets for the very products and services these companies produce is often not recognized and even where it is, employers find it hard to be the only ones to think beyond their own little company while the competitors don't.
third: Americ'a biggest flaw is the huge financial services industry that is sucking resources dry like a giant parasite. not only does wall street and most notably the big I-Banks profit regularly from the miseries of mainstreet (which is often caused or enhanced by wall street). They suck up a lot of talent and skill in non-productive dealing and wheeling (and often in cheating and fraudulent enterprise, btw.) that would be badly needed for constructive, wealth creating enterprise (production design, reserach, development, sciensce, medicine - you name it). Big finance has become a monster that does everything to survive even if the rest of the country goes to dogs. they couldn't care less.. the whole notion of a "service" economy as opposed to a "manufacturing" economy is an invention by wallstreet and big finance to hide the fact that little or no real wealth is created (and often wealth is destroyed on a giant scale) by financial "services".
America is on the way to the poorhouse and if anyone wants to stop that, the power of the big banks and the investment bankers has to be broken. i wonder who will do this when the majority of the politicians are just paid and bought up by all kinds of lobbyists and many not even capable of independent thinking.
voting to sue OPEC over high oil prices was just another example in a long chain of stunning expressions of dumbness and economic illiteracy

2008 Jun 04 06:01 AM

[nukldrager:]

"Someone is benefiting from this madness but it sure is not the consumer." No Sh*t Sherlock. "Someone" is factoring the American consumer out of the future.

2008 Jun 04 09:41 AM

[nukldrager:]

This was obvious to the layman after BS Monday. I've always wondered what was meant by new world order. Guess we'll find out.

2008 Jun 04 09:48 AM

[Joyful Alte...:]

Speaking of giant parasites, the health insurance industry has got to go. Medicare for all would bring a great relief to all the decent employers, including automakers, trying to provide health insurance benefits, and it would free all the frustrated entrepreneurs chained to jobs with health insurance.

2008 Jun 04 11:19 AM

[adan:]

supply and demand

"....For the US to remain competitive wages must come down and spending must come down...."

and w/the reduction in spending will (have to) follow reduction in prices

because of excess credit availability, the true supply and demand between wages and prices (ability to pay and cost of acquiring) was distorted - applies to govt spending even more so i think

as you say: "...it's poor policy decisions at the personal, corporate, municipal, and Federal level that are killing the economy."

"if" we, as individuals, quit spending, prices of things'll have to come down - save your money :-)

2008 Jun 04 11:37 AM

[User 68127:]

Why must we have higher taxes to fund the war? Can't we just keep taxes the same or cut them, and then spend less in other areas? Surely you don't think that the war on terror is the MOST wasteful spending that goes on in our government?

2008 Jun 04 01:06 PM

[David Roskoph:]

Fxtrader,

You are spot on. The "free market" has allowed Wall Street to suck the marrow out of America and create middle classes around the world to feed their habit. Instead of statesmen we have freelance profiteers with little to no regard for what once was the greatest nation the world has ever seen. Our best days are a fading memory.

2008 Jun 04 01:10 PM

[hrant:]

i blame our negotiators of free trade that did such a lousy job that we opened our borders wide open and other countries just played us . You want an example we allow South Korea 700,000 cars per year and they actually agreed to let us no more than 7000 per year . check it out

2008 Jun 04 02:56 PM

[Malkiel:]

I'm looking out on an economy where people are borrowing $10,000 to go to trade schools to learn plumbing, electrical, HVAC, nursing, or truck driving, then finding that those jobs now are being corralled by companies paying $14/hour with few or no benefits. Subsistence wage is right, and if we want any skilled jobs of any kind in this economy we'd better be prepared to be good socialists and pay for schooling to train people, because at those wages the private trade schools won't be around much longer...

2008 Jun 04 03:47 PM

[Atokad00:]

Your falsely present us with a choice between higher taxes or getting out of Iraq. Nice try, but there are many other options. For example, we should get the hell out of Europe before we get out of Iraq. The American taxpayers are being swindled by MUCH worse expenditures than the current war on terror.

Any company willing to pay $28/hour plus great benefits for manual labor deserves to be as uncompetitive in the global marketplace as they are.

Furthermore, and off topic... If legal U.S. citizens aren't willing to pick lettuce for the available wage, one of two things should happen:
1) Stop growing lettuce in the U.S. or
2) Start paying enough to attract legal U.S. citizens to those jobs and charge more for your product. If that makes your price too high in the global market... See #1.

2008 Jun 04 03:55 PM

[moonbat1775:]

My question is: During the French Revolution were the central bankers spared? If so, what a bad precedence!

2008 Jun 04 06:03 PM

[valinho:]

User 68127. atokadoo:
You both can get of the Kool aid anytime now. Never mind that we atacked an unnarmed sovereign nation for no reason and that this discussion was about something totally different. Money is money, personal, state or federal, if you spend more than what you have, you are going to get in trouble sooner then later. We all need to get our polititians to be reponsible for their votes and to the business of running the country.

2008 Jun 04 06:07 PM

[Jason Rines...:]

PoetSam, you see the end result of our Middle Class understanding why they were fleeced into poverty. But unlike the French Revolution, it won't take the Middle Class to learn the truth over a 15 year span, the collective will know in the next 3-4 years. Unlike the French Revolution, 60 million U.S. citizens are gun owners with a military sworn to uphold the Constitution. Add another two million skilled experts to the pile.

My alternative to Revolution is to create a fund to assist Patriots to serve in Congress. Many bright Patriots cannot afford 6 months time off from work to run a campaign and being encumbered to the RNC or DNC for funds mean more consituent pressure for continued insane policies. 2012 will be a time for real political change because thereafter, either our enemies or a Revolution will change our nation.

FX Trader and Droskoph, you guys nailed it. My job in correcting our nation is as a connector and I am building a national way to connect the brightest minds and build plans of actions. This site working on as we speak is called RagingDebate.com . More coming later, for now juggling operational management of a Consumer Healthcare company and launching this program. Goes back to my point that Patriots whom care have to juggle comment.

2008 Jun 04 08:53 PM

[Robert Will...:]

Easy fixes that would be a quick starting point acceptable to most voters:
1. Line item vetos, at all government levels.
2. Mandantory balanced budgets like more state and local governments.
3. Governemnt meetings in absolute sunshine, NO meeting except national security behind closed doors.

2008 Jun 04 09:47 PM

[curious cat:]

there are some good suggestions here. there are also some very frustrated individuals who have no idea how economies work. let's focus on the former though. let's find all the common sense improvements, like the ones from robert williams above and get them into action before we proceed with more radical solutions.

we can divide them into two categories: business/gov't and private behaviors that can stand improvement.

for institutions, i suggest we cap salaries at twenty times the lowest paid employee. i also believe we should limit the size of corporations (all business entities). these actions would reduce inflation and improve competition.

for private behavior: let's all start rereading our religious tomes with an eye towards improving our own behavior, rather than someone else's. be nicer, be more understanding, be generous, be helpful, and thank your god every day for every breath you take. when you see someone who does not look like you, smile at them. it will improve the world.

2008 Jun 05 04:00 AM

[brianoh:]

Some very interesting comments. What it all boils down to is a class structure designed to benefit the very wealthy and multiply their wealth. Globalization - read: cheap offshore labor, Cheap money - read: don't let the Dow fall, Fed loans on rubbish loans - read: look after your mates. Bankers running the economy with disregard of trade deficits and USD loss-of-value - read: madness. A private central bank - read: madness. Subsistence wages - read: the rich benefit. I totally disagree with the concept that it was inevitable that globalization has to force down wages and thereby productivity is replaced by service industries. It is happening because the powers-that-be let it happen to satisfy Wall Street.

2008 Jun 05 06:43 AM

[Matt75:]

Well, when a person in one of these 3rd world countries makes $5 per week at a normal job in his country and then an American Company comes in and offers him $35 per week, the guy acts like he just hit the jackpot...

So basically that company has paid for an entire week's worth of work in India or China that would have gotten him 2 hours of work in the US.

That is why companies go to foreign countries for labor.

2008 Jun 05 09:39 PM

[brianoh:]

The point I was making is that current legislation allows the 3rd world worker to replace the 1st world worker. These goods are then sold in the 1st world at 1st world prices. The jobs of creative people in the 1st world are being lost. Big companies are the only ones on this side to benefit. Only time will tell where this will lead, however based on current experiences it will lead to destruction of the US economy. The trade deficit, the budget deficit, the loss in value of the USD, the bursting of the housing bubble, the bursting of the dotcom bubble, REAL CPI-inflation over 10%. Don't all of these things spell out an economy that is ruined? The only thing that has kept it going is that all the bubbles have not burst. The Fed is fighting like mad to ensure that the last domino, Wall Street stays high. That itself was a bubble from 1990 to 2000 and was about to burst in 2001. Now Bernanke is holding it up in much the same way as Greenspan did in 2001. This time however there is no housing bubble to absorb the liquidity, there is only stocks. Bernanke has the misguided notion that lessons learnt from the 1930s will solve everything and flooding the economy with cheap liquidity will fix everything. The point he misses is that the way to stop the bursting of bubbles is to stop them forming. They do not do this because their Wall Street cronies would not like it (IMO). The US woke the Asian monsters and now they are about to beat the US at it's own game - consumption. US consumption is on the decline because real wages have declined for over 10 years. The housing bubble replaced those wages, and now that has withered. Companies like GM and Ford have the wrong products that consumers can no longer afford. So what we have is an economy that can no longer afford products manufactered by it's own companies and must import products to survive. Standards of living are declining and will continue to do so inversely to standards in China. To aid that process, the US govt sends out tax rebates for people to spend on cheap imports, further helping the foreign economies. Obviously the US has the wrong people in power and making decisions that shape the future of the US over the next century. Look at the start of this century as a guide.

2008 Jun 05 10:25 PM