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Are We Screwing Ourselves?.

  • Written by Syndicated Publisher 36 Comments36 Comments Comments
    August 20, 2011

    In The Great Government Job-Destruction Machine, recently published in Scragged, the authors argue that “Bureaucracy destroys jobs”, not free-trade. I must admit that I find this argument quite convincing.

    I strongly encourage you to click on the link above to read the story because there is plenty of interesting links within the article and I did not bother reproducing them here. Sorry. Moreover, I had never heard of this publication, Scragged, before Bill Taylor from the MIT Alumni Linkedin group pointed it out to me. Thanks Bill. It looks impressive.

    Anyways, here is the piece without any links:

    On September 17, 1985, I gave an address “Successful Strategies for Competing at Home and Abroad” at the Assembly Technology Expo in Chicago, Illinois. It was a vast trade show exhibiting all the latest robots, process control systems, quality inspection, materials handling systems and all sorts of gadgets and gizmos which were intended to help manufacturers keep costs down and increase productivity.

    There were essentially no foreign cars on American roads when I entered college in 1963, but by 1985, everyone connected with the Big 3 automobile manufacturers had realized that there was Trouble Right Here in Motor City – foreign nameplates were taking sales, and jobs, away from Detroit in favor of assembly plants in the American south.

    I was working for a conglomerate called Gould. Among many other things, Gould made special computers for use in factories. These were very rugged units which were programmed in a special language called “ladder” which, although unintelligible to the uninitiated, led to very reliable programs. Software has to be reliable when a software crash means that two robots slam into each other, costing many dollars and possibly killing the programmer.

    It Was A Good Speech

    Our marketing department asked me to focus on the automobile industry because that was where most of our sales originated. They wouldn’t have cared about Detroit if the foreign companies had been buying their controllers, but the Japanese, who were the big foreign players at the time, were buying process control systems from Japanese vendors, surprise, surprise! They wanted to encourage their customers to stay in business.

    My talk explained that it would be fatal to allow the Japanese to take over the low end of the US auto market as they had in TV, consumer audio, copiers, and many other products. People beginning their careers were buying “starter cars” from the Japanese and then buying more expensive models from the same vendors as their incomes rose.

    Despite this unarguable fact, the Big 3 were not making low-priced cars. Industry rumor had it that one of the reasons Henry Ford II fired Lee Iacocca from his job as President of Ford in 1978 despite Ford’s making $2 billion profit that year was that Mr. Iacocca wanted very much to sell smaller cars. “Small cars, small profits,” sniffed Mr. Ford. His name was on the building; he won.

    Mr. Iacocca went on to rescue Chrysler from bankruptcy and stole sales from Ford. Ford concentrated on larger cars and lost market share, just as Mr. Iacocca and I predicted.

    The speech was so well received that I was invited to present it again at a conference sponsored by the Productivity Improvement Group at the University of California under the slogan, “Made in America is Here Again!” This group had been funded because American manufacturing jobs were disappearing. Nobody connected with manufacturing in any way believed that non-manufacturing jobs could pay as well as manufacturing because of the lower value added by each worker. They thought that if we could increase productivity enough, we could overcome other countries advantage of lower wages.

    Manufacturing jobs were important because wages can be higher when 800 workers generate $12,000 worth of automobile engines per minute, or $900 worth of value per worker-hour, than in flipping fries at Burger King. Some of the $900 goes to pay for materials, rent on the building, and profit, but still, $900 per hour is a lot more cash flow per worker than in most non-manufacturing situations. Our economic history since then shows that we were right – losing manufacturing jobs has brought on a great deal of working-class suffering.

    During the second address, I pointed out the irony of the Assembly Technology Expo being held in Chicago, Ill., instead of in Detroit, MI where there was a great deal more manufacturing going on. The reason, as I had found out from talking to exhibitors, was that unionized workers who controlled Cobo Hall in downtown Detroit were charging $50 to plug in a lamp, and woe to an exhibitor who attempted to do his own plugging!

    Exhibiting in Detroit was so expensive that the Expo had switched to Chicago in alternate years. The Detroit unions had driven half the jobs offstate to Chicago. I had an example with which to warn that unionized workers would do the same thing to the automobile industry as a whole.

    It Was The Wrong Speech

    In a sense, the speech was correct in that union wages would have bankrupted both GM and Chrysler without massive gifts of taxpayer money, but it was wrong in that Ford has survived without government help.

    Foreign car makers know that they can be barred from the American market unless they make cars here, and as long as they stay non-union, they can grab more and more market share over time. This has destroyed unionized manufacturing jobs in the Midwest, but it’s created good non-union manufacturing jobs in the South – unfortunate for Midwestern Americans but very nice for Southerners.

    I was so focused on the special case of the automobile business that I missed the real threat to American manufacturing jobs – government regulation. When Toyota had made enough money selling starter cars to move up-market to the Lexus, they had to manufacture it in Japan, not because of unions, but because the EPA would not permit them to use the required painting technology in the US.

    As increased capital gains taxes and corporate income taxes led to American businesses “going global” and investing money outside the US, there have become fewer and fewer manufacturing jobs here. I should have ignored foreign competition and warned that government regulation was the major threat to American jobs of all sorts.

    The Cost of Regulation

    We’re seeing the fruits of years and years of government interference in the economy. An American light bulb factory closed recently, and 200 people were put out of work. Why? Because our government has mandated that American consumers must use twisty fluorescent light bulbs instead of incandescent bulbs.

    These bulbs take a lot more labor to make and require mercury which is hazardous waste. It’s so expensive to run a plant that handles “hazmats,” as the cleanup industry calls hazardous materials, that it’s essentially out of the question to make the bulbs in the US.

    The Wall Street Journal has researched the total cost of regulatory compliance in the US; “The Regulation Tax Keeps Growing” says:

    “The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden.” [emphasis added by author]

    One third of our national income is spent coping with government regulations and taxes! The burden is particularly heavy for manufacturers:

    “Small manufacturers bear compliance costs that are 110% higher than those of medium-sized firms and 125% higher than large firms’ costs. As much as it is fashionable to blame China for the demise of small manufacturing in America, the evidence suggests that looking for some reasons closer to home is warranted.”

    The regulatory cost for small businesses is $10,585 per employee! Competing against countries which don’t impose such costs is like running a marathon in ski boots. You can finish the course if you’re in really good shape, but don’t expect to be among the winners. No matter what you do to increase productivity, you can’t beat a cost handicap of $10,000 per worker.

    This cost estimate assumes that the business can operate at all. In “Licensing to Kill,” the Journal reports the case of a Pakistani immigrant who saved money from working in restaurants and sold his wife’s wedding jewelry to open a hot dog stand in a “fixer-upper” building in downtown Milwaukee.

    “Despite following all the rules, his food license was retracted at the request of Alderman Robert Bauman, who suggested he would rather see a place “with a little class” in the location, instead of Mr. Khan’s restaurant. Reopening Judy’s Red Hots, he argued, would somehow encourage crime and disorder and stall the redevelopment of the community.”

    Mr. Khan followed all the rules, yet the government had the authority to retract his food service license just as he was about to open his store. Even Jeffrey Sachs, a left-leaning economist who claims to have helped parts of the former Soviet Union prosper by introducing market reforms, points out that excessive regulation stifles the Russian economy. Writing in Scientific American, August 2010, p 32, he said:

    “I left St. Petersburg feeling that so much more economic reform was still possible in that glorious city and throughout Russia. the people’s high education and technical expertise do not adequately translate into new businesses and higher incomes. The bureaucracy keeps its traditional grip, even maintaining the internal registration from the time of the tsars that constrains Russians from moving from city to city. Small businesses are similarly encumbered with arbitrary regulations.”

    Except for lack of freedom to move to a different city, Mr. Sachs might as well be describing the American regulatory regimen. No less an expert than President Obama explained why our economy isn’t creating jobs:

    “No business wants to invest in a place where the government skims 20 percent off the top, or the head of the port authority is corrupt. No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, and now is the time for it to end.”

    – President Barack Hussein Obama, on the need for reform in Africa, New York Times quote of the day, July 12, 2009

    Truth doesn’t get any more vivid than that. Read Mr. Obama’s first sentence again – “No business wants to invest in a place where the government skims 20 percent off the top…” He knows this, yet on his watch, regulations have increased to the point that our government takes more than 30% off the top of the entire economy.

    Is it any wonder that American businesses are siting on piles of cash instead of investing it? How would a CEO explain to his stockholders how he invested millions in a lightbulb factory which wasn’t even permitted to start production? It’s much safer to invest the money overseas and simply import the products.

    The Beat Goes On

    Assembly Expo is still operating, albeit only every other year. The next session is September 20-22, 2011, in
    Chicago, not in Detroit. The inventors and gadgeteers will be there, but they’ll be expecting to sell their productivity tools into overseas factories.

     

    Who in his right mind would manufacture anything in the US? As the Journal put it, “The business of America is no longer business. It’s bureaucracy.

    From

    The Sceptical Market Observer: Are We Screwing Ourselves?.

    Images: Flickr (licence/attribution)

    About The Author – Luc Vallée

    Currently President of The Independent Market Observer. Chief Economist and Vice-President at the Caisse de dépôt from 2001 to 2008. Chief Financial Officer and Vice-President, Corporate Strategy for Mediagrif Interactive Technologies from 1999 to 2001 – MDF.TO. Deputy Treasurer at Canadian National Railways, 1997-1999. Associate Professor of Applied Economics at l’École des Hautes Études Commerciales (HEC) in Montréal, 1989-96. Consultant for the World Bank, the Canadian government, the Quebec government and the City of Montreal. Deputy director of the Center for International Studies, 1993-1996. Adviser to the investment banking division of Société Générale in Canada, 1996. President of ASDEQ in 2005-06. Member of the National Statistics Council of Statistics Canada, 2008-now. Ph.D. (1989) in economics from the Massachusetts Institute of Technology.
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