Tuesday, August 16, 2011

Wanted: Good Jobs, Made in America

There has been much talk of late about how much of what Americans consume is actually made in China. This latest round of debate was sparked by an August 8 report by San Francisco Federal Reserve economists Galina Hale and Bart Hobijn that basically said - don't worry about importing China's inflation! China only accounted for 2.7% of what Americans consumed last year! The report created a stir on some of the blogs I read - see here and here and here.

It's important to note that the report specifically aims to address the link between Chinese inflation and the prices Americans pay for products like iPads, auto parts and window frames. Most of what Americans consume, the report argues, is made in America. That's because most (two-thirds) of what we consume is services.

They also argue:

"Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the U.S. workers and managers who staff these operations. "

A few thoughts:

1. All of this underscores the "total package" argument that US sourcing agents and brands describe. It doesn't matter if it's just Chinese wages that are rising. What matters for US retail prices and the viability of individual Chinese factories is the total package - commodities and other input costs, electricity costs, shipping costs, land costs, warehousing costs AND wage costs. While Hale and Hobjin argue that the Chinese are not yet passing on their inflation to us, when these perfect storms of higher costs hit, the Chinese do pass on some of their higher costs. And they will again.

2. The argument that most of what we consume is made-in-America because it's services doesn't reassure me, because I'm not sure whether these are really such great services jobs. I've long been concerned about the "Work at Wal-Mart in order to be able to afford to shop at Wal-Mart" economy that US companies seem to creating. Can these vaunted service jobs cover all the costs of public services that we're going to have to scale back, UK-style, over the coming years? And aren't we as investors rewarding companies that keep costs down by cutting jobs?

3. Smart people like Gary Pisano and Willy Shih at Harvard have made the argument that we are losing the "special sauce" of competitiveness and innovation by outsourcing manufacturing to other countries. I think they have a point, though that train left the station decades ago, again with American investors on the platform waving it off.

4. What really bothers me is that it's not obvious how to create good jobs for Americans anymore. This problem is not just the result of Japanese-style mindless gridlock in Washington, though that clearly plays a role. It's also, I believe, embedded deeply in the way we reward companies (in America at least) for cutting back their workforces and outsourcing as much as they can to the cheapest possible country. (James Fallows made a similar point on his blog recently.)

Technology start-ups are not the font of job creation they once were, though my brother in San Francisco tells me that we are so short of engineers that there are now billboards to recruit them (so there ARE jobs in America, just not the kind most people can do).

As Tyler Cowen has said, we have plucked all the low-hanging fruit of economic growth. Most ominously, China is taking hold of the playing field with both hands and shaking it violently through its indigenous innovation policies. Despite the blow to China's innovation plans from the recent high-speed rail debacle in Wenzhou, these policies should be at the top of every American CEO's and politician's agenda.Link
My question is: what do we need to do to create more (ideally many) better jobs in America? And what do we need to do to ensure that we have a workforce that can do those jobs?

As some Chinese government officials understand, this is as much a problem for China as it is for America, since China depends on the US to consume the fruits of its labor. Even a massive increase in government jobs, as we've seen in Texas, is not a viable solution. Do we bring back manufacturing to America? Are the cost increases in China really narrowing the gap between the cost of Made in China and Made in America, or is the lure of the Chinese consumer (and the US investor) too strong to dissuade most companies from leaving? Is infrastructure investment - again, an old Japanese stand-by - the answer, or will that, too, be hijacked by political concerns that leave America with the equivalent of bridges to nowhere?


Learn Chinese Business said...

Is China's Growing Pride in Being America's Creditor Pervasive and Harmful? http://wp.me/p1Uwxz-2p

Anonymous said...

Thank you for your well-written article.
Your voice was one of the very few ones I've found that has challenged the well-orchestrated flood of approval thats been all over the net lately.
The financial industry is plugging a very appealing message-
There are so many "doom and gloom" economic opinions at the moment,
perhaps things aren't all that bad.


I've also never believed in all those fabulous "service jobs".
Dosen't anyone else find it curious that it's some very familiar investment groups who are trumpeting our financial "misconceptions".

Lets not forget these folks track record.
Isn't it sadly obvious by now that they never did stop drinking the kool-aid?

An excellent antidote to trusting our current financial experts too much can be found in the film
"Inside Job"

I suggest renting/steaming this documentary if you haven't already seen it-

I found it eye-opening.

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