Both Political Candidates Demonstrate Economic Ignorance While Pandering For Votes

As we enter the final lap of the presidential race in the United States, as always, the two candidates will say just about anything to secure your vote. And of course the economy is a major topic of conversation. Loud calls for both higher wages and more jobs dominate the rhetoric.

 

Hill-DonThis year’s election may feature very polarizing and idiosyncratic candidates, but much of their rhetoric is not that much different from that heard on occasion of previous elections.

 

Naturally, Hillary Clinton and Donny Trump claim they can easily solve both of these problems. I can only laugh at their certitude. They are so wrong… and like true political animals, they probably know it.

But promises will get you elected,  even if you cannot follow through and execute on them. Still, just in case they are both as intellectually obtuse as they appear to be, they may want to consider the following.

First of all, the exodus of U.S. jobs to overseas domains is primarily concentrated in the manufacturing sector. The uncomfortable fact is that labor is much cheaper overseas than in the U.S.

Many of these jobs do not require a high degree of skill and formal education… which is not meant to suggest that they are easy to perform. But these skills can be taught to people with minimal effort/cost compared to the potential return on investment.

In the manufacturing economy, labor is typically the highest cost component. Unfortunately, for the American manufacturing worker, overseas laborers will perform the same job at a significantly lower wage. Plus, sorry to say, the quality of the work is (not always) effectively equivalent.

For an American company it is cheaper to manufacture a product overseas in most cases (e.g. Nike sneakers), even after the company constructs/rents a manufacturing facility, “tools” the facility, pays labor costs (which sometimes even include housing) and then transports the product back to the US. The labor component is not just cheaper – but massively cheaper.

Given these facts how will any of these jobs ever be repatriated?  The only answer is, when the level of manufacturing wages in the U.S. equals the cost of production in emerging countries (labor + production + transportation back to the US). Sorry to say, this isn’t happening anytime soon, if ever.

 

1-Manufacturing output vs. employmentIf one compares US manufacturing output to manufacturing employment, it soon becomes clear that mainly labor-intensive production has been shifted to overseas countries. Overall output is close to a record high and the pace of its growth in the new century has mainly been held back by the bursting of the credit-driven booms of the Greenspan Fed. What is happening in manufacturing in developed economies in terms of output and employment today is mainly comparable to what started to happen in agriculture more than a century ago – click to enlarge.

 

So how do both of the U.S. candidates for president rationalize their arguments to bring back American jobs, the day after one of these knuckleheads is elected, against this stark reality?

Basically, Donald Trump wants to tax overseas production at the U.S. border, which is economic suicide, as it is both inflationary and protectionist.  He clearly did not receive the memo on economic globalization.

As for Hillary Clinton,  I am not aware of any strategy other than her sheer desire to increase manufacturing employment.  If these jobs do somehow magically return (which they won’t), she proposes to increase wages which would only make the U.S. increasingly non-competitive with the rest of the world.

Clearly, the policies both candidates are intellectually hollow and poorly designed – almost comical in their seriously flawed simplicity. Their ideas won’t work and, if anything, will weaken America’s global economic strength.

Thanks for the effort, I think… but no thanks.  Please, just go kiss more babies.

 

baby-kissing-1Or maybe don’t… these babies look appropriately confused and are probably scarred for life.

 

The Benefits of Overseas Manufacturing

However what both of these flawed candidates do seem to understand that this exportation of non-essential (anything but defense) U.S. manufacturing has created a lot of economic hurt in the U.S.  It is brutally unfortunate for many of America’s hardest workers, but the  trend is not going to change anytime soon.

Just because one lives and works in the U.S., one is not entitled to an artificially inflated wage vis-a-vis the rest of the world.  Blaming overseas workers willing to accept a lower wage for America’s labor issues is frankly stupid.  And the global economy will only become more connected and ruthlessly efficient in the future.

Politicians like Clinton and Trump can either continue to whine and complain about this cost-driven manufacturing job exodus or try to focus on preserving the dwindling number of current American manufacturing jobs (actually, in many cases, it is merely assembly of parts manufactured overseas),  or even better, examine the benefits of overseas production.

Benefits? Yes. The primary benefit of overseas production is that it drives down inflation, that is the price of many goods at the cash register.  We all like that, right? The real question is whether domestic consumers are prepared to pay more for a product of equivalent quality if it is manufactured in the U.S. instead of  overseas.

Will the average US consumer pay $300.00 for a pair of basic Nike running shoes or $1,000.00 for an iPhone because it is manufactured in the U.S.?  I doubt it. Consumers are probably unwilling to pay such inflated prices to subsidize American labor, no matter how many “Proudly Made In The USA” placards/tags are displayed (by the way, I hope these placards/tags are actually manufactured  in the US?).

 

usaWhere was the tag made?

 

Another, less immediately obvious benefit of overseas manufacturing are improved sovereign relations. Many people regard the promotion of democracy and capitalism all over the globe as part of this country’s job, although American tactics employed to support this mantra often run counter to US cornerstone ideals. What better way to promote an altruistic message/vision than through the ignition of an emerging economy through investment and trade?

 

2-Manufacturing compensationWhile manufacturing employment has declined, manufacturing wages have grown strongly. This shows the extent to which productivity has increased. Note that the only way wages can increase is if more capital is invested per worker. Everything else is economically illiterate wishful thinking. Wage increases imposed by political fiat will simply lead to more unemployment if they go beyond what the market has already made possible by means of saving and investment – click to enlarge.

 

March of the Robots

Back to manufacturing employment.  Has the U.S. permanently lost its edge in production and its techniques?  The short answer is, absolutely not.  US companies surely can produce whatever they want, and better than those in most other countries – this should be considered beyond dispute.

At the moment it just does not make economic sense in many industries.  But perhaps that will change in the future – or is the future already here? Many of the manufacturing jobs that were exported to overseas countries will eventually be performed by robots. Many already are, and many more will be in the not so distant future.

Sort of like in the weekend morning show The Jetsons from a long time ago. What was an animated fantasy back then, increasingly looks like reality in the year 2016 and beyond – with a significant global economic impact, as a lot less human labor will be required. Many of the companies driving/developing these technologies are American; they are very talented at it too, and will only get better.

Robotics are applied in ever more industries. Take e.g. a close look at the garbage trucks passing by once a week. Nowadays the trash bins are picked up and dumped by robotic arms.  No longer are 2-3 dudes hanging on to the truck’s rear handrails. Some still operate that way, such as in Manhattan, but likely not for much longer.

 

garbage truckTrash collection has been half automated so far. The next jobs to go at that of the driver and whoever sits next to him in this picture. This is certainly a problem for those losing their jobs,  but it is actually a positive development big picture-wise. Why should humans waste time with drudgery like trash collection?

Photo credit: Kimberley Parker / Standard-Times

 

So robotics are coming and they are not just cost efficient (after the initial capital outlay) and tireless.  They also don’t complain about long hours, call in sick or go on strike for higher wages and more benefits. It is an easy sell to global corporate CEOs and bean counters. In the global manufacturing process, human participants are a big short.

 

Conclusion

Maybe the collective U.S. approach to manufacturing is not as flawed as Clinton and Trump claim.  Perhaps it should rather be classified as leading-edge? Maybe the politicians just don’t see it? Or maybe their pollsters have told them that all this whining/complaining will lead to more incremental votes in a crucial voting demographic, resulting in a 4 year residency at the White House?

For all their jawboning about issues that affect almost everybody, the election is simply about their personal/ultimate goal to become the most powerful person on the planet. It is nothing more than that… promises made on the campaign trail will quickly be mentally shredded once the final November votes are tallied.

And for those political idealists that may believe otherwise… that is pure fantasy as well

 

Charts by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

This article appeared originally at Global Slant. Dominique Dassault has been active in the capital markets for 26 years as a portfolio manager (hedge funds and private asset capital management) and in international equity sales.

 

 

 

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One Response to “The Idea that Overseas Manufacturing Jobs will Return to the US is Pure Fantasy”

  • wmbean:

    The myth that an increase in productivity results in an increase in economic growth is false. Simply lowering the cost of production which may or may not lower the price of the individual unit does not increase consumption automatically. Consumption of goods, services, and capital are dependent on the ability to pay for them. Credit has enabled many to afford what they might have deferred through lack of current income, but credit also reduces future consumption. We enable the consumption of foreign manufactured goods by exploiting foreign labor and other associated costs. What we gain is the short run consumer boom. Where is that boom now? Economies are a zero sum game. The fact that we often fail to realize that we have added other economies to our own is often the cause for misunderstanding productivity. Will manufacture of goods make a comeback in this country? Unless unions are broken and made illegal, unless most of the bureaucratic structures that impede by use of regulations the business efforts to make and sell goods and services, unless excessive taxes are reduced, manufacturing will not return.

    The fact is, the middle class will continue to shrink and the old blue collar and the poor will grow. In order for the poor to consume the ruling class, government and business owners/management) will need to subsidize these lower classes of society. But that is a self defeating solution. The need to pay others to buy your products means that one can never, in the long run, keep the profits. It’s really a question of supply and demand and price point. A farmer will not profit if he doubles his output using more land. seed, and labor and is then forced to sell at half the price. Consumption reaches saturations limits, beyond which nor further consumption is possible. Barriers to competition doe two things. They increase prices while reducing supply, and they force production into those areas where barriers to competition are not so severe. Barriers to competition produce a vacuum of opportunity and a reduction of gainful employment. Imported goods may reduce prices but that is only temporary as the balance between domestic income is changed.

    Another consideration is that labor is an asset, just like housing. Inflate the price of housing and fewer individuals can afford to buy housing. So if we inflate the price of labor that individuals may be able to afford the inflated cost of housing. But inflating the price of labor inflates the cost of goods and services. This inflation spiral continues until the system totally breaks down. So now we are stuck with a two tiered system of labor. The pool of unskilled and semi-skilled labor is increasing while its asset price is declining. Thus its ability to consume declines. Essentially the whole world economy, which is made up of all the various country economies, is out of equilibrium.

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