Thursday, February 4, 2010

Tying Trends Together reports that Initial Jobless Claims in U.S. Unexpectedly Climbed:

Initial jobless applications increased to 480,000 in the week ended Jan. 30, the most in seven weeks, from 472,000 the prior week, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance was little changed and those receiving extended benefits increased. . .

“Businesses are simply postponing their hiring for as long as possible,” Richard DeKaser, chief economist at Woodley Park Research in Washington, said before the report. “The willingness to hire is not there.”

Bloomberg also reports on old-fashioned labor arbitrage between low-wage and high-wage countries in China’s Labor Edge Overpowers Obama’s ‘Green’ Jobs Initiatives:

“The cost of manufacturing here is too expensive compared to Asia,” said Guy Chaffin, chief executive officer of Elite Search International, a Roseville, California-based executive search firm that has found employees for Tempe, Arizona-based First Solar and Solar Millennium AG. “As far as a flood of good jobs coming to the U.S., we’re not seeing it.” . . .

“Can’t we all agree that these jobs shouldn’t be going to China or Germany or Spain -- they should be right here in the United States?” Obama said at a town hall meeting in New Hampshire on Feb. 1.

The above two news items obviously relate to each other. Industrialized countries are supposed to enhance their wealth when their citizens own companies that generate real additional profits via labor arbitrage, and those profits do not exceed the lost income of the home country employees who have to find lower-paid work.
So, if a business can save a million dollars by saving 2 million dollars on labor costs while expending an additional million on transportation, translation, and extra administrative cost, and those American workers who collectively lose the $2 M of income quickly find work that pays the $1.8 M, then society is $800,000 to the better, with the business owners of course being big winners and American workers being losers. (In a fair system, though, the workers would receive additional benefits so that they would become net winners as well.)

Over time, this system only works if the advanced country creates value by moving up the economic food chain via a better educational system and the network effect such as is seen in high-tech hotspots and advanced medical centers.

Instead, however, what has happened in this country is an educational system that does not prepare enough students to compete with foreign engineers and the like. What we turn out is over-educated students who know more about diversity than their parents but who know their three "R"s less well.

America should press its advantages in high-tech, medical tech, general medicine, and the like. It has lost a great deal of international competitiveness by overspending on larger and larger homes and imports to fill the larger living spaces, ranging from more clothing to more kitchen gizmos to larger televisions. One of the catastrophes of the past two years has been the emphasis on preserving the housing industry in its present form.

So far as labor goes, if America really wants to get serious about competing fairly with other countries, it will go back to the economic virtues it once had: thrift and internationally-competitive wages. If in fact the best we can do with several percent of the work force is compete directly with Chinese wages, we have to face the question of whether, as the President asked in New Hampshire, we want those jobs here. If we do, we then have to decide how much we want to subsidize them, if at all.

Not all the labor arbitrage is assembly line work. Consider Mish's post today, Student Protest Forces Yuba College Board to Rescind Chancellor's Raise; Tuition Soars Everywhere, describing a to-date successful effort to keep a chancellor's salary at $220,000 rather than the planned raise to about $250,000. Note this is only a community college. I know none of the specifics, but all throughout this society, a sense of shared sacrifice is lacking. (Thus the anger at Big Finance pay, government pensions, etc.)

To reiterate, the long-term solution is a focus on our ongoing strengths and an educational, tax and regulatory policy that avoids competing with low-wage countries on their terms by extending our lead in the high-margin industries of the future.

For now, without being overly dramatic, we do see evidence of quasi-imperial over-reach. Without its status as the world's sole superpower, the U. S. would see a yet more rapid reversion to the global mean economically. We must start weaning ourselves from economic reliance on this status, which is subject to the laws of entropy as all else is.

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