Capitalism, Unions, and Offshoring (Part VII): Lessons Learned

In the last six installments of this series, Egalitarius’ management encouraged its workers to unionize, and then instituted several aggressive cost-cutting measures to offset the cost of more expensive unionized labor.

In another scenario, Egalitarius’ unionized workforce went on strike. In the last two scenarios, Meritocratus’ management moved its production facilities offshore, and both companies struggled through a crippling recession.

Throughout these examples, Egalitarius’ concern for society’s well-being resulted in its bankruptcy, while Meritocratus’ ruthless pursuit of the bottom line left a trail of human wreckage in its wake.

Both companies represent caricatures of the left’s and right’s idealized worldviews carried to their natural and extreme conclusions.

What then, can we learn from this cautionary tale?

1. People and Corporations Respond to Incentives

People and corporations are not naturally bad. They just behave badly when they work in environments that provide the wrong incentives. These examples showed unions pushing for higher wages, because it was in their interest to do so. Yet their actions resulted in the company’s ultimate bankruptcy and subsequent loss of everyone’s jobs.

In the same vein, the corporation, Meritocratus, callously abandoned its workforce because labor was cheaper and taxes were lower overseas.

2. Unions Are An Anachronistic Impediment to Progress

When companies worked children to death and workers died frequently on the job, unions were a critical element in protecting workers’ lives and welfare.

Today, they are simply an impediment to progress.

As these examples showed, unions make American companies less competitive and destroy shareholder value. They are a thing of the past that has no place in modern America. Until state and local governments come to this realization, corporations will continue to shift jobs overseas as they struggle to survive in a fiercely competitive global market.

3. Corporate Tax Regime Encourages Firms to Act Against Society’s Interests

As the offshoring example demonstrated, corporations can generate a tremendous amount of value by finding ways to reduce their tax burden. If that means moving their production facilities overseas and hiring cheaper foreign workers, they will likely do so.

Until the United States government lowers corporate taxes, provides tax incentives for corporations to create jobs domestically, and closes loopholes that indirectly encourage corporations to offshore their labor, Americans will continue to lose jobs.

The solution to offshoring is not a simple one. However, it is incumbent upon current politicians to find ways that slow or halt the flow of American jobs overseas.

Advertisements

About Sean Patrick Hazlett

Conservative clean energy crusader, national security hawk, financial analyst, engineer, and former military officer.
This entry was posted in Business, Finance and Economics, Investing, Mathematics, Policy, Politics, Predictions, Taxes, Unions and tagged , , , , , . Bookmark the permalink.

14 Responses to Capitalism, Unions, and Offshoring (Part VII): Lessons Learned

  1. pino says:

    In the same vein, the corporation, Meritocratus, callously abandoned its workforce because labor was cheaper and taxes were lower overseas.

    Corporations that expand labor overseas end up hiring more Americans than firms who do not expand overseas.

    I don’t this this should shock anyone.

    Consider screwdrivers.

    Corporations that buy screwdrivers for $2.39 each do better and hire more people than companies who buy the same screwdriver for $16.95.

    Sub wheat, oil, cotton, lumber, ball bearings or any other commodity for screwdriver and you can see that labor is no different; or shouldn’t be.

  2. Charles McCormack says:

    Basically, I agree with point #1, disagree with #2, and pretty much agree with #3, except I don’t think corporations outsource jobs overseas because of taxes–they do it to exploit cheap labor. Regarding unions (and I hate to defend them without also criticizing them), they’re not anachronistic–they need to reform and start taking responsibility for the businesses that are unionized, not just the workers. The history of unions in America is also the history of the middle class. It may seem justified to lambaste unions for pushing wages and benefits higher, but those same higher wages have allowed workers to buy houses, send their kids to college, go on vacations, and generally live the American dream. Who says that only the executive class and white collar elites who go to Harvard and Stanford (yuk, yuk) deserve to live the dream? You’d be correct in saying that unions have demanded continuously higher wages and benefits to the detriment of their industries; however, it wasn’t unions that designed cars that Americans didn’t want to buy or built mega-stores that offered consumers very low price products that could only be manufactured in places that pay $1/hour or use child, slave, or prison labor. And, while union wages have sky-rocketed, that pales in comparison to executive compensation, where the average F500 CEO now makes 450X what the average worker makes, compared with about 30X only a generation or two ago. We need good unions as much as we need good management, because neither will be “good” without the other.

    • Chuck,

      I think the working class needs a better advocate, I just don’t think unions are an effective mechanism. They currently exist for self-perpetuation and little else.

      • Charles McCormack says:

        The only other viable advocate would be the government. Do you want that? Since unions only represent something like 10% of all American workers it’s probably a moot point anyway. My take is that even if there weren’t any unions at all corporations would still ship jobs overseas, struggle to compete globally, and generally face the same problems they now have. What I haven’t heard from anyone on the right (or left) are ideas that will strengthen the middle class and reduce income inequality, which ultimately will decimate our economy and way of life.

        • Chuck,

          You make a great point. Neither the right nor the left have good solutions to help the middle class. Perhaps as the standard of living improves for emerging markets, global wages will eventually equalize. The problem is that that outcome is probably 30 years out, or more than a generation. We need solutions today.

    • I like your points, Charles. Compensation has gotten out of control and it seems to be basically board-buddies all scratching each others’ backs. I refer back to Drucker’s opinion that executive comp shouldn’t be more than 20x what the rank and file made, because of it’s impact on corp culture.

      “…but those same higher wages have allowed workers to buy houses, send their kids to college, go on vacations, and generally live the American dream.”
      I think these things were, and still are, highly possible with non-union wages. I’d argue instead that perhaps low interest rates did more to spur all that along than union wages.

      “Who says that only the executive class and white collar elites who go to Harvard and Stanford (yuk, yuk) deserve to live the dream?”
      Now this is going to really sound harsh and make me unpopular, but my thinking here is that we’ve moved to a knowledge economy and those who think knowledge work is “elite” will likely never see their American dream realized. The “brawn worker” rather than the “brain worker” in America is now living more the “Taiwanese Dream” of being a labor drone. 30 years ago domestic labor was valuable. Now it hardly is. Speed, insight, anticipation, innovation are the valuable commodities now in western society as far as human resources are concerned.

      There’s people making millions in their underwear on the Internet while those still linked to the romantic notion of a “hard day’s work” refuse to even go near a computer. America still offers “The dream”, but the bar’s been raised and the path to it has changed. The truly valuable American worker has evolved, and that’s my primary beef with unions – they try and force us back to the “brawn” age and try to pretend that only hours worked and loyalty are what are needed for America to compete on the world stage.

  3. Of course anyone can make up a fairy tale that validates their preconceived notions.

    In the state of Ephemeralitude, ten right-wing foundations secretly funded by polluting industries bankrolled studies and politicians who stopped enforcing anti-pollution regulations, and made it more difficult for workers to form and maintain unions. The results: stagnant wages, skyrocketing sexual harassment of employees, and declining population due to high pollution. The six most innovative, rapidly expanding companies then left the state for Massachusetts, in search of well-educated workers and managers who were free to marry their longtime same-sex partners.

    There, I just proved that Republican policies are bad.

    The question is, what is going on in real life?

    The answer is, stagnant wages, near Gilded Age-level inequality, declining wages for all workers including unionized ones, and a managerial class that may well– like our pundits and politicians– be alarmingly misincentivized.

    See: http://motherjones.com/politics/2011/06/speedup-americans-working-harder-charts

    http://www.businessinsider.com/15-charts-about-wealth-and-inequality-in-america-2010-4#half-of-america-has-25-of-the-wealth-2

    http://www.nytimes.com/2011/06/19/business/19gret.html?_r=1

    • No offense, but my scenario is far more grounded in reality than yours is. In fact, the Mother Jones article for which you provided a link suggests that union worker incomes exceed non-union worker incomes by 28%. As such, my scenario was actually more conservative.

      I agree that wages have been stagnant and corporations have taken a huge share of the gains. That said, it is the incentives that the tax structure and unions create that drive them to behave this way. The left sometimes has a tendency to anthropomorphize corporations and suggest that they only seek to harm people and the environment. In the end, the corporation does what is best for the survival of the corporation. When incentives are badly skewed, you will get badly skewed outcomes.

      • People who went to college earn more, too. That doesn’t prove, all on its own, that college is The Enemy. What’s more, you were talking about a one-time 20% boost in salary; that’s not the way things have gone.

        The more important point, though, is that average overall wages have been stagnant for 30 years. But the income of the top quintile has done ok, and the top 1% has done phenomenally well. (See also here for more charts!) And you’re most concerned about unions?!?

        It’s rather a peculiar obsession, given that context.

        As was said at Balloon Juice: A unionized public employee, a teabagger, and a CEO are sitting at a table. In the middle of the table is a plate with a dozen cookies on it. The CEO reaches across and takes 11 cookies, then looks at the teabagger and says “Watch out for that union guy—he wants a piece of your cookie!”

        If you look at data for the US and find that we have higher union membership and slower growth and wages compared to other industrialized economies, then you’ll really have something. Retreating to the Land of Make Believe doesn’t get us there.

        “The left sometimes has a tendency to anthropomorphize corporations and suggest that they only seek to harm people and the environment.”

        Who on “the left”? Which bad policies are those people enacting?

        • Fair enough. These labor cost increases would take more than a year. But the cost of a unionized labor force is, on average, 28% higher.

          The difference between union workers and college graduates is the market pays the market clearing price for college graduates. The supply of labor is in equilibrium to the labor demanded. Because unions demand higher wages than their unskilled labor is worth, the supply of labor outstrips demand. As such, unions sow the seeds of their own destruction. What I detest about unions is that they think they deserve higher wages above and beyond the market rate for services that can be performed at a third of the costs elsewhere. Furthermore, they try to restrict capital flows to non-union workers (Boeing for instance). If your gardener demanded an excessive hourly rate, you’d stop hiring him. Corporations cannot do this with unions.

          It is a fact that highly unionized states pay higher wages. However, these same states have higher levels of per capita debt and unemployment as well. 60% of the jobs businesses created in this country since 1991 were in just 22 right to work states, which contain only 40% of the US population. See my post “rallying Against the Red Menace” for some examples.

          For ridiculous policies from the left, take a look at the NLRB’s suit against Boeing. It is preposterous.

        • pino says:

          The more important point, though, is that average overall wages have been stagnant for 30 years.

          Total compensation includes other forms besides wage. Add to that fact that the basics of life consume less and less of our paychecks each year.

          Contrary to your claim, we are wealthier than we were before.

  4. Not to try and beat a dead horse here, but there was a comment made before that seemed to say that a 20% salary hike by the union was “fantasy”? According to the BLS, (http://www.bls.gov/opub/cwc/cm20030623ar01p1.htm) 20% seems pretty much the norm between union and non-union wages across the board. That doesn’t seem to include total compensation, either, which I imagine would make the 20% even higher when you include all the “ouch I stubbed my toe so give me 10 paid weeks off work for emotional distress” days into that figure.

    As for corporate taxes, there’s the argument made that corporations really pay no taxes anyways, that it is a “cost” that gets passed on to the consumer. Nonetheless, let’s keep in mind here that it’s ALL the regulatory costs and b.s. that a company has to deal with in order to try and do business – not just taxes – that can encourage it to take its business elsewhere. Hate to pick on California again (it’s such a nice State!), but here’s a small list of what I mean: http://www.calchamber.com/headlines/pages/04252011-antibusinessproposalsriseagaininnewsession.aspx

    Like Sean says, the solutions aren’t simple ones but that doesn’t mean they have to be stupid ones, either. The tax code, for starters, needs to be simplified and I agree with him that unions are pretty-much outdated and unnecessary. Taking that further, with the exception of a few unions in particular, I think the bulk of them have actually caused us to devolve individually and collectively, have played a significant role in eroding our world competitiveness.

  5. Pingback: Past Comment Applicable to OWS Now | The Rantings of Vern Rigg Kaine

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s