Tuesday, July 11, 2006

Collateral Damage In The Global Economy

There is no doubt but that we are competing in an increasingly competitive global market, but this is a market environment that has its dark side. The United States is the largest consumer market in the world with Europe a close second but these consumer markets rest on a foundation of wealth which in turn rests on wages. But wages are increasingly under competitive pressures from abroad where highly trained people plus thousands of unskilled workers are available for a fraction of the cost in either America or Europe.

At the turn of the 20th Century more than half of the population was engaged in agriculture with a relatively small percentage engaged in manufacturing. By 1950 the number of people engaged in agriculture had dropped to a small percentage and 50% of the working population was engaged in manufacturing. During the first half of the 20th Century the union movement was instrumental in creating high paying jobs and curtailing the exploitation of the worker. The union movement reached its apogee in the 1950’s and has been declining ever since – primarily because manufacturing jobs have declined to the point where less than 10% of the working population is engaged in manufacturing. Today most manufacturing is done overseas using cheaper labor but the actual unemployment level in the US is approximately 5% which is about where it runs historically. The unemployment rate in Europe is over 10% and rising primarily due to their attempts to maintain employment levels through government control and tariffs. The US has not followed this path but nevertheless this shift from unskilled manufacturing has resulted in some collateral damage to the working class.

As the US moves away from manufacturing and into the service economy it is creating some displacement. The government and various pundits are pushing education as a solution and pointing out that there are plenty of jobs for those who have an education and skills that are not readily available overseas. While this is a logical solution for many people there are those in society who do not fit in a scholastic environment and these are increasingly becoming collateral damage. The service economy certainly includes all of those trained and educated workers but it also includes skilled workers such as; carpenters, plumbers, painters, small business owners, various healthcare workers, and a variety of similar jobs. For the most part these people are employed and make a living wage but there are many workers who are being displaced by machines and by jobs moving overseas who do not have these skills or training. These workers have few options other than retraining and if they cannot succeed in an academic environment then their options are severely limited.

There is increasing pressure for the government to do something and this cry is usually accompanied by the idea that the government should “create jobs”. But the reality is that the government cannot create jobs unless those jobs are government jobs. The government does not produce anything and certainly nothing that even resembles profits so the salaries for all government workers must come from tax revenues. This means that for every job created the government must either increase taxes or reduce spending on existing programs but as everyone knows neither option is attractive to a politician so nothing gets done. Besides, creating government jobs has been the European and UAW solution for years and the result has been catastrophic for both. European countries are staggering under the weight of their welfare states and the UAW is not only hemorrhaging members it is eliminating jobs as well.

As much as the liberal establishment may dislike it, jobs are created by capitalists – that is entrepreneurs and those individuals willing to invest their capital in the profit making enterprise. The less money that is taken from the capitalists the more money is available for investment. The sad reality is that those who advocate big government and government created jobs seem to think that the capitalists are those wealthy individuals with high incomes. This common liberal viewpoint demonstrates an appalling ignorance not only of capitalism but how a capitalist economy works. The money that is invested comes from capitalists alright but these are those individuals who are prudent enough to have saved money, which they have put into the bank, into stocks, or into mutual funds. This is the money that fuels our economy and generates tax revenues for the government, profits (dividends) for the investor (saver), and jobs for others. It is this growth in employment that generates increased tax revenues so as taxes are lowered more money becomes available for investment and paradoxically everybody benefits and the economy grows. As taxes are increased the capital shrinks, jobs evaporate, and tax revenues decline so taxes must be increased in order to sustain the government benefit programs, which starts a cycle of decline. This is a lesson that the big government liberal establishment seems to be incapable of grasping. Therefore, to blame businesses for moving jobs offshore is simply an example of how the Unions and Liberal establishment either cannot or will not accept the realities of a capitalist economy. In socialism the objective is employment in capitalism the objective is profit.

Although the issue is focused by the Unions and Liberal Politicians to the movement of jobs offshore, in reality there are many sectors of the economy that are booming and show positive rates of employment -- but not all. The US Bureau of Labor Statistics shows that production jobs have declined 6% since 1996 but manufacturing jobs have declined 17% and Production manufacturing has declined 42%. The sad reality is that these unskilled jobs are competing with cheap labor offshore and in order to remain competitive manufacturers must lower the cost of production. What seems to be ignored by the unions and the politicians is that even though the management costs, transportation costs, and tariffs are added to the total the overall cost is still lower than the cost of production is in the US. This should be a wake-up call that the status quo cannot be sustained.

But skilled labor seems to be doing well. The construction industry shows a growth of 31% since 1996 and as does Professional and Business Services. The High School Drop-out or those individuals who expect to join the union and get a “good paying job” are in for a disappointment because those are the jobs that are moving overseas. This doesn’t mean that everyone must have a college degree but it does mean that those “good paying jobs” will require some skill. However, for those willing and able to increase their skills through professional education, there are many opportunities and not all of these require an engineering degree, for example Home Healthcare Services shows a 537,100 forecasted growth in employment with a projected annual growth of 5.4%. Even the Entertainment Industry shows a modest growth in job opportunities and even though these jobs may not require a high level of education they do require a level of skill.

Clearly the impact of the Global Economy is reverberating throughout the industrialized world. The Socialist Economies of Europe are being hard hit because employment has always been one of their objectives. Ironically these countries have high unemployment rates and are struggling to retain the jobs they have. The situation in Europe is an example of what happens when the government attempts to “create jobs”. The government does not produce anything so there are few options available. They can hire people directly and increase taxes, which is never an attractive option to politicians – unless of course they are taxing the rich (meaning employed to most liberal politicians). They can increase corporate taxes, which is always a popular choice but even the densest politician knows that this not only slows the economy it usually increases unemployment. But then there is always the Socialist Solution – the one so frequently used by South Americans and Europeans – and that is to seize private businesses and nationalize them. This guarantees employment but it never provides efficiency or profits and in the extreme you have the Soviet Union and we all know how well that worked.

The Global Economy is having a huge impact worldwide as the labor force undergoes realignment and this will result in some collateral damage in the form of individuals who reject the idea of retraining or career changes. The reality is that there are many new jobs being created by industry but only for those flexible enough to change.

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