How Will The American Economy Die?

Pretty interesting to look at this comparison between China and the USA...especially economic;

http://www.indexmundi.com/factbook/compare/china.united-states

Today we live in a global community in which the USA has about 200 million consumers while China might have 800 million consumers and India with 700 million consumers, etc. etc. etc. Most of those markets outside of the USA are emerging so just with these numbers alone it makes sense for other languages to parallel or dominate over English. Someone once said but it wasn't verified that the honor students alone in China equal the total number of students in the USA...obviously the best and brightest, at least in quantity, are outside of the USA. Invention and innovation and design certainly is happening outside of the USA today.

I do think there will be many changes in the US in the next couple of decades and some of them will be painful and long term. The US has had a great run since early 1900's and now other countries are going through this same process or evolution. Seems logical to me that our 315 million population will be squished like a bug by the other 7 BILLION! What bothers me most is when the USA starts to be squished, if things get out of hand militarily or regarding national security, I'm thinking some nukes will be brandished about and who knows what happens once that posturing begins...

 

Well, your perceptions are a bit mistaken. There are quite a few US companies that are very competitive in global markets even with the current currency problems. The cost of doing business in the US is still lower than the cost of doing business in the EU and Japan and the cost of doing business in China has risen to above US levels in certain business sectors.

As always it totally depends on what business you are in. If you are selling capital goods and have maintained your long term investment strategy to stay on the leading edge you can compete and remain competitive regardless of where the competition is based. If you are selling commodity goods and have not continually invested in productivity improvements you will eventually find yourself unable to meet your expenses and you will fail.

It has been like that since 1840, when the first textile factory left New England with their old machinery in search of lower labour costs while their competitors stayed, making improved machinery and using better processes and continuously moving up the value chain as technology advanced. Now the great great grandchildren of those textile workers manufacture the machines that make microchips all over the world. Microchips are a high volume low margin business. The machines that make microchips are a low volume high margin business. When Arizona gives Intel a $1Billion tax break to build a $2Billion microchip factory that will employ 500 people, most of that money ends up employing over 2,000 people in Massachusetts for years without any tax breaks at all, which is why Massachusetts does not bother itself to give away tax money like that.

 

I think we survive, but with a rocky ride:

China going into recession could really bring deflation in commodities.

 

Well we have just gone bubbles galore since 1995. If you lay a ruler on the line that ends in 1995 and extend it, it would surprise me to find when all the gyrations end that is where we land.

 

It's the global economy! We produce there, we sell there, we buy from there and most all other nations are doing the same. Since consumers demand lower prices manufacturers have little choice but to seek out lower cost labor and materials and this will force mainstream manufacturing to those locations around the world. The consumers get exactly what they want but it comes at a cost as US manufacturers are required to compete with the rest of the world.

Regarding Xerox, and quality control, I find it interesting that so many other US companies, for example Apple, can produce in China with great quality control and Xerox could not? Although they will never admit it, many times it is the design which causes quality problems.

It's probably impossible to relate my next comment to any data, but many manufacturing jobs are a place where relatively inexperienced and unskilled workers could find a career. If they worked hard, kept their nose clean, learned new skills, and moved into supervision, they could easily increase their incomes. Today, many of these same inexperienced and unskilled workers are relegated to non-manufacturing jobs, service jobs, and the consequence of this is very low wages and few benefits and little upward mobility. As long as US factories required human labor, and lots of it, the average worker had a good deal. But since this is gone, and as you say it ain't coming back, we have tens of millions of US workers who find themselves desperate...with politicians who pander to this. For many, due to location and/or age, etc. they have few options if any. Younger workers have options but if they don't apply themselves to more education and skills they too will have a long and bumpy career path. I'd like to see more people seek cottage industry type work/business using whatever skills they have to produce something or provide a service. Or they can just do nothing and accept their status quo...

 

Apple phones are just assembled in China. Most of the components made elsewhere, the glass and many of the microchips are made in the US and Japan. Assembly is a labour intensive low margin business, suitable for a place like China where the workforce has gained the skills and wages are still low enough for assembly firms to make a profit. Apple's design and engineering jobs are still in the US, as is its market, where it gets away with an ungodly profit margin due to extremely proficient marketing prowess. Xerox products are far more difficult to assemble than simple phones.

US factories these days do not require a lot of labour. What they need is skilled technicians and engineers, The problem is that many US manufacturers still have the mindset that factory workers are unskilled
labour and are unwilling to offer appropriate wages that will attract the type of workers they need. I watched a tv show about a manufacturer in Toledo that cried that he could get no one to come work in his factory. As it turned out the jobs were for journeyman electricians to keep his fully automated factory running and he was offering $13 an hour, which was about $15 an hour less than what a journeyman electrician could make in construction. It was not even enough for a recently graduated apprentice electrician, who would be unable to live on that and pay back the $30,000 cost of electrician school.

Employers spent decades crushing the unions. The unions had no choice but to eliminate their apprentice programs and send their kids off to college. Now that the last of the union trained workers are retiring there is a severe lack of workers with the skills the employers need and the few young people who have those skills paid a lot of money to a private technical school to get them. They are not going to replace those old guys at the old wage scales, where long time employees accepted wage cuts and stuff because they did not have many other options.

The manufacturing employment crises in the US is entirely the fault of short sighted management practices that sought to increased profits over the short and medium term but has become severely challenging now that the long term has arrived. It is even worse in the construction industry, right to work laws have decimated the construction unions and caused them to close their apprentice programs also. It has been estimated that there is currently a backlog of over $200Billion in private sector construction work in the US that cannot even be started due to a ongoing shortage of plumbers and electricians. Right now 300,000 electricians and 200,000 plumbers would be hired if they showed up.

Two entire generations of plumbers and electricians are missing from the labour market. There is 60 year old masters and 20 year old apprentices with very few journeyman in between. Wages are higher than ever as builders compete for workers. The big problem is that unless you grew up in that environment it can be a very difficult work experience. It used to be that sons followed fathers and uncles into these jobs but now it is kids who have no idea about the work, or the work culture and ethic. Trying times are ahead as employers try to reassemble what they threw away so long ago.

 

Scale error. With any growth item, more recent data looks more pronounced because you are not adjusting it proportionally. To compare the data over time, you need a logarithmic scale.

For example, for the 8 year period from August 1982 to August 1994, your chart, because of the scale, makes it appear that there was only modest growth in the S&P., and that growth has exploded since 1994.

In fact, the S&P grew by 350% during the 8 year period from 1982 to 1994.

By contrast, for the 21 year period form August 1994 to to the present, the S&P has only grown 330%.

So, because of the logarithmic scale error, although it looks like the S&P has grown much more from 1994 to present than from 1982 to 1994, the converse is true.

Here for comparison, is a standard scale chart of the S&P 500 since 1950:



Like you chart, the scale make it look like there was only modest growth for the first 30 years, and then much stronger growth (with much wider fluctuations) since then.

Here's the same chart on a log scale:



Presents a whole 'nuther picture, doesn't it? Now we can see that the S&P is in actuality pretty close to the historic trend line over the past 60 years.

While it might be a common mistake for the average person to not appreciate the difference between a standard and log scale (I've seen that error made here on a number of occasions), I have to wonder why your source would present such a misleading chart. Surely they should know better. Are they trying to mislead folks for some reason?

 

Much of that 'gain' in the S&P doesn't go into actual business capital investment, just other financial instruments and overseas investments, so these charts bear little resemblance to the domestic economy, really, which is why they're useless as far as using them as a guide to domestic economic policy. One of the main factors that caused the Great Depression was so much money being poured into the money markets as demand for call loans increased during the market bubbles then, which according to the data available matched almost exactly the decreases in real capital spending and the rise of unemployment and economic downturns that began in 1926-1927, so we the phenomenon of market bubbles sucking investment out of the real economy into the financial economy, which produces nothing. They were all chasing stocks in companies that 'invested' in other stocks, which invested in companies that 'invested' in other stocks, and so on, which is pretty much a mirror of what has been going on since the Reagan 'bull markets' and merger manias. We now have an inverted pyramid economy where the top is sitting on massive amounts of cash with nowhere to put it, while the bottom 90% are cash starved and the money supply has little or no redistribution and 'velocity' and isn't recycled back down the chain; it goes up and stays there or goes out of the country altogether.

 

I don't disagree. Since the Reagan "trickle down" revolution almost all the real economic growth has gone to the rich, and very little to the bottom 90%. As a result, the great engine of spending, the middle classes, do not have the same proportionate purchasing power to drive a robust economy. A fact not helped by the de facto austerity that the government has effected during the recovery.

But my point was only that the use of a standard scale graph distorts the proportional growth, which can be seen comparing the standard graph of the S&P with the log graph I included in my prior post.

 

I know; I wasn't arguing, just adding my own take on graphs. I'll add that the reason the massive increase in Federal spending hasn't generated much inflation despite their best efforts is because of where it goes, which makes the 'money supply' arguments by the right wingers a non-issue; they can print all kinds of debt but as long those borrowing it don't spend it on producing anything and re-circulating it it has no effect at all. They would do far better to just increase SS payments to reflect real inflation, forgive all those housing loans and write that debt off, along with increasing food stamps and WIC bennies, even though a lot of that will end up back in Wal-Mart's pockets or going back to China or wherever, more of it will re-circulate here than it ever will bailing out Wall Street or the banks.

 

85% of the phones are assembled in China while 15% elsewhere. Apple does not use China because of cost; it uses China because of it's ability to change directions overnight, bring in 1000's more workers, and to have thousands of engineers to support manufacturing...all of which cannot be done in the USA. China sales are third after Europe and the Americas. Apple may make profits in the US but they are subject to 35% corporate income taxes while sales outside of the US are taxed at much lower rates.

Most factory workers who do repetitive work can be unskilled and trained on the job. Factory workers who do specialized work are not unskilled. A company must pay the going labor rates or find alternatives to using labor.

Wages scales are the same no matter if young or old. Employers did not crush unions...unions crushed themselves.

Strategic business practices, like outsourcing and automation, are primarily done to remain competitive...not to earn higher profits. You cannot have one cell phone manufacturer made 100% in the USA and another manufacturer made 75% offshore and 25% onshore...the US company will die. Consumers demand more for less cost and manufacturers have no choice but to design their business models around this.

Regarding skilled trade jobs, seems like kids today don't wish to do that kind of work. The key here is how to get those kids who don't want to work to get interested in a skilled trade job?

Times are changing, work is changing, jobs are changing, education is changing...people who wish to participate in the economy as a worker are required to pay attention to all of these trends and take steps to insert themselves to achieve whatever it is they desire...