In-Sourcing the U.S. Middle Class

In-Sourcing the U.S. Middle Class

Welcome back American manufacturing. U.S. in-sourcing (global companies bringing jobs back to the U.S. that were previously sent overseas) hit the mainstream news cycle again this month. An in-depth Atlantic article by Charles Fishman on GE’s plans to manufacture  high-end appliances has drawn exceptional attention. James Fallows, also in The Atlantic, provided the China context.

President Obama gave a January speech on bringing jobs back to the U.S. where he said:

 

“I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany.  I want them taking root in places like Michigan and Ohio and Virginia and North Carolina.”

Among the notable companies announcing in-sourcing plans this past year Apple plans to spend $100 million on new domestic (U.S.) production capabilities and Starbucks’ $172 million investment in a Georgia plant (net 140 jobs, that’s some capital intensive, high-productivity work). White-collar workers appear to be gaining as well. General Motors plans to hire up to 10,000 U.S.-based IT workers, starting with 500 employees at an Austin, Texas innovation center.

The in-sourcing or reshoring “trend” isn’t exactly new. Otis Elevator announced plans to move jobs from Mexico to a new highly-efficient plant in South Carolina more than a year ago. Chesapeake Candle, one of the featured companies at the White House event actually opened its first U.S. factory back in July, 2011.

These jobs mostly aren’t the same ones that went overseas for lower-wage, low-skill workers overseas in the first place either. Garment manufacturing, for example, won’t be making a comeback.

What companies are finding, however is that the total cost for manufacturing abroad to sell back into the U.S. were never fully accounted for (shipping, training, quality control, etc.) When they are, it turns out, semi-skilled to high-skill work closest to where the products will be sold is more profitable than manufacturing overseas and sending them back.

Significant obstacle remain for these anecdotes to turn into a trend.

 

 

 

 

 

 

 

 

 

 

 

 

 

First and foremost worker’s need re-training. Without significant investment in, dare I say it during these tough fiscal times, education, the skilled workforce won’t materialize to make these now isolated cases cascade into a wave of better jobs for America’s workforce.

Beyond education there remains a stultifying restriction on educated immigrants. Vivek Wahda in a July Foreign Policy piece makes the case for focusing on reform as many talented students leave the U.S. after finishing their studies because they can’t get green cards to stay. And if they could stay they’d likely either fill the numerous unfilled tech jobs still floating around in this glum economy, or start businesses of their own.

The Republican-led House passed legislation in November to give 55,000 science and tech grads per year an immediate path to permanent residence. That’s a start but not nearly comprehensive enough. Millions of illegal immigrants on which this country depends need to be turned into tax-paying members of the workforce. The legislation is unlikely to pass both the Senate and the President’s desk without major additions.

Without changes to education and immigration the U.S. risks a serious and long-lasting hollowing out of the middle class. That would prove disastrous for an economy that relies on consumption for 70% of its annual gross domestic product.

 

For more Klein’s Commentary sign up for email updates or connect via Twitter @brianpklein.

Related Posts:

Photo: Wikimedia Commons, depression-era soup line.

Mfg Data: http://unstats.un.org/unsd/snaama/dnllist.asp

If China Televised a Presidential Debate

If China Televised a Presidential Debate

(Sometime in the future . . .)

Moderator, internationally-renowned artist Ai Weiwei: Thank you all for coming to the National Center for the Performing Arts in downtown Beijing for this first ever, internationally televised CCTV – China Presidential Debate. There will be no opening remarks, only questions submitted by Weibo users whose names will be concealed. Our first question comes from a real estate developer.

What do the candidates believe the role of government should be in the economy?

Candidate on the left podium – The government should have more state control, more direction over the economy and more of a focus on the poor. State-owned enterprises stabilize the country. My opponent believes the free market and western economic ideals should be slavishly followed. I believe China should follow its own development path and bring back the ideals of our founding father.

(We hear mild applause. Several in the audience are holding pictures of Mao and waving small Chinese flags.)

Candidate on the right podium – The government should facilitate greater reform and opening. That is how China will take its rightful place as a global economic and political leader in the 21st century. Private enterprise will drive future growth in leading industries. Government can and must enforce the rule of law to create a positive environment for business to flourish. Corruption must be stamped out. Consumers, not elites should drive growth.

(More applause, a little louder and longer than the first.)

Second question comes from a graduate student at the China Foreign Affairs University.

China was invaded many times in the past. Now we are a strong country. Why shouldn’t we take back what is rightfully ours including Taiwan, the South China Sea and the Diaoyu islands?

Candidate (on the left): China is a strong nation and will defend its national interests wherever they may lie.

Candidate (on the right): China is a strong nation and will defend its national interests wherever they may lie. Let me add that we believe in a peaceful rise.

Okay. Our third and final question, well more of a comment and a question, comes from a factory worker in Guangdong.

My husband and I both work 10-12 hours a day, 7 days a week at a Chinese-owned factory. The owner often doesn’t pay the overtime we are promised, even after we’ve paid the manager to get the extra hours. Many of my co-workers have gotten ill from the chemicals we use to clean computer screens. The company said they would pay for medical costs but the local hospital insist on cash. If we want to see the actual doctor we have to pay more. Even with receipts we never get reimbursed. I went to complain to the union. The union boss told the factory manager and now I’ve lost all of my overtime and have to work the overnight shift.

Since I do not have a residency permit my daughter can’t attend school here. She lives 200 kilometers away with my parents. Local officials took their land. Now they live in a small apartment in a new building many miles away that is already falling apart. The money they received wasn’t enough for the apartment so they had to use up all of their savings. While we earn more than we used to both of our salaries barely pay our parent’s doctor bills (they have no insurance), my daughter’s school fees (even though she goes to a public school) and our company housing and food. I do not feel better off than I did ten years ago. What are you going to do about it?

(Large thunderous applause fills the auditorium.)

The microphones are suddenly cut and the candidates whisked off stage. Ai Weiwei pulls out his own bullhorn just as television screens across the country go black. A few seconds later images of fireworks appear from the 2008 Summer Olympic Games.

Foxconn Riots and the Limits of China’s Middle Class

Foxconn Riots and the Limits of China’s Middle Class

Several thousand rioting workers in Foxconn’s Taiyuan factory this week highlighted the inherent limits on China’s emerging middle class. Questions about the causes of the violence continue to circulate, either a dispute sparked by a security guard beating a worker or a fight in one of the privately contracted dormitories that went awry. (Jennifer Preston of the New York Times’ “The Lede” summarizes the blogosphere’s accounts versus official government pronouncements here.) In either case the life of your average manufacturing worker revolves around 10-12 hour days, sleeping in dormitories and eating in massive cafeterias. Room and board are deducted from their pay, when they’re paid on time and accurately.

With some 79,000 workers at this particular plant Foxconn runs the equivalent of a small-sized U.S. town. Workers often self-segregate based on their hometowns or provinces giving rise to rivalries and sometimes conflict. But why hasn’t the sheer size of this workforce spawned a private housing boom, new neighborhoods, and the freedom to congregate and eat where one pleases?

Back in the 1950’s and ’60’s U.S. factory workers fueled a booming middle class. Many were young (in their 20‘s). After several years they got married, bought homes, cars and appliances. Restaurants, hair salons, bowling alleys and movie theaters sprang up nearby. For most of Asia, including Japan, Taiwan, and South Korea which used to assemble similar goods, the story was much the same. Workers salaries rose to the point were they could afford mortgages and banks were eager to lend to workers with stable incomes. Public infrastructure connected new communities to the factory gates. Their children spurred a rise in school construction. Personal and corporate income taxes fueled public infrastructure projects.

The factory model in China, however remains largely stuck in an almost feudalistic past where the company provides, or more accurately controls, what workers can and can’t do, even in their off time. The hukou or residency permit system restricts workers from buying apartments near where they work unless they are already a resident (most are not). Their children can’t attend local schools so many must be left behind in villages with grandparents (see Alexandra Harney’s “The China Price” for the affects of low cost manufacturing on workers.) The state-controlled union can operate, but it mostly supports the interests of the government rather than the workers they’re meant to represent.

The basis for this manufacturing system isn’t strictly a socialist ethos or “manufacturing with Chinese characteristics”. Early industrial U.S. company towns often ran the local store (charging ridiculously high prices) and provided housing (at a cost). When workers tried to organize they brought in local thugs or police to impose force. Those days are long gone primarily because workers could and did organize for better pay, regular hours, and safety. Present day working life in China remains more a matter of control than culture. While the Foxconn riots weren’t directed at management worker’s inability to organize can lead to explosions of pent up anger elsewhere.

Labor advocating for its interests and securing freedom of choice in where to live, eat, and enjoy their spare time forms one of the most basic tenants of middle class growth.  Reasonable hours and significantly higher overtime pay increases personal income and domestic consumption. Company co-sponsored health insurance plans lowers the need to pile away current savings for future medical needs. Rising wages for middle class workers increases social stability. While incomes have been going up some 10% for Chinese workers the income gap is widening and basic healthcare and housing remain out of reach for many.)

Without structural changes China’s economic transition from state and investment-led growth to consumer-driven demand will remain stunted. When tens of thousands of employees stuffed into cramped dormitories and shuffled like cattle through stadium-sized cafeterias finally gain more economic freedom, China’s middle class will flourish. Until then pent up frustrations that erupted in the Foxconn riots suggest more turbulent times ahead.

 

Photo: Youtube video.

The Decline of the Rest

The Decline of the Rest

A popular economic theme made the rounds not so long ago that featured prominently in a series of “end of the west, rise of the rest” predictions. It went something like this.

Emerging Asia, now an independent source of world growth driven by their expanding middle class no longer relied on the collective “west” for their economic well being. These countries had struck domestic “gold” freeing them from economic cycles in the rest of the world. It was called decoupling and it was wrong.

The fascination with the idea, if not the fact, of independent economic growth grew from a series of statistics. China had become the world’s second largest economy (by GDP), eclipsing the tech giant nation to their east, Japan. Decades of near double-digit growth meant China would overtake the U.S, and ostensibly the world, in 2020, 2030 or 2040 depending on the study. No end to high-rises, malls and luxury cars was on the horizon. China had become the perpetual growth machine for the ages.

India too was ramping up to break-neck speed. Its tech sector dominated outsourcing and was aiming for indigenous innovation with chip design and software. Bangalore was the new Silicon Valley. Largely untouched by the 2008 financial crisis that sent the U.S. reeling into recession, India’s massive population, natural resources, and increasingly business-minded politicians were about to unleash the second great consumer wave of the 21st century.

Ideologically the rising Asia theme also satisfied nationalistic tendencies that saw in their growing wealth, and the supposed decline of the U.S., an historic reversal of fortune. Decades if not centuries of perceived second-nation status had ended. Even capitalism itself had been rendered mute to the alternate, more socialist common cause of Chinese and Indian inspired growth.

In the last several weeks another set of statistics have appeared. Slowing growth is no longer just for the U.S. with a disappointing 1.7% in Q2, along with recession-hit Europe and now Japan. China too has seen a dramatic fall in consumer demand. Overall growth, as a manufactured number itself, will likely fall somewhere between 7.6% – 8.0% for the year, but data out on electricity production, warehouses overflowing with commodities including steel and coal, and a glut of other goods strongly suggest greater slowing, even if not officially admitted.

India’s leading figures are ratcheting down as well, currently to a sub 6.0%. Even in vibrant southeast Asian countries including Vietnam and Thailand face stronger headwinds (though Malaysia and Indonesia continue to buck the trend). The slowdown has now turned truly global. Commodity prices for copper, a key input for any advanced economy, test yearly lows as broad-based demand wanes.

Asia hadn’t built a world-leading growth engine after-all because the middle class continued to face severe restrictions. Income gaps widened and while certainly new consumerism did emerge, it can no longer be maintained absent the institutions of reliable government. That means protecting intellectual property, enforcing tax collection and limiting the corrosive effects of corruption.

In the end emerging Asia isn’t driving world growth, and the collective fortunes of the “west and the rest” are more intertwined than ever. Both developed and developing economies face constrained opportunity going forward. When recovery returns, and eventually it will, both may feel the rising tide together. Until then it’s a long slog through tough economic times.

World Politics Review Article on the Global Middle Class – Part II

World Politics Review Article on the Global Middle Class – Part II

The damage done to the global middle class, while significant, is not irreparable. The solutions are as varied as the countries themselves, but they all share several key features that influence whether a consumer-driven economy will flourish or not.

First and foremost is access to capital for small and medium-sized enterprises. In developed and developing economies alike, funding all but dried up during the economic crisis that began in U.S. and quickly spread around the world. Especially during recessionary periods, start-ups are critical job creators compared to existing firms, which tend to shed employees. During the 1991 and 2002 U.S. recessions, start-ups added nearly 3 million new jobs, while established firms laid off 4 million to 5 million people, according to a Kaufmann Foundation report.

Misguided government regulations have also been thwarting the return of the middle class. Breaking up the excessive influence of conglomerates in emerging economies is another way to create room for the middle class, but doing so often proves to be difficult and controversial. Policymakers, no matter where they are, need to shift their fixation from top-line statistics like GDP growth, which can obscure wealth-gap and purchasing-power problems, and focus more on the health and size of their middle class. Until the world’s middle class recovers, there will be no global recovery.

Full article is available on the World Politics Review website.

Photo: President Barack Obama signs the Middle Class Tax Relief and Job Creation Act of 2012 in the Oval Office, Feb. 22, 2012 (White House photo by Pete Souza).

World Politics Review Article: The Crisis of the Global Middle Class

World Politics Review Article: The Crisis of the Global Middle Class

The Arab Spring uprisings were fueled by the rising expectations of a nascent middle class in the face of opportunity that for too long had been denied. Tunisia’s uprising was in essence a middle class awakening, with the fight for economic opportunity replacing political ideology as the principal force shaping the future of fragile nations. It is a problem that even industrialized countries now face.

If nothing is done to build up the fragile middle class, we run the risk of greater social, economic and political polarization that, at its worst, could lead to a rise in nationalism, xenophobia and a breakdown of a tenuous global order. Historically speaking, that generally does not end well. Fortunately, such an outcome is not inevitable.

Full article is available on the World Politics Review website.

Photo by Wikimedia user Ghassen Bradai, licensed under the Creative Commons Universal Public Domain Dedication.

Blog Series: The Middle Class – Engine of Innovation

Blog Series: The Middle Class – Engine of Innovation

Consider this: The greatest inventions of the modern age— from the light bulb and the telephone to antibiotics, airplanes and the computer— were all made possible by the purchasing power of the middle class. Without this market much of what has redefined the way people live today would never have been successfully developed.

While early adopters fund initial inventions (one of the first home computers cost thousands of dollars in the 1970’s),  mass market appeal keeps the innovation engine humming. Energy, automobiles, communications, pharmaceuticals, electronics and retail make up the vast majority of the world’s 500 largest companies. Commercial financial institutions account for only 19% of the total.

When executives sit down to plot out what new products they’re going to pursue they inevitably size the market. That’s business 101. None of today’s global companies would even exist if it weren’t for the mass middle market. And when that market begins to shrink real consequences follow.

Investments in nascent and emerging businesses are no longer growing like they once did. Venture capital fundraising, one of the main financial sources for start-ups and fast growth young companies has yet to recover from its 2008 high water mark of $25 billion, plummeting to under $14 billion in 2010. Results for 2012 remain cautiously optimistic. Reuters and the National Venture Capital Association reported a 10% rise for the first half of 2012 compared to the same period a year ago after a disastrous first quarter drop of 35%. The number of firms raising new capital has shrunk considerably, however.

Start-ups, especially during recessionary periods are critical job creators while existing firms tend to shed employees. During the 1991 and 2002 recessions they added nearly 3 million new jobs while established firms laid off four to five million people according to a Kaufmann Foundation report. Meanwhile corporate research and development funding, while growing nominally at about 2.8% in the U.S. remains flat in real terms owing to inflation.

While start-up funding has become more difficult for start-ups a new crowd sourcing platform is emerging. Still in its nascent stage this has led to millions being raised on kickstarter.com which has grown from an indie creative fundraising outfit to a real source of finance for entrepreneurs. With the passage of the Jumpstart Our Business Startups (JOBS) Act individuals will be able to invest directly in small companies for an equity share within certain limitations.

The “industry” is still finding its way and looking to create a unified set of standards. Fraud concerns are real and need to be addressed (hopefully better than the pervasive fraud on Wall Street these days). Crowd Funding Intermediary Regulatory Advocates (CFIRA) has held events to solicit public input. Crowdsourcing.org has launched an accreditation program. The Securities and Exchange Committee has scheduled an Aug. hearing on lifting advertising bans on securities. New rules on crowdfunding up to $1 million in equity are expected by the end of this year.

New approaches to small business support will go only part of the way to rebuilding a middle class. Much broader efforts need to be implemented to save the middle from truly hollowing out and innovation grinding to a halt. Middle class consumption clearly drives innovation. Their health is the health of a nation. Until they recover, there is no recovery.

Coming up: Middle Class Awakening – when the middle does not hold.

Photo: Tokyo at Night, Brian P. Klein, 2009

Blog Series: Rebuilding the Global Middle

Blog Series: Rebuilding the Global Middle

Part I: Good Times Gone Very, Very Bad –

It seems like a quaint folk tale told to schoolchildren. Study, work hard, and you too can live happily ever after. The American Dream, each generation better off than the last meant true upward mobility. Skills rather than birthright defined success. It’s been the mainstay of popular culture for over a century. Was it too good to last?

There’s a long and generous history of hardworking immigrants establishing themselves in the U.S. Children often gained more education than their parents and either walked into a good manufacturing job after high school, went to a trade school or off to college. Eventually most married, bought a small house, a car, a television and appliances. Maybe they took a vacation to Disneyland or rented a room for a week at the beach each summer.

Suburbs sprouted out of shallow fields and the interstate highway connected a patchwork of states that eventually became part of a global economic, media and politically powerful nation.

Somewhere around the 1970’s the magic of upward mobility soured. Wage growth stalled while the cost of living kept rising. A worker might produce more per hour, especially with the aid of advanced manufacturing and automation, but that didn’t translate into higher take home pay, especially with the bite of inflation. Where one salary supported a family of four in the past, two incomes and credit card debt soon became the norm.

When that failed to keep up with the Joneses next door home equity loans became the fashion. “Free” money paved the way up the increasing slope of superficial prosperity until the road ended in a cliff. That was 2008 and four years after the the worst economic disaster since the Great Depression the U.S. recovery slows to near stall speed. Signs of a prolonged global slowdown point to increasing middle class strain.

At this juncture in economic history it becomes increasingly difficult to imagine how the middle class recovers absent a 1950’s-60’s style manufacturing boom. That pattern can hardly repeat itself considering the outsourcing trend and globalization which, in theory, opens the way for more value-added jobs in the U.S.

The changing structure of work isn’t necessarily a bad thing. Telephone operators that literally connected phone calls with wires and plugs were made obsolete by electric switching. Automobiles replaced horse drawn carriages.

Each leap forward left some destruction in its wake, but there was always another factory, another invention, another job to do.

Lower prices for clothing and shoes to washing machines and televisions made every dollar go further, for the moment. That moment has passed. Borrowing to buy now and retire later in near poverty has become the new reality, not the promise of an almost forgotten dream.

Has the middle class been damaged beyond repair? While this may not be the end of the age of opportunity, some serious surgery is required, and soon.

Next: Middle Class: Engine of Innovation

(To receive updates of new posts subscribe via email.)
Mid-Day Note: Global Economic Data Disappoints

Mid-Day Note: Global Economic Data Disappoints

U.S. economy still lags.

Today’s U.S. housing and consumer confidence figures failed to signal a real economic rebound. This after Moody’s downgrades of fifteen banks last week, including Goldman Sachs, and earlier Federal Reserve data* showing U.S. household net wealth plunging over 40 percent between 2007-2010. That’s an entire generation of wealth creation gone in three years. On a slightly positive note net wealth has been growing slowly since then, but for whom? Mainly shareholders and executives. Corporations continue to sit on cash ($1.7 trillion give or take) while the middle class, hit hardest by the downturn remains worst positioned to recover.

The temperature continues rising on a host of ills begging for resolution (jobs, insurance, income gaps), but as election season shifts into full gear expect more political paralysis in Washington, not less. Still, some growth, any growth, is better than contraction even at a paltry 1.8%. Lower gas prices may pump a few extra dollars into pockets over the next few months. Major concerns of course remain. Where will growth emerge if consumers continue to face pressure from all sides – stubbornly high unemployment, marginal home price increases, expiring tax breaks and soaring healthcare costs. Expect a long, hot summer.

Europe – Cyprus and Spain join the bailout line.

Moody’s downgraded Spanish banks in a widely recognized crisis of financial confidence. Now one of Europe’s larger economies officially joins the bailout que. Add Cyprus’s estimated 5-10 billion euros, a pittance compared to Greece, and Europe’s southern rim continues unravelling. Brussels won’t yield money without constraints. The only question left, at what cost in the short term versus broader integration later. The focus needs to remain firmly on the moment as the European Union will need plenty of time to hash out new monetary rules among its 17 member countries and 23 official languages.

Japan – Nuclear power returns but jobs may not.

Nuclear plants are coming back online absent energy alternatives (including a fragmented electrical grid and untapped geothermal resources). That will at least avoid production shutdowns that hobbled 2011 electronics and automotive manufacturing. Tepid recovery following last year’s disaster remains on track, but a track to where? Longer trends still point downward. Major manufacturers are off-shoring in droves, responding to light domestic demand, a troublesome exchange rate (making exports exceptionally expensive for overseas buyers), and greater growth prospects elsewhere. With all three of the world’s traditional growth engines stalled or sputtering, sources of new growth remain a mystery.

China – Slower growth than expected.

Serious headwinds continue to mount in China’s struggle to maintain history-defying growth. HSBC’s June flash purchasing manufacturer’s index fell to 48.1, it’s eighth consecutive month of contraction staying below the critical 50 mark. Accurate statistics continue to be problem, but if electricity consumption and coal inventories are any gauge, especially in China’s southern production heartland, then a slowdown has been building for some time. Power generation is barely growing as it approaches early 2010 lows, and this time absent a major global economic shock like the U.S. financial crisis. Strains in Europe alone don’t account for this slowdown. Chinese stimulus efforts are expected to fall far below their previous $550+ billion injection during the leanest years (2008-2009). Officials know that only so much demand exists for infrastructure and construction projects, their preferred stimulus sectors of the past.

Bottom Line:

Tepid U.S. recovery continues but rising risks suggest more slowing ahead. Europe’s ills are the near term weight, but China has a long way to go towards structural change and real consumer-driven demand. With their own power transition incomplete until the end of the year don’t expect dramatic upside surprises any time soon. If/when politicians on any continent finally resolve to get more money into the pockets of the middle class, then recovery prospects will finally brighten.

* For Federal Reserve household wealth data see:
htp://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

Photo: Brian P. Klein
The Diplomat Article: The Rise of Global Feudalism

The Diplomat Article: The Rise of Global Feudalism

In April 2007, New Century Financial Corporation filed for what was then a little noticed bankruptcy protection. Their mortgage-backed securities had become worthless and by summer Bear Stearns began liquidating hedge funds. Come autumn, Britain’s fifth largest mortgage lender Northern Rock was on the ropes propped up by the Bank of England. The rest is well known history.

Five years on, after bank failures and bailouts, foreclosures, and rising unemployment, the crisis that started as an obscure financial scheme has led to an unusual triple failure in all three of the world’s traditional growth engines, the United States, Europe and Japan. Though boom-bust cycles are nothing new, they tended to peak and trough at different times. Germany’s early 20th century malaise was paired with America’s roaring twenties. Japan’s first lost decade of the 1990’s coincided with a western tech-driven high.

Now, industrialized nations are facing their greatest economic threat in nearly a century – a troubled middle class losing its purchasing power to drive world growth. If current trends aren’t reversed, and soon, 2012 may be the year the middle fails and a century of economic modernization grinds to a halt.

Full article on The Diplomat website.

 
Photo credit: The-Diplomat