See that Chinese-made toaster on the shelf at Wal-Mart that sells for $6.87, while the one made in America, on sale at your local kitchen and wine shop, costs $49.99? There is a story there, and it's not a bad story at all - or at least not an all-bad story.
Plug in the toaster, slide in an English muffin and pay attention. By the time the muffin is crisp, you will have learned something.
If you are a factory worker whose job has just been sent to Guangdong, you probably do not have kind feelings about Chinese manufacturers. If you are an automobile assembly line worker (as my grandfather was) whose factory is on shaky ground because of the torrent of Japanese imports, you may not feel madly in love with the Japanese. Few people want to lose their jobs. But if you are an ordinary American consumer or investor, you may want to connect the dots and see just what it means that the United States imports so incredibly much from China and Japan and how, in many ways, it is a substantial benefit to the American consumer and especially to the investor - at least in the short run.
As everyone knows, the United States runs very large trade deficits with many countries, but let's focus on China and Japan. The trade deficits mean that the Chinese and the Japanese collect a vast hoard of dollars by selling us toasters and other products, but that they do not spend nearly as much here buying cow hides, lumber, wheat and whatnot. They take these unspent dollars, turn them in to the central banks of their countries and get their local currencies to pay their workers and pay their mortgages.
The central banks then take all those dollars, or a lot of them, and buy Treasury securities in the United States. Japan loves Treasuries: in the last year, it has been buying those bonds at a rate of about $20 billion a month. To be sure, part of this has been to keep the dollar high and thus encourage additional American purchases of Japanese goods, but much of the reason is that Treasuries are a remarkably safe investment in terms of return of principal.
Japan now holds roughly one-sixth of all Treasury debt, or more than $600 billion of it. China has bought much less but still owns about $170 billion of the stuff and is adding a few billion dollars a month. (I am indebted to my statistician friend, Phil DeMuth, head of Conservative Wealth Management, for this data.)
This may seem scary, and, in a way, it is. It means that we citizens are paying a good chunk of our income tax each year for interest on debt owned by the Chinese and the Japanese.
But there are legions of positive effects from their bond buying and the large trade surpluses that their countries are running with the United States - and will continue to run, even if their commodities prices rise, because their labor costs will remain less.
First, their bond purchases help keep American interest rates low. Their voracious appetite for Treasury bonds props up the price and lowers the rate. That is a benefit for every borrower - every man or woman applying for a mortgage, every business wanting to finance a microchip plant. (And even after recent run-ups, rates remain low by historical standards.)
To the extent that the United States avoided a deep recession after the bubble burst in 2000, we owe some thanks to the nice people in Beijing and Tokyo who recycled those dollars. The stimulus to economic activity is hard to measure, but it is all good - unless you are a retiree wanting higher interest rates on your savings. Then it's not good.
Low interest rates help the stock market, too. The value of a stock is generally considered to be its flow of dividends or earnings far into the future, discounted back to the present at current rates of interest. If current interest rates are low, there is far less of a discount applied to those earnings and dividends. That makes the market rise. If rates are low, stocks seem cheap compared with bonds; this also props up stock prices.
Exporting countries like China and Japan also help to keep rates low because they have such efficient industrial machines and sell goods cheaply here. As prices stay low, the Federal Reserve is less tempted than it might be otherwise to raise rates to fight inflation. When you get your brokerage statement - and if it looks good - you may want to thank the Chinese and the Japanese.
Again, that may seem a burden for American manufacturing workers who have to compete with lower-paying foreign manufacturers, and it is. But for consumers, prices are kept low by the deluge of imports. Not every American is a manufacturing worker, but every American is a consumer, so we all benefit in some way.
BUT how long can this go on? How long can we run trade deficits in the neighborhood of $600 billion a year? What happens when the Chinese and the Japanese have bought all of the Treasury debt - or when our securities market is heavily dominated by Asian buyers? Will we become, in essence, a colony of China and Japan, working a large part of the year to pay the interest and dividends on the bonds and stocks owned in those countries?
In a way, that's the problem of the Chinese and the Japanese. At some point, if you owe the bank enough money, you own the bank. And we can always print more money to pay the interest on the debt. Anyway, that is a long way off. And to those who say that running this kind of trade deficit cannot go on forever, I offer the words of my late, great father, Herbert Stein, when asked about this very problem. "If a thing cannot go on forever," he said, "it will stop."
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.
Let me share with you a recent e-newsletter:
OUTSOURCING = GETTING SOME HELP
Two are better than one; because they have a good
reward for their labour. For if they fall, the
one will lift up his fellow: but woe to him that
is alone when he falleth; for he hath not another
to help him up. Again, if two lie together, then
they have heat: but how can one be warm alone?
And if one prevail against him, two shall
withstand him; and a threefold cord is not
quickly broken (Ecclesiastes 4:9-12).
Sometimes, it pays to consider again ancient wisdom that has stood the test of time. This is one of those times.
Ecclesiastes, who is generally thought to be King Solomon, wrote about the division of labor long before Adam Smith presented his famous story of the pin-makers, in the first chapter of "The Wealth of Nations." Ecclesiastes made the obvious point that when we fall, we can get help from those who work with us. Also, "A threefold cord is not quickly broken."
Years ago, I read a book on entrepreneurship, "The E-
Myth," by Michael Gerber. This is an indispensable book
for anyone who is thinking about starting a business. It
shows you what you had better do early in preparation for
what you will have to later on to remain successful.
He describes an organizational chart for a fictitious
manufacturing company (p. 101). Two men run it: Jack and
Murray. The chart looks as though it describes a large
conglomerate, but it's just a two-man operation.
Gerber's point is that the business has to perform
certain tasks, and someone has to be assigned these tasks.
Murray and Jack decide who wants to do what. From the
beginning, they know what has to be done. Therefore, to
take care of business, they allocate the tasks from the
beginning. Each box in the chart has a name in it: Murray
or Jack (p. 104).
Their goal, says Gerber, is to grow the business.
This means that they intend eventually to hire people to
take over each of the jobs in the organizational chart, when
the income will support additional employees. By having a
chart, they can systematically plan the expansion process,
because they know what must be done. Each of them wants to
hand off most of the things that he does to a specialist.
We call this process the price of expansion. We can
also call it outsourcing.
PETER DRUCKER'S INSIGHT
I began reading management theorist Peter Drucker's
books in the late 1960s. By then, he had been writing
books for three decades. He is still writing them. One
of the themes that grabbed my attention early was his
discussion of outsourcing within corporations. He coined
the term, 'knowledge economy'. He discussed outsourcing in
terms of specialized knowledge. Also important is personal
ambition.
Consider an employee who is very good at managing a
particular service within a company. No matter how well he
does his job, he is unlikely to become the CEO of the
company. He is employed to manage a specific component of
the overall operation. He maximizes his return for the
company by mastering this one operation. He is never going
to rise above vice president in charge of this division.
If he is ambitious, this fact thwarts his career
objectives.
If this in-house service is necessary to companies in
the industry, he has a way to advance his career. He can
start his own company that specializes in this service.
Then he sells this service to several companies in the
industry. He maximizes his income. He maximizes his
authority. He rises to the top in his own company. He may
even rise to the top in his sub-industry. He is no longer
facing the career barrier of vice president.
In a hospital, Drucker says, the value system is tied
to the concerns of the physicians and nurses. Maintenance
work, clerical work, and similar support tasks are not high
on a hospital's list of priorities. Also, no one in
maintenance has a prayer of rising to a senior position in
a hospital.
In his book, "Post-Capitalist Society," he gives the
example of a Mexican immigrant who was working as a floor-
washer in a local hospital. Had she been on the hospital's
payroll, her career would have hit a ceiling early. But
she worked for a company that did the maintenance work on
contract for hospitals. She kept her eyes open. She began
to see ways to clean floors better. Her employer was
concerned exclusively with clean floors and clean beds. In
contrast, hospitals are concerned with making people well
enough to go home. A hospital does not concentrate on
clean floors and clean beds with the same intensity that it
concentrates on medical procedures. Room cleanliness was
the hospital's job only insofar as it reduced the spread of
disease. But, for the maintenance company, clean floors
were its bread and butter. The floor-scrubbing Mexican
lady rose to senior vice president of the hospital division
of America's largest maintenance company.
As a result of outsourcing, hospital maintenance
productivity in the United States tripled, 1975-1990. The
company in question invested in the tools needed, "right
down to the bed sheets." Drucker says that the time needed
to change a bed was cut by two-thirds. Now, that's short-
sheeting!
Drucker's point for a generation has been this: the
division of labor is increased, along with efficiency and
profitability, when tasks that are not at the core of a
business are outsourced. ("There is no noun that cannot be
verbed.") This point was made in a recent IBM commercial,
where a bunch of young corporate hot shots in a diner have
this principle explained to them by patrons.
All of this is a variant of Jack and Murray. Both of
them want to unload -- outsource -- certain tasks to
others. Drucker began arguing decades ago that it is a
mistake to think that this outsourcing of individual tasks
has to take place inside the same structure of ownership.
It must take place within the same structure of operations,
but nothing says that the person whose name is inside one
of the corporate boxes has to be on the payroll of the
corporation. He just has to get the job done for the
corporation.
This is simple to understand, once you mentally
separate the judicial boundaries of ownership from the
economic boundaries of operations. But it takes a clear
vision to make this mental distinction.
REDUNDANT VS. LIBERATED
Two decades ago, I made a trip to Great Britain. The
word heard everywhere then was "redundant." It was another
word for "fired." A person who was fired had been "made
redundant." He was redundant inside the organization.
Outside the organization, he was not redundant; he was
unemployed.
The problem was this: those who had been protected for
years by the government and a trade union found that this
protection -- based on political coercion and the threat of
legal violence -- could no longer protect them from the
economic reality of foreign competition. The legal
boundary collapsed in the face of a successful attack by
economic innovators from outside the British Isles. There
was also technological innovation that Mrs. Thatcher's
government allowed to displace -- "make redundant" -- the
once-protected workers.
The unemployed man who had thought that his own
productivity had secured his job found that he had
insufficient productivity to protect him from that most
ferocious critic, the consumer, who now had new
opportunities. The consumers, through their decisions to
buy one product and not another, now pressured employers to
face up to economic reality: redundancy. This involved
redundant workers, redundant equipment, redundant
marketers, and redundant in-house forecasters. As unsold
products piled up on retailers' shelves, the retailers sent
a clear message down the chain of supply: "Don't send us
any more of these. What we already have on our shelves is
redundant." And so, redundancy spread: from consumers'
shelves to retailers' shelves to manufacturers' shelves to
blokes on the production line.
The political structure had long protected these
people from the wrath of consumers. The consumers had kept
saying "yes" because other producers were not allowed to
make them a better offer. As soon as it became legal for
other producers to make British consumers better offers,
redundancy spread like a forest fire. Political protection
of jobs collapsed, leaving the previously protected
manufacturers and trade union members without the skills to
adjust to new consumer demand.
This was done on a small scale compared to what
happened to Russia after 1991. The consumer had been
stifled since 1917 by the Communists. Before 1917, he had
been stifled by the Czarist bureaucracy, which Lenin
inherited overnight. Now, without warning, consumers were
able to pick and choose. Unemployed resources soared.
My friend Terry Easton used to entertain visitors from
the Soviet Union. He lives in the Bay area of California,
an affluent region of the United States. These high-level
Communist Party aparatchiks would visit him. He was then a
specialist in telecommunications. He would take guests to
"see the lights" around Burlingame and Palo Alto. They
always asked to visit a supermarket. The effect was
unnerving for them. The lights, the colors, the immense
supply of goods on shelves were too much for them. Some
would get dizzy. Some would start crying. Here, in plain
sight, was the refutation of a lifetime of Communist
propaganda. Here was the reality of free market
capitalism. They were at the top of the political
hierarchy of over 250 million people, and they had almost
nothing to show for it.
Finally, in 1991, political protection ended for the
mass of Russian producers, leaving them at the mercy of
Russian consumers. They met the enemy, and the enemy was
them. One result today is despair among the pensioners and
the redundant. Another result is supermarkets with filled
shelves. The difference is this: the percentage of the
Russian population that can afford to shop in a supermarket
is much lower than the percentage in the West. Communism's
dead hand strangled the Russian consumer in the street for
the benefit of about 3% of the population, and probably
only 20% of that 3% -- Pareto by way of Marx. Yet after
three generations of Communist redistribution upward, the
protected elite at the top of the hierarchy did not live as
well as the middle-class Joe in the United States.
The basis of our wealth in the West is the legal right
of the consumer to make producers redundant and his
economic ability to do so. The consumer in the West has
been liberated. But, in his liberated condition, he wreaks
havoc on those who do not meet his standards. Meanwhile,
entrepreneurs are constantly raising the standards.
As you may recall, I don't like Windows-based word
processing programs. They are slow. They are bloated
because they serve as semi-typesetting/layout programs.
For getting words onto a screen, I prefer WordPerfect for
DOS. Two decades ago, there were advocates of WordStar who
resisted WordPerfect, with its use of function keys and its
absence of on-screen command codes. Super typists had a
point. Wordstar was better for very fast typists. They
were not slowed down by function keys. But these elite
typists were swamped by WordPerfect users. WordStar went
under. Then Windows knocked us DOS people out of
contention. I use a 21-year-old keyboard -- vastly
superior to today's keyboards -- and a 14-year-old version
of WordPerfect to do my basic typing. But I typeset my
books with WordPerfect for Windows. They look OK.
So, there is ebb and flow in the market. For full-
time writers with ancient keyboards, WordPerfect for DOS is
better for putting words on a screen/page. But for the
average computer user, the Windows versions of WordPerfect
and Microsoft Word are better. They integrate better with
office programs. Yet this in turn has left open the door
to a Linux-based version of Microsoft Office that is free.
(
http://www.openoffice.org) Now IBM is making available
the Linux operating system on its mainframes. Microsoft
has competitors nipping at its heels. There are neither
free lunches nor free rides under capitalism.
Windows liberated millions of users. It made DOS-
based programs redundant. But with the advent of Windows-
based verbal transcription programs like Naturally Speaking
and ViaVoice, Windows may yet liberate me from my ancient
keyboard and my even more ancient typing habits.
DEFENDING YOUR JOB
This week's segment of "The West Wing" was amazingly
pro-free enterprise. The White House has negotiated a free
trade plan with Congress. Then word gets out that 17,000
programming jobs will be sent to India immediately, with 3
million more to follow over the next decade. (Well, maybe.
That is a lot of programming!)
The White House's chief negotiator is upset. These
are good jobs, not low-level jobs. (This assumes that
upper-middle-class workers have a moral right to their
jobs, but low-level workers, being losers, have no such
right.) The programming company's CEO tells him that
paying $40/hour when you can pay $10 is not rational. But
this will hurt the union! Tough, is the reply. (I don't
know of many programmers in a labor union, but it made for
a lively political show.) Finally, the President tells the
staffer that it's a myth that the President can do much of
anything to make the economy better. The economy is just
too powerful. The President is a Nobel-Prize winning
economist, and for the first time, the screenwriters
actually put some accurate economics into his mouth.
The legal protection which has been provided by
governments is collapsing all over the world. No nation
can get rich that does not erase most of the barriers.
This was Adam Smith's message in 1776, yet still some
politicians refuse to believe it. Deng Xaio Ping did
believe it. This is why China has let automobile
manufacturers from the West enter the country. China
needs jobs, and the rising middle class wants cars -- tens
of millions of cars. The Shanghai freeway looks as crowded
as Houston's at rush hour.
You cannot escape. No matter how protected you think
your economic position is, unless you personally deal
directly with buyers, along the lines of Paul Harvey's
relationship with his radio audience, you can be replaced.
You can be made redundant by liberated consumers. This is
the price of liberty. Redundancy is the other side of the
coin. If the consumer is not able to say, like Donald Trump,
"You're fired!" to every seller, then he does not possess liberty.
The editor of the "Early to Rise" newsletter says that
a person can become competent in a new field with 1,000
hours of study. If he invests 5,000 hours, he can become a
master, assuming that he innately possesses the
profession's required ability. (If you don't have a knack
for math, you won't become a physicist.) I think these
time estimates are accurate. To invest 1,000 hours in one
year, you must set aside about 3 hours a day. That's about
what most people waste watching television. Five years
will make you a master. But it is more likely that you
will quit your full-time job after two or three years, and
start investing more than 3 hours a day in your new
profession.
If you take two years, you can become competent in 90
minutes a day, if you stick rigorously to your schedule.
Few people will. That is the great barrier to entry in
most fields: the laziness and lack of discipline of
potential competitors. This is what protects people
economically.
Don't assume that you will enjoy this protection when
the economy turns sour. Even if it doesn't turn sour, you
are still facing competition from very bright people, such
as computer programmers, who are being replaced by equally
bright but very hungry workers offshore.
CONCLUSION
'Outsourcing' is a bad word these days, mainly because
the process is operating across invisible national
boundaries. What is thought to be a terrible thing across
a political border is thought to be rational and consumer-
satisfying when done across an equally invisible corporate
border or state line.
Outsourcing is great if you are an outsourcer. It is
also great if you're an outsourcee. You want that
contract. The complainers are people who have been
employed in a corporate division that never had a written
contract but only an implicit contract with senior
management. Today, there are competitors across borders --
corporate, state, and national -- who say to management,
"Let us contract with you explicitly. Ask the implicit
contractors to match our price. If they don't, fire them."
This process has been going on for as long as sellers
and buyers have been getting together in search of a better
deal. Sellers compete against sellers. Buyers compete
against buyers.
As a seller of services, you can be made redundant by
rival sellers of services. If your boss refuses to
recognize this, then buyers can shop elsewhere, and your
boss will become redundant. He may take you with him.
There are no safe havens any longer. He who refuses
to see this and take steps to deal with it is on the fast
track to redundancy.
People are looking for help. They are willing to pay
for help. If you are in a position to help them and get
paid, then you should concentrate on making your services
available to the consumer who will bid most for the help
you are capable of providing. If your boss gets in your
way, fire him. Quit. You cannot rise in your profession
unless you fire your employer or replace him. If you can't
move up, move out.
Nice post. And did you see the Chinese calling in Kim Jong-Il the other day to tell him what an embarrassment he and N. Korea were out there in the world? A Chinese leak has it that Kim was told "Get in the real world and get some solid capitalism going!" Well, didja ever?
Meanwhile, I kinda like having the Chinese for my slaves for a while (until they start demanding more). They are actually cheaper keepers than slaves. $6 toasters.
What happens next is anyone's guess. But mine is that the Chinese worker starts to hanker for (and receive, grudgingly), his piece of this big ol' capitalist pie.
There's no question the US consumer has benefitted from the importation of lower and lower priced consumer goods. A great segment of those individuals whose jobs have been exported have also been forced to adapt to a lower standard of living.
There's also no question (at least to me) that insurance companies who cannot achieve nominal rates of return on the premiums they were once used to collecting in the stock and bond markets have been forced to raise their premiums to maintain their profitability and liquidity. Likewise with fuel costs. Yes, fuel is still very cheap and selling at 50's prices adjusted for inflation. But household budgets aren't adjusted for inflation. IMO, most people spend according to their incomes. (IOW, take your income and spend 120% of it)
There's also no question that skyrocketing real estate prices and consumers' ability to refi their homes over and over at 50 (now 45) year low rates has flushed loads of liqudity into the market and the economy in general.
The nagging issue to me is that wages are not keeping up with rising living costs. The numbers of jobs being created (if you believe them) are good news. Personally I don't believe both the median and the average wage is rising, I think it is falling.
My point is, that it's great that toasters and computers are cheaper. Things you replace every 5 years. Normal monthly expenses, however, are IMO rising much faster than wage increases. Milk, insurance, fuel, food. And, the improving economy will no doubt fuel subtle price increases as suppliers generally feel more and more emboldened to do so. Although the death of the US consumer has been incorrectly foretold for several years now, while consumers have apparently endless money to spend on all manner of debris, I can't help but think that at some point, inflation is going to crimp the consumer's spending power. In some ways, I believe this is why the admin has not the slightest intention of crimping massive immigration into the US---it provides an ever expanding class of consumers and cheap labor.
IMO it's essentially a form of economic Darwinism. Which has always been so in a capitalist system and I don't decry it. I think, however, that ultimately a class of native-born folks who cannot keep up with a rising rate of inflation will be supplanted by an immigrant class that is perhaps harder working and more adaptable to changing conditions. And I don't decry that, either. The only thing that I dislike is the obession with consumer goods and the idea that consumption is 70% of the economy. I can't prove it; it just seems unhealthy.
My can opener is actually american made, its also somewhat of a relic, at least 15 years old, I keep it clean and take care of it, I'd never get an electric can opener. I still have my pride.
My can opener is actually american made, its also somewhat of a relic, at least 15 years old, I keep it clean and take care of it, I'd never get an electric can opener. I still have my pride.
Assuming what you say is true, which I doubt, Mexico back then had a birth rate problem, and of course rampant corruption, which truncated growth. The birth rate issue is over with. In recent years, Mexico has been moving forward, rapidly, since the evil days of the peso collapse.