Hypothesis: The US income gap is caused by Asia

Great Debates
41

Because their increased productivity increases the bottom line, and if no one pays anyone no one buys anything. More on this later.

The point is that during the '50s we had the same increase in technology available to people as today, and still had a reasonable amount of income inequality. This “they got a cellphone so they shouldn’t mind not getting raises for a decade” philosophy is bread and circuses without the bread.

I am definitely not for automatic pay increases. I am for sharing increases in productivity across the board. (If no productivity increase, no raise.)
When I started to work our secretaries could type, fill out forms, book conference rooms, and call the company travel agent to book flights. Today our admin serves ten times as many people as they did, and knows how to navigate our inordinately difficult systems as well as knowing word processing. Not all our old secretaries could handle this. Don’t you think she’s worth a tiny bit more in terms of pay?
If you’ve ever tried to teach someone who was a bit slow something intricate you’ll know that not everyone can handle it. Aren’t those who can be worth more.

And if you are in favor of the market, you should be in favor of unions, since they are part of the market also. When I worked for Bell Labs I was not in a union, but I got lots of benefits fought for by the people who were.

42

[QUOTE=Voyager]
And if you are in favor of the market, you should be in favor of unions, since they are part of the market also. When I worked for Bell Labs I was not in a union, but I got lots of benefits fought for by the people who were.
[/QUOTE]

I’m not opposed to unions, no. Not sure why you think I am. I AM opposed to union monopolies backed up by government coercion, but that’s something different. Certainly collective bargaining is part of the market (in this case, the labor market).

The productivity increases aren’t due to labor, though. Thus, IMHO labor wouldn’t reap the majority of the rewards from that increase (which is what’s actually happened…they aren’t, by and large).

As to ‘no one pays anyone no one buys anything’ type arguments, I believe they are attempts to appeal to emotion and also to take things over the top. We don’t pay people in order to buy stuff, we pay them as an exchange of money and benefits for labor given, a simple transaction. If my company is more productive due to labor, then I HAVE to pay them more to keep them, or they will take their labor elsewhere and benefit someone else. However, if my companies productivity gains are because of capital I invested in infrastructure or automation, then why SHOULD I pay labor consummate with my gains?? I’m not saying that labor should get nothing (because nothing is ever black and white, and no gains are every from one single factor or innovation, but from a range of them, including labor), but you seem to be saying that if my company increases their profits that I should automatically pass those along to labor, even if labor was a minor factor in those gains…just because those people would then buy stuff. To me, that’s not how it works.

Well, the second half of this sentence is a strawman…I never said nor think that because people get a ‘cellphone’ that they shouldn’t or wouldn’t mind not getting a raise. That has nothing to do with my point.

As for the '50’s, while automation was coming into the work force, labor was still a major factor for why and how businesses expanded, thus why labor got a larger share of the gains from companies profits. Remember that during that time period, skilled and semi-skilled labor was still vital in manufacturing in the US. That gave labor a large advantage when it came to leverage against companies…if companies who were profiting from labors increased production then they had to pay some of those gains back, or their labor force responsible would take their labor somewhere else, and allow them to profit instead.

To me (in my non-economics major ignorance), the turning point was when labor attempted to over-leverage that by using the government and the public to press through their increasing demands. The backlash is what we have today. Many of the things that companies did in the past that required large skilled or semi-skilled (or unskilled) labor forces were broken down and automated. Processes that used to take many people to over see are done by expert systems and automated processes. Corporate bloat was trimmed down by new streamlined procedures and processes that allowed for fewer people to oversee and manage. All the while, productivity increased by a large factor. That’s how the US is able to manufacture at higher levels today with a fraction of the work force. All of this, however, lessened the dependence of industry on labor, however, since you needed far fewer people, and those people were less necessary, I guess.

Since you used an anecdote taken from your own experience, let me share mine. When I started off as a network engineer, the job was extremely difficult, and it took people of fairly exceptional skill to do it. Every network devices…routers, switches, hubs, firewalls, etc…had a different, extremely esoteric command line interface you needed to master to configure them. The IP addressing scheme itself took some level of skill with binary and understanding of subnetting to manipulate, and there were no schools or training for this by and large. You learned the old fashioned way. I remember when IP first came out, and we were all trying to figure out how to address things on the internet (this was before RFC-1918 private network addressing) or even in large corporate networks. Network engineers, rightfully, commanded large salaries and we were always in demand. My personal salary shot up continuously…ever time I changed jobs I got at least a 10% bump, often more, and I changed jobs extremely frequently through the 90’s. This was the norm in my own circle of peers.

Today? Well, I won’t say that network engineers are a dime a dozen, since we aren’t (and I still make pretty good money), but today we don’t command the same level of demand we once did. Why? Well, because of expert systems of course. Today, to configure a router/switch/firewall/VM farm/SAN/server system/etc you need to know the basics, to be sure, but it’s all a GUI driven process. IP Addressing? There are tools that will subnet an address space to any mask you like in literally seconds (I have two apps on my iPad and iPhone to do this, and you can simply Google and use a web browser to do one now). If I need to know how a command works or the syntax, I can use Google to look it up quickly. Someone can do what I do with a fraction of the knowledge about infrastructure and architecture that I have (and it will probably be some damned kid making a fraction of what I make doing it too :p).

So, is this right? Shouldn’t network engineers just get to continue to make more and more? I mean, the companies are making more and more. Shouldn’t we also make more? My answer remains the same as above…should we make more? Certainly, if we contribute to the overall success of the company. Should we make more consummate to the companies gains? Nope…why should we? The breakthrough in why we engineers are more productive isn’t us, it’s in the systems we have today, in the tools we use. As for the people who created those, I’d guess they ARE making more or have made more, by and large.

43

Sure. Boyo Jim already stated it – bolded emphasis mine: “Asia is a factor in the wealth gap, in that the wealthy have learned how to use Asian labor to increase their profits – by and large by displacing American labor.” It ties into the Piketty idea, also mentioned before, that the investment income accessible to the wealthy grows faster than the overall economy.

On a related note, I noticed this:

Very true. Without verifying that particular number, the US did in the past have very high marginal tax rates at high income levels, among the highest in the industrialized world, in fact. The Reagan tax cuts were one of the major turning points in that scenario.

But that’s just the point. The explosion in executive salaries – the massive multipliers between the astronomical earnings of top executives and average workers – was largely the product of these tax cuts, because there’s not much point in giving yourself an astronomical salary when marginal tax rates are near 90%. So this was another direct contributor to the income gap.

44

What I’d like to see are agreements only for union members, with non-union members getting the first proposal by management. The reason for “coercion” is the free rider problem - anyone not joining a union gets all the benefits with none of the dues or strikes.

Consider a world where people who go to work get a voucher good for anything they want at any store, paid for by a magic elf. Would companies pay workers then? Unlikely. At the very least companies pay workers enough so that they can eat and have shelter. And clearly what workers produce for the company has to be more than their pay.
If the magic voucher was good for stuff poofed out of the air, so that workers did not have to buy anything, how long would a company last?
Sure the optimal strategy for a company would be to pay their workers nothing and have the workers for all the other companies buy their products - but that isn’t a stable strategy.
Now, I agree that not all the profits should go to workers. But you seem to have a big misconception, which is that the people who are making lots of money as CEOs have anything to do with capital. Many have very little capital invested in a company. The ones whose big pay comes from stock are not investing, really, they are getting a chunk of capital for free. If it is okay for workers to not get a lot of the added productivity, why do the execs get it. If their pay was reasonable, the money would go to the shareholders who are a lot closer to capitalists than the CEOs. Since corporate governance these days is such that this never happens, why shouldn’t the government claw back some of this money and capitalize our infrastructure, for example?

You brought up the wonderful stuff we have today - which is totally irrelevant.

Ah, that’s what you mean by expert system. More smarts in the code does not an expert system make, I had a boss who was really into them until he tried to implement one. But that doesn’t affect your point - or mine.
The network engineers who pretty much followed canned procedures that now can be implemented within the system indeed don’t deserve more - or anything. But those of you who really understand the stuff and can debug and fix the situations the software screws up on are worth even more.
I understand why those in support type jobs have a harder time seeing a direct link to profitability. But in this environment designers don’t do that much better.
As the Google / Apple poaching scandal shows, companies don’t want to be governed by market forces if they can get away with it. Innovations don’t come from machines.

45

IMHO, the US income gap is caused by technology, globalization, automation and other factors creating a sort of “winner take all” environment. It only takes a relatively few number of individuals to start a company that can become a global enterprise worth billions. Most of the wealth generated by that company goes to the owners and investors while most of the employees earn market wages. And unfortunately, unless you have particular skill sets, there has been significant downward pressure on those wages for decades.

Much of this is also fostered by a “superstar” mentality. Like Hollywood or professional sports, Wall Street and Silicon Valley operate on a mentality that most wealth is created by superstars who deserve the lions share. In fact, Wall Street and Silicon Valley have mostly evolved to be ecosystems for people to get rich off betting on who the next person who will make them rich will be.

46

Neglecting the fact that almost everyone gets market wages by definition, many start-ups, which are often rather small, pay pretty well. But don’t have gigantic staffs. I’m sure you’ve read about the protesting against the Google buses in San Francisco. The people who ride the buses are not the capitalists, but rather developers and engineers. Those protesting are probably the ones getting market wages, and not working for Google or Yahoo or Facebook.

47

What I recall of the 70’s is my high-school friends who didn’t want to go on to college got great factory jobs and were buying fancy new 4x4 pickups while those of us who continued in school were driving jalopies (if we were lucky enough to have wheels at all – as a kid of lawyers, I was one of the lucky ones driving a jalopy.) Why did those factory jobs pay so highly? Because of unions, and because there was no overseas competition limiting union power.

Note that I’m not making a value judgment here, about whether the unions were good or bad. I’m just saying that they contributed dramatically to lowering the income gap. Most Americans bought American cars, so unions could raise wages for all without affecting competition between the companies. (Each year, they negotiated with one auto company first, the one they thought was the weakest. Whatever deal they got, the other two companies took without argument.)

In my town (Saginaw, MI) the auto factories drove the economy, providing jobs and income supporting the local service economy.

With the advent of overseas competition in the auto industry, the unions lost the power to ask for higher wages: higher wages would mean less sales.

I’m not saying that Piketty isn’t significant, but I suspect that the loss of manufacturing to Asia was a huge factor, and I suspect it’s more significant than Piketty’s trends or the result of taxation. My guess is that, without competition from Asia, we’d probably still have more inequality, but far less than we see today.

48

Automation is a definite possibility.

In the past, worries that improvements in technology would reduce demand for labor proved needless, because the improvements generated higher productivity rather than reduced demand for labor. This trend goes way back to the beginning of the industrial revolution. But have we reached a watershed, where thanks to automation, productivity exceeds demand with low labor requirements? I suspect so, and I suspect you’re right that this is a factor.

On the other hand, isn’t the rise of Asia due more to cheap labor than to automation? Honest question; I sure don’t know. No doubt it’s a complex combination. No doubt the need for less skilled labor (thanks to automation) is a factor.

49

I think some forms of US vs foreign manufacturing policy has to be looked at as well. The US used to stand for long lasting quality, but that resulted in products lasting too long and people not replacing products soon enough. That resulted in designed obsolesce intentionally manufacturing a product to prematurely fail. The Japanese totally kicked our back side using the US borne policy of total quality management where products were built to last.

Then the next stage was to change style of what is considered ‘modern’, causing people to have to upgrade more often, well the Chinese kicked our rear end on that, by improving quality to a acceptable level but keeping costs down enough to allow Americans to buy the modern style cheap then dispose when styles change and buy again cheap instead of buy a long lasting product that is functionally obsolete long before it’s service life is up.

So it is US cooperate policy that has caused the rise of the divide by making our manufacturing base make products that may have a short term boost of revenue but in the long term are self destructive.

50

From an economic standpoint, I’m not sure if it matters if you have a machine that makes things cheap or if that machine is called “China”. Chinese labor is cheap because there are over a billion of them. Labor is expensive in the US so we tend to manufacture more using automation. In spite of the common saying that “we don’t make anything in the US anymore”, the US is only slightly behind China in terms of output. And before you get too worked up over China’s growth rate, looking at this chart shows that Japan was on a similar trajectory a few decades ago.

Either way, if you are in a working class or blue collar job, or even a low-skilled white collar job, the trend continues to be to either automate your work or ship it off to countries where they do it a lot cheaper.

What happens is that some of the cost savings gets passed on to the consumer, but a lot of it also gets passed onto people who hold equity in the company. Typically the founders and their circle of senior executives and the investment banks, venture capital firms and private equity firms that financed the company.

51

You are correct. I’ve heard a paper from a major electronics manufacturer where they not that they do not automate their Asian factories (except to the point required by precision and quality) because labor is cheaper than new machines.

52

I watched a report on employment in America which said much the same thing about American jobs.

Something I’ve not seen mentioned so far is the increase in population of America. In 1970 it was ~200M, in 1990 it was ~250M; today it’s ~320M. That’s a huge increase and I wonder if the American economy has grown sufficiently to support that population at the 1990 level?

53

Yes, I think we all agree about this.

Thanks, though it sure seems that we don’t make most of the consumer products we buy. Perhaps the US builds more things for industry? (That said, I work for Cisco. We design the products, but it’s all built overseas. When we get lab gear for our development labs, it comes in Foxcomm boxes. Customers probably get stuff in Cisco boxes, as we tend to build overseas but assemble and test in the US, if I understand it correctly.)

Interesting, thanks. I’m not worked up; China’s growth is inevitable, and it’s up to us to deal with it.

No kidding.

Thanks. Makes sense.

Interesting. However, that’s about a 1% annual growth rate, which is smaller than the US economy’s growth rate, so the answer should be “yes”. The issue seems to be that while the economy as a whole has grown, most of the benefit of that growth has accrued to the wealthy. Of course, that’s obviously going to happen in any capitalist economy. The real issue is whether the gradient is too steep.

My guess is that the gradient due to the natural accumulation of wealth by the wealthy is significant, but the erosion of the middle class is due more to changes in the nature of the economy, and not due to concentration of wealth. But I have to admit that’s just a hunch, and I don’t have any particularly good ideas how to buttress that point with statistical arguments. Instead all I have is essentially anecdotal evidence, pointing to all that Chinese stuff we buy (because it’s so damn good and so damn inexpensive!)

IMHO, the concentration of wealth is a more of a political problem than a specifically economic one, especially with rulings like Citizens United. That’s beside my question here, but it’s still a very important one and not something I’d want to sweep under the rug. And of course, extreme concentration of ownership would be very likely to lead to social and economic problems.

54

Understood, but in fact the differences are substantial. Aside from the fact that not everything is subject to a high level of automation, the loss of domestic manufacturing means a lot more than the loss of direct blue-collar manufacturing jobs – it also means the loss of a big part of the overall manufacturing infrastructure and all the jobs that go along with that, everything from construction to domestic energy consumption. Furthermore, while automation eliminates many manufacturing jobs, it also creates new ones – in the design, deployment, and operation of the automated machinery, effectively elevating the employment skill level and requiring fewer unskilled but more skilled workers.

There’s a reason that the Chinese economy and their top-tier wealth is growing so dramatically. In effect offshoring is the largest international wealth transfer scheme in history, driven by the unconstrained self-serving interests of American and other western industries.

Right. These are pretty much the only beneficiaries, which ties directly into the topic of this thread. However my earlier point is that this is just one of a great many examples of the ability of the wealthy to grow their wealth much faster than the rate of economic growth, which becomes a greater factor as general economic growth – the engine that traditionally fuels the income growth and wealth of typical everyman – stagnates with a burgeoning population and intrinsic limits on resources.