The Washington Post has a story that blandly supports the continued strip mining of the American economy. Of course, in Versailles that the nation’s capitol has become, this lobbyist-and-big-ticket-political-donor supporting point of view no doubt seems entirely logical.
Three years ago, Harvard Business School asked thousands of its graduates, many of whom are leaders of America’s top companies, where their firms had decided to locate jobs in the previous year. The responses led the researchers to declare a “competitiveness problem” at home: HBS Alumni reported 56 separate instances where they moved 1,000 or more U.S. jobs to foreign countries, zero cases of moving that many jobs in one block to America from abroad, and just four cases of creating that many new jobs in the United States. Three in four respondents said American competitiveness was falling.
Harvard released a similar survey this week, which suggested executives aren’t as glum about American competitiveness as they once were…
Companies don’t appear any more keen on American workers today, though. The Harvard grads are down on American education and on workers’ skill sets, but they admit they’re just not really engaged in improving either area. Three-quarters said their firms would rather invest in new technology than hire new employees. More than two-thirds said they’d rather rely on vendors for work that can be outsourced, as opposed to adding their own staff. A plurality said they expected to be less able to pay high wages and benefits to American workers.
The researchers who conducted the study call that a failure on the part of big American business. They say the market will eventually force companies to correct course and invest in what they call the “commons” of America’s workforce. “We think this mismatch is, at some fundamental sense, unsustainable,” Michael Porter, one of the professors behind the studies, said in an interview this week.
But what if it’s not?
Why, if you were a multinational corporation, would you feel a need to correct that mismatch? Why would you invest in American workers? Why would you create a job here?
At what point does it become a rational business decision for American companies to write off most Americans?
It’s hard to know where to begin with this. First, Harvard Business School is hardly a bastion of socialist thinking. Porter and his colleagues are correct to call out short-sightedness in the incumbents of C-suites. And there’s nary a mention of the role of the long-overvalued dollar, thanks to the lessons that China and the Asian tigers learned in the wake of the 1997 Asian crisis: keep your currency pegged low, run a big trade surplus so you have such a large foreign exchange warchest as to never again be subject to the tender ministrations of the IMF.
But second, and more worrisome, is a vastly larger intellectual failure on the part of the Washington Post and even the Harvard investigators. They’ve completely lost sight of whose interests are at work. The HBS grads are looting the American economy for their own personal profit. Making better products and developing new markets is hard and it takes time for that effort to pay off. Cutting costs is easy. Getting a pop in the price of your stock due to investors’ belief that offshoring and outsourcing will lower costs is even easier.
It’s far from a given, particularly at this juncture, that more outsourcing and offshoring is good for anyone aside from top executives, well-placed middle managers, and the various intermediaries in the outsourcing industry (yes, there is such a thing). We’ve been writing for years that even in the 1990s, we were hearing from executives at companies that sent operations overseas that the business case was weak, but they went ahead regardless to please Wall Street. Chief investment officers have said flatly that outsourcing is overrated as a cost saver.
In the early 2000s, we heard regularly from contacts at McKinsey that their clients had become so short-sighted that it was virtually impossible to get investments of any sort approved, even ones that on paper were no-brainers. Why? Any investment still has an expense component, meaning some costs will be reported as expenses on the income statement, as opposed to capitalized on the balance sheet. Companies were so loath to do anything that might blemish their quarterly earnings that they’d shun even remarkably attractive projects out of an antipathy for even a short-term lowering of quarterly profits.
And even when these projects actually do lower costs (as opposed to transfer income from lower-paid workers to middle managers, who need to do more coordinating, and senior executives), there are hidden costs in terms of extended supply chains, lost flexibility, and ceding the opportunity to develop expertise to vendors. In other words, even when profits improve, it’s typically achieved by making the company more fragile.
This unwillingness to invest represents a failure of capitalists to do their job on a massive scale. US-style short-termism has become all too common around the globe. As yours truly and Rob Parenteau wrote for the New York Times in 2010:
For instance, IMF and World Bank studies found a reduced reinvestment rate of profits in many Asian nations following the 1998 crisis. Similarly, a 2005 JPMorgan report noted with concern that since 2002, US corporations on average ran a net financial surplus of 1.7 percent of GDP, which contrasted with an average deficit of 1.2 percent of GDP for the preceding forty years. Companies as a whole historically ran fiscal surpluses, meaning in aggregate they saved rather than expanded, in economic downturns, not expansion phases.
The big culprit in America is that public companies are obsessed with quarterly earnings. Investing in future growth often reduces profits short term. The enterprise has to spend money, say on additional staff or extra marketing, before any new revenues come in the door. And for bolder initiatives like developing new products, the up front costs can be considerable (marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors). Thus a fall in business investment short circuits a major driver of growth in capitalist economies.
Companies, while claiming they maximize shareholder value, increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in financial speculation. They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities.
Some may argue that lower investment rates are the result of poor prospects, but the data does not support that view. Corporate profits have risen as a share of GDP since the early 1980s, reaching unprecedented levels right before the global financial crisis took hold. Even now, US profit margins are nearly two thirds of the way back to their prior cyclical high, despite a subpar recovery.
More than four years later, those sorry trends have continued, with profits now at a record share of GDP. But the top brass has been handsomely rewarded for its sorry behavior. They’ve discovered that the more they squeeze workers, both here and abroad, the more they can keep for themselves.
And in a bit of unintended irony, the Washington Post shows a headline for another way they’ve succeeded in making the greater public subsidize their profits: How the Postal Service subsidizes cheap Chinese goods. As readers know, the sources of corporate welfare are legion. Walmart’s super low wages are subsidized by $6.2 billion a year in public assistance, a significant portion of its $17 billion in reported 2013 profits. And that’s before you factor in the value of state and local tax breaks that Walmart gets by pitting communities against each other when it is planning new store locations. These concessions are particularly dubious given that Walmarts don’t create jobs, but do a combination of destroy them (by putting smaller retailers out of business) and steal them (by syphoning retail sales and hence other jobs) from neighboring communities.
While Walmart is the poster child of subsidized profits, the Bentonville giant has plenty of company, including large financial firms (so heavily subsidized and backstopped as to not be properly considered private companies), Big Pharma (a huge beneficiary of decades of NIH-funded research) and Big Auto (which has played the “pit communities against each other” game as adeptly as Walmart in securing subsidies for moving plants into union-hostile Sunbelt states).
Unfortunately, Porter appears to have characterized the problem accurately when he depicts the attitude of these self-serving executives as a looting of the commons of labor, meaning much of America. And the precursor of the early industrial period show that this can be a sustainable strategy until workers finally rebel. The Bolshevik revolution, which was actually a peasant revolt, was more than a century after the enclosure movement began its successful program to turn independent yeoman farmers into desperate factory wage-slaves. So while history suggests that capitalists will push workers beyond their breaking point, that rupture can be a very long time in coming.