February 23, 2016

When manufacturing returns, consumer prices may not rise; rather, stockholders may see lower profits

We've never off-shored entire fundamental sectors of our economy before, nor have we taken them back. So we have no history to consult when we try to figure out what might happen once the Trump administration begins to bring manufacturing back to the United States.

Certainly the company's labor costs will be higher -- cutting costs on labor was the main reason they sent the jobs overseas in the first place. Why pay an American who expects $20 an hour, when a Mexican or a Chinese will do it for $5?

But if a company tries to pass that higher labor cost onto the consumer in the form of higher prices, they risk pricing themselves out of the market. After all, there will be other companies in that sector who will raise their prices by a smaller amount in order to grab the customers. This competition creates a race to the bottom, where they won't end up passing on much of the higher labor costs at all.

If they want any business whatsoever, they're just going to have to get by on smaller profit margins than they had been enjoying during the era of off-shoring.

This assumes there's a healthy level of competition, but for most of the stuff we're talking about -- clothing, tools, appliances, electronics, furniture, etc. -- there are already numerous companies competing against each other.

We can dismiss any hysteria about the profit margins already being so razor-thin -- that's more for retailers, not the producers themselves. We know that the smaller profit margins are sustainable because that's how the economy worked for decades and decades before the stock market boom that only began in the 1980s. Labor costs were high because companies paid good wages, yet profits were not very high as seen in the low level of stock market value. It must have been that prices to consumers were not outta-whack with what we see today.

It's striking to look through old ads and adjust prices for inflation -- cars, scissors, power drills, all kinds of stuff doesn't seem to have been much more expensive back when it was made in America, and when labor costs were therefore higher than today's junk made with cheap Chinese sweatshop labor. (This is not even counting how much greater the quality was when it was made in the first world.)

All sorts of other things have gotten much more expensive than even the overall rate of inflation, like housing, health care, education, and more recently energy and food. These are subject to bubbles of one sort or another, unlike garden-variety consumer products like silverware, screwdrivers, and sweaters.

Most of the scaremongering about higher prices if we return manufacturing to America seems to come from those with a lot of stock market wealth that could evaporate if higher labor costs, combined with a competitive mature industry, means that profits will start to tank for shareholders. That's all for the good: they only got all that wealth since the '80s because off-shoring jobs allowed shareholder value to soar. They got rich from dismantling our economy, so they can lose their ill-gotten wealth in order to restore our economy.

Restoring a healthy economy will lower the top, which has been shooting off into outer space over the past 30 to 40 years, and will raise the bottom, who have been scraping by on stagnant or declining real incomes.

This form of narrowing inequality does not involve taxing the rich and handing out goodies to the poor. It simply removes the ability of elites to leverage a decision about off-shoring into massive wealth to stockholders, which also has the effect of providing good-paying jobs to the bottom layers of the pyramid. This way does not stoke class war in the way that Robin Hood policies would -- some degree of those might be fine, too, but only after making these structural changes that are not an overt form of class war.

An entirely similar line of argument shows the effect of deporting the illegals in the American labor market, and even curtailing the ranks of legal immigrants in our workforce. Whether the foreigner who steals the American's job lives in his homeland (off-shoring) or has been brought here (scabs) makes no difference.

Getting rid of illegals will increase the labor costs to the companies who must now employ Americans, but in any competitive industry these will not be able to be passed on very much to the consumer as higher prices. Rather, the company will simply make less in profits and their stock won't be worth as much.

Very well -- most of us don't own that much wealth in stock, and if you do treat the stock market as a great big casino, you have to accept the possibility of getting burned big-time. You should have invested your money in a more responsible way than in the disgraceful dismantling of your own country's economy. It's far beyond time for the 1980s stock market bubble to burst for good.

29 comments:

  1. Awesome post. You are absolutely right: the best solution to our grotesque income inequality isn't tax-and-redistribute (though a little bit of that might not hurt, especially an inheritance tax to break up dynastic fortunes), but fighting the shady shit the oligarchs have done to build their fortunes in the first place. Reverse offshoring and force corporations to produce in America and pay Americans a living wage. Eliminate the tax-deductibility of interest (Trump has proposed capping this deduction) to reduce the incentive to lever up and engage in useless buybacks/M&A that usually amount to so much insider dealing. Put pressure on the Fed to stop playing God and let the market start setting interest rates. Set up antitrust laws with teeth and initiate automatic, mandatory breakups of companies with market share or total assets above some threshold. Install hefty tariffs and make foreigners pay dearly for the privilege of selling to Americans. Run the economy for the benefit of workers first (i.e. practically everybody) and shareholders second, and they'll be building statues of you before your body is even cold.

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  2. A Trump consistency. He has said many times that he's never been much of a stock market investor. He's always been a land guy. Its just an instinct: owning and making actual things is the economy, not holding numbers and paper.

    He has the instincts of an agricultural and pastoralist economy rather than a tax farming and usury ashkenazi jew economy.

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  3. advancedatheist2/23/16, 9:50 AM

    I don't think you've kept up with the times, agnostic. If American companies have to bring their factories back, why wouldn't they just run them with robots instead of human workers?

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  4. The probable end game of these tariffs and whatnot is the end of piles of Chinese crap and people buying less quantity of hetter quality

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  5. "If American companies have to bring their factories back, why wouldn't they just run them with robots instead of human workers?"

    We've been over this before. Look at where these things are being made overseas -- is it made by robots? No: by people, only Third Worlders who'll work for peanuts.

    Cars, clothing, shoes, tools, electronics, appliances -- all made by people on assembly lines. Using technology, of course, but not automated or robotic.

    Foxconn, the electronics behemoth in China, employs 1.3 MILLION people, not 1.3 million robots.

    When those jobs come back, they'll continue to be done by human beings, only now Americans earning a decent income.

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  6. "A Trump consistency. He has said many times that he's never been much of a stock market investor."

    That's right, and he keeps saying that we're in a big fat bubble with the stock market. Clearly not minding if the Wall Street casino people lose their shirts -- their fault for gambling.

    "Set up antitrust laws with teeth and initiate automatic, mandatory breakups of companies with market share or total assets above some threshold."

    I hope he goes after the media monopoly first. No sector is more hated by the general public or by the Trumpinator himself. And they're one of the most concentrated industries -- today 90% is controlled by just 6 corporations, vs. 50 corporations back in 1983.

    It would also be a great way to get a Trump News Channel up and running. There would be yuge defections from Fox News, most independents would go there, and a sizable chunk of CNN's well-meaning Democrats would join as well.

    And getting some original primetime network programming that isn't pozzed to hell.

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  7. "The probable end game of these tariffs and whatnot is the end of piles of Chinese crap and people buying less quantity of hetter quality"

    This is an important point. It's hilarious how people crow about the "great design" of Apple products that are designed to be obsolete in 9 months and unusable in 2-3 years. We've reached a really toxic level of consumerism where people expect to throw everything away and buy a replacement the instant the tiniest flaw appears, and products are frequently designed to intentionally break down after a few years to force that replacement purchase.

    It would be wonderful -- and very enjoyable once the adjustment was made -- to go back to an economy of design and craftsmanship, where stuff costs more but much of what you own is heirloom-quality and perfectly usable even decades after it was bought. Workers could take pride in what they create, and customers could enjoy owning beautiful well-made things instead of looking forward to their chance to upgrade to a newer disposable POS.

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  8. "the end of piles of Chinese crap and people buying less quantity of hetter quality"

    Trump will have a great way of selling this to the wary consumer. He's an expert salesman.

    Nothing sanctimonious like we would write on the internet. More like, "Folks, think about it -- who wants to be shopping all the time for new stuff? Don't you just, like, kinda hate being stuck in crowded stores, fighting other customers? Ay yay yay. When the stuff is made much better and longer-lasting, you're only going to have to go shopping for shoes once every five or ten years, not every year! Your sanity will thank you!"

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  9. And then Ivanka will make a similar ad targeted at Millennials who buy everything online. No more having to do research for hours over which item seems the least sketchy. Made in USA means you can trust the quality, so you can ditch endless research and just get on with the fun parts of your life.

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  10. I agree with most of this. No way in hell will any President be able to accomplish this on his/her own, but hey, would be great if they could. I also don't buy that companies would absorb manufacturing cost increases by reducing shareholder profits. They haven't so far, in fact, increasing shareholder profits are the entire reason for offshoring in the first place.

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  11. If he can't accomplish this stuff on his own, that's fine. It gives him incentive to get involved in congress/Senate elections and primary out some of these loser like McCain et al. who are bought.

    A nod and promotion from President Trump and his media dominance can alleviate the need to raise Wall St. money for some of these candidates. We could have a semi-clean congress in a few years for the first time in decades.

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  12. "I also don't buy that companies would absorb manufacturing cost increases by reducing shareholder profits. They haven't so far, in fact, increasing shareholder profits are the entire reason for offshoring in the first place."

    But that avenue toward rising profits will be closed off. Either they eat the higher labor costs and lower profits, or they can raise prices and get priced out of the market by their competitors who eat more of the costs and at least get *some* profit rather than *no* profit.

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  13. "A nod and promotion from President Trump and his media dominance can alleviate the need to raise Wall St. money for some of these candidates. We could have a semi-clean congress in a few years for the first time in decades."

    I've been thinking about this too. At this point, all he has to do is officially endorse a candidate, and the disaffected "clean politics" crowd will come out of the woodwork, in addition to the defections from the Establishment of both parties.

    He and his people would have to vet them, but they're in a much better position to do that than the grassroots voters are. We'd trust their best judgment.

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  14. This is just a bunch of wishful thinking and hand waving.

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  15. A lot of the stockholders are large mutual funds and pension funds, are your parents going to accept lower returns and how much better off will they be fit doing it?

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  16. Even if prices were to rise a little, so what? It would then be more economical to repair things when they quit working instead of throwing them away. Some garbagemen might lose their jobs, but more people would get into the repair business. This is a net positive for the economy because repairmen are skilled laborers and garbagemen aren't. The result would be higher wages that could be spent into the economy.

    This would make up for a slight overall increase in consumer prices that might be caused by "in-sourcing" American jobs. Not to mention the fact that more repairmen and less garbagemen results in a higher personal sense of worth among the American citizenry.

    The only problem (and it's a big one) with a Trump administration bringing jobs back to America is the fact that our international monetary system is dependent on the US running a perpetual trade deficit. The US has to provide the international reserves (USDs & USTs) that the rest of the world's central banks hold on the asset side of their balance sheet. Remember, the US Dollar is the world's reserve currency.

    We've gone so far with this type of monetary system that the US is in a quandary (it's called Triffin's Dilemma) and bringing jobs back to America on a large scale would mean the collapse of the international monetary system. Without a shit ton of USDs flowing out of the country to buy foreign products on a regular basis, there won't be enough supply to meet the demand for the amount of USDs that are required to function as the reserve assets held by foreign central banks.

    Dont get me wrong, I'd love to see this monetary system burn to the ground as much as the rest of you. But I don't want it to happen on Trump's watch because he'll be blamed for it. Even though it won't be his fault, that's the way the media will portray it and the way the public will perceive it. And that will undoubtedly set back the nationalist movement to the point it may never regain the momentum it has right now.

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  17. It's not worth it for anyone to bring back manufacturing and assembly when labor is 10 times what it is in Asia. If you want high wages increase your marginal productivity. Meaning get an education. This is like asking that we bring back agricultural production by destroying the machinery and technology that replaced it just so we can bring back those "high paying" farming jobs. Guess what pays more than blue collar jobs: white collar jobs. If grandpa was a farmer and dad was a machinist, become an engineer. Going back is not the way forward.

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  18. "This is just a bunch of wishful thinking and hand waving."

    Just like Trump's campaign, right? Keep your head in the sand, it'll make it easier for us.

    "are your parents going to accept lower returns"

    Like I said, if you gambled all your savings on the theory that dismantling the American economy would pay huge dividends forever and ever, you deserve to lose your shirt.

    "If you want high wages increase your marginal productivity. Meaning get an education."

    More nuggets of wisdom from this sperg: If you're drowning, switch to breathing water instead of air.

    Earth to libertarian morons: blue-collar people don't benefit from higher ed.

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  19. "This is like asking that we bring back agricultural production by destroying the machinery and technology that replaced it just so we can bring back those "high paying" farming jobs."

    Earth to genius: farming didn't pay more than industrial labor. Industrial revolution lifted the income of the common man tremendously.

    If you knew anything about farming or history, you could never have thought that farming was a high-paying job compared to industry. But then you're probably Jewish, so we can't expect you to know any better.

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  20. "Earth to genius: farming didn't pay more than industrial labor. Industrial revolution lifted the income of the common man tremendously."

    You missed the point. The point is that when a more efficient method of production makes a large part of the labor in one sector obsolete and unnecessary, those people (if they're smart) move to higher productivity employment in other areas of the economy, in the process increasing their wages. With agriculture, that was moving into the industrial sector.

    "Earth to libertarian morons: blue-collar people don't benefit from higher ed."

    Why not? Are you saying they're too stupid to learn a profession? Were farmers too stupid to become machinists?

    I'm not a libertarian. I think displaced workers should be supported in retraining and education in moving on to another form of work. But trying to move manufacturing from low cost of labor areas to a high cost of labour area just introduces inefficiency. It's akin to the luddites destroying machines to save jobs. The better thing to do is retrain displaced workers for higher productivity work, which would increase their wages in the process.

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  21. "Just like Trump's campaign, right? Keep your head in the sand, it'll make it easier for us."

    Trump is just telling you what you want to hear. For now.

    The sheer irony of a bunch of down and out lower middle class people looking to a bombastic, self-serving plutocrat to rescue them. Trump cares more about his hair than he does about his base.

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  22. "A lot of the stockholders are large mutual funds and pension funds, are your parents going to accept lower returns and how much better off will they be fit doing it?"

    If it becomes easier to justify slowly killing your country by blindly contributing to a large pool of savings (i.e., "we're not personally responsible for this social devastation, we just blindly gave them enough of our money and not enough of our questions and this somehow happened") then maybe the answer is the de-scaling of personal finance as well.

    All of a sudden you have a giant incentive for people to maintain more consistent connections with their parents-what, in fact, are they spending their retirement-or the family fortune on? Do they fall for scams and hucksters, and is disconnecting with them entirely likely to make them and the money they control a target of scammers? Should we stay electronically or physically near them in order to keep a good handle on what they're thinking and who they're talking to?

    Or are we better off all handing over our money and putting the ((invisible hand)) in charge?

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  23. "Are you saying they're too stupid to learn a profession? Were farmers too stupid to become machinists?"

    You glibly pose that as a rhetorical question but that's a simple empirical matter than any idiot could figure out. Blue-collar people get nothing out of higher ed, plus they go into tremendous debt from loans.

    Farmers demonstrated that they could take on industrial jobs.

    Mystery solved.

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  24. "Trump is just telling you what you want to hear."

    You're telling yourself what you want to hear. It's called delusion, and it's great for us -- you're not even gearing up for Trump's massive onslaught. Please stay that way -- easier to knock over.

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  25. "Should we stay electronically or physically near them in order to keep a good handle on what they're thinking and who they're talking to?"

    Definitely, especially considering that our parents are Boomers and Silents, the Me Generation.

    You have to be stubborn, and put in a lot of work yourself, but you can save your confused / deluded Boomer parents who are on a one-way ride toward oblivion.

    Getting them to sell their inflated house in a place where they have few connections or roots, and move where they belong is the hardest part, but necessary. They just love their real estate. But frame it as cutting costs (perhaps paying off their mortgage and buying their new place outright), not living in a Tower of Babel, being around people who care about them, etc.

    Don't bother framing it as a duty or responsibility that they have toward anyone else -- they're the Me Generation. It has to be about their own satisfaction. Like it or don't like it, but it can get them back where they belong, and that's what really matters.

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  26. "You glibly pose that as a rhetorical question but that's a simple empirical matter than any idiot could figure out. Blue-collar people get nothing out of higher ed, plus they go into tremendous debt from loans."

    So your solution is to seal the country off from trade so that we can maintain an industry of menial jobs at a higher cost of labor than we could otherwise get, just so we can keep people who either don't want to, or can't get a post-secondary level of education? That's punishing everyone for a few laggards. We might as well pay them to dig ditches and fill them back up if work is what they want.

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  27. "You're telling yourself what you want to hear. It's called delusion, and it's great for us -- you're not even gearing up for Trump's massive onslaught. Please stay that way -- easier to knock over."

    Come on, you sound like a little kid talking about a super hero.

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  28. You're a 20 year-old Jewish sperg, you know nothing about anything and only repeat worn-out hysterical talking points that you picked up from websurfing EconLog all day long.

    Dipshits like you are going to be triggered into shell-shock for 3000 consecutive days -- it's going to be glorious to behold.

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  29. I've deleted Anon's continued socially retarded arguments about why we need to send good jobs overseas so that the drones in the great big termite mound can do them for peanuts, while blue-collar Americans get to transition downward into a patchwork of crappy part-time jobs, just so the elite can get richer than its wildest dreams.

    BTW, Anon never disputed being a 20 year-old Jewish sperg. You're banned. Don't bother commenting anymore, go back to EconLog.

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