Musings on Globalization, Labor, and Consumer Behavior

The argument posited by politicians about about moving abroad only helping Mexico or China is a too common misconception. Ask yourself why companies move. Moves are not merely about labor, but labor is part of the equation. Labor costs are one of the few factors a company has control over. To keep costs down and remain competitive in a global market place many companies have little choice but to move. And, I’ve already given the second part away: costs. If the company were to stay in the United States and pay higher labor wages – and remember, its not only about the wage but insurance and retirement costs – you will pay more for that some item. Say you work for Wal-mart. What you see in your paycheck is not what you cost Wal-mart. The actual cost to Wal-mart having you as an employee is roughing about 25-33% higher than your hourly wage. Wal-mart has to carry compensation insurance, unemployment insurance, may have to make a contribution to health care and retirement for you. Thus, if you make $8.50 an hour at Wal-mart, you are really costing Wal-mart about $10 an hour.

Now, translate this into a manufacturing job where labor costs are built into the price of the item. In most cases, the cost of the raw materials are fixed by the materials market. You and all of you competitors are going to be pay pretty much the same amount for a given quantity of material. Transportation costs will play a part, but those are generally stable, too. Advertising costs are a miniscule part of the price, and so are research and development of new items, unfortunately. The most readily controlled input is labor costs. When US labor costs go up, so do all the factors I described above. When US Labor Unions cry out for more money, lower hours, better insurance, and richer retirement plans, who do you think is going to bear the brunt of those demands? We are, the US consumer, or the consumer, in general. That money does not materialize out of thin air.

Companies are then faced to make choices which a self-interested person is not going to like. When negotiations fail and the livelihood of a company is at stake, one solution means finding a labor market where the demands are fewer. Perhaps there are also other ancillary benefits, like lax environmental laws. So, rather than deal with self-serving employees who don’t understand the global market place and appear to place greater and greater demands on a tighter and tighter market where profit margins are low, they opt to move. And, they have to move well before the breaking point so market position is not lost. Then, these companies are called “unpatriotic,” or “un-American,” or one party or the other is blamed for losing businesses. I’m my opinion, the real problem is not the company moving. The real problem falls upon politicians who promote fallacy of causation, meaning they have no idea how market economics work, either, but I need to blame someone so I can improve my chances of being re-elected. The other problem is the US consumer, though this is more of a trait than problem.

Given one widget made in USA at $10 and one widget made in Mexico at $7 which one would you buy. I will answer that for you: you will buy the $7 widget, given nearly identical quality. You might argue with that, but there is no argument, as this is precisely what happened to US electronics industry in the 70s and 80s and why there are no TV maker and very few shoe makers in the US. US consumers always chose the lower priced item. US citizens themselves are the ones who pushed companies out because we refused to pay higher prices. We tell companies what to do every time we buy something or do not buy something.

Pay attention to the Nook/Kindle/iPad/Tablet market. About 2 weeks after the tablet hits the market, analysts will begin discussing sales in terms of number of units sold. They will reveal analyst expectations of sales. They will look at inventory. Then, they will make comments like, “the units are not selling as fast as hoped; they priced the tablet too high.” Or, you will see comments like, “Best Buy cannot keep units on the shelves, they are selling so fast.” From both comments we can infer our input into the global market place. In the first, case we are are telling the tablet maker, “you messed up; I cannot afford this.” In the second case, we told the tablet maker, “you messed up; this is a steal at this price.” Eventually, tablet makers figure out the best price point. Today, that price point is about $200, with the exception of the iPad. But, Apple people are crazy anyway.

As of 2005, US citizens saved over $800 billion dollars due to the savings enjoyed from buying products from US companies made in foreign countries. I would guess savings today is approaching $1 trillion. That is real, in-your-pocket, money, not some theoretical nebulous amount.

All of this explains why geography, and for that matter, economics is important. You cannot rely on politicians to educate you. They are going to commit lies (lie by commission), hide the truth (lie by omission), present statistics as facts (questionable), obfuscate (cloud details in rhetoric), because they have no interest in much else except for helping out their campaign contributors, themselves, pandering to political action committees (PACs), and keeping blocks of voters happy (Special Interest Groups; SIGs). If you feel happy after hearing a politician, you’ve probably been lied to; if you feel angry, you’ve probably heard the truth. A politician everyone loves probably should not be trusted; a politician everyone hates is probably the best man for the job.

***End of Transmission

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