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Guest column | C.D. Chamberlain

Outsourcing's profits, problems

There is no reason you would have heard of my friend Ralph. He manufactures and sells trucks all around the world. Not the Mack or Volvo kind; his trucks are the steel wheels and axles attached to railroad rolling stock. His product is top drawer and reasonably profitable. Here's how Ralph (not his real name) makes it work.

Ralph got a group of silent partners to help him buy an abandoned foundry and machine works in southwest Michigan. He also acquired some tax-funded incentives for his operation. From Gary, Ind. to Muskegon, Mich., the Lake Michigan south shore-line is known for producing iron and steel. Heavy industry really took off during the second world war. Recruiters brought bus loads of field hands from the deep South who could endure the ferocious heat of blast furnaces and open hearth foundries. These unskilled workers earned good money.

Ralph concluded up front he couldn't make money operating the foundry. It was the 1990s and environmentalists were taking all the fun out of air pollution. Simple. He out-sourced all foundry work to China. Nobody there was concerned about pollution. Obligingly, the Communists made unions illegal. Although doing castings in China made sense, he couldn't find enough highly-skilled machinists to satisfy his exacting quality standards.

This is how he fixed that problem. The castings were done under bond in China — that means tax free. He brought the casting to Michigan and had the parts machined and the trucks assembled by skilled craftsmen. This whole process was also completed under bond, meaning no tax in Michigan because the trucks were being manufactured for export. Now he had a winning strategy. Ralph was making good money. The small number of highly skilled U.S. workers, even though non-union, made a handsome living as well.

But every solution carries with it the seeds of the next problem. The horde of unskilled foundry workers lost their jobs. They couldn't go back South because cotton production was now totally mechanized. Local government still had to provide the necessary infrastructure for Ralph's shop but acquired no off-setting revenue to cover the cost of services. The city went bankrupt and had to be taken over by the state. Perhaps Ralph's successful formula illustrates some of the rough edges present in our economy.

It is not true that the U.S. has lost its manufacturing base. As a matter of fact, the U.S. remains the world's largest manufacturer although it is now neck and neck with China. The difference is, we have achieved this enormous manufacturing output with 1 billion fewer people than China. Yes, many manufacturing jobs have been shipped to China permanently. Ralph was able to achieve huge productivity gains because of the large value added by a few highly-skilled workers in contrast with small value added by a large number of low-skilled foundry workers.

We must recognize that this re-shaping of manufacturing in the U.S. creates some hard-core problems in our economy. Despite significant gains in U.S. productivity during the 25 years between 1980 and 2005, 80 percent of this new wealth went to the top 1 percent of the population. This kind of wealth distribution creates serious economic distortion. There are fewer workers with an income to purchase the goods they manufacture. For the top 1 percent, even if you have a couple of Cadillacs in your 15-car garage, such ostentatious wealth is no substitute for a few hundred workers buying a Ford Focus.

Walter Reuther asserted that workers who are paid a bicycle wage he will ride a bicycle. Henry Ford said he wanted his workers to earn enough so they could buy a Ford. Odd isn't it? Labor and management used to agree on this central reality of a consumerist economy.

Since 1976 U.S. median household income has remained stagnant. To cope with this reality families decided both parents had to earn an income. When two-income families discovered their income still fell short, they turned to credit cards. The median income household now has no place else to go. There is no third person to add income. The plastic is maxed out.

The greatest barrier to economic recovery is for our nation to return to the wealth distribution that existed when we had a healthy and expanding economy. It should be obvious by now that distributing 80 percent of all productivity gains to the top 1 percent has not created a healthy economy.

It's time to return to the income distribution that existed during the Eisenhower and Nixon years.

C.D. Chamberlain lives in Spring Hill.

Outsourcing's profits, problems 08/08/12 [Last modified: Wednesday, August 8, 2012 4:57pm]
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