"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Tuesday, July 17, 2012

Romney, Bain, And Outsourcing–He Was Just Doing His Job

There has been a lot of flap in the media about Romney and Bain Capital, most recently about his o of ‘American’ jobs.  Those who criticize Romney are wrongheaded and far off the mark.  Of course Romney outsourced jobs.  He didn’t do it deliberately in some crypto-conspiratorial move to deprive Americans of their livelihoods.  He did so to make money; or, in more responsible and less contentious terms, to create wealth.  His job as at Bain was to make a profit for his investors and this is a function of maximizing sales while minimizing costs.  When the labor costs in the United States became too high – a function of union demands, rising health care costs, the absence of right-to-work laws, and low productivity – and the labor forces of Asia became better trained while costs remained low, it was obvious that businesses would outsource as many of the labor-intensive jobs as possible to countries in Asia.  Not only were Asian workers skilled and well-trained, they were disciplined and used to working in a working environment where collaborative enterprise was the rule (i.e. focusing on team productivity rather than individual output). 

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.” (NY Times 1.12)

The tide has turned inevitably, and manufacturing jobs will continue to go offshore for the foreseeable future:

After dominating the globe for over 60 years as the world's largest, most productive, and technologically advanced in the world, America's manufacturing sector is in a decline in nearly all industries. America's lead in a number of industries vanished years ago, and nearly all industries are facing potentially dangerous erosion.

No single indicator represents manufacturing capabilities or trends. But several key indicators, when taken together, provide strong evidence that America's manufacturing has greatly weakened in the last decade. These are: ndustrial output (as measured by share of Gross Domestic Product), industrial capacity, employment, number of manufacturers, balance of trade in goods, and import penetration rate.

The trend in employment and number of manufacturers is dramatic -- 5.5 million manufacturing jobs and over 50,000 manufacturing companies gone since 2000. The balance of trade in goods has grown steadily since 1979, growing from a deficit of $25.5 billion in 1980 to $645.8 billion in 2010, which was down from a high of $835.7 billion in 2006 (Balance of Payment basis.) Manufacturing's share of the Gross Domestic Products had taken a serious downward trend -- dropping from a high of 28% in 1965 to 11% in 2010. (Huffington Post 8.11)

A recent article in the Washington Post http://www.washingtonpost.com/opinions/richard-cohen-bain-and-offshoring-are-off-point/2012/07/16/gJQA6eCcpW_story.html by Richard Cohen reaffirms the above:

Manufacturing — all those men and women in overalls turning out the planes and tanks that won World War II in the good old Arsenal of Democracy days — has gone from more than 25 percent of economic activity to about 12 percent in the past 45 years. My Post colleague Zachary A. Goldfarb reports that most of the manufacturing jobs lost in the recent recession have not come back. The jobs are gone; only the workers remain.

Products or services that can be produced more cheaply abroad will be offshored. This is a rule. Products that can be produced by robots will be produced by robots. This, too, is a rule.

The businesses supported by Bain Capital were not the only ones to go offshore.  In a famous interchange between Steve Jobs and Barack Obama, the President asked what would it take to make iPhones in the US? 

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products. (NY Times 1.12)

American businesses have always sought to increase profits by reducing costs .Firms moved out of the Rust Belt to the South where labor was cheaper, open shops were the rule rather than the exception, costs of living were lower, and favorable concessions were made by local governments interested in creating jobs.  Parts of the Rust Belt are renewing themselves – the area around Boston’s Route 128 became one of the first IT areas in the country and helped to replace jobs that went South.  Less farsighted municipalities like Detroit or Buffalo lost jobs but never replaced them. 

The United States has been committed to free markets, free trade, and competition forever in one form or another.  NAFTA is but one example of our emphasis on free trade and after two decades of political carping and criticism, the arrangement is paying off.  Not only is the Mexican economy now one of the fastest growing, the migration patterns between Mexico and the US are reversing – migrant workers in the US are now returning to their country because the higher-paying jobs are there not here.  The US has been a staunch supporter of the World Trade Organization which oversees international trade to help ensure the free movement of labor and capital.  So, why the complaints about Bain Capital?

The US has also been a staunch supporter of Wall Street which has financed American economic development for 100 years.  Without Wall Street investors, businesses would not have the working capital to expand their markets, to increase employment, and to become increasingly competitive in a world market.  Regardless of the current financial crisis, major investors have always been the engines of private economic development.  So why pick on Bain Capital?

Finally, the US has always been a staunch supporter of wealth creation.  Despite the current Occupy protests, America has always been about money, wealth, and economic success.  The credo etched in stone alongside of the parchment of the Declaration of Independence is “Make Money”.  So what is wrong with Bain Capital doing just that.  Neither Romney nor any other investment banker has said that they were in the job creation business.  They are in the money-making business.  As Richard Cohen observes in the NY Times article:

Let there be no doubt (at least in my mind) that if Romney did not approve offshoring jobs in companies controlled by his Bain Capital, he certainly would have. His job — his raison d’être, his very heart and soul — was to make money for his investors and himself. He didn’t care about a particular company. He only wanted to buy it, wring the profit out of it and sell it. He was not in the business of creating jobs. He was in the business of creating wealth.

Cohen concludes by stating that the debate over what Romney did or did not do while at Bain Capital is irrelevant:

It hardly matters who was running Bain when some steelworkers were fired and their jobs sent across the great ocean. If Romney was really in charge, he was doing what he was being paid to do. If Romney was not in charge, others did what he would have done — and he, the record shows, did not complain. He merely deposited the checks.

The point is that neither Obama nor Romney have a clue to increasing American employment.  They are both simply facing a strong ebbing tide of jobs overseas.  American capitalism is working in the way it was designed – reduce costs, increase profits.  In this new world of international economics – justified and sanctified by the United States above all other nations – businesses are doing exactly what they are expected to do.  Bain Capital and other investment banks are playing their part by providing the capital for these businesses.

What, then is the problem?  There is none.

1 comment:

  1. “There is nothing wrong with being successful and making money. That’s the American dream. But there is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business. I happen to think that that is indefensible,” Rick Perry said.

    http://www.nationaljournal.com/2012-presidential-campaign/perry-attacks-romney-for-pink-slip-comments-20120109

    http://videocafe.crooksandliars.com/david/perry-says-romney-bain-capital-are-vultures

    ReplyDelete