Tag Archives: labor

Surprise! Henry Ford was Right. You’ve Got to Pay People!

Op-Ed Columnist – Revenge of the Glut – NYTimes.com.

In the article link above, Paul Krugman puts the blame for our economic mess on a glut of savings that has outstripped business’ interest or ability to invest it in productive things.

Far be it from me to refine Paul Krugman, but I will try anyway.

We’ve seen this glut of savings bouncing around the world and failing to be productively invested for over a decade.  This glut is what created the Internet bubble.  When that bubble collapsed, it created the housing bubble.  When that bubble collapsed it created the commodities bubble.  When that bubble collapsed it created the Treasuries bubble.  The Treasuries bubble hasn’t collapsed yet, but it will.  Warren Buffet knows it, and now the rest of us do too.

Because business has been unable to justify investing this savings in production capacity it has bounced from asset class to asset class looking for a productive, profitable place to land.  Interestingly, I guess because of the global communications efficiency we have now, it is moving largely as a single mass.  When it felt like Internet stocks were the place to be, way too much of this excess savings went into them, thus creating the bubble.  When that bubble popped, this money moved, en masse, into housing stock and real estate.  When this bubble burst, way too much of it went into commodities futures.

Meanwhile, free trade has increased the global supply of labor drastically.  In the world of Henry Ford, new labor markets would create new consumption markets because Henry Ford knew that, whatever the availability of labor was, if he didn’t pay his workers enough to buy the products they made, nobody would be able to afford them and he would never achieve scale.  In our free trade environment, investors have taken full advantage of the labor glut to lower labor costs.  In fact, they have gotten so low that only a small portion of the new labor market actually has the ability to consume what it produces.

Businesses can’t invest in capacity to meet the needs of the millions of laborers with pent up needs and wants but with no money, and has already produced too much capacity to meet even the most exotic of needs of the relative few people who do have money.  The only way to create new markets now that justify building productive capacity that will actually put the excess savings to work is to increase the wages of the global labor force to the point that it can actually consume what it produces.

In a laissez-faire, free-trade, purely competitive environment it is impossible for businesses to do this on their own.  Any company that attempts to “do the right thing” will end up at a price disadvantage, lose market share, and eventually go out of business.  The only way to do this is to force a floor on labor price, either via minimum wages or strengthened unions, so that all businesses are forced to “do the right thing” without giving any of them a competitive advantage.

Traditionally, we would see such a move as being inflationary.  It would be if we were working with a closed system that was not going to increase the supply of goods.  But we aren’t, and that is just the point!  If the wage increases go to people who can create NEW demand that justifies new supply, the demand will justify new investment that will sop up the savings glut.  In the end we will not only achieve greater financial stability and solve the chaos this bubble of unspent money is creating, but we will increase the quality of life for hundreds of millions of people around the globe… which I think everyone has to agree is a good thing!

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You have an opportunity to place an important vote but you only have one day to do it!

Change.org has solicited ideas to present to the Obama administration on a variety of subjects.  My idea for Fair Trade (my own definition of it) is currently in 1st place and gaining ground, but if you agree with it, it needs your vote.

Here’s where you vote: http://www.change.org/ideas/view/replace_free_trade_with_fair_trade

And here’s why:

My definition of Fair Trade may be a little different from the common one.

To me, trade is fair when nations gain competitive advantage based on quality, productivity, innovation, etc.  Trade is not fair when nations gain competitive advantage by despoiling their environments, enslaving their workers, employing child labor, putting workers into unreasonably dangerous or depraved conditions, opting to not have or not enforce safety regulations and consumer protections, etc.

When we have to compete against nations that don’t care about their environment, their children, their workers, their investors, their consumers, etc.; nations that will do anything to gain competitive advantage, we end up in a global race to the bottom… we race every nation in the world to minimize the costs associated with protecting the environment, keeping workers safe and whole, providing living wages, educating people, making sure there isn’t melamine in the milk, etc.

We shouldn’t be wanting that, while we should always still be welcoming competition based on quality, productivity, innovation, efficiency, etc.

To balance things, there should be a global index that allows all nations to be compared to each other on various dimensions and tariffs should be put in place to compensate for cost advantages achieved by “unfair” or predatory competition.

If you think this through, this would maintain incentives to compete with healthy competition and penalize unhealthy competition.  Economies that implemented and enforced the best worker protections, environmental protections, investor protections, consumer protections, education systems, healthcare systems, etc. would benefit economically because there would be no tarrifs on their exports and lots of tarrifs on their imports.

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Filed under economy, Politics