Wednesday, August 11, 2010

The US economy ... what is up with jobs?

Dear Colleagues

The US job economy is in the doldrums ... going nowhere fast. Meanwhile the for profit big cap corporate sector seems to be doing very well and reporting growing profits and high productivity. The capital markets seem to be applauding the corporate performance ... and the big concern is whether taxes are going to get raised and diminish net profits.

It makes me mad!

And a few days ago the jobs statistics included the little fact that the average wage in the public sector is something like twice the average wage in the private sector. What is going on?

I do not know whether this factoid takes into consideration the pension costs associated with public sector employment ... I hope it did, otherwise the US economy is way more broke than I ever imagined.

I used to do business analysis to help companies improve their profit performance. Moving manufacturing from the high wage cost USA to a low wage cost China is an easy case to make where the goal is to reduce costs now and to improve profits now. For the past twenty years or so this has been a good short term profit strategy for the US corporate community ... but now things are starting to change.

For a couple of decades consumer prices were able to be more or less stable, while costs went down and profits went up. Now Chinese costs are starting to increase ... and the politicians want the exchange rate to be reset at a rate that weakens the dollar, so either profits will decline or prices ... that is inflation ... will increase.

But at the same time the consumers have finished most of the money in their various private "piggy banks". Consumer credit is maxed out ... home equity has disappeared ... but most disconcerting, job opportunities have all but evaporated. What was a prosperous US market is now near nothing. Its tough to make profit from poor people ... and the corporate strategy for the past decade has been well suited to making people in the USA pretty poor.

When I cam to the USA from the UK in the mid 1960s I was able to earn more in a month in the USA than I could in a year in the UK. Whatever happened? Well educated MBAs have driven decisions for a very long time that have made it look like the USA was prospering, when in fact all that was happening was that the corporate world was optimizing for profit and totally ignoring the macro-impact of their decision making on society.

Things can work OK in a market where there are many small businesses and the market is efficient ... but it does not work when the enterprises are huge, global in scale and there are only a few of them. Many big companies are economically bigger than countries ... and capital moves where it wants when it wants with almost nothing to assure that there are no negative consequences.

There are some important decisions to be made about jobs ... and the responsibilities and roles of the corporate world and capital markets in job formation.

Don't expect corporate decision makers and the capital markets to get it right as long as the only metric they are using is the profit metric.

Corporate leaders and capital markets need to think through how they can organize resources to fund works that are needed to make the US world class efficient ... and do it with US based workers performing well. If the corporate organizations ... including banks ... and capital markets won't allocate resources to do important things like this, then it will have to be the Federal Government that steps in ... an option that exists and might be needed if the private sector and the capital markets do not figure out what to do on their own!

A couple of days ago new subway cars were delivered to the cash strapped MTA in New York ... shipped in from Brazil. Hope they work well! I am sure they were better priced than made in the USA! But MTA cannot afford to run them ... and New Yorkers cannot afford to ride them ... and the Government (State) has no money to subsidize them ... and nobody wants to pay taxes needed for all of this to work. It is a mess of gigantic proportions.

But the corporate profits seem to be holding up well this quarter, so there is not much to worry about. Which of course is B*** S***!

Peter Burgess

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