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Monday, October 09, 2006

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A. PERLA

NE: "It seems clear from this paper that domestic demand shocks in the US are, as the authors put it, "transmitted in an amplified manner to Mexican outsourcing industries"."

Another bit of economic research that simply underlines the obvious?

Companies maximize their operational configuration at a specified output level. Beyond that level, and when marginal costs (overtime, namely) start eating into profits, they will outsource production. That they will do so to Mexico seems obvious, but in certain industries (micro-circuits), it is the far east that will feel the volatility in a semiconductor market that is, by nature, volatile.

They will also do so for product refinements or introductions, for as long as shipping costs and time-to-markets does not change the cost equation. Again, which products are likely to be affected depends upon the cost equation. German manufacturers of high-margin cars have found that, once a certain volume level is achieved, it is better (read, more profitable) to start operations in (relatively) cheaper labor areas of the south of the US, rather than furnish from high-cost, long-distance productions centers in Europe. Are cars a "highly volatile" product? No, not really. Stocks tend to accumulate on the lots in a more moderate fashion, before production cuts are signaled as necessary.

NE: "A related question is whether this in turn is reducing output volatility in the corresponding industries in the US?"

If it isn't, then only flexitime can. And, the US is not famous for readily adopting flexitime schemes. Only immigrants will work the night shift, as they always have in the past.

Immigrants are plentiful for the moment. But, there seems to be an underlying current in the population indicating a growing sentiment that "enough is enough". The assimilation process of immigrants is long and arduous and, even in America, the melting pot of this globe ... the social fabric is beginning to show its rents.

More so, the ineluctable is written on the walls. Native Americans do not care any longer to work on an assembly-line production as the economy veers towards the services sectors where people can pass their lives in cubicles punching away at a computer. Or, worse, flipping hamburgers at Mcdonalds. Or, at Waltons selling low-cost gadgetry and other produce from China.

This "economic phenomenon", if we may call it one, is long-term as the modernized western economies transit out of the Industrial Age and into the Information Age. Meaning what? This: Is volatility really that important in a manufacturing sector that is basically dissipating itself?

This historical trend is infrastructural and permanent. The "point of inflection" has long since passed. Woe betide the country that this not preparing its youth for the change that is taking place.

What nations cannot seem to get thier heads around, is the notion that manufacturing is not necessarily the "national champion" that it used to be. Smokestacks belching smoke seem to reassure the population that the economy is "at work". Nostalgia aint what it used to be.

Arthur Eckart

The U.S. economy is large and diversified. Any reduction in output volatility from recent outsourcing may be negligible. The adjustment mechanism may be through higher U.S. frictional unemployment. Also, I may add, poor immigrants, including illegal immigrants, are generally in jobs that can't be outsourced, e.g. restaurants, hotels, construction, retail, cleaning, gardening, etc. It seems, wages are kept low in those segments of the economy. The real growth of the U.S. economy is in its abilities to invent, innovate, improve, and mass produce efficiently, which are reflected in its corporations.

A. PERLA

"The real growth of the U.S. economy is in its abilities to invent, innovate, improve, and mass produce efficiently,"

Are you VERY sure?

The last bit - about "mass produce efficiently" - is all wrong. The US cannot mass produce (and sell the product competitively) without qualified workers willing to work Chinese or Indian wages.

Let's stop dreaming. A fundamental transfer in qualified-worker jobs is happening. For instance:
1) Sell hi-tech Boeing aircraft to the Chinese? Then expect the Chinese to want to license production.
2) A relational databases to manage the supply cycle? Expect an Indian company to have just such an application off the shelf.
3) Innovate the latest 64-bit chip? But expect the billion dollar investment on a fab-plant to be made in China.
4) You want a state-of-the-art computer controlled machine-tool that was designed in Germany. Expect to see its Chinese equivalent at the next tradeshow within a year’s time of its production announcement in Germany.

Innovation and invention were not patented in America. Hubris, maybe.

Arthur Eckart

A Perla, some countries mass produce inefficiently, while the U.S. mass produces efficiently. The U.S. tends to produce higher value goods than its competitors. Also, U.S. manufacturing productivity is higher than productivity in the U.S. economy. Moreover, the U.S. produces with minimal negative externalities. Furthermore, the U.S. economy expands at a sustainable rate, which is optimal, etc. Consequently, the U.S. will produce $13.5 trillion of output in 2006, which includes durable and non-durable goods. It's uncertain if some products are included in manufacturing, e.g. software, internet, new techniques, new drugs, genetics, etc. The U.S. invented the assembly line. So, I think, Americans know how to mass produce, although it doesn't take much ability in the current global economy. Perhaps, American invention and innovation seem less spectacular than a hundred years ago, because people don't really understand the products, e.g. mainframe computers, semiconductors, telecommunications, biotech, medical equipment, etc. Also, there's invention & innovation in old industries, e.g. trucks & tractors, retail, media, financial, aircraft & aerospace, etc.

A. PERLA

Eckart: " ... some countries mass produce inefficiently, while the U.S. mass produces efficiently."

Access to technology and its consequence, innovation, is the preserve of no country.

French hourly productivity is as good as that of the average American worker (GDP per hour worked in France is 1% more than the US), so why does France suffer from twice the rate of unemployment and lower wealth creation? Because the French work 1543 hours per year versus 1731 hours for Americans - or 11% less.

Your statistics seem like baseball scores, as if the more the better. Well, I can play that silly game too : The EU has only a billion dollars less of GDP generation than North America (including Canada).

Moreover, it is not the absolute numbers that count ... you are submitting to the incorrect notion that bigger is somehow better. But, that is understandable since superlatives are part and parcel of the American culture. (Quality of life is also an important criteria, but it is unfortunately empirically subjective. Or, I certainly would be bringing it up.)

Look up the meaning of word hubris.

Arthur Eckart

A Perla, I wouldn't say the truth is a silly game or hubris. I was responding to your statement that it's all wrong to assume Americans can mass produce and compete, because they're unwilling to work for Third World wages. I wouldn't be surprised that France has higher productivity than the U.S., since firms tend to hire the best workers first. However, the optimal combination of labor and leisure is different between countries. Also, when comparing E.U. and U.S. economies, E.U output is slightly more. However, it should be noted the E.U. has 150 million more people. Moreover, I wouldn't say bigger is better. However, better may lead to bigger.

A. PERLA

eckart: "I was responding to your statement that it's all wrong to assume Americans can mass produce and compete, because they're unwilling to work for Third World wages."

But, that IS the bottom-line. Nobody can compete with third-world wages, which is why non-qualified assembly-line work is transiting to the Far East.

This is fact, not fiction. The problem is that as wages increase the Far East churns out increasingly more technically competent people chasing those earnings. So, inevitably, these countries are going to take the technology escalator and start seeking markets that are "traditionally" preserves of Cincinnati Milicron or 3M or Siemens or ...

Why do you think the Germans are all bent out of shape that the Chinese are setting up engineering shops in Germany? For what, Germany's marvelous climate? Germany's export resurgence has been engendered by its small to medium-sized machine tool shops.

The same is happening stateside. It is inevitable and typical of free-markets where competition brings out the best devices for the least cost. How to compete? Either reduce (total) wages or increase productivity in those sectors that need it most. I.e., manufacturing.

Europe has been misguided in increasing total wages by limiting work rules, increasing social charges and advancing retirement. It must correct those elements if it ever hopes to even save the jobs it has. This hubris was brought about by nearly forty years of protectionism behind the tariff barrier of the Common Market (and now the EU).

For America, the lesson is a bit different. Its manufacturing "power" is being threatened by obsolescence because it does not invest enough in advancing manufacturing techniques, particularly in car manufacturing.

Arthur Eckart

A Perla, you're making several false assumptions or twisting things around. Third World countries generally can't compete with the E.U. and the U.S., unless those countries lower prices, dump their goods, or weaken their currencies. Also, the E.U. and the U.S. don't need to lower wages or increase productivity to compete. Higher value products can offset higher wages or lower productivity. It's inevitable that industries will become relatively obsolete and Third World countries will eventually produce higher value products. Moreover, I disagree that the U.S. (and the E.U.) doesn't invest enough in its industries, given limited resources.

A. PERLA

"Third World countries generally can't compete with the E.U. and the U.S., unless those countries lower prices, dump their goods, or weaken their currencies."

Hogwash. Just go walk around Walmarts.

"Depreciating currency"? The Japanese "depreciated" their currency in the '50s and '60s to get their products introduced into US markets. As have the Chinese "depreciated" their currency in the same tactic? Or, the Vietnamese? Or the Taiwanese?

Doesn't make sense, Eckart, except from the narrow-minded point of view of Americans and Europeans who have become far too accustomed to the dominance of their manufacturing capacity.

Those days are gone forever.

r4 ds

If we keep outsourcing all our jobs in the USA will be GONE!! Thats right even the big CEO jobs will be outsourced soon becase corporate thinks its good for the compamy. So if the way things are going aren't bothering you and the economy looks good now,then you must be not paying attention too well.

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