Tuesday, March 17, 2009

Myth of the Market - Pt 3

I have two LG cell phones and a washing machine. When my GE microwave burned up after only one year, I replaced it with an LG. Zenith was a great American innovator of consumer electronics – they invented the TV remote and HDTV. Zenith sent its American workers home and went bankrupt in 1999. Zenith now belongs to LG.

Since the 1970’s, the income (adjusted for inflation) of the American middle class has not kept pace with the cost of living. Living wage manufacturing jobs have steadily declined, and in some sectors of the economy, they are gone for good. We have turned from a county that used to “make” things, to one that mostly “buys” things. Stuff that we INVENTED, like almost the entire electronic industry (TV, a
udio, cameras), are no longer made here. Zenith, Marantz, RCA, and dozens of household names are now gone from the domestic employment landscape. Most all of our clothing is imported, as is much of our food. Even American flags are made in China. Steel manufacturing in the US is gone – our largest export is now scrap metal.

For years CNN news anchor and author, Lou Dobbs, has been warning that corporate America has been laying-off their own customers. Dobbs even has a new book out about it. When you think about it, the corporate mindset in this country is pretty schizophrenic – My Company reduces overhead and increases profit by laying people off. But My Company wants the Other Guy’s Company employees to spend their wages buying My Company’s products. Of course, Other Guy’s Company wants the same thing. They both (all) suffer the same cognitive disconnect.

Therein lies what American corporations don’t understand: “Employees” and “Consumers” are the SAME PEOPLE. This simple, elegant and apparently, unknown fact has me screaming at the TV news every night. Laying people off makes the economy WORSE! If your boat is sinking, you don’t drill more holes in the hull to let the water out!

To their credit, a (significantly) scant few companies have figured this out. For example: locally in Corvallis, HP (Hewlett Packard) instead decided to reduce the salaries of their employees rather than lay people off entirely. Laid off people don’t keep spending – but employed people do. Spending makes the economy work. People spending money creates jobs (tax cuts do not).

Don’t believe it? Look at China. Asia has replaced our manufacturing base; Japan, then Korea, Taiwan then China all raised the living standard of their middle class by MAKING stuff for American consumers and benefiting themselves by creating a new class of Asian consumers. But then our financial crisis, and the subsequent laying off of millions of workers/consumers, has reduced our ability to buy stuff made in Asia, causing their economy to go south.

The parable of the Goose that Lays the Golden Egg is most apt when describing the corporate mindset – the story goes that the golden eggs are not being laid fast enough to satisfy the greed of the goose’s owners, so they cut it open to get at all the golden eggs -- They kill their only source of income. Laying off their employees may satisfy a company's short-term needs, but that only causes a snowballing-effect throughout the entire economy, causing others to need to do the same. Being unable or unwilling to see the bigger picture does not reflect well on the reputation of “American Innovation” that we as a nation like to pride ourselves on.


Rachel Noy said...

"Therein lies what American corporations don’t understand: “Employees” and “Consumers” are the SAME PEOPLE."

Remind me again, why can't people in important places realise this?

The UK is going the same way, apparently we're the worst affected. Yay.

The goose that laid the golden egg analogy is spot-on. Great blog.

Robert the Skeptic said...

Rachel: Thanks for reading. I believe it is entirely plausible that many corporations make money simply out of dumb luck than due to the (supposedly) stellar wisdom of their executive management.

I cite the AIG disaster as one example.

I'm not an economist but, over the last few years, I could clearly see the trend where home prices, at their rate of inflation, would soon rise out of reach of people able to afford to buy them. I am surprised it didn't all collapse sooner. But then again, scant few of us seem to possess a rare intellectual attribute -- common sense.

Rachel Noy said...

Eeek, scary, but true.

Ahh well, what's done is done. Let's hope something stronger can come out of the ashes.