Eight years ago in the early spring, when the mud is still frozen here in northern Indiana, a TV journalist called me late one night. News had just broken in Europe that the German company Bosch had purchased Allied Signal, which employed 430 South Bend workers. Within minutes of my hanging up the phone a camera crew was in my living room. During the interview, where I was serving as the local economics expert, I remarked that in one sense the news was good for area workers: German executives didn’t act like the “Corporate Killer” American CEOs, as Newsweek had dubbed the new breed of business leaders who use massive layoffs to make shareholder profits soar. The jobs in Michiana were likely to be secure.
The 11 p.m. WNDU newscast featured my interview (I was grateful my pajamas looked like a pantsuit on screen) and televised the now-famous Newsweek “Corporate Killer” cover of February 26, 1996. It featured mug shots of four CEOs, including “Chainsaw Al” Dunlop of Sunbeam and “Neutron Jack” Welch of General Electric.
In 2001, a spokeswoman for Nortel Networks Corporation, the Canadian-based international communications company, described what is called a share-value layoff to a Boston Globe reporter, explaining why Nortel was shedding more than 8,000 American jobs. “They felt they had to do something quickly,” she said of the extra layoffs. “The latest earnings forecast deeply disappointed investors.” Such share-value layoffs, where employees are laid off to increase the company’s profits, are a breed apart from the so-called “distressed” layoffs that businesses reluctantly resort to in bad times.
Nortel had learned something from Neutron Jack, who got his nickname because GE’s exceptional growth in the value of its shares was partly a result of Welch’s deep downsizing. Like a neutron bomb, he keeps the buildings standing and vaporizes the people.
In December 2001, Notre Dame students, administrators and faculty greeted retiring GE chief Welch with overflow audiences at the Mendoza School of Business. Ironically, in the same year, GE acquired OEC Medical Systems, a company that manufactured X-ray equipment, and closed its Indiana factory, not because the plant was unprofitable, but because Mexican production offered more profits.
The Broken Economy and Jobless Recoveries
Fast forward to the strange economic news of spring 2004. Officially, the economic recovery started in November 2001. Instead of an expected 1 to 3 percent monthly increase in job growth, however, the average job creation rate was negative. Using the weak job numbers as a backdrop, President Bush successfully implored Congress to cut taxes two years in a row, partly to stimulate economic activity. In April 2003, the president predicted an average 306,000 new jobs would be created each month by economic growth and his second half-trillion dollar tax cut. Yet, the average increase in the number of jobs has been under 58,000 per month between April 2003 and March 2004.
Today we are 5 million jobs short of the president’s prediction. Worse, workers face conditions found only in nasty recessions: sickly wage growth and an unprecedented average job search time of more than 20 weeks. Most ominous is that the labor force is actually shrinking. That has never happened in an economic expansion. This recovery deserves the moniker “jobless recovery.”
The causes of this twisted economy are not recent. The seeds of these perversions were planted in the late 1980s and ‘90s when the rules of making profits in America changed.
Layoffs to increase a company’s bottom line were pioneered by celebrated CEOs and are partly responsible for the unprecedented “jobless recovery” and stagnant wage growth. Another factor, contrary to commonplace wisdom, is low prices. Inflation can help create jobs. Companies searching for ways to maintain profits when they can’t raise prices cut costs by making the same number of employees work harder. Louis Uchitelle of The New York Times links our Wal-Mart, low-price nation to job loss; he quotes Larry Geiger, a vice president for the American Management Association, who says in this environment “the goal of companies is not to hire.”
Economists don’t disagree much about the numbers. The debate over causes and solutions is where the intellectual fur starts to fly.
Some policy responses take aim at outsourcing and offshoring. In outsourcing, companies fire employees and transfer work to lower-cost firms in the United States. When U.S. companies transfer work to lower-cost firms abroad, it’s called offshoring. According to the research firm Gartner Inc., more than 40 percent of Fortune 500 companies are expected to move some of their work out of the country. GE, for example, has moved most of its research and development overseas. More than one-fourth of information technology jobs are expected to move to China and India by 2008.
In early 2004, IBM announced, with some flourish, that it would add 5,000 jobs in the United States. This was partly to distract from its unpopular announcement in early December 2003 to move more than 4,700 jobs to India. IBM plays a vigorous role in helping other firms outsource. High-paying firms, such as AT&T and J.P. Morgan Chase, use IBM to do work not related to their core function of communications or banking. For example, AT&T contracts with IBM to update software, and AT&T transfers its workers to IBM to complete the project. IBM employment roles swell, but when the project is finished the jobs at IBM disappear and the workers have lost any attachment to AT&T.
My 67-year-old mother sells newspaper classified ads for the Sacramento Bee. In her department, people who leave are not being replaced. She comes to work early, eager to get ads left on the answering machine and website to make the higher quotas for a merit pay increase. Since the California newspaper outsourced to a New York call center, three times zones away, those ads are already picked up. The call center, fewer full-time staff and higher production quotas help expand the newspaper’s profitable classified ad section. The _Bee_’s workers pay for this with more work and smaller paychecks.
Federal Reserve Board Chairman Alan Greenspan understands the sweating at my mom’s work place well. He explains the miracle economy—the miracle where a company’s profits can increase but prices don’t—by workers’ fear of being laid off and of being unable to find a replacement job as good as the one they lost. MIT’s Paul Osterman tells a parable to illustrate the effects of a strategic layoff. When only one worker out of a hundred loses her or his job, the measured job loss is tiny but the 99 workers left are changed forever. They are scared. Magnify this example many times over as thousands of educated workers—accountants, industrial engineers, computer systems analysts, database administrators, among others—lose their jobs to cheaper domestic and foreign vendors. That explains the jobless, wageless recovery. Those who are still working don’t ask for health insurance, don’t unionize, don’t quit when their work load doubles or when they are asked to train their replacements. Companies enjoy the effects of workers’ fear. In this way offshoring and outsourcing result in lower quit rates, soaring productivity and too many workers faint of heart to demand pay hikes.
As I write this, in late April 2004, no less than three bills in Congress aim to save American jobs shipped overseas. The proposed legislation shares the conviction that the economic reasoning of the Bush administration is dead wrong. N. Gregory Mankiw, chief economic adviser to President Bush, in mid-February explained: “outsourcing was probably a plus for the economy in the long run” because it reflected businesses taking advantage of free trade and cheaper labor abroad. Mankiw has been apologizing ever since, saying he was unclear and he didn’t mean the president praises U.S. job losses.
But Mankiw was clear. He was repeating orthodox economic theory that teaches that free trade will make everyone better off in the long run even though, at first, companies win and workers lose. It’s a kind of “I win, you lose, I win again and then you win” proposition.
Most economists agree that losing jobs abroad—offshoring —explains only about 10 to 15 percent of the U.S. job losses. Outsourcing is the larger phenomenon and causes an even larger problem. When jobs are farmed out, the result is a fall in the pay and working conditions of U.S. jobs. America has a job quality problem.
The enduring problem is that millions of better-paying jobs have not been created in the United States. Stopping the offshoring of good jobs won’t transform bad jobs to good ones, but that’s the ticket many mistakenly want us to buy. According to the current economic plans, bad jobs dominate America’s future. The Bureau of Labor Statistics, in its understated but fascinating report, Occupational Outlook for the U.S., shows that the top two fastest-growing occupations (adding more than a million jobs together) are college teachers and registered nurses. This is great news, not because I am in one of those professions but because these jobs are high paying—average wage over $41,000. The bad news is that 3.5 million jobs in seven of the eight next fastest-growing occupations—service representatives, food preparation workers, cashiers, janitors and cleaners, waiters and waitresses—pay the worst, less than $15,000.
Where the president matters, and what the government has control over, is how labor markets are regulated and encouraged to raise job quality. After September 11 Congress and President Bush turned thousands of minimum-wage jobs at airports into jobs with health insurance and pensions, which shows government actions can establish job quality.
The peculiar situation of being in a business-cycle recovery in which profits and the quantity of goods and services are growing without job growth is just one symptom of a broken economy. According to Harvard economist David Ellwood, in the last 20 years the earnings ability of male workers with only high school diplomas fell by more than 13 percent and those with less than a high school degree fell by an incredible 20 percent. College graduates got a 4 percent boost in earnings.
The consequences still make me pause. No other advanced industrial democracy has seen more than two-thirds of its male workers, those at the middle and lower end of wages and education distribution, doing worse than their counterparts 20 years ago. Full-time, year-round work at minimum wage once raised a family out of poverty. Now it gets you only halfway there. Unions helped transform many secondary jobs—such as steel making, plumbing, meatpacking, bus driving and garment work—into secure, adequately paid occupations. Today, as the economic future of the NASCAR dad grows worse, his family stays afloat by a working NASCAR mom. Any relevant job policy must promise to create middle-class jobs.
What Happened to the Good Jobs?
Disagreement about the causes of anemic job and wage growth reflect the differences in proposed fixes. Orthodox economists explain that the transfer of jobs abroad and the growing gap between high-income and low-income workers are caused by technology. The orthodox explanation is basically that shifts in production processes favor computer-based work and college-educated workers. Communications and finance can zip around the globe in nanoseconds. For the first time in human history capital can move faster and cheaper than labor. You can’t blame anyone for technologically driven job losses and income inequality, the orthodox, free-trade economists say. There is no villain and no victim. The solution for the workers who lose their jobs is to get more skills and be patient because the economic rewards of low prices and higher profits will benefit all people involved in the exchange.
The school of economics called “institutional” places more emphasis on how economic conditions and laws and regulations alter the balance of economic power. Economists date the idea of outsourcing to the first capitalist who wanted cheaper labor. Adam Smith, back in 1776, called for free trade, in part to give labor a chance against the new factories and the enclosure laws that didn’t allow workers to leave their assigned communities. Smith reasoned that his plan would leave workers free to seek an employer with the best offer for their skills. Capitalists would vie with better techniques and higher wages. Everyone would win with free markets, because it was assumed workers could more easily leave a chiseling employer or a nation with low labor standards than factories could move to find cheap labor.
An institutional economist recognizes that these conditions don’t exist now because capital has become more mobile than labor. A medical conglomerate can set up communication uplinks and computers so lower-paid radiologists in India can read X-rays taken in the United States. That’s faster than waiting for those same lower-paid Indian radiologists to move to U.S. hospitals. Workers don’t go to better-paying capitalists; capital goes to lower-paid and worse-treated workers. The balance of power has shifted so that outsourcing and the threat of outsourcing cause workers to lower their expectations and for companies to enjoy more profits.
More important, institutionalists note, the orthodox economists can’t explain Europe. Among developed democratic nations, only the United States has experienced a growing gap between the rich and the poor. In European nations, the middle class thrives even though Europeans face the same technological changes.
The difference between Europe and the United States is the rules that regulate economic activity. When the Europeans formed the European Union they devised an elaborate and patient plan to shore up the working standards of and transfer development aid to their undeveloped partners, including Greece and Portugal, before Greek and Portuguese exports could enter the EU markets. The aim was to prevent Greek wages bringing down German pay.
Free-trade pacts between the United States and Mexico have different rules; trade is not contingent on leveling working standards. Institutional economists emphasize that technological changes and mismatched skills do not explain declining wages and increasing insecurity for U.S. workers; the loss of economic power does. American radiologists are among the highest-skilled physicians, but if they must now compete with radiologists in Slovakia and India their pay will fall. Instead of mismatched skills causing losses in job quality, these real-world economists cite the strategic decisions by corporations, enabled by government policies, to maximize share value by outsourcing and otherwise seeking cheaper, more compliant labor.
My read is that the evidence tilts towards the institutionalists. It is not that capital flight is inherently bad for workers; there are always losers and winners during economic change. But in the United States, the rules are tilted toward the winners. Losers are not compensated, even if they helped benefit the winners. The gains to trade and outsourcing are not paid back. The particular conditions in America have made capital mobility bad for workers and good for profits.
According to a study from the prestigious National Bureau of Economic Research, sending jobs abroad has reduced pay for U.S. workers affected by 6 to 8 percent. Bonehead economics could predict that. Free trade, the free movement of capital across borders, as Mankiw said, is good for shareholders in the short run. No disagreement there. Mankiw also said trade is good in the long run for workers, but the conditions for that to be true are very specific. For workers to benefit there must never be any job shortages, corporations must pay the full cost of their decisions and consumers the full cost of the product.
Corporations have a lot of help moving their capital to find cheap labor. Capital can move cheaply in many sectors because of the Internet. The Internet was designed by the U.S. government to help weapons researchers in universities across the country collaborate. Corporations and their shareholders did not take any risk in developing the Internet, which lowered the cost of outsourcing. Taxpayers paid for the technology underlying global supply chains, and shareholders reap the gains.
Long unemployment spells, even in economic recoveries, are caused by the constant threat of outsourcing and offshoring. Low-paid workers hope for low prices, but the search for low prices transforms communities into “everyday-low-price economies.” Wal-Mart’s trek across America requires thousands of community hearings to get zoning rules changed for its big-box retail. These political debates have left a trail of sophisticated analysis of the chain’s effect on towns and cities, mainly because of its policies of low wages and benefits. A February 2004 Congressional Report documented that a California Wal-Mart left a community’s taxpayers paying for free and reduced school lunches and health insurance for children of Wal-Mart families as well as Section 8 housing assistance. In other words, Wal-Mart’s low wages causes welfare payments to increase.
According to Purdue University’s Richard Fineberg, Wal-Mart drives away local grocery and retail stores while obtaining tens of thousands of dollars of tax abatements and building assistance, leaving less money for health care and education.
This dynamic of a downward spiral because of free trade was made clear when I oversaw $21 billion in the Indiana Public Employees Retirement Fund and the federal Pension Benefit Guaranty Corporation fund. Top money managers, among the most successful in the world, explained their investment strategy to my fellow board members and me. They strategically chose companies that can move production quickly to any part of the world because there are 2 billion peasants in the world ready to work. That flexibility guarantees profits and stock returns as far into the future as the actuarial software can see. Yet, key economic goals were abandoned. Efficiency is an important goal; companies should strive to produce more with the same resources. But if 10 young teens do the work of one American adult for less price, efficiency takes a step backward to profitability. Ten people are now doing the work of one, though profits are up. Profitability is divorced from efficiency, but the pension funds, on behalf of the taxpayers, hired these money managers anyway.
Firms adopt high-wage strategies when they face steady demand. For more than 150 years Studebaker’s innovations were made possible in part by military demand for its covered wagons then for its Army jeeps. Government contracts keep Honeywell, EDS and Halliburton on the cutting edge. Well-paying jobs do not just appear. Demand from foreigners helps, but U.S. consumer demand, especially if the consumer is the American government, makes the difference.
Creating Good Jobs for Americans and Global Workers
Orthodox economists agree with institutionalist economists that free trade creates winners and losers. Some workers never recover from a loss of the value of their skills. The inevitable imbalance of who bears the costs of free trade and who benefits from outsourcing justifies trade adjustment assistance programs like the Trade Adjustment Act. Workers displaced because of NAFTA and other trade agreements receive super-sized unemployment insurance. Economists Lori Keltzer and Robert Litan go one step further and advocate wage insurance that pays the difference between the wages of a new job and the one lost to trade. These wage supplements are a step in the right direction. They do not, however, bring back middle-class jobs or do anything about strategic layoffs and outsourcing that aim to maximize profits and discipline workers. These wage supplement proposals are short-run shallow fixes—though not shallow for those immediately helped.
Transfers of money to losers from outsourcing make sense, but transfers from whom? Who pays? Shareholders and CEOs who profit handsomely from the transfers should help pay for the costs they impose, not the taxpayers, who subsidized the technology making capital mobility possible. If CEOs paid the full price of job destruction, job creation might look more like a winning strategy.
More on target, but still weak, are current proposals to plug tax breaks for companies earning profits abroad, to require longer advance notice of offshoring and to require more outplacement services for the job losers. Thirty proposals in 20 states curb using offshore contractors by state and local governments, and two Republican senators propose banning the offshoring of some federal government jobs.
Members of the Bush Administration oppose these proposals. Their response is steadfast; they insist that all parties will be better off in the long run when businesses are encouraged to outsource and offshore, just wait and see.
Many in business do not embrace orthodox economics. Industries hard hit by trade have their own set of solutions featuring activist government intervention. The Computer Systems Policy Project (member firms include Hewlett Packard, IBM and Dell) wants the White House to reverse spending cuts to 1,200 two-year community colleges and for unemployed workers to get $3,000 for education and training. They have even floated the idea of high-speed Internet installed in public housing. For these policies not to be one-sided, where the government and workers pay for an increased supply of skills in their industry, there should be a quid pro quo. Firms must adopt strategies that involve hiring Americans in well-paying jobs. Improving the work force is not a policy for middle-class jobs. Improve the people and the jobs.
Manufacturing-job losses continue to be a focus because this industry provides middle-class jobs to people with average educations. There is no doubt that some of the job loss in manufacturing is a numbers game—outsourced clerical, sales and janitorial work is now classified as services. But these category shifts have real consequences because the average service-industry wage is half of manufacturing. The Bush administration floated an idea in the brand new Economic Report of the President to classify fast food restaurants as “manufacturing” (Mankiw made his impolitic remarks at the press conference releasing the report). The reasoning is that assembling a hamburger is assembly. The idea is certainly dead on arrival, but we see how much room there is for a job-quality agenda. Even the Bush administration realizes that manufacturing-jobs growth looks better because typically in the United States manufacturing provided middle-class jobs.
No one policy will create middle-class jobs, whether in the United States or other nations. Mexico lost thousands of manufacturing jobs to China last year. Pakistan, a former British colony with an English-speaking population, is beginning to lure India’s tech sector jobs there by offering lower wages and weaker workers protections.
In addition to the existing proposals to eliminate tax advantages to investing abroad, other proposals are part of a winning recipe to raise job quality. These include tying tax abatements and subsidies to job creation, using taxpayers’ money to produce domestic jobs, figuring out how to reduce the trade deficit so that the Chinese yuan is not so cheap relative to the dollar (a high-priced currency is bad for a nation’s exporters), raising the minimum wage, protecting workers who want to unionize, committing to full employment, raising consumer demand and tolerance for higher-priced goods, and direct government spending for health care and education. Those two industries are great sources of middle-class jobs.
These initiatives will cost money, and someone has to pay— candidates are the consumers and shareholders who benefit from lower prices and cheaper wages. We also must do more for employers, like the countless unsung owners and corporations that value efficiency, loyalty and communities. These groups include Kmart and OEC Medical, who are losing out to corporate killers.
Bosch now employs 10 more workers in South Bend than in 1996. Trade can be good. Don’t stop trade and outsourcing, but make beneficiaries of trade help the losers—especially if the losers subsidized the beneficiaries. Economists can earn their daily bread by sorting out who owes whom instead of issuing assurances that everything will be all right in the long run.
Teresa Ghilarducci is a Notre Dame associate professor of economics and policy studies and director of Monsignor Higgins Labor Research Center.