Can the US bring the jobs back it lost to emerging economies

Friday, September 27, 2013

Can the US bring the jobs back it lost to emerging economies

Ask anyone when they last purchased a product with “Made in USA” written on it, and chances are the person will be at a loss. This is the result of the oft-quoted term “outsourcing”, by which companies, seeking bigger profit margins and reduced production hassles, sought to relocate some (or all) of their units in countries which offered them the right incentives and labor costs – China, India, Vietnam, etc. This was followed by the exodus of good engineers and skilled workers, who could no longer find telling US jobs, thereby creating a brain drain. 

Image credit: leedsn / 123RF Stock Photo

Popular rhetoric blames this exodus on the companies' endless greed, but the real reasons are more complex:

  • Production in America was around 20% costlier than even Canada.
  • Tough regulatory frameworks, which prevented the companies from modifying production and quality as per market needs. It increased overall costs, which began to squeeze even more as the recession began.
  • Powerful unions, which were often helped by politicians. Unlike in the past, however, when most of the production was in the States (as in 1979, when one in three Americans worked on the production line), companies could (and did) pack up and leave, taking with them hundreds of US jobs.
  • Governments of China, India, Singapore, Vietnam and others offer multiple incentives, including tax-free land, tax-breaks for first few years, etc, in order to entice the companies and, therefore, increase the employment of their people.

The result was that rising unemployment in US, which was sought to be disguised by social security measures. The situation has gradually worsened, leaving more and more people dependent upon state aid, thereby putting increasing amounts of stress upon the US finances. This, in a nutshell, has transformed the US economy from a profitable and productive one, to one that's lives off dole.

The excellent news is that conditions have changed for the better in the intervening decade, due to the following factors:

  1. Realization of companies that a widely dispersed production chain, spread across different jurisdictions and regimes having different laws, creates multiple hindrances to profit.
  2. Reduction of production costs, in US, – production in US is now 9% cheaper (in some industries) than in places like Canada.
  3. Preference of US consumers for “Made in USA” goods, especially since a number of scandals (like the recall of 2 million baby cribs in 2010 following deaths of 32 babies due to incorrect security mechanisms) relating to mass recall of foreign made products by quality watchdogs undermined consumer confidence in foreign manufactured products.
  4. Production in USA allows companies to cater to changing consumer needs (both quality and quantity) better.

This has led to an as yet minor trend of “insourcing” in which companies return to US for manufacturing purposes. This trend needs to be turned into a dominant one if the US economy is to stand on its own feet again. Here's what needs to be done:

  • Provide sufficient incentives to companies – Since America's competitors routinely provide incentives to companies, even bypassing or publicly flouting trade laws as they do so, it is common sense for US to offer incentives. These may not include free lands, tax holidays, tax-free and interest-free loans, etc. Even such simple sops like a pat on the back from the President may do the job since companies are often painted as anti-patriotic, and some praise from the President boosts their image immensely. The praise President Obama heaped upon “insourcing” companies was a crucial first step, but it could be expanded to involve government officials asking the companies for pledges regarding sourcing of materials and creating of jobs in US, and these pledges could be then reported to the White House. The President would then publicly thank the said companies for their patriotism, thus boosting their image.

                Finally, the federal government could ask the Congress for a multi-billion dollar fund which would be used to counteract the sops offered by any foreign company to a US firm. Though this may seem rather outlandish at first, it should be remembered that the Governors and politicians routinely engage to win firms to set up factories in their states and constituencies. If the federal government follows this policy on a national level, it would end this internecine conflict and provide jobs for all.

  • Persuade the Unions to be reasonable – Aggressive trade unionism may have ruled the roost in the past, but the current globalized economy means the companies can simply dodge them. Since the US has exceedingly powerful organized labor unions, companies are often forced to leave the States, forcing many workers to relocate to the unorganized sector, or simply become unemployed.

The company moves to other areas, like China, where labor is dirt cheap, and the government follows a more enterprise-friendly policy. However, given the steady improvement of Chinese wages (from $0.62 to $1.38 per hour) and the increasing support given to workers by governments, the incentives for companies to move offshore are declining. It is, therefore, the right time to rein in the unions, such that they stop driving the capital away.

  • Build up the infrastructure – America lags behind developed nations like Germany, Japan, South Korea and even Bulgaria, in some crucial aspects like roads, transport speed, power generation and broadband speeds. Since robust infrastructure reduces costs and time (especially transportation and communication time), it is imperative that the US fixes its infrastructure if it wants to create more jobs in US. Considering that there is sufficient resources available at reasonable rates at the moment, infrastructure investment must rise immediately.

                Equally vital is the human capital i.e. The skilled workers. Community colleges and universities must be given incentives to teach courses which include industrial and commercial relevance, thus allowing pass outs to get jobs in US more easily. If fees are too high, subsidies can be provided to students.

                Recent surveys have shown that most engineers passing out of the US universities are of            foreign origin. Though this in itself is worrying, one should make the best of the situation by giving these foreign workers enough incentives such that they can stay on and contribute to the economy. Providing green cards, which allows them to get jobs more easily, could be a first step in this direction.

  • Ensure continuity and stability of Federal financial policy – Companies seek assurances that the government won't default on debts due to Congressional logjams, or otherwise divert towards financial ruin due to petty politics. Though this last point seems the most difficult of the four, it is also the only one which can be achieved without any significant economic costs, but would rather provide appreciable benefits to the economy.

Though much of what is mentioned above may seem a pipe dream, President Obama's recent comments can be seen as a good omen. He mentioned , “Over the last three-and-a-half years, our businesses have added 7.5 million new jobs. The unemployment rate has come down. Our housing market is healing. Our financial system is safer. We sell more stuff made in America to the rest of the world than ever before. We generate more renewable energy than ever before. We produce more natural gas than anybody.”

Though some of it is obviously political-speech, there are kernels of truth in his assertions regarding adding of jobs and decline of the unemployment rate. This, combined with the in-sourcing trend, gives hope that the US economy will again become a highly productive one someday. But there's a long way to go, and it is earnestly hoped that the federal government will follow some, if not all, of the above points as it seeks to bring jobs back to the Americans.

Author: Aritra Mazumdar.

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