It Boils Down to Labor Costs
Governor Cuomo is on to something. He has commented that the current political dialogue (or shouting match) pitting Republican cost cutters versus Democratic 1% tax leviers won’t solve New York State’s fiscal problems, only a growing economy can do that.
[Surprisingly, the editors of Foreign Affairs appear to disagree with him and say that income redistribution that increases the size of the middle class, not growth, is critical to the survival of liberal democracy. See “The Clash of Ideas” 90th Anniversary Issue, Foreign Affairs, January / February 2012].
Though his head is in the right place, looking at Mr. Cuomo proposed 2012 budget, his execution is weak. Perhaps he is too constrained by immovable political forces like Sheldon Silver. Cuomo’s budget contains a string of tired old ideas like building roads, bridges and tunnels. Its worst elements are gambling casinos that indirectly tax the poor, old and stupid and a mega-convention center [read, white elephant] just as trade shows are dying under the weight of instant and free communications via the Internet.
If Governor Cuomo really wants to grow the economy, he needs to go back to basic economics and focus on lowering labor costs in New York State. Lowering labor cost, however, is so difficult and controversial that it can’t fit into the agenda of either major party. It is political suicide.
History teaches that growth goes to the economy with the lowest unit cost of production. Most economies achieve the lowest unit cost of production by either employing the cheapest labor or organizing labor more efficiently through the use of technology. Regulation, intellectual property, energy, capital, and transportation costs can provide short-term advantages, but in the long run, it is the labor component of the unit cost of production that defines competitive advantage. Some experts say that the software and Internet technologies are different, but they probably haven’t looked at enough data over a long enough period of time.
Labor costs are the reason why US textile and shoe companies “invented” the Southern strategy in the 1950’s to take advantage of low, non-union wages in the Carolinas by moving mills and plants out of Lowell, Endicott and Brooklyn. Today, those non-union mills are empty or completely computerized as textile and shoe production has moved to below-minimum wage economies in developing world. The minimum wage in the richest regions of Vietnam is $63.69 per month or $0.2653 per hour for a 60 hour week versus a comparable minimum wage of $7.25 per hour in the US or $1,740 per month for an illegal 60 hour workweek. If Nikes were made in New York State at the minimum wage, a $60 pair at retail would cost $234 (assuming 10 hours of labor at $7.25 per hour and a labor component of cost of about 7.5%). My son who has more sneakers than he can fit in the mudroom closet would have to make do with one pair.
Many conservative economists, who are comfortably in the middle class, like the ones who educated my daughter at overpriced Georgetown University, would argue that the solution to the labor cost problem in New York State is the elimination of the minimum wage. Do away with the minimum wage and then there would be full-employment because every occupation would find the ‘equilibrium’ wage at which willing wage seekers would find willing wage payers.
Though this is a seductively simple, RonPaulian theory and it might work in the very poorest regions of Mississippi Valley, sweat shop wages wouldn’t find any takers in New York State, with its middle class price structure and social safety net. In the New York metropolitan area, it is hard to find willing workers at the minimum wage – look at the home health care industry -- let alone people who would work at sweat shop rates competitive with China or India or the Philippines.
So Governor Cuomo faces a real dilemma. He can’t really transform Brooklyn back into the workshop of world, the way it was in 1910 when it was the Shenzhen of the world economy with its teeming hoards of underpaid, powerless, immigrant workers. No one in Park Slope living in a $1 million Victorian brownstone would tolerate living near an underclass living in squalid conditions on the mainland earning $144 per month like the 31 million migrant workers in Guangdong Province, right next to rich Hong Kong.
In short, the wage differentials are just too great between rich New York State and the developing world for Governor Cuomo to be able to close the labor cost disadvantage and reviving the manufacturing base. By now he must have realized that high paying, high technology manufacturing jobs are an oxymoron, particularly after last week's Foxconn incident.
He could try to undercut the minimum wage by turning a blind eye on illegal aliens -- there are apparently 500,000 in the State – as a way of providing New York State manufacturers with cheaper labor. Or expand the J-1 visa program and exempt its participants from wage protections as a source of migrant labor. Or attack the World Trade Organization and demand that ‘fair trade’ replace ‘free trade’, i.e., fair trade would guarantee a worker’s right to organize and so they wouldn’t have to threaten mass suicide to get a pay raise like the workers did at Foxconn.
But realistically these tools are not available to Governor Cuomo. They are controlled by the Federal Government and can’t work politically. Governor Cuomo can't fix the manfacturing sector because he can't (and doesn't want to) establish the conditions needed to achieve the lowest unit labor cost.
A soft tool that Governor Cuomo might use to highlight unbridgeable labor cost differentials is product labeling – similar to the nutritional labeling of food and restaurant meals. On every product sold in New York State, the retailer could be required to disclose what the product would have cost had it been made employing workers earning the minimum wage. Just like calorie counts on candy and fast food menus have modified consumer behavior, perhaps labor cost disclosures might slowly educate the American consumer about just how unfair globalization and 'free trade' are to the working class.
To realistically encourage economic growth, Governor Cuomo should stop spending on casinos and convention centers and take a cue from Mayor Bloomberg. He should focus on education and nurturing the new technologies being created by twenty year olds -- not subsidizing another IBM chip factory near Albany or doomed solar panel plants near Poughkeepsie. Governor Cuomo needs to beef up the SUNY system. SUNY needs elite engineering, computer science and biotechnology programs (and a nationally rated football team) that will attract the best and brightest to New York State. It is amazing that New York State does not have a public engineering school that ranks in the top ten nationwide. When New York State can boast a leading public engineering school then he will have done his job. But it looks like Mayor Bloomberg will beat him to the punch.
Consider the events of last week. 300 workers at a Foxconn factory in China assembling Xbox 360’s for Microsoft based on chips designed by IBM and to be sold at Best Buy threatened to commit mass suicide if they didn’t get a pay raise – the amount of the raise is not clear. Foxconn is a privately owned Taiwanese company and the largest net exporter from Greater China. The employees went up on the roof of the factory and threatened to jump off until they were talked down by the mayor of the town. Foxconn has nets around the roofs of its factories to prevent suicides, so it is not clear how the workers would have been able to kill themselves. The 300 suicidal workers (reminds me Mohammed Bouazizi, the young vegetable vendor in Tunisia who set off the Arab Spring) were immediately fired. Then management announced that a few days pay would be withheld as punishment. A few of the strikers declared that they would commit suicide if they did get their back pay. Due to the power of the Internet and Microsoft’subsequent embarrassment, the strikers got a few bucks and didn’t have to kill themselves to make a point. Why would the Chinese Communist Party protect a Taiwanese company that exploits Chinese workers on the behalf of American corporations and suffer international condemnation of their country’s labor practices? I don’t get it.
According to the Republican Presidential candidates, there are 11 million illegal aliens living in the United States; 500,000 are said to live in New York State. Obviously, these illegals who can be seen on certain street corners in every community are filling low paying, transitory jobs that Americans don’t want. The problem with illegals in that they cannot work in large, organized factories that can turn out manufactured goods, so their contribution to the economy is mainly in services. A guest labor system is clearly the answer.
Then there are the J-1 visa holders that supply a small, but steady stream of cheap labor. Abuses of the J-1 visa program are proliferating. Every country club in Westchester County has waitresses and waiters from the Philippines or some other developing country who are ‘studying’ in the US. Six Flags Great Adventure employs hundreds of young people with J-1 visas from all over the world who live in dormitories next to the amusement park and learn what? In fact, there was the first revolt of the J-1’s last summer at the Hershey chocolate factory in Pennsylvania over pay and working conditions.
In Maryland, when the J-1 visa program was cut back by the Obama Administration to protect American jobs, the crab cake processing industry almost went under. In appears that there are few blue-blooded Americans who like to pick crabs for the minimum wage. Fortunately, Congress granted the industry an exemption, allowing it to import Vietnamese crab pickers in the niche of time. Red Lobster and Maryland traditions were saved. It is time to expand the J-1 visa system to include low-skill manufacturing jobs that are being exported to other countries.
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