Chapter 12. Impoverishing Labor and eventually Capital

Wages of non-supervisory labor in the United States declined 19% between 1973 and 1996 even as labor efficiency steadily increased. Just as Britain, 100 years ago, sold industrial technology to Germany, who then used it to take over Britain’s world markets (leading to the two world wars), U.S. labor has lost both industrial jobs and buying power through American technology and capital employing labor in other countries. The “miracle” of more Americans employed than ever before even as high-paying primary jobs shrank has been accomplished by expansion of lower-paying service jobs (cooking each other meals, washing each other’s clothes, and giving each other heart transplants, see this author’s The World’s Wasted Wealth 2) and wives going to work to make up the shortfall in pay.

Before the 1996-98 increase in the minimum wage, the buying power of low-paid labor was declining at a rate exceeding 1% per year.1 Though the buying power of American labor initially rose when the Asian tigers and Russia underwent their 1997-98 financial meltdown, and the buying power of those who owned stocks rose sharply through the price spread between production costs on the periphery and sales prices in the center and the rise in stock prices as money fled to the safety of America, the continued cheap imports (if permitted) will eventually result in a quickening pay loss for European and American labor and a shrinkage of business profits.

In 1987, it took only 40% as much labor to produce the same amount of goods as in 1973. During that time span, even as U.S. industrial productivity remained the highest in the world, the earnings of German and other European labor increased. The industrial wages of 14 nations are now greater than the industrial wages in the United States. At $23 an hour as opposed to $14 an hour, Germany’s industrial labor is 64% ($17,000 a year) better paid.2 In 1979, a U.S. worker had to work 23 weeks to earn enough to buy an average-priced car. Having to work 32 weeks a decade later to buy the same quality car indicates labor has lost more buying power than the above-calculated 19%. However, this loss has not translated into political action. “Wall Street economists did not anticipate any great rebellion. Wages have been falling for nearly two decades, they noted, and so far the American people have accepted it with patience and maturity.”3

The world’s workers should be aware what the managers-of-state have in store for them. William Greider explains:

[O]rthodox economists routinely assume that the American wage decline must continue for at least another generation…. Wall Street economists, without exception, predicted further erosion for the next twenty to twenty-five years. Unfortunate but inevitable, they said … wage patterns are moving toward equilibrium—a “harmonization” of labor costs among nations.4

While a bonanza for corporate imperialists, that “harmonization of labor costs among nations” is, for the simple reason that their wages will continue to drop; a disaster for developed world labor. The story of the Jim Robbins Seat Belt Company illustrates the process. In 1972, it moved from Detroit, Michigan, to Knoxville, Tennessee, and reduced its labor costs from $5.04 an hour to $2.58 an hour. In 1980, the company started moving its operations to Alabama, where wages were about 60% those at Knoxville. Then in 1985 the factory was moved to Mexico, where wages were about 37-cents per hour.5

The claims that labor is too small a share of production costs to influence major corporations to rebuild factories in low-wage countries are not valid. If labor costs of a runaway industry are 20% of production costs in the high-wage country, they will be only 5% in a country with one-quarter the wage rate. Add in tax savings, lack of pollution controls, cheap land, and cheap construction labor, and a former 10% profit rate becomes 25-to-40%. It is only in the markets of China and Southeast Asia, who had moved under the protection umbrella the United States placed over Japan, that wages had been consistently rising (until their 1997-98 financial meltdown). William Greider explains:

On the streets of Juarez [Mexico] … [t]heir incomes are not rising, not in terms of purchasing power. They have been falling drastically for years…. In 1981, the industry association reported, the labor cost for a Maquila worker was $1.12 an hour. By the end of 1989, the real cost had fallen to 56-cents an hour.”6

Before their approval, radio host Jim Hightower had been alerting America to the realities of the General Agreement on Trades and Tariffs (GATT, now superseded by the WTO/MAI/NAFTA/GATS/FTAA:

No need to speculate on the impact of NAFTA. We can already see its future. Dozens of big-name U.S. corporations have already moved 500,000 jobs from our country to Mexico…. In 1985, Zenith employed 4,500 Americans making TV sets in Evansville, Indiana, and another 3,000 in Springfield, Missouri. Workers made about $9.60 an hour—hardly a fortune, but enough to raise a family. Today, all of Zenith’s jobs are gone from Evansville, and only 400 remain in Springfield. No, Zenith hasn’t gone out of business—it’s gone to Mexico, where it pays Mexican workers only 64 to 84-cents an hour…. Consider this: The average manufacturing wage in Mexico is a buck eighty-five. The average wage U.S. companies pay down there is 63-cents—$29 a week. They’re going to buy a Buick from us on that? Our companies aren’t creating consumers in Mexico, they’re creating serfs…. Academics used by the government to promote NAFTA as a job creator] confessed that instead of a gain of 175,000 jobs for the United States—as they had claimed in their book … [it] would cause a job loss…. The real purpose behind NAFTA is not to help Mexican workers, but to use their low wages as a machete to whack down ours. “Take a paycut, or we’ll take a hike” the companies say. The Wall Street Journal even found in a survey that one-fourth of the U.S. executives admit that this is what they’ve got in mind.7

This power of workers to increase wages peaked and started declining in Western Europe, the United States, and Japan while, until their 1997-98 financial meltdown, it was in the middle stages of increase in Taiwan and South Korea and in the beginning stages in China, Malaysia, and Indonesia. Under free trade rules, and at the expense of developed world workers, wages of developed and developing countries will equalize and integrated economies will eventually balance but, unless the rights of labor and communities are reinstated, it will be at a low level:

With the growth of worldwide sourcing, telecommunications, and money transfers, there is no pecuniary reason for U.S. firms to pay Americans to do what Mexicans or Koreans will do at a fraction of the cost. This is why “elite” U.S. working-class jobs are being sent abroad and “outsourcing” is the current rage in manufacturing. As a result, American multinationals remain highly competitive and their profits are booming, while the United States itself is becoming less and less competitive. In the 1980s, U.S. capital goods exports have collapsed while imports of both consumer and producer goods have surged, no doubt in part because U.S. firms are now importing these products from foreign lands. In other words, we once exported the capital goods used to manufacture our consumer imports; now we are also importing the capital goods to run what remains of our domestic industry. Even a growing percentage of output in “sunrise” industries like computers and telecommunications is moving offshore. At home, the result is downward pressure on wages and chronic job insecurity for the remaining manufacturing jobholders, who are more docile as a result. Meanwhile, the castoffs from manufacturing and mining plus new labor market participants flock to low-productivity jobs serving coffee, making hamburgers, and running copying machines. Barring protectionism or a decline in U.S. wages to Korean or Mexican levels, this situation will persist and, in fact, will probably get much worse.8

We should make no mistake about this: integrating a high-wage developed economy with a low-wage developing economy—without the protection of equalizing managed trade —will be traumatic. The developed society’s labor income must take a severe cut and without protection against even lower-paid labor there is no assurance that developing world labor will see an increase. The balance—reached by equalization of labor costs—will not hold. The owners of capital will reach outside the newly balanced economies for even cheaper labor and the downward cycle will continue.

It is the inequalities between, and within, societies that permit evasion of social responsibilities. If all societies—and labor within each society—had achieved equality, the bottom line would still measure capital accumulation but it could only be realized by honest competition:

Broadly speaking, employers can compete either by offering low wages and ignoring the need for effective environmental and other regulations or by achieving higher productivity and producing higher-quality goods. Without a social and environmental charter, a free-trade agreement will encourage competition of the first kind. If, on the other hand, such a charter is adopted, it will not only protect wider social interests but also encourage firms to seek comparative advantage by concentrating on innovative productivity-enhancing approaches. Equally important, a charter is necessary to ensure that workers share in the benefits of rising productivity, thus creating demand for the goods they produce. Simply put, if workers cannot buy the products they make, manufacturers cannot sell them—a point that Henry Ford stressed more than half a century ago.9

For decades, Sweden, Japan, and Germany successfully protected both their labor and capital, and their economies were the envy of the world. But the loss of markets to cheaper producers is forcing those countries to abandon their protection of labor. Their capital is now fleeing and their wages are declining, albeit only slightly. This hollowing out of economies is due to the excessive rights of capital as they escape outside national boundaries. The loss of rights of labor as those industries flee is but the other side of the coin of the increased rights of property. A part of the earnings of first world labor has been transferred to the low-wage country and a part to increased corporate profits. In the Industrial Revolution, repressed skilled labor fled to the most productive centers of capital that was protected and firmly rooted within national boundaries. Today it is the reverse: capital is fleeing both national laws and labor.

The trauma to a country’s finance structure and to workers within the countries whose economies are declining, and the almost certain restructuring of ideology and replacement of current leaders if that decline continues, are, of course, why countries go to war over trade. But corporate imperialism provides a new international economic framework. If the economies of all nations are spiraling downward as capital parked outside national borders destroys capital protected within borders and various elements of this externally parked capital continue cannibalizing each other (capital destroying capital), it will be interesting to see who the managers-of-state go to war with.

Meltdown on the Periphery of Empire as the Center Holds

The world is watching closely: Will the former economic tigers, Eastern and Central Europe, Russia, and Latin America reenergize? Will the world return to the old balance of a wealthy center and poor, but functioning, periphery (successful financial warfare)? Or has control of technology and control of trade been lost, resulting in ultra-cheap manufactured products pouring into, and collapsing, the center (another great depression and failure of financial warfare)?

The financial collapse of the former Soviet Union, Mexico, Southeast Asia, and South America and the lower living standards of Eastern and Central Europe does not have to spread to the imperial centers. If banking and military monopolies are strong enough, the financial collapse of peripheral nations means lower import prices for the intact imperial-centers-of-capital. There was an $11-trillion increase in American stock market values between 1989 and 2000 plus large bond and real estate value increases, over $200-billion was confiscated from the collapsing periphery through currency speculation in 1997-98, and the wealth confiscated as the imperial center buys up high-quality firms on the periphery bankrupted by their nations’ currency collapses is many times that.10 (The $5-trillion loss in the stock market since has been compensated for by higher real estate prices and a rebound in stock markets.)

Close to 50% of American households own stock. If stockholders in the imperial centers stay broadly distributed, if speculations continue to lay claim to the wealth of the periphery, if profits increase even further due to higher profits from those lower import costs, if stock prices rise substantially due to money fleeing back to the security of America and Europe being invested in those markets, and if those stockholders spend a substantial share of their increased wealth, the economies of the imperial centers can maintain their vigor.11 Likewise, if profits fall and stock and home prices fall that created money (created by borrowing against those increased values) would evaporate and the economy will stagnate or collapse.

Because it is difficult to take rights away once they have been given, strong efforts were made to protect key South American countries and restart the Southeast Asian economies. However, this is being done under the rules of Adam Smith free trade, not Friedrich List protection under which those tiger economies first gained access to capital, technology, and markets.

Financial capital is safely banked in the currently-intact imperial-centers-of-capital and those collapsed economies on the periphery can restart only when finance capital flows back. As those economies restart, many of their industries will have new owners. Subtle finance capital monopolists of the imperial centers will have, during the financial crisis on the periphery, bought title to those industries and resources for a fraction of true value.

Under that scenario of successful financial warfare, economies on the periphery of empire will not have the same vigor as before. Too much money will have been siphoned off by subtle finance monopolists with their increased titles to others’ wealth and there will be massive excess capacity relative to the world’s buying power. However, if the increased wealth flowing to the center of empire trickles down to the masses through both lower prices and buying power generated from stock market profits and higher real estate values, it is possible for the imperial center to retain its vigor.

But a collapse of Western stock market and real estate values would eliminate the trickling down of wealth and reduce purchases. That reduction could multiply through the economy, and the recessions and depressions on the periphery will have come home to the imperial-centers-of-capital. A substantial softening of European and American economies would blow back upon the economies of Southeast Asia and put heavy pressure on the Chinese economy. If economies fall to that level, only relaxing the monopolization of finance capital and restructuring world trade (meaning equal rights, equal access to technology and capital, equal trade, et al., along the guidelines of Part III) can establish a vigorous world economy in its current form.

However, there is now adequate modern industry in Japan, China, and India to establish an Asian trading currency, sign trade agreements with South America and Africa, and maintain, or even expand, economic activity within the former periphery of empire. Russia is also a potential player.

Bond and Currency Markets lowering Living standards for the Politically Weak

Through the economic multiplier, jobs, profits, and commerce expand wherever industries are established. A nation rich in commerce provides profits and a tax base to repay bondholders who provided the capital to build infrastructure and industries. Those same taxes fund safety nets within the developed world (environmental and labor protections, Social Security, Medicare, private retirement programs, unemployment benefits, and welfare programs of all kinds) built up to protect labor and society as a whole. The developing world has no such protections for their citizens and imposed structural adjustments deny them the right to provide such supports.

Whenever a nation attempts to pass laws to increase the rights of labor, bond and currency traders move out of those bonds and currencies and into bonds and currencies of nations not imposing those costs upon capital.12 Rather than promote labor rights and social supports on the periphery of empire so as to remain competitive at home, corporations chose to reduce labor rights and social supports to stakeholders within the developed world. To reduce or eliminate government expenditures supporting stakeholders with weakened or non-existent political power, there was first massive rhetoric to cut budget deficits and control national debts. With fears of deficits and national debts firmly in the social mind, corporations, through their heavily-funded think-tanks, then lobbied for drastic reductions in the safety nets within the developed world.

As a group, the same people who make decisions for the bond and currency markets make the decisions of the IMF and World Bank and these two institutions earlier forced the same structural adjustments on the developing world as corporations are now forcing upon labor within the developed world. In short, instead of expanding rights as capital spread across the globe, the rights of all other stakeholders within societies are being lowered as the rights of capital are being raised. As economics correspondent Richard C. Longworth thoroughly illuminates in Global Squeeze: The Coming Crisis for First World Nations:

Nations that insist on these [labor rights and social support] laws, regulations, and standards—the components of a decent industrial civilization—will find their industry gone and their tax dollars, which supports this civilization, dried up…. [Neither corporations nor governments] see the real connection between big government, the welfare state, and the global economy, nor understands that, without the welfare state, the global economy will fail. Nor do they grasp that either the unrestrained global economy or democracy will survive, but not both.13

Corporate Welfare

Just as corporations make profits by ignoring worker safety, failure to properly dispose of waste, and failure to pay their full share of taxes, profits are made by direct subsidies. The American government provides this welfare to corporations to the tune of $125-billion a year (1997, $448 billion when all subsidies are counted), much to the wealthiest and most profitable corporations (collectively with $4.5-trillion in profits), while providing under $14.4-billion for welfare for the truly poor, of which a large share is consumed in administration and funds going to people not really in poverty. The equivalent of 4% of the wages of every working American subsidizes the wealthy while the equivalent of less than ½-of-1% of America’s wages goes for welfare for the poor and well over half of that goes to some who are not truly needy and to administrative costs.14

Federal corporate welfare takes the form of tax credits, tax exemptions, tax deferrals and deductions, a tax rate lower than others pay, price supports, funds to train workers, government-insured transactions of all kinds, government grants for research, government services (such as building logging roads for timber companies), outright subsidies, and lavish corporate lifestyles deducted from taxes.15

In attempts to attract industry to their communities, states and cities give corporate welfare in the form of forgiving local taxes; low taxes; government and municipal bonds floated to build factories and infrastructure; outright grants of land; low-interest loans; free water, sewer, and garbage services due to those tax exemptions; and discounted utility bills. Thus Kentucky taxpayers paid $300-million (equal to the plant’s wage bill for 2-to-3 years) for Toyota to build its automobile assembly plant there, Alabama paid Mercedes Benz $253-million for the same purpose, Minneapolis $828-million, Illinois gave Sears $240-million worth of land as an incentive not to move, the Pentagon financed the Martin Marietta/Lockheed merger to the tune of billions of dollars even as the companies were making record profits, and the list goes on and on.16 “More than a third of annual U.S. government spending, an estimated $448-billion, consists of direct and indirect subsidies for corporations and wealthy individuals, in direct violation of free-market principles.”17

Cities are bidding against other cities, states are bidding against other states, and nations are bidding against other nations. Cities, states, and nations that bid the lowest taxes, least environmental protection costs, lowest wages, and highest subsidies get the corporate jobs. These ransom payments are competitive bids between societies, not competition by production and distribution efficiency:

Externalizing environmental and social costs is one way to boost corporate profits. Paying child laborers slave wages in some countries may increase a U.S. firm’s bottom line. It is a tragic lure that has its winners and losers determined before it even gets underway. Workers, consumers, and communities in all the countries lose, short-term profits soar, and the corporation “wins.”18

Looking only at their bottom line, and listening to their own rhetoric, the managers of capital are unaware they are moving society back towards the wealth and rights discrepancies of the early Industrial Revolution. This return to quasi-aristocratic privileges is a recipe for eventual contraction of commerce, and destruction of their own wealth will likely come right behind the collapse of labor’s buying power.

Endnotes

1. Lester Thurow, The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World (England: Penguin Books, 1996), pp. 2, 6; Lester Thurow, “Falling Wages, Failing Policy,” Dollars and Sense, September/October 1996, p. 7; Mortimer B. Zuckerman, “Where Have the Good Jobs Gone,” U.S. News & World Report, July 31, 1995, p. 68; Dean Baker, “Job Drain,” The Nation, July 12, 1993, p. 68, addresses the 2.7% drop in 1992; Kevin Phillips, Boiling Point: Democrats, Republicans, and the Decline of Middle Class Prosperity, (New York: Random House, 1993), p. 24; Lester Thurow, “The Crusade That is Killing Prosperity,” The American Prospect (March/April 1996), pp. 54-59;. The following sources were published before that year. Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe, and America (New York: William Morrow, 1992), p. 53. The 1980 Economic Report to the President put the loss from 1973 to 1980 at 8% and that decline has continued even more rapidly; an editorial in The Nation, September 19, 1988, p. 187, puts the loss at 16% in weekly income and 11% in hourly earnings. Lester Thurow, “Investing in America’s Future,” Economic Policy Institute, C-Span Transcript, October 21, 1991, p. 9, puts the loss at 12% in hourly pay and 18% in weekly pay; Peter Drucker, The New Realities (New York: Harper and Row, 1989), p. 123. Back to text
2. Lester Thurow, Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy (New York: HarperCollins, 1999), p. 95; Thurow, The Future of Capitalism, pp. 46, 168; Doug Henwood, “Clinton and the Austerity Cops,” The Nation, November 23, 1992, p. 628. Colin Hines and Tim Lang, Jerry Mander and Edward Goldsmith, eds., The Case Against the Global Economy and For A Turn Toward the Local (San Francisco: Sierra Club, 1996), p. 487, cites $24.90 an hour for the Germany, $16.40 for the U.S. Back to text
3. William Greider, Who Will Tell the People? (New York: Simon and Schuster, 1992), pp. 395-97, emphasis added; Jerry W. Sanders, “The Prospects for ‘Democratic Engagement’,” World Policy Journal (Summer,1992): 375; Thurow, Head to Head, p. 163; Thurow, “The Crusade That is Killing Prosperity.” Back to text
4. Greider, Who Will Tell the People? p. 396, emphasis added. Back to text
5. Thurow, The Future of Capitalism, pp. 2, 227; John Cavanagh, Editor, Trading Freedom (San Francisco: The Institute for Food and Development Policy, 1992), pp. 19-23. Read also Jim Hightower, “NAFTA—We Don’t Hafta,” Utne Reader, July/August 1993; Donald L. Barlett, James B. Steele, America
   : What Went Wrong? (Kansas City: Andrews and McMeel, 1992), esp. p. 3. Back to text
6. Greider, Who Will Tell the People?, pp. 381-82. Back to text
7. Jim Hightower, “NAFTA—We Don’t Hafta,” pp. 95-100. Back to text
8. Michael Moffitt, “Shocks, Deadlocks, and Scorched Earth,” World Policy Journal (Fall,1987), pp. 359-60. Back to text
9. George E. Brown, Jr., J. William Goold, John Cavanagh, “Making Trade Fair,” World Policy Journal (Spring,1992) pp. 313. Back to text
10. Chalmers Johnson, Blowback: The Cost and Consequences of American Empire (New York: Henry Holt & Company, 2000), p. 226-27 Back to text
11. “The New ‘Financial Architecture’ Crumbles,” Economic Reform, March 1999, pp. 10-11; “Marshall Plan for Creditors and Speculators.” Economic Reform, January 1999, pp. 11, 14. Back to text
12. Peter Gowan, The Global Gamble: Washington’s Faustian Bid for World Dominance (New York: verso, 1999); John Gray, False Dawn (New York: The Free Press, 1998). Back to text
13. Richard C. Longworth, Global Squeeze: The Coming Crisis of First-World Nations (Chicago: Contemporary Books, 1999), pp. 56-57, 60. Back to text
14. Laura Karmatz, Alisha Labi, Joan Levinstein, Special Report, “States at War,” Time, November 9, 1998, pp. 40-54; Donald L, Barlett, James B. Steele, “Fantasy Island and Other Perfectly Legal Ways that Big companies Manage to avoid Billions in Federal Taxes,” Time, November 16, 1998, pp. 79-93; Donald L Barlett, James B. Steele, “Paying a Price for Polluters,” Time, November 23, 1998, pp. 72-82; Donald Barlett, James B. Steele, “The Empire of Pigs,” Time, November 30, 1998, pp. 52-64; “Five Ways Out,” Time, November 30, 1998), pp. 75-79; http://www.progress.org/banneker/cw.html, The Banneker Center’s Corporate Welfare Shame Links. For funds not going to the really poor read J.W. Smith, The World’s Wasted Wealth 2 (http://www.ied.info: Institute for Economic Democracy, 1994), Chapter 6. Back to text
15. Ibid Back to text
16. Ibid Back to text
17. Frances Moore Lappé, World Hunger: Twelve Myths (New York: Grove Press: 1998), p. 98; Ousseynu Gueye, “Let African Farmers Compete,” World Press Review (October 2002), p. 12. Back to text
18. Jerry Mander, Edward Goldsmith, The Case Against the Global Economy (San Francisco: Sierra Club Books, 1996), p. 106; Joanna Cagan, Neil DeMause, Field of Schemes (Monroe Maine: Common Courage Press, 1998); Sadruddin Aga Khan, editor. Policing the Global Economy: Why, How and for Whom. Cameron Bay Publishers, 1998.; Susan Strange, The Retreat of the State: The Diffusion of Power in the Global Economy (Cambridge, UK: Cambridge Studies in International Relations, number 49, 1998); Joshua Karlinger, The Corporate Planet: Ecology and Politics in the Age of Globalization (San Francisco: Sierra Club, 1998); John Elkington, Cannibals With Forks (Gabriola Island, B.C., New Society Publishers, 1998); Edward Goldsmith, The Future of Progress: Reflections on Environment and Development (Berkeley: International Society for Ecology and Culture, 1995). Back to text

This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.