Winning by losing? U.S. manufacturing could make a comeback via lower wages, labor concessions

This is either really good news, or incredibly depressing.

Tyler Durden at ZeroHedge spots a trend that could mean big upside for U.S. states (mostly in the south) who are pushing their wage scales lower, through “right to work laws” that hobble unions:

A rather controversial perspective on “reverse labor mobility” has recently seen a revival following the release of BCG’s analysis: “Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring” which claims that “within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world.”

Is that good news?

While this topic, as we will shortly see courtesy of SocGen is far from taken for granted, could be the deus ex machina that could provide the historic jobs boost to Obama’s second presidential campaign (should he get that far), it could also explain the eagerness of the Fed to continue exporting US inflation to China. If the latter is indeed the case, it would mean that the Fed will do everything to continue flooding the world with excess liquidity if for no other reason than to see Chinese inflation reach an out of control state, and wages explode, in an outcome that would ultimately undo the great manufacturing job outsourcing phase that marked the 1990s and 2000s. If successful, it would indeed lead to a second US renaissance in manufacturing jobs.

Ok, so it is good!

However, will China allow its economy to lose the competitive wage advantage it has held for decades over the US, an outcome which would culminate in riots, as unemployment in the billion + nation goes parabolic. Of course, the conspiratorially minded can imagine a scenario in which the inflationary transference plan concocted by the Chairman has one goal and one goal only: to cause labor cost parity between the US and China in the shortest amount of time. The only two question in this case are: how long until China realizes what is going on, and how will it react?

Ohh… riots …

The analysis — Chinese wages rising in urban versus rural areas, as American wages fall and work rules loosen — explains not just the Fed’s behavior, but also that of Republican governors, who seem to be engaged in a nationwide race to bottom; eliminating state taxation of corporations wherever they can, and gutting what’s left of the union movement (though they’ve obviously gone after public, not private sector unions) in an effort to win the beauty pageant for corporations seeking low wage, low regulation environments to do business in the continental U.S.

Durden next links to this analysis from the Boston Consulting Group, which has the following inspirational subhead:

Reinvestment During the Next Five Years Could Usher in a ‘Manufacturing Renaissance’ as the U.S. Becomes a Low-Cost Country Among Developed Nations, According to Analysis by The Boston Consulting Group

A “low cost country among developed nations.” It’s like American exceptionalism, only exceptionally sad.

A bit more:

With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

MSNBC ran a segment on this on Monday, and presented it as potentially great news for American workers. The upsides were presented as follows: since its not all that much cheaper to manufacture in China these days, manufacturers are looking to reap the benefits from skipping reimportation costs and jumping on the “made in America” trendwagon and bringing their plants home.

The Obama administration has focused on higher wage technical and green jobs, including the manufacture of advanced batteries and the components for wind energy and high speed rail. But in states run by Republicans, not just in the south, but now also in the upper midwest, the strategy is different: what Democratic strategist Dixie Madison called “moonlight and magnolias” economics:

[Wisconsin governor Scott] Walker also has an economic vision for his state—one which is common currency in the Republican Party today, but hitherto alien in a historically progressive, unionist Midwestern state like Wisconsin. It is based on a theory of economic growth that is not only anti-statist but aggressively pro-corporate: relentlessly focused on breaking the backs of unions; slashing worker compensation and benefits; and subsidizing businesses in order to attract capital from elsewhere and avoid its flight to even more benighted locales. Students of economic development will recognize it as the “smokestack-chasing” model of growth adopted by desperate developing countries around the world, which have attempted to use their low costs and poor living conditions as leverage in the global economy. And students of American economic history will recognize it as the “Moonlight and Magnolias” model of development, which is native to the Deep South. …

… this was the default model of economic growth in Southern states for decades—as the capital-starved, low-wage region concluded that the way it could compete economically with other states was to emphasize its comparative advantages: low costs, a large pool of relatively poor workers, “right to work” laws that discouraged unionization, and a small appetite for environmental or any other sort of regulation. So, like an eager Third-World country, the South sought to attract capital by touting and accentuating these attributes, rather than trying to build Silicon Valleys or seek broad-based improvements in the quality of life. Only during the last several decades, when Southern leaders like Arkansas’s Bill Clinton and North Carolina’s Jim Hunt called for economic strategies that revolved around improving public education and spawning home-grown industries was the hold of the “Moonlight and Magnolias” approach partially broken. And now it’s back with a vengeance, but no longer just in the South.

And now, with China worrying over U.S. demands regarding its currency, and the Obama administration’s increasingly brazen encroachment into Beijing’s Asian back yard, it appears that the Moonlight and Magnolias strategy could actually start paying off, for manufacturers, but not for American wages or our standard of living.

Meanwhile, on the flip side, China’s rising wealth benefits American retail, but that could change if Republicans keep demagoguing China. How’s that for irony.

Related reading: China turns out to be just as obsessed with us as we are with them.

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2 Responses to Winning by losing? U.S. manufacturing could make a comeback via lower wages, labor concessions

  1. bmull says:

    The rearlly sad part is unions are in favor of this trend of quantity over quality. No one’s really looking out for the quality of life of workers anymore.

  2. JReid says:

    BMull -
    That was the saddest part of the article – the “enthusiasm” of unions for the return of manufacturing jobs literally at any cost. It’s a kind of desperation that speaks to union weakness, and fatalism. We’re being told we can no longer afford what has been the traditional American standard of living, so we’ll have to settle for something more like the Chinese one.

    Pathetic. And what a sad reason for you and I to finally agree :)

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