US reverts to economic/ political structure of a developing nation

The US economy has reverted to the economic and political structure of a developing nation according to a book by Peter Temin, emeritus professor of economics at MIT (Massachusetts Institute of Technology), published in 2017. Temin who turned 80 in December, has used a 1950s era economic model developed by W. Arthur Lewis (1915-1991), the West Indian economist who won the Nobel Memorial Prize in Economic Sciences in 1979. Lewis proposed a dual economy in developing countries, with one part containing upwardly-mobile, skilled workers and the other part inhabited by subsistence workers.

Temin in “The Vanishing Middle Class: Prejudice and Power in a Dual Economy,”  says applied to the US today, “The Lewis model actually works. The economy can grow, but it detaches from the [subsistence] sector. Simple as it is, the Lewis model offers the benefit that a good economic model does, which is to clarify your thinking.”

Social control is used to keep the low-wage sector from challenging policies favoured by the high-income sector.

In Temin’s terms, America now features what he calls the “FTE sector” — people who work in finance, technology, and electronics — and “the low-wage sector.” Workers, in the first sector comprising  20% of the population, tend to thrive; workers in the second sector usually struggle. Much of the book examines how the US has developed this way over the last 40 years, and how it might transform itself back into a country with one economy for all.

In 1971, the US middle class — with household incomes ranging from two-thirds to double the national median — accounted for almost 60% of total US earnings. But in 2014, middle-class households earned just about 40% of the total national income. And, adjusted for inflation, the incomes of goods-producing workers have been flat since the mid-1970s.

“We have a fractured society,” writes Prof Temin. “The middle class is vanishing.”

He says that one of the easiest ways to see evidence of US regression, is in the infrastructure: many of the roads and bridges look more like those in Thailand or Venezuela than the Netherlands or Japan.

Ford Motor Company and Apple

Henry Ford (1863-1947), the Irish-American industrialist, shocked America in 1914 by doubling the minimum daily pay to $5 and cutting the work-day from 9 to 8 hours at his main American plant at Highland Park, Michigan. Twelve years later the Ford Motor Company became one of the first big corporations to introduce the 5-day 40-hour work week.  In 1998 Tim Cook (b. 1960) joined Apple and he has been responsible for the biggest outsourcing from an American company to China — today almost all Apple’s manufacturing, and component supplies, are located in Asia.

As with other large American companies, Apple also outsourced many of its domestic non-core jobs.  

In 1914 the janitors (cleaners) at Ford’s main plant celebrated their good fortune, but their counterparts at Apple’s new campus in Cupertino, California, have no such luck as they are not employed by Apple. Last year The New York Times compared a current Apple janitor on an hourly rate of $16.60 with a janitor at Eastman Kodak  35 years ago – the inflation-adjusted pay is the same but the Apple janitor cannot afford to take vacations because she would lose pay while the Eastman Kodak janitor succeeded in becoming a senior executive as she was a full-time employee of Kodak. “She received more than four weeks of paid vacation per year, reimbursement of some tuition costs to go to college part-time, and a bonus payment every March.”

The introduction of the moving assembly line at Ford’s Highland Park plant cut the time to build a car from 12 and a half hours to 93 minutes. Henry Ford was concerned that the repetitive work was resulting in high staff turnover and he was in a position to share the rise in productivity with his staff, and customers through price cuts. Ford raised the minimum wage to $6 in 1919 and sales of the Model T car rose from 308,000 in 1914 — more than all other carmakers combined, and by 1920 Ford was selling a million cars a year.

Ford shared super-profits with his employees and it was good business. He was a pioneer among industrialists in the number of African-Americans he hired and he paid them the same as whites doing similar work.

In 1919 Henry Ford also opened a tractor plant in Cork City, near the harbour from where his father William journeyed to the USA in 1847. By 1930, Henry Ford & Son in Cork had 7,000 employed — a record for a foreign direct investment (FDI) project, since the founding of the Irish State in 1922.

Apple has about 5,000 employed at its Cork campus — about half are from elsewhere in Europe and the total is a quarter of the European workforce.

Peak employment at Ford’s River Rouge plant in Michigan was at 120,000 during World War II and today Apple’s total employment in the US is at 80,000 with the majority of the staff working in retail stores and call centers.

According to the Congressional Research Service (CRS) average manufacturing wages have declined over time, compared to those in other industries, with the exceptions of retailing and transportation. In 2000, for example, nonsupervisory workers in manufacturing earned 5.1% more, on an hourly basis, than workers in the services sector; in 2016, they earned 4.3% less than services workers, on average.

The CRS says that at the start of the 21st century, 17.1m Americans worked in manufacturing. This number declined during the recession that began in March 2001, in line with the historic pattern. "In a departure from past patterns, however, manufacturing employment failed to recover after that recession ended in November 2001. By the time the most recent recession began, in December 2007, the number of manufacturing jobs in the United States had fallen to 13.7m. "

Currently, 12.5m (Nov 2017) workers are employed in the manufacturing sector while total non-farm employment was at 153.9m.

Tim Cook, Apple CEO, of the most valuable listed company in the world, has called criticism of Apple’s fiction of having a quarter trillion dollars in cash in Irish shell companies to avoid tax, “political crap.”

Apple today is anti-trade union as Henry Ford was, and Apple like other tech companies in Silicon Valley is belatedly giving attention to workforce diversity.

In some social areas, times do change: Henry Ford hated Jews and Tim Cook is the most prominent openly gay business person in the United States.

Race and CEO pay

From about 1945 until 1975, Peter Temin documents in his book that US productivity gains and the wage gains of goods-producing workers tracked each other closely. But since 1975, productivity has roughly doubled, while those wages have stayed flat.

Meanwhile “CEO compensation at the largest firms dipped temporarily in 2015, but remains 940.9% above its 1978 level,” according to a 2016 Economic Policy Institute report. “This growth in CEO compensation far exceeded the growth of the stock market . . . . This shows that executives have done far better than the firms they have led and executive pay cannot be simply attributed to better firm performance” (see chart)

Where “The Vanishing Middle Class” moves well beyond a discussion of basic economic relations, is in Temin’s insistence that readers consider the interaction of racial politics and economics.

While a majority of the low-wage sector is white, with blacks and Latinos making up the other part, Temin says politicians began identifying the low-wage sector as mostly black because it allowed them to appeal to racial prejudice, which is useful in maintaining support for the structure of the dual economy — and hurting everyone in the low-wage sector. Temin notes that “the desire to preserve the inferior status of blacks has motivated policies against all members of the low-wage sector.”

“Race plays an important part in discussions of politics related to inequality in the United States,” he writes.

To take one example: Again starting in the 1970s, incarceration policies led to an increasing proportion of African-Americans being jailed. Today, Temin notes, about one in three African-American men will serve jail time, which he calls “a very striking figure. You can see how that would just destroy the fabric of a community.” After all, those who become imprisoned see a significant reduction in their ability to obtain healthy incomes over their lifetimes.

For that matter, Temin observes, incarceration has expanded so dramatically it has affected the ability of society to pay for prisons, which may be a factor that limits their further growth. At the moment, he notes in the book, the US states pay roughly $50 billion a year for prisons and roughly $75 billion annually to support higher education.

Nicholas Bloom (b. 1973), a native of England, who is a Stanford University professor, wrote in The Harvard Business Review, last year:

"What is clear is that over the past 35 years, firms have divided between winners and losers, and between those that rely heavily on knowledge workers and those that don’t. Employees inside winning companies enjoy rising incomes and interesting cognitive challenges. Workers outside this charmed circle experience something quite different. For example, contract janitors no longer receive the benefits or pay premium tied to a job at a big company. Their wages have been squeezed as their employers routinely bid to retain outsourcing contracts, a process ensuring that labor costs remain low or go ever lower. Their earnings have also come under pressure as the pool of less-skilled job seekers has expanded, due to automation, trade, and the Great Recession. In the process, work has begun to mirror neighborhoods — sharply segregated along economic and educational lines."

Solutions?

“The link between the two parts of the modern dual economy is education, which provides a possible path that children of low-wage workers can take to move into the FTE sector,” Temin writes.

That begins with early-childhood education, which Temin calls “critically important” — although, he says, “in order to continue those benefits, [students] have to build on that foundation. That goes all the way up to college.”

And for students in challenging social and economic circumstances, Temin adds, what matters is not just the simple acquisition of knowledge but the classroom experiences that lead to, as he puts it, “Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment.”

It takes at least a 16-year (or longer) plan for education with most things going right for an individual. 

In the book Temin bluntly advocates for greater investment in public schools as well as public universities, saying that America’s “educational system was the wonder of the 20th century.” It still works very well, he notes, for kids at good public schools and for those college students who graduate without burdensome debt.

But for others, he notes, “We don’t have a path for the next generation to have what we expect for a middle-class life … [and] not everyone wants to finance it.”

New York Times Jan 02, 2018: Erica Garner and How America Destroys Black Families

"Since the country’s founding, black families have never been able to thrive. Slavery broke them apart by allowing family members to be sold at auctions to different owners, and by prohibiting slaves from legally marrying, since slaves were classified as property, not people. Millions of black family members were killed during slavery and the lynching era, from 1877 to 1950. The modern legal system separates black families at higher rates than other families through many methods, including disparate sentencing schemes. Black defendants often receive far longer sentences than similarly situated white defendants."