Off-shoring is not a black and white issue.

It’s neither categorically wrong, nor categorically acceptable. In its purest form, off-shoring is simply the international division of labor, and although I prefer to think of things not in terms of nations and borders, the concept of divided labor really is morally neutral: no better or worse than the division of labor between you and your barber, or your butcher, or your ISP or the guy who changes your oil. Smith noted that you could open a vinyard in Scotland, but the grapes would be awful and the wine terrible unless you spent an enormous sum on greenhouses. But why do that when you can grow perfectly good grapes in California, the Loire Valley in France, Traverse City MI, etc.

What about profits going overseas and vice-versa?

On both sides of the aisle people complain about “profits going overseas”.  For instance, they don’t want you to buy Toyota cars because the “profits go to Japan”.  Hypocritically, many people (let’s call them Republicans) also consider “free markets” the environment in which American giants of industry can continually exploit cheap labor in developing economies while slashing labor in the US. You can’t have your cake, and eat it, too.

There’s nothing necessarily bad about someone (foreign or otherwise) who’s willing to sink millions/billions in to capital investments, creating jobs, infrastructure, and productive capacity. So even if you buy in to the argument that the “profits are going overseas”, the infrastructure, the knowledge base, and the employment is happening here and you need to reckon that. Besides, they created the jobs and opportunities, and so they are entitled to profit (there are serious objections to why we depend upon the grace of a privileged few when it seems we ought be able to provide for our own well-being; these are presently outside of scope). That’s how it works.

But the last I checked, Toyota was publicly traded. If you want a slice of Toyota pie, just call your broker and place an order.

But that’s not how off-shoring really works. Is it?

So far we’ve been talking about off-shoring in its purest form. Actually existing offshoring is quite often another story altogether and this is where we need to start examining those objections to which I alluded, above.  A critical examination would fill many volumes.

The reader’s digest version is: transnational companies are able to offshore mostly because of US imperialism and the remnant of European colonialism which basically pillaged the resource-rich countries now known as “the third world”.

When you start peeling back the layers of this rotten onion, what you’ll see (if you can fight back the tears) is a system in which you and I are expendable.  On the backs of our labor, Uncle Sam bails out the banks that caused so much havoc.  We pay for their mistakes, but don’t profit from their success, instead we chase higher and higher prices caused by inflation.  It is a system in which you & I pay taxes to fund a military force which keeps the volatile “third world” safe — safe for the very same profiteering corporations (which our taxes also subsidize) who continue to off-shore the jobs that used to be ours.

We’re paying for (and many of us don’t even know it) an empire which is jeopardizing our well-being, our livelihoods, and our security.

A dollar an hour to park in royal oak..I bet businesses love that…not! (via Twitter)

If I had my druthers, the city would stop collecting property taxes and say to all the people and businesses: “You figure it out. The roads, the parking lots, the meters, they’re all yours now. Do with them (or not) as you wish.” So, this is not a defense per se of the proposed increase.

With that qualifier out of the way, I responded with a little Econ 101 knowledge: especially on a Thursday-Friday-Saturday evening, they could easily charge $3-4 per hour that much and there would be no shortage of people willing to pay. This is fundamental economics: when the price of a good or service is set lower than the market will bear, there will be a shortage of that good or service vis à vis the number of people who want to consume that good or service.

If parking were nominally “free”, it would be even more difficult to find a parking spot. Right now, parking is inexpensive, at fifty cents per hour during normal business hours and it’s still very difficult to find a parking spot. This is the number 2 reason why I don’t visit Royal Oak.

The number 1 reason is a preponderance of douchebags. I think the douchebags are attracted by low parking fees.

Stephen responded that, “As a rule, merchants resist parking price increases… they have a tendency to drive away business, but your point is well-taken.”

The notion that these customers (the same people who gladly pay $6 for a pint of beer and $190 for a pair of jeans) are going to be off-put by a 25-cent per hour increase in the meter fees is as retarded as a football bat, by the way.

Let me rephrase that: The business interests downtown oppose any change to this fee structure which would result in them bearing a greater amount (i.e., their fair share) of the burden for maintaining public parking lots in the city. The taxpayers in the City of Royal Oak are providing corporate welfare to the businesses in Royal Oak, predominately in the city’s downtown district. It is a direct transfer of wealth from the people who live and pay taxes in Royal Oak, to the people who only visit Royal Oak.

In a free market, there would be no taxpayer subsidized parking lots just like there would be no taxpayer subsidized bank bailouts, because there would be no taxpayers in the first place! How the parking situation might resolve itself, if I had my druthers (see above) is anyone’s guess. Here are a few options:

• Parking lots could be strictly private: belonging to a person or group of people who may (or may not) choose to explicitly charge for their use.
• An independent parking lot would probably charge daily or hourly fees to maintain the parking lot.
• A restaurant might charge a daily or hourly fee for entry, and validate the charge (or a portion thereof) for any restaurant patrons, or a restaurant might keep the lot for patrons only, building the cost of maintenance/upkeep in to their menu prices, just like they do with the amortization costs of the establishment proper.
• Or parking lots could be communally owned and operated — perhaps by a group of neighbors/citizens, but more likely by a group of commercial establishments with less absolute need for parking lots may pool resources together and establish shared lots, perhaps managed by the group or by a third party.

But instead, we have this pseudo-marketplace where the state or city zoning board sets (more-or-less arbitrarily) a uniform price for all places & times. The fact of the matter is that, although business interests may unanimously oppose fee increases, raising the parking fee is not necessarily “bad for business” or “bad for downtown Royal Oak”. The effects either way are probably de minimis, but I would argue that at least on principle of basic economic theory, subsidizing parking lots is a harmful distortion to market prices.

The results: parking is a clusterfuck during weekends and high-traffic events, and there are too many idiots wearing Ed Retardy jeans and fist-pumping all night long in sunglasses after dark.

Jim Mulva, ConocoPhillips’ chief executive, says that the unlimited liability some are proposing in Congress to punish operators for further spills in the Gulf of Mexico is inappropriate… He said to analysts:

We will not develop the resources if we have that situation.

… Mulva’s intent, of course, was to argue against imposing unlimited liability for oil spills. But assuming his statement was more than bluster, his implicit admission is that the risks of oil spills are so great that in a free market, the costs of paying for spill damages would outweigh the benefits of developing the resources.

via Financial Times

Because they could not afford to obtain and refine oil-based products if they had to bear the true costs.  Their costs would rise, and they’d have to raise prices in-step.  Yes, high prices suck. No, we wouldn’t have to put up with them (and stagnation) forever, because as the adage goes, necessity is the mother of invention.

The more expensive is oil, the less costly becomes the tradeoffs for alternative energies and other methods of lighting up the lightbulbs and motoring the cars and microwaving dinners.  And the less burdensome (relatively) is that opportunity cost, the more innovation and effort flows in to those alternatives. This is what’s known as competition.  It is not a dirty word.

It’s how shit gets done.  And it’s a process of discovery in which some people are inevitably wrong.  And that makes everyone better off.

The sooner governments stop subsidizing, bailing out, and propping up these monsters, the sooner the rest of us can get on with building a better tomorrow.

So, how can I possibly be opposed to such a program? Because it’s funded by taxes, silly (i.e., legalized theft, extortion). And I am fundamentally opposed to all taxes, except for maybe some sort of “asshole tax”. Yes, if they could find a way to levy taxes only on people who are total assholes, I could be OK with that.

Other than the very vague description given in the press release, I know nothing about the study or its method. What I do know from years of experience in the field, is that “online consumer panels” pose many serious challenges to market researchers in terms of obtaining representative sample (they skew significantly younger), avoiding ‘professional survey takers’, etc. So, take it for what it’s worth.

Distributed Costs, Concentrated Benefits

One popular argument is simply the magnitude of the problem an. Spend $12M to generate $600M in revenues. I understand the difficulties in organizing competing businesses in some sort of consortium, but seriously this should be a no-brainer. “Difficulty” in organizing is simply not a valid justification for taxing people. It’s “difficult” to make a No.2 pencil — so difficult in fact that nobody really knows how its done — but we have them anyways. It’s “difficult” to raise money to build a factory to manufacture vehicles, but people do it all the time. Lots of things are “difficult” and require imagination, ingenuity, and the sacrifice of risk. But that doesn’t justify taxing people.

At the very least, it seems like an opportunity for dominant assurance contracts or real-life community-building. Less “competition” and more “cooperation”, if you will.

And it clearly fails the popular “public goods” test.

Macro explanations for the micro boon

Although it is not clear whether the authors are suggesting that the macro-economy had a positive or negative impact on these numbers, they do qualify the research, stating:

These results should also be considered in light of the economic conditions in the United States in 2009 which had a constraining effect on travel and traveler spending

In my grossly uninformed opinion, against the backdrop of a faltering economy, 2009 was probably a down year overall for vacations in the traditional sense, as families abandoned luxurious plans in favor of the “stay-cation.” It certainly seems plausible that the “stay-cation” phenomena could skew midwest travel, as people substitute Michigan vacations for the more extravagant vacation they might take under different economic circumstances.

Marginal consumption, and small margins

The hospitality industry operates on small margins. A fortunate restaurant might increase its sales by 10% but net profits increase maybe a fraction of a 1% (or less). This isn’t the sort of revenue that enables capital-intensive investments. It’s not creating long-term growth opportunities, it’s simply moving finished goods from one place to another.

Most of this spending is marginal, and purely consumption; i.e., it doesn’t really matter whether the gas station sells 1M gallons of gas in 2009, or 1.001 million gallons of gas. It doesn’t matter if a restaurant sells one extra steak dinner or one single extra beer. That is, it requires no additional labor, brings no unemployed people in to the labor force, and generally does not measurably improve the lot of anyone already in the labor force.

Seen and unseen

Every dollar funneled into, or otherwise diverted to the tourism industry is a dollar which can’t be used on other productive endeavors. So to some extent, tax-funded promotions like this encourage the mis-allocation of productive resources (labor and capital) in favor of the hospitality industry, and at the expense of every other sector of the economy.

Conclusion

The only palatable argument for such a program is if its used to offset resident’s taxes. So, if MI plans to reduce their property taxes by the net of $29M, or if they plan on refunding $29M worth of sales taxes paid by MI residents, I guess it’s not such a bad thing. But that’s not how it operates.

Instead, it is a direct transfer of wealth, corporate subsidies, if you will. Use $12M worth of money taken from taxpayers (an extremely distributed cost) in order to fund an Advertising/Marketing campaign to support business interests which, although still distributed, are significantly more concentrated than ‘taxpayers’. Hey, it’s better than spending their own money, and coming up with their own solutions to the problems they face.

Ad spending, and private business revenues/profits is not a public good which would arguably justify some sort of redistribution, and since it’s not a public good, we have to reject the Reagan-esque, trickle-down-economics argument which is mostly bullshit anyways.

Addenda

I swear when I was walking the dog yesterday evning I had one more even better response, but I lost that train of thought and it hasn’t come back yet…

Michigan had $23B worth of tax revenue in FY2009 — in all honesty $41M is like pissing on a forest fire.

Because of current trends in housing and financial markets, Fannie Mae expects to continue having a net worth deficit in future periods and to need to tap more funding from the Treasury.

A ‘net worth deficit’ is newspeak for worth less than nothing.

NB: This is the ‘private’ company charged with “promoting sustainable homeownership”.

Vacant about 99% of the time since 2002, the ‘Dome has been maintained of late by the City of Pontiac, at an annual cost (to taxpayers) of about $1.5M.

As recently as 2005, the City refused a $20M purchase offer. This week, the City of Pontiac (MI) accepted a bid to purchase the Silverdome, nestled among 127 sprawling acres of crumbling concrete and lightpots, on the outskirts of 20.2 square miles of blight known as the “City of Pontiac”, for $583,000.

Five-hundred eighty-three thousand dollars. That’s about $8 per seat; the cost of a single domestic draft beer at most Stadiums today.

Home to the Detroit Lions of the NFL for 25 years before they built the sweet new Ford Field stadium in Downtown Detroit, the Silverdome cost $55.7 million to build, adjusted for inflation that’s something like $250-600 million, depending on how you calculate it.

Ford Field , which cost over $400M to build, like the Silverdome and most modern arenas, was financed largely by public (i.e., taxpayer) funds which were justified by spurious claims of “urban renewal”, “development”, “jobs”, “tax base” and other economic bullshit.

In the e-mail, Brad made an excellent argument which I’ll quote:

I’m 98% sure I can’t support this…

…I understand that student loans suck and I feel lucky to not have any of them. So if you and the other 90% or so of college students that have student loans get bailed out…then what about me. My parents put away a $100 a month from the day I was born for my brother and I to be able to pay for college in full. My parents came up with real money to pay for college and not loans. Shouldn’t they get bailed out too?

For background, the chart below shows the rising cost of annual room, board and tuition expenses (I do not believe they are indexed) at Public and Private schools in the United States. [link to Excel data]

CNN Money reports that the cost of higher education has far outpaced price inflation over the last 25 years or so.  What I was really looking for (but couldn’t find given limited time) was a 40- or 50-year trend, which would go back far enough to look at the price of higher education before government began subsidizing the hell out of it.  I’ve seen these data elsewhere, and it’s pretty damning.

In the interest of full disclosure, I’d be happier than a pig in shit if student loans were forgiven. But it’s not going to happen, no matter how many Facebook signatures they collect. A Student Loan obligation, like any other sort of tax or government fee, is simply one of many means by which most people, most of their lives, are kept largely enslaved by the system.

The system, for those of you not in the know, is not set up for you to get ahead. (Thanks, dad!)

If you’ll allow me to take some license with the argument Brad sets forth, above, there are plenty of people whose parents saved up and paid for their education, there are a lot of people who worked their asses off all through college and paid for their own education, and there are plenty of other people who either didn’t go to college, went to a community college, or went to a lesser school than they qualified for academically, because they couldn’t afford a 4-year degree at a better school. The “forgive student loans” petition doesn’t help these people who were arguably injured the most by the onerous cost of higher education, which is itself a consequence of the existence of the federal student loan/grant programs.

We have arrived at this problem, of unaffordable education, precisely because the government has tried to make education affordable for the masses.

If you want to criticize all the parasites in the banking industry and in the government, that conspired or otherwise caused the affordability problem in higher education, I won’t get in your way: I don’t want to give any of them one thin dime more than I can get away with. Insofar as student loan obligations are pretty much bullshit to begin with, and that everyone whose income has derived principally from these subsidies over the past 30 or 40 years has really been stealing from the nation’s productivity, I won’t object at all if you want to personally repudiate them.  But it’s pure nonsense to try and “work within the system” to remove the chains and shackles placed upon you.  On the other hand, whenever the entire system crumbles under its own weight, you won’t have to worry about all those fraudulent obligations any longer!

Understand that an awful lot of people were genuinely harmed by this program (and others like it) in ways that you or I can barely fathom.  What you’re saying is, “I want a career that allows me to be my own boss, one which is protected by a State-sanctioned monopoly, one which allows me to bill my clients upwards of $100-200/hour, for the rest of my life. I want all of these privileges, and I don’t want to be inconvenienced in the least.”

I do not think I’m out of line to accuse this complaint of approaching the height of selfishness.

All was well and good, apparently, until yesterday, when in the interest of preserving “fairness”, the Governor signed House Bill 6644, which by amending Section 436.1203 of Public Act 58 of 1998

[P]prohibits stores from sending wine directly to customers.

The wine law comes after a federal court ruling saying Michigan’s old law was unfair to out-of-state stores.

The law was, as are most laws governing commerce between “free” individuals, about protecting vested special interests. In this case, Michigan’s liquor control board, and their three-tiered distribution model.

Now, if your local liquor distributor doesn’t stock that particular label from Napa that you love, you’re out of luck, without recourse. Now, if your local liquor distributor doesn’t stock that particular label from Traverse City (MI) that you love, you’re out of luck. That is, unless a road trip to Napa (CA) or Traverse City (MI) is in your future.

The Supreme Court ruling which struck down the previous law on account of it being “unfair” to out-of-state producers was only half right, and because it was only half right, it was wrong enough to be challenged. Now, the State will prevent Michigan residents from buying any liquor, from any producer, in any State via mail order.

But hey, it’s fair, right?

A correct ruling would’ve also noted that the old law was also “unfair” to consumers, because there was not then, nor is there now, a compelling reason for the government to prevent grown men and women, from purchasing a particular brand of beer or wine merely on the basis of where it happens to have been produced, distilled or bottled.

A lot of people are saying things like, “It’s not really a bailout. It’s a loan.” Nice try. It’s still a bad idea.

If they are getting money that nobody would freely lend, then it’s a bailout. If they are getting subsidized interest rates, then it’s a bailout. The end result is that by shielding these organizations from failure, the government will be incentivizing the very behavior that resulted in this dismal state of affairs. By giving these manufacturers a bailout, the government allows them to maintain prices otherwise unsustainable. By not holding them accountable to the market, they will be allowed to continue making overpriced cars that nobody wants to buy.

I did the math. In order to remain solvent, General Motors would need to triple its 3Q sales volume over the next two quarters, just to meet its obligations and keep enough cash on hand to pay the bills that come due.

By January, GM may not be able to “pay its suppliers, meet its loan covenants or cover health care obligations in its labor contracts.” Therefore, our “representatives” in Congress are hammering out a deal that would give our money to these very same companies. According to Nancy Pelosi,

Emergency assistance to the automobile industry would be conditioned on executive compensation restrictions, a prohibition on golden parachutes, rigorous independent oversight and other taxpayer protections to ensure that any companies that benefit from this assistance and not the taxpayers bear the full burden of repaying any costs that are incurred.

You see, the companies are going to bear the burden, not the taxpayers.

The entire point of a bailout is to reduce and/or eliminate a corporation’s financial duress! And this can only be done by making someone else accountable for its shortcomings. Where is the money coming from?

It’s either coming from taxes (i.e., from taxpayers) or its coming hot off the printing press and being loaned to these megalithic corporations, who will be able to spend the money into existence before prices have risen to accommodate the additional supply. In either case, individuals will bear this burden, not the corporations.

And what if the bailout doesn’t work? What if we’re forced to pump $50B or $100B or more into the industry (immediately and perceptibly reducing our current standards of living) and the companies still fail?

Who is going to bear that burden?

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Gilligan left a comment in #27, most likely in response to continued discussion about Who Owns General Motors?

I liked this statement:

“Employees could purchase the company outright in a month, if they were so inclined.”

Brings up an interesting point. If employees had total ownership of the company, they could fire the management for their decisions to produce products nobody wants. … All the benefits of ownership and vested self-interest would apply.

I worked for one of the big 3 in the late 80’s. I could write a massive post about all of the waste that ranges from comical to tragic, but to nutshell it:

Please do so, I’d love to read it. I’ve heard horror stories from some consultants/six-sigma types that used to work with the automotive manufacturers and their suppliers. Like, “Corporate Jets for everyone!” horror stories.

Management (i.e. engineering) waited for summer students to arrive to throw overdue projects over the fence at them to complete. In the meantime, they used the companies facilities to run their home businesses.

The guys who were making out like bandits were the trades folk. The employee incentive program said that an employee that came up with and implemented X would be paid 10% of what it saved the company in the first year, up to a maximum of 20K. You should have seen the size of their paychecks. Deep into the 6 figures…whew. Senior management used to get outraged and would chew into the salaried engineers, “Why don’t you guys invent this stuff?” Of course, the incentive program did not apply to the engineers…’nuff said.

Where I work, most non-managerial employees are eligible for overtime pay. Once you become a supervisor, however, the OT pay stops, which could potentially result in lower income after your promotion. If you think about it, you only need to work about 3 hours of OT per week to make 10% more than your base salary. If you average 5-8 hours of overtime per week, you’re making a lot of extra money. If you get a 15% raise and promoted to a managerial position, you’ll probably take home less money and you’ll have to work more. Needless to say, the employee churn at the 2-3 year mark (when most people become eligible for this sort of promotion) is pretty staggering.

Papa G, who also worked in automotive, left a comment on A Bailout for Detroit

I hold the Big 3 management teams as the problems for the rust belt states and in particular, here in Michigan. Now they want a bailout…they made the mistakes and they want our money. So does Wall Street . If the Wall Street bailouts work out OK, will the government put some of the profits in the hands of the citizens of the United States….probably not ! If the bailouts of the Big 3 proves to be successful..will the government put the profits in our accounts. Again…probably not !!

As the lean fad took over in the 1980s and 1990s, GM under the leadership of F. A. Smith (and the others) began reducing the number of suppliers that they used to source parts. Some were forced out by GM’s pricing power, others were bought out or consolidated. When the dust settled, where there had been many small, independent machine shops and suppliers, now there are only a few. Some of them (like Delphi) are also bankrupt.

Before, if one supplier went on strike, or couldn’t fulfill the order, there were a dozen others who would fill it. Now, if General Motors’ single supplier of widgets goes on strike, the entire company is dead in the water, wasting through millions of dollars a day. This sort of top-down management has been disastrous for General Motors, as strikes become increasingly crippling.

Bailing out Chrylser twice in the past few decades was a bad idea. Bailing out General Motors so it can buy Chrysler which needs its own bailout is an EPIC FAIL.

There are parts of both companies that are valuable and salvageable, although probably not at any price approaching book-value. The rest of the organizations are junk. You’d practically have to pay people to take them off your hands. The junk needs to be written off, not subsidized, because it’s only dragging down the few strong points these organizations have left.

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Despite the fact that I thought it was probably going to be a boring post (too academic, perhaps), a number of people left comments on Entrepreneurs, the Firm, and the Knowledge Problem saying that they really liked the post and found it interesting. I’m glad to hear that, maybe I’ll do more of that sort of writing in the future.