What’s
Wrong Today:

Why is this man laughing?

Yesterday,
we said that it was difficult to understand precisely what John Boehner
expected to get from passing Plan B. We were focused on the wrong issue. The
right question is what does he expect to get now that Plan B wasn’t passed?

It
turns out that Plan B was not brought to a vote, since John of Orange
apparently did not count noses correctly and would not have had enough votes to
pass the House.

So,
two winners emerge from this disaster: Mr. Obama, who does not have to explain
why he isn’t doing more to meet Mr. Boehner in the middle; and Rep. Eric Cantor, (R-VA)
the House Majority Leader, pictured above, in a happy moment obviously
not on the floor of the House last night.

Mr.
Cantor is likely to be the next Speaker of the House, unless he is too smart to
take the job.

The
National Review reported
that House Republicans gathered in the Capitol basement for a meeting:

Boehner’s
talk to the group was short: He said his plan didn’t have enough support and
that the House would adjourn at least until after Christmas. But:

Everyone appeared stunned that
Boehner didn’t have the votes and that he was just pulling the bill and sending
everyone home for the holidays. Boehner’s allies thought: “This is a disaster”.

If
there were two winners, the loser is
the Country. Nothing of substance that favorably impacts the Country’s
fiscal health will be passed as long as the Republicans are so divided amongst
themselves.

When
the sanest of the crazies (arguably, Boehner) can’t herd the cats, you know
it’s a lost cause.

Today’s
Republican Party is a loose confederation of independent agents, many of whom
views themselves as elected to be the savior of the Real America: Governing
is not something that they seem to have any interest in understanding or in
doing.

The
Republicans either must establish discipline in the caucus (unlikely) or
abandon the Hastert Rule, under which nothing comes to the floor unless there
are enough Republican votes to pass it.

Although
they hold 234 seats and just 218 votes are required to pass legislation, there
are more than 17 Republicans who will refuse to support anything that has a
good chance of passing in the Senate, so Mr. Boehner cannot lead on any issue
that is of critical importance to our country.  

Does
anyone really believe that Mr. Boehner and the next Congress will pass any of
the following?

• Meaningful
  Tax Reform?
• Immigration
  Reform?
• Restrictions
  of the sale of assault weapons and high capacity magazines?
• Raising
  the debt ceiling on a routine basis?

Is
Mr. Boehner a patriot rather than an ideologue? If he is, perhaps he can make a deal with Mr. Obama and get
40 or so other Republican patriots to join 204 (or fewer) Democrats and pass a fiscal
reform bill that ends the Fiscal Cliff issue.

Otherwise,
that giant crashing sound you will
hear in the New Year will be America’s sole superpower standing, wobbling and
then collapsing on itself.

Great
job Republicans!

What’s
Wrong Today:

Here is
a visual breakdown of the offers and counteroffers between Mr. Obama and Mr. Boehner
through Tuesday:

Source: Wonkblog

(The green blocks below the line are spending increases, while
everything above the line are spending cuts and tax increases)

They don’t seem very far apart based on the chart, but since then there
have been no negotiations between the parties. Then, yesterday, Mr. Boehner met
the press and said that his latest
idea is Plan B, a back-up plan that assumes a deal can’t get done by the
end of the year, and that he would ask
the House to vote on it today.

Dan
Pfeiffer at the White House said this about the Boehner’s Plan B:

So what is Speaker Boehner trying to accomplish? It is difficult
to fathom why he’s even attempting to do this. He’s trying to get his caucus to
vote for tax hikes on millionaires in return for what?

Apparently, nothing.

The
Democrats are desperate to make the
Republicans break their anti-tax pledge and Boehner is asking his
members to do it for free?

It
might be a sensible strategy if it got him further towards some plausible goal,
but what is it?

John of
Orange is saying: “Get in the car Thelma, I’ll drive.”

 

What’s Wrong Today:

The Newtown shootings
have generated millions of words, many colored with understandable emotion. The
facts were difficult to find, since the news services all got some part of the
story wrong right from the start and repeated those inaccuracies for many
hours. Some of that was understandable, some less so. 

Facts must drive
solutions to problems. Many facts surrounding the current state of the gun
culture in the US are reported with more than a tinge of opinion. There is
nothing new in that, it happens every day in our politics.

So it was nice to
find that the Fiscal Times offered up some
information about guns in America that is worth repeating.  Their reporting is by Blaire Briody
and Maureen
Mackey. Here, as they reported, are some numbers associated with guns:

31:
Mass shootings in the US since Columbine in 1999.

70: People killed in mass shootings this
year in the US (not including the shooters who killed themselves). Seventy-two
more people were injured.

19.5/1:
Ratio of people
killed by guns in the US compared to other developed countries in the OECD. For
15-to-20-year-olds, firearm homicide rates in the US are 42.7 times higher than
in other OECD countries, according to a 2011 UCLA
School of Public Health study.

80:
Percent of all
firearm deaths that occurred in the US, among the 23 developed countries looked
at in the UCLA study. 87% of all children ages 0 to 14 killed by guns in these
countries are US children.

47,500:
Murders from firearms
in the US between the years 2001-2005 alone – and nearly 8 in 10 of these
murders involved a handgun, according to the FBI.

165,600: Number of signatures on a White House petition started on Friday, December 14th,
after the events in Newtown, demanding the Obama administration “produce
legislation that limits access to guns.”

16.8
million: Applications in
2012 to purchase firearms, up from 8.5 million in 2002, according to the FBI. Kentucky saw the most firearm
applications this year at 2.3 million.

$31.8
billion: What the firearms
industry generated in 2011 in job creation, sales and taxes, according to the National Shooting Sports Foundation (NSSF). (Curiously, the
NSSF is located in
Newtown CT.)

30
percent: The growth of gun
industry-related jobs during the recession (between 2008 and 2011), according
to the NSSF.

693
percent: The rise in stock market
value of Sturm, Ruger & Co., the largest publicly-traded gun maker, from
Obama’s inauguration until the day before the shooting. Smith &
Wesson stock was up 289% over that time. Since the shooting, however,
both stocks have fallen more than 15%.

600:
Estimated number of
guns bought back in Oakland and San Francisco, California, this past Saturday,
December 15. Each weapon was exchanged for $200 in cash. In Baltimore, Maryland, people sold back 461 guns the same
day.

600,000:
Semi-automatic
shotguns and rifles bought back as part of new gun control measures in Australia after a 1996 mass shooting in which 35 people
were killed. The country also prohibited private sales of guns. From 1995 to
2006, homicides by firearm in Australia plunged 59% and they haven’t had a mass
shooting since.

$1,100:
Price of a Bushmaster
Model .223 on GunBroker.com, the same model used in the Newtown shooting.

300
million: The approximate
number of firearms owned by civilians in the US as of 2010, according to the
book Firearms and Violence: A Critical Review. Some 47% of
adults report having a gun in their home, according to an October 2011 Gallup survey. 

10
years: The maximum time in
prison for gun possession by any of the following: someone convicted of a
crime, someone dishonorably discharged from the military, a person with a
history of mentally illness, or an illegal immigrant.

1.1%:
The percentage of
the 108 million background checks processed through the federal system
that were denied between 1994 and 2009, according to a 2009 report from the Department of Justice, the latest data
available.

99:
The number of laws the NRA has pushed through in the past four
years making guns easier to own, carry in public or harder for the government
to track. Eight states currently allow firearms in bars.

$17
million: Amount the NRA spent on campaigns during the 2012 election cycle.

Two more facts that were not in the
Fiscal Times article:

1. A report by Mayors Against Illegal
   Guns finds:  Failure by 23 states in
   submitting mental health records to the system, with another 17 states
   reporting fewer than 10 records and four submitting none at all.
2. After the Virginia Tech shooting, federal agencies were required to
   report relevant mental health and substance records to the NICS database. 
   However, the vast majority of federal agencies have not complied: 

a. Currently,
52 of 61 federal
agencies that are listed
in the FBI data obtained by Mayors Against Illegal Guns have reported zero mental health records to
NICS

b. 59 of 61 federal agencies have submitted zero substance abuse
records to the database, including the Drug Enforcement
Administration (!), the Department of Defense and the Air Force, Army, Navy
and Marine Corps

Now it is your turn
to think about what other information
you need to make an informed decision about any policy changes we should
make regarding the gun culture and gun ownership.

Tomorrow, a possible out of the box
solution on gun control.

 

Here are
two tidbits left over from last week:

1. 1.   Debt Ceiling/Fiscal Cliff

The
Republicans argue that the debt limit is their only leverage to curb Mr.
Obama’s spending: Sen. Lindsey Graham (R-SC) on Fox News:

In
other words, the GOP will only support budgets that don’t add much, if anything
to the debt.

This
is demonstrably, laughably, even shockingly false. Why? Because it
would take about $6 Trillion over the next decade just to
accommodate the debt Republicans voted for when they passed Rep. Ryan’s budget
last year.

This
proves beyond question that the debt ceiling clash has nothing to do with
shrinking the debt.  Raising the ceiling is about acknowledging what both
parties know — that under any fiscal scenario, we need to fund what Congress has already passed plus whatever it takes to fund a glide path back to
balanced budgets.

1. 2.  
   Newtown/Gun Control

Mr. Obama was heartfelt
and moving in his talk at the Newtown vigil last night. Everyone carried the
President’s words, but you may not have seen Gov. Molloy’s speech
or First Selectwoman Patricia Llodra’s,
but both were also very good.  

The Bushmaster .223
was the gun that killed most of the children in Newtown, it is an assault
rifle. It looks like this:

It
is similar to the AR-15 military weapon, except it doesn’t have an automatic/semi-automatic
selector switch. From 1994 to 2004, the Federal Assault
Weapons Ban
was in place (the Congressional Research Service’s report on gun violence is here).

After
Newtown, we should ask: Are shootings like this on the rise? Would a gun
control law make a difference? It is common to hear in these situations that
the weapons were acquired legally. This raises the issue of what would happen
if the law changed. There is some evidence:

Here
is a graph of the number of people killed or wounded in mass shootings since
1982. The grey area is the period of
the Assault Weapons Ban:

The
data are from a tabulation by Mark Follman at
Mother Jones.
Except for 1999, when Columbine and 4 other shootings happened, the assault ban
period was relatively peaceful by US standards:

Years	Shootings	Per year	People shot/year
1982-1994	19	1.5	25.5
1995-2004	16	1.6	20.9
2005-2012	27	3.4	54.8

Since
the end of the Ban in 2004, the number of shootings per year has doubled, and
the number of victims per year has nearly tripled. Three of the bloodiest four
years shown here occurred since the expiration. The numbers are not adjusted
for the increases in US population, although the CRS data adjusts for that
since it is per 100,000 population.

Some on the right were quick to do the bidding of
the NRA and the gun manufacturers. Rep. Louis Gohmert (R-TX) said
of the school Principal Dawn Hochsprung:

You
read that correctly, Gohmert’s solution to this school massacre is to arm the teachers and Principals. That
would be the same teachers that his fellow travelers call union thugs, parasites who leech off of society with
their demands for fair pay, benefits, and secure pensions.


The teachers they claim work only part-time, with
plenty of paid vacation days throughout the year; who take the Jesus and prayer out of schools and replace Him
with secular crap like evolution and other science.


THESE are the people Gohmert would arm in the
classrooms of America’s children?  Please
Rep. Gohmert, choose from among your ideologies a bit more carefully!


Let’s dispose of the argument that killers won’t kill if they know another
armed person is nearby. Really?

There
were 42 cops killed this year in America by gunfire. Last year: 67 were killed. And 59 were killed the year before.

All
told, 1,132 cops have been killed
by guns in the last 22 years. 

Were any killed
by people who thought they were unarmed?

What’s Wrong Today:

What
happened in Newtown simply can’t be processed. The evil displayed is beyond
anything that we can comprehend. The Wrongologist lives about 15 miles from
Newtown. He has shot guns. He has used them to kill small animals. He is not naive
to the value and allure of gun ownership or to the constitutional issues raised
by both sides in the debate about gun controls.

We need
the NRA and their fellow advocates to balance
the scales for the rest of us, to explain why the possible loss of freedom that would accrue to gun owners
if we had tighter restrictions on guns and ammunition purchases offsets the death of these children in
their classrooms.

They need
to explain why their inconvenience or loss of freedom would be worse than that of the people who died in other shootings, or who lost
family members and friends.

They need
to balance for us the permanent loss
of so much potential with the impatience of a waiting period, a background
check, or the loss of the ability to fire more rounds per minute.

This is the
choice our society makes in the gun owners’ favor every day.

One of the
most basic purposes of government is to protect its citizens. We accept this
throughout our society and it causes inconvenience and some loss of freedom to
many. Think about not being able to take your bottle of water or your hand gun through
security at the airport. It is inconvenient and it is an abridgement of your
rights.

Our government
has determined that the greater good requires that abridgement of your rights to
protect all of the passengers against the threat of a shoe bomber or worse.

We accept
this in the interest of the greater good.

As
Nicholas Kristof wrote
in today’s New York Times;

Will
we EVER regulate guns as thoughtfully as we should? What should we make of the
contrast between those heroic teachers in Newtown and our cowardly politicians who
won’t stand up and be counted whenever the issue of gun control comes forward?

So far it
has come out that the primary gun used in the Newtown killings was a Bushmaster.223,
which was formerly regulated by the now-defunct
assault weapons ban.

Combining
300 million people with a simple path to gun ownership creates an environment
where this horror will occur. We should know that these events, even with tighter
controls and laws, will generally not be preventable.

However,
that is no excuse for turning our faces away from the problem. There are
questions that need answering:

• Does
  the profile of mass shooters coincide with a person who would normally be
  denied a gun given the current process?

• What
  options are available?  Do we enact sweeping
  changes in gun laws, similar to much of Europe that makes it quite difficult to
  own and maintain any firearm?

• Do we further reduce regulation so that
  everyone is strapped and ready to engage the bad guy?

• Or do
  we listen to Mike
  Huckabee, who said the shootings happened because religion isn’t taught in
  public schools?

Kristof suggests we look at Canada,
which requires a 28-day waiting period to buy a handgun, and it imposes a
clever safeguard: gun buyers should have the support of two people vouching for
them. He goes on to say:

It is time to take on the NRA, the gun retailers and the liberty-first crowd that have
made our politicians look the other way whenever the subject of stronger gun
control legislation comes up.

Elections
matter. Elect people of moral and intellectual courage!

What’s
Wrong Today:

The
problem with researching a topic to bring to readers of the Wrongologist Blog is
that events can overtake the narrative.
A good example of this happened yesterday. The Wrongologist criticized the
Federal Reserve for ignoring one of its two primary objectives, using monetary
policy to grow the economy rather than just to fight inflation.  

So yesterday afternoon,
the Fed blunted that criticism when the Federal Open Market Committee (FOMC) did
a great thing: For the first time, the Fed now has numerical
thresholds for both the level of unemployment and inflation to guide its
decisions on raising the Federal funds rate.

The FOMC essentially
adopted the “Evans Rule”: It
promised to keep interest rates near zero at least as long as the unemployment
rate remains above 6.5%, unless the inflation forecast ticks above 2.5%.

That’s Charles
Evans, president of the Federal Reserve Bank of Chicago, who some have credited
as a key force behind this surprising move by the Federal Open Market
Committee. Evans has been pushing his colleagues on the FOMC to
adopt a specific threshold of unemployment to guide its decisions on when to
raise short-term interest rates. 

The messaging is powerful. The
Federal Reserve is finally saying chronic high unemployment matters.

A
little history:

 

We owe
a debt to Augustus
Hawkins, Hubert
Humphrey, and Henry
Reuss, DC legislators in the 1970s, who pushed Congress to give the Fed its dual mandate of low
inflation and maximum employment.  In the context of the
1970s—with both high inflation and unemployment—a Democratic Congress moved to
strengthen its oversight of the Fed—requiring semi-annual reports to Congress
and expanding the Fed’s statutory mandate. 

Bernanke reminded us in his
press conference that the long-term unemployment rate is not driven directly by
monetary policy. In that sense, the 6.5% threshold is more “guidepost”
than “target.” 

However,
after thirty-five years of the Fed’s benign neglect of its employment mandate,
the FOMC’s move is remarkable. One of the most important legacies of the Bernanke Fed may be this
effort to take both elements of its mandate seriously.  

If only Congress and Wall Street
would do the same: Tie policy directly to the employment of America’s citizens.
Over and over again, Congressional policy leaders avoid tying tax rebates to the hiring
and retaining of US citizens, something that the Wrongologist has asked for here.

Americans are last on
the list for consideration in employment, yet first up for
destruction of their jobs, social security, pensions and social safety nets.

The Committee seems to be concerned
that, without sufficient policy accommodation, economic growth might not be
strong enough to generate sustained improvement in labor market conditions.

As described yesterday, more than 40%
of the unemployed (about 5 million people), have been without a job for more
than six months and millions more say they would like full-time work but have
been able to find only part-time employment, or have stopped looking entirely.

The prevailing conditions in the job
market represent an enormous
threat to our society while wasting human and economic potential. The FOMC recognized that in their projections
of future unemployment released today:

(Extract by the Wrongologist. Numbers
reflect % of headline rate unemployment)

 

	2012	2013	2014	2015	Longer Run
Unemployment Rate	7.8 to 7.9	7.4 to 7.7	6.8 to 7.3	6.0 to 6.6	5.2 to 6.0

 

Note
that the Fed thinks that unemployment will remain stubbornly high through 2015;
and remain above 5% for the long term, without getting back to the 2007 level
of 5%, or the 4% unemployment rate we
saw in 2000.

 

This
shows that the FOMC believes American labor will suffer for years to
come. They stated they do not expect unemployment to go below 6.5% until
mid-2015 and that means the federal funds rate will stay effectively 0% until then.

The message hidden in the FOMC announcement is to
America’s employers: Work
matters, employment matters and businesses operating in the United States,
bottom line, are working against our national goals by not hiring her citizens.

Nice Work FOMC!

 

What’s
Wrong Today:

Some
may remember “Lost in Space”, the TV series that ran from 1965-1968. Wikipedia says
that the robot was:

C3PO
is remembered as the kindly robot who often said “I don’t think this is a good
idea”, while the Terminator (“I’ll be back”) was a robot with both a bad side
and a good side. Now we have the Transformers, sentient machines that according to Wikipedia, share
these characteristics:

So,
What’s Wrong?

The
evolution of Hollywood’s robots pales by comparison to the evolution of robots that
are transforming global manufacturing: Although industrial robots look like
machines, not humans, they act as Terminators in our jobs market.

The
Wrongologist moaned here about how wages were lower as a
percent of income than at any time in our recent history. Paul Krugman also mused over the weekend about
the declining labor share of national income, saying this:

Anyone who has walked a factory floor in the last 25
years knows that America’s manufacturers have been committed to adding robots,
improving efficiency while limiting labor cost.

This has in part, hastened the flight of
manufacturing jobs to Asia.

In fact, data indicate that US multinationals have been creating
nearly 2 million jobs offshore every year since 2006, while shedding 2.75
million per year at home during the same period. So, we lost 16.5 million jobs at
home while these corporate persons created 12 million offshore jobs (they ARE people my friends, your Supreme Court says
so).

Tuesday’s data from the
BLS indicate that there are just 3.7
million current job openings in the US.

The number of private
job openings was up 1.3% from last month, and is 6.5% higher than one year ago.
That’s nice, but, the current unemployment/underemployment
rate in the US (called U6, meaning those out of work, or who work part time
when they want to work full-time) is near 15%.

This means
we have about 17 million souls unemployed or underemployed, or 4.6 people who need a job for every
job opening in the US. Congress says the answer is to increase the
number of Science, Technology, Engineering and Mathematics (STEM) graduates.
But that is not the sole answer to the inequality in our economy, since there simply aren’t enough jobs for the
people who are looking for work.

Consider the
attitude of business leaders like Tim Cook, CEO of Apple. Apple got great press
because they may be bringing about 200 jobs back to America. In an interview
with NBC’s Brian Williams; Williams asked Cook how bringing
manufacturing jobs back to the US from China would affect the price tags
attached to devices like Macs, iPhones and iPads. Cook said:

Here is
the drill: Corporate America (Apple) offshores jobs. Production lines are shut down. Skilled labor
is laid off. The economy absorbs some of the workers in other roles. The others
are among the long-term unemployed. Skills and experience are lost.

And then Mr.
Cook says we don’t produce the right skill sets anymore? Apple has 80,000 employees worldwide, with 50,000 of
that number based in the US. Keep the champagne in the fridge. There is nothing to cheer about if 200
jobs of a total of 30,000 offshore come back home.

It’s true
that the unemployed need to approach
their job search as a marketing problem that needs to be solved, maybe
by looking at jobs that cannot be replaced by robots. That is why low-end
services jobs in health care, hospitality and retail are the fastest growing
segments of employment. It also explains why wage growth is poor.

Matt Ygleslas at Slate adds a view of what contributes to
this situation. He blames the Federal Reserve and the Corporatists for much of
this problem.

See the red
trend line on this chart:

The red
trend line implies that there is a
structural cause of the trend in the labor share of business output.

Why
does labor’s contribution to income decline during recessions and rise during
booms?

Because
the Federal Reserve has dual objectives: Managing inflation within a band of 2%
to 4% annually and doing what it can to grow the economy. It uses monetary
policy to achieve those goals. Over the past 30 years, it has a nearly perfect track record of managing inflation
(which is to say there have been no sustained periods in which prices rise and wages
rise faster than productivity). But the Fed doesn’t
have a good record of achieving sustained economic growth.

One
consequence of this asymmetrical goal seeking is that labor’s share of national
income has declined.

Ygleslas
adds:

Labor’s declining share of national income
isn’t just the result of technology and better robots taking the jobs of
skilled labor; it’s also the result of the Fed’s policy choices. Specifically their
anti inflation policies. The Fed has followed a policy that their prime
directive is to control inflation, not grow the economy or employment.

This means
their policies help corporations indirectly by keeping a tight rein on production
costs, which ultimately means your wages.

In the
early 1990’s, the Fed’s prime directive was still new. Corporate America was
unsure if they could rely on the Fed to do their bidding. There was a period
when news of growth in employment would cause the stock market to drop, because
the Fed and Big Industry worried that high employment levels would cause wages
to rise and then higher pay would lead to inflation.

It became SOP for the Fed to respond to
high employment levels with rising interest rates to drive employment
down. This policy helped prevent big wage gains.

So, here
we are: The Fed has a worldview that is more comfortable with recession and
prolonged periods of high unemployment than you are. But the Fed remains less comfortable
promoting policies that might allow wages to move higher. Those policies would usually mean
high employment. Their fear is that it could also mean the start of a cost-push
inflation.

C3PO was right;
these are not a good ideas.
Or, in the words of B9: Danger, Will
Robinson: The real danger is that you could lose your job due to the
policies of the job Terminators. Or not see a pay increase, or have your skills
eroded, or work as a temporary without benefits.

There should
be no turning back from more industrial efficiency; ultimately it is a good
thing. But people who have to work for
less than their cost of living erodes our culture.

This is
how our two-tier labor market, one tier of insiders who enjoy job protection and a
second comprised of outsiders with no protection, was born and how it will transform our society.

Unchecked,
this situation could become impossible, while over time, our emergent two-tier economic society may just collapse of its own weight.

Indeed, “Danger, Will Robinson”.

Today is
the anniversary of the attack on Pearl Harbor.  According to About.com,

At this distance of
71 years, very few Americans remember the day clearly. There are conspiracy theorists
who claim that President Roosevelt knew about the attack in advance and
permitted it to happen in order to pave the way for the US to enter the War on
the side of England.

But for all of the
budding social and political scientists out there, a real question is:

Did Mr. Roosevelt say
“A day which will live in
infamy”, or did he say “A date
which will live in infamy”?

The Wrongologist
solves this question for you: Roosevelt said: “A date which will live in infamy”.
 You can see the speech here. If you choose to read the various drafts of the written speech, they are contained in the
National Archives and you can review them here.
 

So, What’s Wrong?

There was another “date
that will live in infamy” in Washington DC. It occurred in the fall semester of
the Wrongologist’s freshman year in college. He lived in a dorm with an ancient
cell-phone like device called a pay phone at the end of the hall. It was
located just outside the Wrongologist’s room.  One day, he answered the phone to hear a
female voice:

In a show of bad judgment,
The Wrongologist went to the Hotel Willard. (below)

There he met Charlotte, a 6’ 5”
Catholic girl from what was then called Trinity
College. He is certain that she was a wonderful person, very smart too.

In
a show of horrifying judgment, The Wrongologist soon excused himself, visited the
men’s room and then left the hotel.

While
this barely qualified as a date, it clearly lives in infamy. 

It is very clear that
the incident does not speak well of the Wrongologist’s character, or his judgment.

On the other hand, based
on this experience, he should have had a VERY successful career in politics: Show
up, lie, fail to deliver and sneak out the back.

Charles
Fishman wrote
in The Atlantic this month about the return of manufacturing jobs to the US:

GE tried to sell the appliance business in 2008, but got no takers. Jeffery Immelt, GE’s CEO, wrote in Harvard Business Review last March that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances“, four years after he tried to sell the business!

What
Happened?

Just five years ago, unchallenged business logic was that you could no longer manufacture in the United States. Now the CEO of America’s leading industrial manufacturing company says offshoring is obsolete.

Why does it suddenly
make business sense for GE to build dishwashers (and more) in Kentucky?

Charles Fishman says that changes in the global economy are making the return of manufacturing to
the US more than just a PR exercise:

• Oil prices are three times what
  they were in 2000, making cargo-ship fuel much more expensive now than it was then.
• The natural-gas boom in the US has dramatically lowered the cost for running something as energy-intensive as
  a factory here at home. Natural gas now costs four times as much in Asia as it does in the US.
• In dollar terms, wages in China are some five times higher than they were in 2000 and they are expected to keep rising at 18% a year.
• Labor unions have less bargaining
  power: GE’s Kentucky union agreed to a two-tier wage scale in 2005. Today, 70% of the jobs there are in the lower tier, which starts at $13.50/hour, $8 less than what the starting wage used to be.
• US productivity has continued to rise, (see chart above) meaning that labor costs are a smaller component of the total cost of finished goods.

You simply don’t save
as much money chasing labor arbitrage savings today.

Why
did outsourcing become so significant?

In the past, the theory of product life cycles
kept manufacturing in the US. We had an advantage making high-value products due to the critical mass of engineers, skilled workers and marketers in close proximity to each other and to consumers. This allowed quick feedback and improved product design. There was also a great number of highly-advanced industrial pointing devices for sale, this may not mean a lot to most people but this will allow the business to produce and manufacture the products for a lower cost.

The theory said that
when a product was mature, price would become the most significant driver of market share, so production could then be moved to low-wage countries.

But in the 1990s, that cycle got short-circuited. In 2000, the typical Chinese factory worker made 52¢ an hour. You could hire 30 workers overseas for each one in Kentucky. Advances in communications and information technology, along with continuing trade
liberalization, convinced many companies that they could start the product cycle offshore immediately: globalized production, it appeared, had become “seamless.” You could also employee a company like jonble overseas to keep an eye on quality control and ensure that products were fit for shipping and for consumers. Because there were third party inspectors and cheap labour, outsourcing was a great idea.

This shift caused us to hemorrhage jobs: Manufacturing jobs peaked in 1979 at 19.5 million. They drifted down slowly until 2000. But since 2000, these jobs fell precipitously: We lost 6 million jobs from 2000 to 2009, while productivity grew.

Now things
are turning around: 500,000 factory jobs were created between January 2010
and September 2012;
a fraction of what we lost.

Harry
Moser, of the Reshoring Initiative, reports that about 10% of those new jobs are due to restoring. Their research shows most companies could reshore
about 25% of what they have offshored while improving profitability. That would be about 1.5 million of our lost manufacturing jobs.

Why
are some jobs coming back?

Here is James
Fallows in The Atlantic:

Among the reasons is
that the product life cycle is getting
shorter: Today, most products are crammed with firmware that adds features/functions to the basic washing machine, dishwasher and water heater. This shortens the product life cycle from 7 years to about 2 years before the
manufacturers need to start selling improved models.

Factories take time
to settle into a new product design. They face a learning curve and models that have a run of only a couple of years become outdated just when the assembly line starts to reach peak efficiency.

Companies are
rediscovering that how you run a
factory is its own technical skill set. The improvements in process and product design that happen on the factory floor can be worth more to the bottom line than the labor savings in someone else’s factory. Improving the printing aspect of the manufacturing process could provide various benefits, just check out this article to see how a simple upgrade of ink can help withstand the high temperatures often associated with manufacturing – Printing News: Industrial Component Marking. Heat-resistant pigment ink allows a clear typeface even at 1000° C which is good for marking products before going on sale.

Here are GE’s
results when water heater production moved from the Chinese factory to the Kentucky
factory:

Kentucky’s retail price beat the Chinese price
by nearly 20%.
The China-made water heater retailed in the US for $1,599. The Louisville-made water heater retails for $1,299.

GE’s appliance unit will
end this year with 3,600 hourly employees, 1,700 more than last year, more than at any point in the last 10 years. GE has also hired 500 new designers and engineers since 2009, to support the new manufacturing. Back in the ’60s,
Appliance Park was turning out 250,000 appliances a month. Today, they are turning out almost as many, with about one-third of the workers.

Other companies are moving some products back to the US: Whirlpool will make mixers in Ohio, Otis is bringing elevator production back from Mexico
to South Carolina and Wham-O is bringing Frisbee-molding back from China to California.

Today, Apple
reported that they plan
to build a line of iMacs at an as-yet-undisclosed site in the US next year, but China will remain its primary
source of hardware production. In
fact, this may just be a trial move: Apple owes the speed-to-market of its
iDevices to Foxconn, the Chinese manufacturer.

3600 new
manufacturing jobs in GE’s Kentucky plant are nice, but it is only about .5% of
the jobs that were lost, so by itself, it only points toward an answer to America’s
reindustrialization.

Real growth
in manufacturing depends on large-scale change:

• Investment
  in high technology
• Education
  to train the next generation of engineers and craftsmen
• Negotiations
  with trading partners to open markets and protect intellectual property

It is the same broken record: Our companies need to invest in people, process and technology IN AMERICA, while our Government needs to invest in education, trade and industrial policy. Hopefully, there will be more industrial sites opening back up again in America soon with these industrial policies. At the end of the day, it will benefit the economy. If more industrial businesses do start reopening, they will need to find a suitable site to set up. For many pre-exisiting industrial complexes, they use electrical houses, from companies like BMarko. These prefabricated buildings are easy to customize and can be ideal to house electrical equipment rooms on industrial sites. Perhaps more businesses will consider using those sorts of buildings to get their site up and running quickly. It’s about time industrial businesses came back to America.

Think it will happen?