The Market Ticker
Commentary on The Capital Markets- Category [Musings]
2016-11-28 00:00 by Karl Denninger
in Musings , 600 references
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So Bernie Sanders wants Trump to use defense contracts as a cudgel to force Carrier to keep its air conditioner assembly jobs in the United States?

"I call on Mr. Trump to make it clear to the CEO of United Technologies that if his firm wants to receive another defense contract from the taxpayers of this country, it must not move these plants to Mexico," the senator from Vermont said in a statement.

Why doesn't Sanders (or Trump for that matter) talk about what's really going on here?

The media has, accidentally.  They have pointed out that the cost of assembling air conditioners -- that is, manufacturing labor -- in Mexico is about $3/hour.  Incidentally it's probably not much more for assembling cars.

There are two options folks:

1. Make it uneconomic for companies to take such an action by causing the cost of labor there to reach effective parity with the cost herein which case the offshoring of labor will disappear


2. Accept a $3/hour wage here in America as the labor rate to assemble air conditioners in Indiana.

The logic and math on this is pretty simple; if a company can have labor performed for $3/hour they will not pay $20/hour.  Nobody in their right mind will.  The problem is that you can always find a third-world ****hole where the rate of labor is $3/hour or less.

As such you either drag your wage rate down to that price or you make it uneconomic for companies to do this sort of thing.

The same is true for environmental laws.  It costs money to not dump your toxic waste into the water, air or on the land.  If you can place your factory in a location where such dumping is not illegal and does not lead you to go to prison then you will do so and thus the "cost" of producing that good or service appears to fall.

It did not, however, actually go down.  Instead the producer shifted the cost onto the people who live there in that environment without their consent.

The answer to both problems is, as I pointed out in Leverage,  to impose wage and environmental parity tariffs in an across-the-board fashion.  If the cost of labor in the United States is $20/hour and in Mexico it is $3/hour for comparable work then determine how many man-hours go into assembling an air conditioner, multiply by $17 and that's the tariff on said air conditioner.

If companies are in fact moving factories because it's "better" for their global supply chain or somesuch (which is the usual excuse) then this will not change their decision.  They will still put the factory there and pay the tariff, since it will not disadvantage them.

However, if the real reason is that they're exploiting the $3/hour wage then the factory will either not leave at all or will come back to the United States.

Do the same for environmental parity -- if the ability to pollute in location "A" .vs. not being able to pollute in the United States provides a "savings" of $100 million a year and the factory produces 1 million things in a year then the per-item tariff is $100.

This can easily be applied to steel, cars, computer chips -- or anything else.  Determining the value of such despoiling of the environment is not very difficult, since we know what it costs to prevent it here in the United States -- and we also know what sort of******of the land, air and water takes place "over there" on a top-to-bottom basis, including the production of energy (e.g. coal-fired power plants without scrubbers.)

Will Trump do this?  Probably not as I don't believe he really means a damn thing he said about it on the campaign trail, but he damn well should.

The usual argument is that if we do this then manufacturers will choose instead to build using robots.  Fine, let them.  That doesn't change a thing in terms of the calculations nor the business decision.  The environmental side still applies and if the assembly happens here but with robots then someone still has to build and maintain the robots and we'd prefer that to happen here, right?  Never mind that the labor rate to build the robots also goes into a wage parity tariff computation should a manufacturer choose to build "over there" with said robots!

In short the usual argument from various advocates of "offshoring" is that these choices are all about global supply chain management, not labor and environmental arbitrage.

I believe those claims are lies; the real choice is over 90% cost of labor reductions and billions of dollars of imputed costs to the people of a given region imposed by pollution that we do not allow here in the United States.

But the truth of my beliefs, or of the claims made by advocates of offshoring, is easily tested -- impose the tariffs and see what happens.  If the jobs keep leaving then I'm wrong but we still get the tax revenue from the tariffs and thus we can offset the social benefit costs of our lower-skill workers increasingly being left unemployed.

But if I'm right then the jobs come right back here -- we don't get the tariff revenue but we also don't need it for said social programs since instead of welfare we'll have jobs and people will be working for a living.

It's a win-win -- well, except for those in the business sector who are financially and environmentally raping people.

So what will it be, Mr. Trump?

Or, if you prefer and somewhat more to the point: What will you allow, America?

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