Argument by Example

John's comment to my "Not a Trick Question, but Close" post is well worth a read:

Let me use a real life, real RI example to rebut your argument. Let's assume that your theoretical factory owner in fact owned a jewelry factory. Now let's look at what happened to his economics over the past decade. As an economist would say, they were "non-stationary" -- there was a major structural break called the entry of China into the global economy, followed closely by radical fall in the cost of communications and computing. Now what did this mean to our jewelry factory in Pawtucket?

First, our factory owner now faced competitors who had drastically lower wage costs. Second, many Asian competitors had invested in the latest generation of equipment. For example, such equipment enabled them to translate designs into finished products much more quickly. Third, the odds are quite high that the Asian (read Chinese) competitors probably had a more educated workforce.

The result was superior productivity and time to market on the part of Chinese competitors, which translated into brutal competition for our Pawtucket based jewelry factory. Rather than raising their wages to the "living wage" you propose, most of them went out of business instead.

Now I know what you will say at this point. The difference is all about China's weaker environmental laws, labor laws and undervalued exchange rate.

And I say to you: not true. You could raise the level of environmental compliance in the Chinese factory to Western standards, and the productivity difference alone would sill give them an incredible pricing advantage. Evidence? Most Western countries operating in China (due to pressure from their shareholders, the media, watchdog groups and the like) actually comply with Chinese environmental laws (unlike many of the locals) -- and China's environmental laws, on paper at least, are quite stringent. Actually most Western companies have to comply with global company standards, which are generally even more strict. But do you see this additional cost driving those companies from China? No, you don't.

Ditto for the labor laws. Western companies in China actually do quite a good job treating their workers -- if they didn't, the NYT would be writing front page stories about it. But here's what they don't report (often enough): the relatively stunning level of education and training available in huge quantities in India and China. I know of a global chemical company with a plant in India where all the first line operators are degreed chemical engineers. Think about that. And guess which of this company's plants is number one in productivity and quality on its internal benchmarking charts? Right -- the one in India.

Finally, let's look at your inevitable argument that our Pawtucket factory owner can't offer a living wage to his workers (or keep them employed at all) because China undervalues it exchange rate. I will not deny that this has happened, as part of China's strategy (the same one used by other Asian countries) to rapidly grow its economy via exports. But if you take the IMF's analysis of where an equilibrium exchange rate for the Renminbi might lie, and you then impose it on the Chinese company's cost structure, guess what? The Chinese company is still more than competitive because of its superior productivity, which is enabled by newer capital and better educated workers.

So turning back the clock a bit, was there anything our factory owner in Pawtucket could have done to preserve jobs and, in Matt's wildest dreams, pay the mythical living wage?

Since some companies have successfully competed against Chinese competitors, it is obvious that the answer is yes. Our factory owner could have invested in new equipment, or, over time, built strong customer relationships (e.g., based on integrated IT enabled supply chains), funded in renminbi denominated debt, and focused on improving productivity.

But the more important question is whether this would have been possible in RI, as opposed to, say, North Carolina. Capital investment per worker across multiple industries in RI has long been among the lowest in the country. Why? Part of the reason has been high energy and tax costs, which depress the return on capital and thereby discourage new investment. Improving worker productivity requires highly educated workers as well as superior equipment and organizational changes. RI's public schools have done a terrible job at creating a highly educated workforce, while its high costs and taxes have discouraged highly productive workers from moving here.

Finally, it is also likely that our Pawtucket factory owner had what I call the "RI attitude." Top down, command and control, I'm in this for myself, I know a guy, etc. Basically, the antithesis of what modern management researchers say is the attitude needed to compete in today's world. So, even if the superior equipment and educated workforce was there, I'm not sure our factory owner would have been capable of the organizational change required to maximize productivity. Why not just suck out as much profit as you can and then, like so many other private and public sector workers, retire to Florida? The cynicism bred by RI's highly dysfunctional political culture has inevitably infected the private sector here too -- just ask any business person who has moved to RI from another state, and wondered what time warp they hit.

Finally, Matt, let's make the further assumption that our factory in Pawtucket is a public company, whose CEO decides to tell his shareholders that he is going to cut their returns in order to pay workers a "living wage", despite the competitive conditions facing the company. How long do you think it would be before he or she was fired? With institutional investors (like those from union and public sector -- who, in order to pay pension benefits, must earn high returns) leading the charge?

Matt, there is a word for all this: it is called "reality." But don't take it from me. Call your father, and ask him where he disagrees with what I've written.

Basically, your writing provides consistent evidence that you don't have a clue about what goes on in the private sector, whose struggles you degrade and whose success you seem to deeply resent.