Labor Day weekend brings about curious statements. Mr. Bush is quoted as saying, Every day, our workers go to factories and offices and farms and produce the world’s finest goods and services. Their creativity and energy are the greatest advantage of the American economy.” It’s a heart swelling statement, but one not generally accepted by the executives who run some of the largest factories, offices, and farms in this country. And therein lies the rub.
The recent economic downturn has spurred ever larger numbers of companies to push more and more jobs overseas to third world countries. Where a decade ago, it was manual labor jobs heading abroad, today it’s office work, and increasingly technical jobs in the Information Technology and Engineering sectors. There are a number of factors at work here.
At the global level, there is an undeniable trend toward a normalization of the world economy. Our communication and transportation network has reached a level where geographic barriers are no longer formidable in many businesses, and this trend continues unabated. Top notch education is available in emerging third world countries. As long as the politics of the region is stable enough and committed enough to building the physical infrastructure, talented labor is available for cheap. Third world economies grow as business from mature economies migrates to take advantage of the cheap labor. What is less spoken of is the inevitable decline of the mature economies as a result of the migration. This is a classic “mattress in the road” paradox. For any given company in the U.S. (as an example), it is in their economic interest to move operations overseas and layoff their comparatively higher paid U.S. employees. However, considering the U.S. economy as a whole, this is a death spiral. Id all companies do that, then the unemployed or under-employed Americans are no longer financially able to purchase the products being produced overseas for them. Markets and companies collapse, and the economy becomes more depressed. Much like a mattress in the road, traffic is benefited most by someone stopping to remove the obstruction, but each car in line is incented to simply drive around it.
I’m certainly not the first to ring the alarm bell in this arena. Bells were sounding when the manual labor manufacturing jobs left. And most of the worst case scenarios were abated when service sector jobs replaced manufacturing jobs. But many of those employees remain under-employed today and that means less consumer buying power. I have no doubt that as white collar jobs move, more of the same will happen. This keeps the spiral nice and slow so no one panics. But generation to generation, the country suffers. Is this the legacy we want to leave our children?
In a different vein, I’m also concerned about the future of the very companies currently pushing jobs overseas. I’m not concerned about their declining sales, but rather their declining talent pool from which to groom the managers and executives who run their operations. Right now, it is all the entry level position being moved abroad. In fact, many of these offshore markets have a disconcerting lack of management talent available. But that will change over time. As their entry level people mature, they will be less dependent on domestic management. More and more higher level jobs will move overseas. But at some point, if a domestic company is to remain more than a U.S. based stock symbol on the ticker, there has to be some U.S. based presence. Some U.S. employees, and presumably ones at pretty high talent levels. I’m wondering, 30 years down the road, where all those seasoned talented executives will come from. We didn’t grow them here. We don’t hire people in those fields any more. Will we then be importing executives from overseas to mange our companies whose operations are all overseas? To what advantage? Obviously, the companies themselves will eventually migrate.
Not to fear, in several generations the world economies will normalize and the U.S. will again be an attractive or at least cost neutral labor market. But our way of life will erode considerably before that happens. It won’t be a pretty century to live in. So what is there to do? On the one hand, our government could step in and impose tariffs on imported goods and services making our economy artificially attractive once again. But that is an erected facade, and will also erode our ability to export goods and services, which ultimately is essential to our economic success. Sooner or later that bubble has to burst.
I would contend that it is the incentives which our corporate executives currently operate under which ultimately are to blame, and ultimately the lever to fix things. Executive are incented for long term gains. It is not uncommon for an executive to swoop into a company, make drastic changes to save millions of dollars and then ride out of town with several million in his pocket. For domestic companies to succeed, executives have to be vested, financially and emotionally, in their success. They need to shepherd the company as its founder would have. It needs to be their baby. I’m not entirely certain how to construct a compensation package or media campaign to achieve that goal, but I do believe it is the solution. I’m also pretty sure that most of the founders of American flagship companies would roll in their graves if they could see how their babies are being managed today.