Wages plummet in global race to the bottom

Despite massive state intervention, including two interest rate reductions and huge injections of credit, the Chinese economy has been unable to withstand the consequences of global overcapacity.

The  contraction in China’s immense, globally-significant manufacturing sector is recorded by two, complementary  measures. HSBC, the global financial conglomerate, measures activity in the smaller, private firms, and its index has been in contraction territory for ten months in a row.

Last month the official government-maintained measure of manufacturing activity, focussing on big state-owned firms which have been heavily supported by government spending on infrastructure, fell to a lower-than-expected 49.2 in August.

The impact of the growing Chinese downturn is being felt sharply in the United States. In August, manufacturing activity shrank for the third month in row. The Purchasing Managers’ Index recorded that new orders – an indicator of future demand –  fell to 47.1 from a reading of 48 in July.

Anything above 50 indicates expansion. Below 50 means contraction. August’s figure is the lowest since the depths of the post-crash recession in April 2009.

Looking deeper we discover that In the US manufacturing comprises only 12% of economic activity, and its continuing growth has been founded upon a drive to lower wages.  

Millions of relatively well-paid skilled jobs were lost following the crash as unemployment soared to be replaced by a much smaller number of low-paid workers in the service sector.

A new report from the National Employment Law Project shows that companies in the United States eliminated about 8.1 million jobs after the recession began in late 2007. The economy has since recovered only about 3.3 million of those jobs, starting in early 2010..

During the recession, employment losses occurred throughout the economy, but were concentrated in mid-wage occupations. By contrast, during the recovery, employment gains have been concentrated in lower-wage occupations, which grew 2.7 times as fast as mid-wage and higher-wage occupations. Specifically:

• Lower-wage occupations were 21%  of recession losses, but 58% of recovery growth.
• Mid-wage occupations were 60% of recession losses, but only 22%  of recovery growth
• Higher-wage occupations were 19% of recession job losses, and 20% of recovery growth.

In the US unemployment benefits cease after 23 months and many workers either disappear off the employment statistics altogether or are forced into low-paying jobs. James Paulsen, chief investment strategist at Wells Capital Management sums it up very bluntly: “The cost of labour is very cheap,”

Whilst cheap labour is good for short-term profit, which is reflected in the results of US corporations in particular, in the longer term it adds another twist to the downward spiral. This is because the decline in real incomes, which is being felt throughout the world, results in weaker demand.

According to Ethan Harris, co-head of global economics research at Bank of America Corp in New York, the proliferation of “very distressed workers” hurts consumption, which, he estimates is likely to increase just 1.5% in the next six quarters.  

But the drive to lower wage costs is just as relentless as the global manufacturing contraction and workers in the US and Europe face further attacks in the competitive drive to the bottom.

Foxconn Technology Group's is the main manufacturer of Apple products like the hugely successful iPads and iPhone, and Apple became the world’s most valuable company ever in August surging to $624 billion in market value.

The company has been criticised for factory conditions in China resulting in a series of deaths and suicides. Foxconn is now investing $10 billion in Indonesia where manufacturing wage costs are 60% percent of China's. Just think of that the next time you use an ubiquitous Apple product.

Gerry Gold

Economics editor

It's the system, stupid

A sketchy deal on spending cuts which allow the US debt ceiling to be raised is no more than an acknowledgement that law-makers in even the world’s largest national economy can make little if any impact on the deepening crisis.

The credit ratings agencies whose pronouncements are treated as holy gospel say that the America’s AAA rating won’t last. And it’s easy to see why. US debt, already at a staggering $13 trillion, is forecast to rise without pause through to 2016.

As it does so, the cost of financing the debt will have to come out of current budgets, leading to further cuts in health and welfare benefits. Political turmoil in Washington, with Barack Obama looking increasingly like a lame duck, one-term president, only adds to the sense of crisis.

Stock markets nose-dived on news of the vague compromise which, like the UK Coalition’s savage austerity programme, is founded on false expectations of growth. Market speculators immediately turned their attention back to Europe, driving up borrowing rates once again for Italy, where Berlusconi has called an emergency meeting, and Spain, where prime minister Zapatero yesterday postponed his holiday to deal with the crisis.

Throughout the post-war period, the world economy grew as it had to if profits were to be maintained, but the global trend in the rate of that growth has been relentlessly downward. Throughout the period of globalisation a series of ever sharper, deeper and more extensive crises saw the rate plummet and then recover, but the recovery was always weaker than the crash.

During 2007/8, when a series of individual mortgage defaults undermined the extreme fragility of the global house of cards built from credit and debt, the growth rate threatened to turn negative for the first time. This prompted the panic which saw governments and central banks flood the world with more credit, which as debt has now rebounded with such devastating effect.

Sovereign debt quickly overtook private and corporate debt, and now all are in the same boat – with the rudder entangled in a net of credit default swaps, holed below the water line and sinking fast towards a collective default. The long-hoped for “return to growth” is just that – a hope.

Reports on manufacturing this week reveal that output is not just slowing badly in the US the world’s largest producer, but actually shrinking in China, the world’s second largest, and in the UK – the seventh largest.

The universal consequences of the crisis and attempts to fix it include inflation boosted by fantasy finance and unemployment as public bodies cut spending. Corporations respond in their usual ruthless way in a desperate bid to maintain profits.

Foxconn, the world's largest maker of computer components which assembles products for Apple, Sony and Nokia, is in the spotlight after a string of suicides of workers at its massive Chinese plants, blamed on harsh working conditions. The Taiwan-based company currently employs 1.2 million people, with

most of them working on the Chinese mainland.

The corporation’s classic response is contained in its plans to introduce a million robots to its production lines over the next three years to cut rising labour costs and improve efficiency. If it is successful, the products it turns out will be highly competitive, but will flood onto a declining market as the global economy slows further. And because labour is the source of all value, the rate of profit on the whole operation will shrink dramatically.

It’s just another example of the inescapable, contradictory logic that ensures that in the midst of a crisis – and this is unarguably the worst in the short history of capitalist society - any attempt to fix things has exactly the opposite effect. In the 1992 US presidential election campaign, Bill Clinton taunted his opponent with the phrase “it’s the economy, stupid”. Actually, it’s the system, stupid.

Gerry Gold

Economics editor

Mind the gap

Despite an agreement to swap half of the 1,200 threatened jobs for a two-year pay freeze and lower pensions, Vauxhall workers in the UK should be warned against welcoming their prospective new Canadian and Russian employers too early.

Massive overcapacity persists in car production as well as the economy in general and no jobs are safe. Last night, for example, the Chinese government set out its detailed plans to deal with overcapacity throughout the huge country’s economy.

China has provided massive support for its major industries in the face of the shutdown of activity in the labour-intensive cities that served the needs of global corporations producing for the now dormant Western consumer markets.

The state has funded infrastructure projects and underwritten production and consumption in the hope that overseas demand for the commodities produced within its borders would recover. But now that hope has evaporated, even though China’s domestic market for cars continues to grow.

Alongside its plans to reduce capacity in traditional industries such as steel, aluminium and cement, China is forced to act on silicon, the key input to the electronics industry, and wind power generation.

In bowing to the logic that follows the credit crunch, China’s State Council said meeting the government's long-standing goal of reducing overcapacity was urgent. Factory closures, job losses and rising bad bank loans would result from inaction.

At the same time the council admitted that the crisis had already spun out of control. Some 58 million tonnes of crude steel capacity under construction is “illegitimate”, and would bring the surplus to 700 million tonnes.

During the globalisation decades that saw it emerge as a major source of profitable cheap labour China grew to become the world’s top producer and consumer of cement. But the global slump has sharply reversed its fortunes. China's cement production capacity will rise to 2.7 billion tonnes per year if all approved projects start operation, and market demand totals only 1.6 billion tonnes. With capitalist-style competition dominating the economy, in 2010 Chinese companies in the wind power industry are expected to produce equipment equivalent to 20 million kilowatts of capacity, double the 10 million kilowatts of actual capacity likely to be installed in the country.

To tackle this oversupply, and in a blow to those in the West who favour a move to localised production, the cabinet said it would refuse approval for the construction of complete wind-power equipment factories. It also banned investors in the sector from using locally-produced equipment, aiming to prevent local governments from building their own equipment plants.

China’s predicament expresses the collapse in demand throughout the major capitalist economies because consumers, all maxed out on credit card and other debt, have stopped spending in the way they did before. And in an economy actually fuelled by debt, this is bad new for capitalism.

Despite aggressive “downsizing” by manufacturing since the recession began, leading to the loss of tens of millions of jobs worldwide, there is still vast overcapacity as shown in the "output gap". This is defined by analysts as the difference between the potential output of a given economy and what is actually being produced (including services).

The Organisation for Economic Cooperation and Development (OECD) is projecting that the situation will actually deteriorate. Next year, the OECD says the output gap among in the advanced economies will widen to -5.7% — the biggest number seen since the 1930s.

HSBC's China economist, Qu Hongbin told Time magazine: "There still is hope that we'll go back to the old days but demand in the future will be lower than in the past. That means the factory owners have to face reality."

That “reality” is that the global recession is heading inexorably towards outright slump and talk of a “recovery” in the near future is delusional. A new economic model is needed to replace a capitalist system that is clearly unsustainable and beyond repair.

Gerry Gold
Economics editor