Is America’s Middle Class Doomed? |

Is America’s Middle Class Doomed?

By Mitch Gurney

March 28, 2011

“Multi-national corporations are not about country first and never will be unless it benefits their bottom line. They don’t perceive the global marketplace and labor force in terms of borders or along political party lines. Their business models and strategies are based on a global economy and have been for many years. Multi-national corporations have adapted to a new paradigm, in fact they created the paradigm.”

Globalization: Multi-national corporations Paradigm Shift

Did you know that some corporate strategists think hollowing out America’s middle class is not a big deal?

America’s middle class is in trouble, although some folks are just now figuring this out it could be a bit too late – about 30 years late as the deed is done. We’re now in the consequence phase. You might say we’re in that stage where those of us who got shafted are beginning to realize that while at the party we slept through all the fun.

In addition to trends already established over the past 30 years the following comments made by some of our fellow American CEOs and other corporate executives make this clear:

Jeffrey Immelt – CEO of General Electric said in December 6, 2002
When I am talking to GE managers, I talk China, China, China, China, China. You need to be there. You need to change the way people talk about it and how they get there. I am a nut on China. Outsourcing from China is going to grow to 5 billion. We are building a tech center in China. Every discussion today has to center on China. The cost basis is extremely attractive. You can take an 18-cubic-foot refrigerator, make it in China, land it in the United States, and land it for less than we can make an 18-cubic-foot refrigerator today ourselves. 

See transcript

Many of us are trying to figure out what’s happened to our jobs and why they’re not coming back. Perhaps they haven’t noticed that at least 80 percent of the “cheap imports” we buy are actually American Brands. Thanks Mr Immelt for shedding some light on the mystery. And about those cheap imports, is an iPhone cheap? (Assembled in China)

You may recall that Mr. Immelt was appointed in 2009 by President Obama to serve as a member to the President’s Economic Recovery Advisory Board “to provide the president and his administration with advice and counsel in fixing America’s economic downturn.”

Now I know we’re toast with a high profile dude like Immelt advising our President after making a statement like that in 2002. Like many of its multi-national corporate associates GE’s history for outsourcing is factual. To add insult to injury we are reminded GE pays less in taxes then you or I do. But it’s all legal and naturally corporations like GE influenced legislation to make it that way. And they are not alone, its standard fair.

In a recent article The Rise of the New Global Elite by Chrystia Freeland and published in The Atlantic, the author notes that:

America’s … own super-elite is rapidly adjusting to [a]…more global perspective…

Ms Freeland shares a few comments made to her over the years by various corporate executives:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

Hollowing out America’s middle class doesn’t really matter? There are differing views for an overall strategy conveyed in that entire statement. One view is that it could be an altruistic objective by MNCs to lift all boats in the harbor. But have you ever noticed that when the tide rises in one area it lowers in another? If it were truly a selfless act wouldn’t a global standardization of wages be a more equable system? The statement made by Mr. Immelt reveals a different motive. It’s really about maximizing profits and cheap labor is one way to achieve that. The cheap labor mentality views labor not as an asset but as a resource whose cost must be minimized if profits are to be maximized.

Ms Freeland continues:

[Voicing a similar concern the]…CFO of a U.S. Internet company told her:

“We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

And there you have it from the lips of a bold CFO – the Chief Financial Officer – the corporate bean counter. Although I am not so sure the middle class is being given much of a free choice in the matter as the CFO implies, it appears more forced. One component of Fair Trade is that it’s a license to pursue cheap labor wherever it can be found. Today it is China and India. Tomorrow when they become too expensive it’ll be somewhere else. While this is great for company profits and their shareholders and for countries with a cheap labor force it spells disaster for the mature labor markets in the U.S and Europe. Does anyone see the decline in our living standard just on the horizon?

One other point about that CFO statement; so it’s America’s middle class that’s asking too much? Oh really and here, and here? How dare us for being so brazen, shame on us.

Ms Freeland continues:

At last summer’s Aspen Ideas Festival, Michael Splinter, CEO of the Silicon Valley green-tech firm Applied Materials, said that if he were starting from scratch, only 20 percent of his workforce would be domestic. “This year, almost 90 percent of our sales will be outside the U.S.,” he explained. “The pull to be close to the customers—most of them in Asia—is enormous.”

Speaking at the same conference, Thomas Wilson, CEO of Allstate, also lamented this global reality: “I can get [workers] anywhere in the world. It is a problem for America, but it is not necessarily a problem for American business … American businesses will adapt.”

Increasingly U.S. companies and some of their work force are being drawn to China. In High Tech Research Moves from U.S. to China Mark R. Pinto became the first chief technology officer of a major American tech company to move to China. “The company, Applied Materials, is one of Silicon Valley’s most prominent firms. In addition to moving Mr. Pinto and his family to Beijing in January, Applied Materials, whose headquarters are in Santa Clara, Calif., has just built its newest and largest research labs here.” Mr Pinto announced at the time:

“We’re obviously not giving up on the U.S.,” Mr. Pinto said. “China needs more electricity. It’s as simple as that.”

Now, Mr. Pinto said, researchers from the United States and Europe have to be ready to move to China if they want to do cutting-edge work on solar manufacturing because the new Applied Materials complex here is the only research center that can fit an entire solar panel assembly line.

Oh what a relief that Applied Materials is not giving up on the U.S:

Applied Materials has built a 360-employee operation here in Xi’an after announcing an 18-month program last year to reduce employment by 10 to 12 percent, or 1,300 to 1,500 jobs, including layoffs in the United States and Europe. Mr. Pinto said that the company was readjusting its work force as manufacturing shifted to Asia…

Indeed, corporations have a natural need to grow profits year over year and they go where the income opportunities are best. It’s as natural as workers needing a decent wage to sustain an honorable standard of living. America besides being a mature labor market is also a mature consumer market with a GDP growing at about 2-3% per year. Companies can’t grow profits 10 percent per year in an economy with such tepid growth as Charles Hugh Smith illustrates in We Don’t Need No Stinkin’ Jobs (in the U.S.):

Global Corporate America has decoupled from the American middle class; its interests are now international rather than domestic.

Global Corporate America has been decoupling from its country of origin for a long time, and the last weak bonds appear to be snapping.

Corporations are operated by people. Their loyalty during their working hours is to the corporation, and the goal of the corporation is to maximize return on investment for the shareholders, owners and senior managers who will profit most from rising revenues and profits.

To expect corporations to extend loyalty to a nation is to misunderstand the entire purpose and directive of the corporation as an enterprise.

Is it merely coincidental that corporate profits from non-U.S. sales were flat during the heyday of the U.S. middle class and that they have been rising as the middle class loses ground?

I think this chart makes a strong case for a direct correlation:

Click on image to enlarge

Global corporations now have the resources to influence the machinery of governance in their favor, and as noted above, this is the rational and necessary result of their prime directives and loyalties.

To decline to lobby the Federal government could spell disaster for a company’s revenues and profits should competitors succeed in wiring the market to their advantage. Thus there is no choice now but to lobby for one’s own interests. With corporate profits exceeding $1 trillion, the costs of influencing politics is now trivial.

The middle class is comparatively powerless: it is not a source of campaign funding, and half of its members don’t even bother to vote. Most of those who do vote are swayed by easily purchased, expertly contrived propaganda.

The ideal setup for Global Corporate America is domestic stability. The erosion of the American middle class is of little concern for one simple reason: it no longer matters much on the global stage. All that Global Corporate America needs from America is a stable foundation that won’t offer up any surprises or spots of bother.

As the discretionary purchasing power of the American middle class erodes, four times as many new potential customers appear elsewhere, hungry to taste the Oreos, become consumed by the iPhone, etc., and ten times as many are potential buyers of toothpaste and other basics.

The concern for domestic jobs is mere political expediency. U.S. corporations are pulling $500 billion in profits from non-U.S. sales, and they hold $1 trillion in stashed overseas profits in various tax havens. All the growth in their revenues and profits are coming from non-U.S. sources. Spending $3-$5 billion on lobbying and campaign contributions is an “investment” with extremely high returns: for that small sum, U.S.-based global corporations make sure the U.S. government and citizenry don’t become overly burdensome or obstructive.

Many believe this is exactly how a free market should function. A market where people and corporations freely pursue and fulfill their self-interest and those that do well are rewarded. But is it really a free market when corporations and unions are allowed to spend billions annually on lobbying and campaign financing to garner greater control and influence over policy?

It’s not a perfect world and never will be. There will always be winners and losers, the haves and have not’s. But wouldn’t a true and more equable free market be one that:

Eliminated corporate and union ownership of government and legislation

Governments providing and enforcing regulations that protect its citizens from unscrupulous behavior

Establish a global standardization of wages to create a more level playing field for labor market participants

In addition to building and maintaining our public infrastructure the government should, as effectively and ethically as possible, be doing what the private sector cannot and will not do and that is promote and provide sufficient protections and more balanced policies.

Mitch Gurney

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