Cheap (34 page)

Applying this reasoning to the twenty-first century, free trade evan gelicals have argued that it is more efficient for America to outsource many functions to low-wage countries such as India and China. Harvard economist Gregory Mankiw, chairman of the White House Council of Economic Advisors in the Bush administration, could not have been more clear on this point. “When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically. This can be difficult for workers who are displaced and need to find jobs in new growing industries. But the economy overall benefits.” Mankiw’s comments echoed those made by former Federal Reserve Chairman Alan Greenspan, by which he reassured workers hurt by outsourcing by saying they “can be confident that new jobs will displace old ones as they always have.”

This brand of “creative destruction,” Mankiw, Greenspan, and others have argued, will allow Americans to focus on what we do best: invention and entrepreneurship. On the surface this seems to make sense. The United States is an innovative powerhouse, a place where ideas are born, raised, and coaxed into profitable ventures. Indian and Chinese workers indeed do good work, and they do it cheaply. But what held true for the trade of wine and cloth in the eighteenth century does not necessarily hold true in the post-Internet age.

The assumption that America is the land of endless innovation begs a critical question: Can the majority of us be—or do we want to be—constantly creative and inventive? Even if this unlikely prospect were the case, Americans hold no monopoly on entrepreneurial zeal, creativity, or intellectual firepower. Jared Bernstein, the chief economic advisor for Vice President Joseph Biden, is an expert on international labor markets. “It’s pure hubris to say that we have the market cornered on talent and brains,” he told me. Hubris is probably understating it. India, China, and other low-wage economies are ramping up scientific and engineering research with a vengeance. They are also educating their workforces. It is estimated that only 15 percent of the world’s PhD’s in 2010 will be conferred on Americans, down from 50 percent in 1975. Nearly one-third of those in graduate programs in science and engineering in the United States are foreign students, many of whom return to their home countries, set up businesses, and surpass their American rivals. Other foreign-born graduates stay here, competing for jobs. This, in turn, has made science and engineering less attractive to American students.

New York Times
columnist Thomas L. Friedman wrote in his best-selling
The World Is Flat,
“The Indians and Chinese are not racing us to the bottom. They are racing us to the top—and that is a good thing.” Well, yes and no. It is a very good thing that globalization has to some degree redistributed the spoils of innovation and that India and China are supporting educational and technological advance and building human capital. It is a very good thing that millions of people in the developing world are being lifted out of poverty, some into positions of responsibility and influence. But it is not such a good thing that skilled jobs and opportunities are being commodified with little thought and almost no regard for the consequences. For despite the hopeful projections of global ists, the demand for even the most skilled workers is not endless, and the idea that more and more Americans can reinvent themselves into ever more challenging work is a pipe dream. Harvard trade economist Richard Freeman made this case persuasively in a speech delivered to the Boston Federal Reserve conference in 2006: “By giving firms a new supply of low-wage labor, the doubling of the global workforce has weakened the bargaining position of workers in the advanced countries and in many developing countries as well. Firms threaten to move facilities to lower-wage settings or to import products made by low-wage workers if their current workforce does not accept lower wages or working conditions, to which there is no strong labor response.”

While Freeman does not believe that U.S. wages will be ratcheted down to the China price anytime soon, he points out that how workers fare in China and India and other rapidly developing countries will determine to a great degree the wages and working conditions for the rest of us. Technological advance, combined with the threat of outsourcing and downsizing, has neutered unions and given employers unbeatable leverage in almost every job sector. Caterpillar, the quintessentially American maker of tractors and earthmoving equipment, offers a stark illustration. Based in Peoria, Illinois, the company once set a gold standard for wages and benefits. Its machines helped build the Hoover Dam and topple the Berlin Wall. In 1982, Caterpillar was featured among the “excellent” companies, in business guru Tom Peters’s best-selling
In Search of Excellence
. But after losing more than $1 billion thanks to competition from Japan in the 1980s, the company decided to change course. First it farmed out work to nonunion shops. Then it adopted a “southern strategy,” moving some of its manufacturing to “right-to-work states” where labor laws provide fewer protections for workers to organize. Finally, it strong-armed the remaining unionized workers into a two-tier agreement that slashed in half wages and benefits for all new hires. Before the changes, the typical compensation package for unionized Caterpillar factory workers was $40 an hour including benefits. Today a worker in the same job is getting $13 to $18 an hour plus $9 in benefits. To put it bluntly, Caterpillar’s young employees labor under a contract their fathers would have laughed at.

“Caterpillar is a powerful symbol,” University of California, Berkeley, labor economist Harley Shaiken told the
New York Times.
“It dominates its field. It is one of America’s largest exporters, and it is very profitable. If there ever was a company that could bring back the social contract of the mid-twentieth century, it is Caterpillar. But it chooses not to.”

Caterpillar CEO James W. Owens insisted that choice had nothing to do with the changes. The new wage structure was essential to the company’s survival in the United States, he said, a way to ensure that the factories stayed in Illinois rather than being forced overseas. It is hard to know whether this is a fair assessment or a thinly veiled threat. What is certain is that company profits soared under the new low-wage scheme, to $3.5 billion in 2006, up 74 percent from two years earlier. This windfall worked out to roughly $37,000 per employee, but the employees did not get a raise. Caterpillar executives did: Owens received $14.8 million in 2007 compensation, a jump of 17 percent from the previous year. Caterpillar sales declined that year, and by November 2008, Owens was fretting publicly over the company’s future. By then the world was less inclined than it once was to buy earthmoving equipment, the sort of machines that, among other things, dig foundations for new homes. As one factory worker said at the time, “I don’t understand how you’re supposed to be able to buy a house and live the American dream when you work for one of the biggest companies in the United States and it’s paying you just twelve dollars an hour.” It was as if Owens and his shareholders had been too caught up in their own dreams to notice that most Americans were being rudely awakened from theirs.

“Because of the low-cost imperative, you have a vicious cycle, squeezing workers up and down the value chain,” Robert Bruno said. “This impoverishes them and makes it impossible for them to achieve social mobility. What’s happening is that we are creating low-income workers who become low-wage consumers who seek low-priced goods. Stores are built strategically to cater to these low-wage earners, filled with products that are there for the single reason that they are affordable. This is a diabolical strategy, an evil strategy. What it comes down to is one group of workers eating another while the big boys in corporate sit back and watch the carnage. This thing could take us down.”

 

 

 

HENRY FORD is lionized for connecting the dots between worker prosperity and profitability. He understood that when workers are paid enough to purchase the fruits of their labor, companies thrive and communities prosper. When workers no longer have the means to buy what they make—or, for that matter, what other decently treated workers make—companies fail and economies crumble. In a sense that is what happened to Caterpillar and to many other companies in the economic downturn of late 2008. Consumer confidence faltered as unemployment peaked, housing prices fell, and credit became scarce. Consumer spending accounts for 70 percent of the nation’s gross domestic product, so when Americans stopped spending, the economy came to a crashing halt.

Anticipation of President Obama’s jubilant inauguration did little to ease pessimism as commodity prices tanked and energy consumption withered. Fear gripped the world’s markets, credit tightened to a strangle-hold, unemployment crept higher, and consumer confidence was at an all-time low. As the United States fell into its worst economic downturn in generations, then-Wal-Mart CEO H. Lee Scott Jr. couldn’t help but gloat. “In my mind there is no doubt that this is Wal-Mart time,” he said. “This is the kind of environment that Sam Walton built this company for.” Dollar stores, too, were booming. There is no question that when the country is in pain, the discounters gain. Discounters do not have to innovate to gain profit share; they simply squeeze their employees and suppliers a bit harder, and lower prices.

The year before, Wal-Mart had announced a new scheduling system that created unconventional shifts for its 1.3 million employees. Under the new plan, minimum wage workers were expected to be on call several days a week and would be sent home—without pay—during a lull. Schedules would change from day to day or even hour by hour, meaning that employees would have difficulty arranging babysitters for their children and predicting what their income would be from month to month. The following year a number of other retailers followed Wal-Mart’s lead and installed similar systems. In September 2008 the
Wall Street Journal
reported: “The systems stand to have a broad impact on the work lives of Americans. Some 15 million people work in the U.S. retail industry, making it the nation’s third largest private-sector employer. The work isn’t especially lucrative. Many jobs are part-time, the pay is low, and most sales jobs aren’t unionized.” Still Wall Street lauded the new system’s unquestionable efficiency. “Retailers as a whole are embracing this technology,” Rick Rubin, an analyst at Mercantile Bankshares Corp., told the
Los Angeles Times.
“It’s probably the right decision from a customer service standpoint.” But he added, “It may not make employees all that happy.”

As the United States plunged deeper and deeper into recession, cutthroat price competition became the norm. Still, the crises got Americans thinking about what had gotten us into the mess.
New York Times
readers flooded the Internet with commentary in response to a
New York Times
opinion piece entitled “Obama’s Biggest Challenge.” Wrote a typical responder: “the reliance upon low-cost and poor quality imports from abroad has actually been counterproductive for the consumer. . . . I would be happy to pay a little extra for an article that lasts longer and is not tainted with health hazards.” There were other signs as well that public awareness was on the upswing, signs that the creepy upstairs/ downstairs synergy between discount retailers and high-end purveyors was starting to fall apart.

As 2008 sputtered to a close, the
New York Times
reported that the demand for organic food after growing by double digits for years was on the decline. As an example it cited Whole Foods Market, the world’s largest retailer of natural and organic foods. At the time, Whole Foods was struggling to stay afloat through the toughest stretch in its twenty-eight-year history. The company stock was in free fall, down by more than 70 percent in ten months, and analysts were not optimistic that matters would improve soon. The
Times
interpreted this as a public retreat from quality, writing: “It turns out that when times are tough, consumers may be less interested in what type of feed a cow ate before it got chopped up for dinner, or whether carrots were grown without chemical fertilizers . . . ”

Well, maybe. Or maybe the deepening recession had jolted the public to its senses, and led us to question whether the Whole Foods premium was worth paying. For years, customers had complained that the chain was paying less attention to quality than to public relations. Looking closely, there seemed to be some truth to this: The Whole Foods nearest my home sells very little locally grown produce or meat and, though situated in New England, surprisingly little local seafood. It does sell shrimp farmed in Thailand and lamb from New Zealand, while most of the produce is trucked in from huge California farms. The company’s much vaunted quality standards were called into question by the revelation that in 2008 it sold beef tainted with dangerous bacteria. But the public’s real beef with the chain some call “Whole Paycheck” is its inattention to value.

 

 

 

WHOLE FOODS is the largest nonunion supermarket chain after Wal-Mart and exerts profound demands on its suppliers to cut costs. Yet until sales started to slip, the company largely declined to pass those savings on to consumers. At Whole Foods, a loaf of Heart Gluten-Free bread costs $7.50, and the salad bar $7.99 a pound for (among other things) lettuce, carrots, coleslaw, deep-fried tofu cubes, and hard-boiled eggs. That’s eight bucks a pound for shredded lettuce and eggs! “They charge a premium, and people are willing to pay it,” Mike Griswold, research director at AMR Research, told the
Los Angeles Times.
“They’ve conditioned the market to believe that if you want high-quality natural foods, you have to pay more for it.” No surprise, then, that when the economy tanked, Whole Foods lost credibility and market share. What some mistook for a retreat from quality might be more accurately described as a return to common sense.

Cheap is a two-sided coin. Tails is Whole Foods and other chains promoting the oxymoronic ideal of affordable luxury. Heads is Wal-Mart, Target, outlet malls, dollar stores, and other low-price brokers. These supposedly opposing entities actually bolster each other, creating the false impression that quality and everything that goes with it must by definition be expensive. This, of course, rationalizes both business models: If we want quality, we go one way; if we want value, we go the other. What is missing here is what we used to take for granted—what my mother called “the happy medium.”