Capital Flight and Unions: 40 Years of Economic History in the FSofA

Posted originally on TBP  on 21st February 2011 by Reverse Engineer  in Economy

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40 Years of Economic History in the FSofA


Back in the 1970s our beloved POTUS Tricky Dick “I am not a Crook” Nixon took a trip over to China, “opening” the closed doors of the then “Communist” nation to the wondrous world of Capitalism. Just around the same time, the same Tricky Dick slammed shut the Gold Window on Charlie DeGaulle’s fingers, Women were out on the streets Burning their Bras and at about the same time as all of that we hit local Peak Oil here in the FSofA and became a net Oil Importer. Interesting Coinkidinks, no? Of course, it is no coincidence, all of these factors are integrally related. This Rant will explain all these relationships, and how Unions and the Capitalist model functioned from the period between 1970 and 2011. It will also explain why the spin down occurring now was inevitable regardless of the economic behaviors of the participants, although the spin down might have occurred differently had other paths been pursued. Pretty big undertaking to complete inside of 3600 Words, no? 41 years of economic and political history squashed down into 3600 words is damn good condensation as I see it, so anyone who accuses me of being too wordy here will get a piece of my mind for sure. Besides which, included in the Grand Rant are a few VERY funny (IMHO) Mini-Rants which should entertain you and make reading the whole fucking thing a bit more bearable. LOL.

In the Capitalist model of production and consumption, you seek to produce at the lowest cost while you sell at the highest price the consumer will pay for the product. The difference between those two represents your profit, the Holy Grail of the Capitalist. In the FSofA as the 60s were winding down and most of Europe leveled during WWII had been rebuilt, we no longer had a ready market over there funded by the Marshall Plan for what our industry was producing, so the main market had to be ourselves. Nobody in the 3rd world of course could afford to buy the toys we were building at the time.

Embedded in the cost of each product is the labor and the energy it takes to make that product. In order for the workers to afford to buy the products, they need to make a good wage, which Unions had the job of negotiating for the workers. As long as the energy came cheap and local, the capitalist could still make a profit on the value added by the cheap energy while still paying a good wage to the worker, who then could afford to buy the product. The profit margin was coming from the amazingly low cost of energy, practically free up until the 1960s. Even I remember when gas was 15 cents/gal. Even with 200% inflation since 1960 you would still only be at 60 cents/gallon today, and while inflation has occurred, it wasn’t that bad. The REAL price of energy has been increasing steadily since we hit local Peak Oil in the early 70s.

Once Local Peak Oil was reached here and energy began its relentless upward climb, the amount of profit that could be extracted from the amount it cost to produce versus what the consumer could afford to pay began to shrink. A squeeze on margins of course. How does the Capitalist seek to resolve this problem? By driving down the labor cost, which in the 1970s began to happen as factory jobs started getting offshored to China where the Capitalist could buy a slave for $1 a day, courtesy of Tricky Dicky’s Ping Pong Diplomacy. Got offshored other places as well of course.

Before packing his bags and heading for China, the Kind & Caring Capitalist goes first to the Union Shop Steward in his local factory before he picks up his factory and lays down the LAW with him. If you don’t take a pay cut to $15hr, we will move the plant to China! Or any other place they could arbitrage a cheaper wage.

What does this pay cut mean to J6P Unionista? Well it means he will no longer be able to afford the very products he is making, nor will he be able to afford the cost of his house he is living in and paying a mortgage on or anything else that in his community was all based on the economics of him making $20/hr, not $15/hr. So he refuses, and the Capitalist goes ahead and picks up the machine tools and all the rest from the factory floor and loads them on a container ship bound for China, where Mao provides him with millions of slaves who will work for $1/day.

The Capitalist is now Happy, he is making a profit again, but J6P is Sad, because he no longer has a $20/hr factory job, but rather has a $10/hr service sector job. He is out of his house completely, and his nice little factory town becomes a Ghost Town. Starts looking like Detroit or Gary, IN. He might have had a $15/hr factory job a while longer had he agreed to take the pay cut, but it would have eventually been arbed out by cheaper Chinese labor to much less than that down the line. Nothing short of protective tariffs could have stopped the migration of capital toward the lowest possible labor costs, and of course protective tariffs were anaethema to “free trade” globalists.

The Capitalist does have a significant problem here though, which is now that J6P here is only making $10 on average in the service sector, he can’t sell as many products to him, and he sure can’t sell them to his Chinese slaves who are making $1/day. This problem is first resolved by having the Women Burn their Bras and head out into the workforce also to bring the combined family income back up to nearer $20/hr. However, this brings with it two things, first is that it drives down wages still further here as more people are competing for fewer available jobs, second is that the family now has added expenses in day care as well as the general structure of the family starting to fall apart. J6P and Wife are running harder to stay in place economically, and this gets harder and harder to do as the price of energy continues its inexorable climb upwards. The gas bill for the 2 cars they now need to commute to two different jobs keeps going up, the cost of electricity for the house keeps going up, and of course the taxes keep going up. Why? Because all the Unionistas employed by Da Goobermint have the same problems here and keep negotiating bigger pay packages of course. Besides the fact that of course bureaucracies always continue to increase in size until they crash under their own weight.

Still the Capitalist is doing OK because the labor is so Cheap in China and Walmart here marks down to the LOWEST Price Every Day so J6P can still buy some stuff, assuming he is bombarded with enough advertisement convincing him he needs the stuff. Sadly now for the Capitalist though, the energy input price for his products ALSO continues to rise, and he has now arbed down his labor costs as low as he possibly can, there simply is nowhere on earth to find cheaper labor than the Chindians or Egyptians or the Mexicans will work for. The cost of the products begin to rise at Walmart, and unless the Capitalist can figure out some way to put more money in the pockets of J6P to buy said products, he is going to go outta biz. Does he find a way to do this? Of COURSE he does. VISA! For everything you ever wanted but could not afford, there is VISA! By the time the 1990s are underway, the consumer credit binge has begun, and not only that because J6P cannot afford to pay higher taxes also, in order to keep funding Da Goobermint it ALSO runs up its own credit card bill, selling debt to those frugal, smart and hard working slaves over in China.

Frantically now as we move into the 2000s the whole fucking House of Cards is going to fall down along with the WTC unless more money gets injected into the system. Enter Stage Left the Maestro Alan Greenspan, who Blows the biggest fucking Bubble of all time in the RE market and Banksters start issuing no doc LIAR loans to anyone who has a pulse, putting all sorts of funny money into the system, some of which does get distributed out to J6P since he is now employed again at $20/hr construction jobs in the housing industry building McMansions while his Wife the RE Agent takes home megabucks Commissions selling the $300K McMansions to Janitors and Burger Flippers, on ARM loans with low teaser rates said Janitor can barely afford for a few years, but he then takes out a HELOC on his ever increasing in value McMansion to live the good life a while longer still. LOTS of funny money flowing around here during this period, and Banksters create still MORE of it in the Shadow Banking industry. You get fucking geniuses like Blythe Masters, the Limey Economic Bimbo from Trinity College of Cambridge University who create CDS so everyone can start betting on who will be first to fail. Man, there are days I wish I had hung on as a Pigman at Merrill, because I sure would have enjoyed having a Blackboard Contest with that fucking Bimbo. What kind of Bullshit Math was she pitching out there anyhow? Was she smoking Crack or was she just too busy Blowing her Boss to think straight? The fucking Stooges over at JP Morgan never could do a decent regression analysis anyhow. Don’t even get me started on the jackasses over at Goldman, although my College Roommate was one of them. Those guys actually DID know their math, the fucking problem with them was they FAKED shit on PURPOSE. Goldman math wizards will take a fucking TURD and PROVE to you why it’s a profitable Turd to invest in, and the Due Diligence you have to do to figure out exactly HOW they fake the analysis is virtually impossible to do they are so fucking good at it. You would have to hire out the entire graduating class from MIT and rent out a year’s worth of time on a Cray Supercomputer to figure it all out, except you can’t do that because Goldman already hired the geeks and leased out the time for the next 50 years! Those guys turned Financial Fraud into a goddamn Science, a whole new branch of mathematics.

Anyhow, Stockbroker Pigmen are making money hand over fist through this time period, and again some of this money drifts into the Main Street economy as these guys spend megabucks at fancy restaurants eating with $5000 Hookers now also making a decent living for a night of flatbacking. Besides that, they are taking their “hard earned” funny money and investing Venture Capital in some Geek who creates Guitar Hero software, who then again uses his new found “wealth” to buy still more shit for himself and buys his own $5000 Hookers and Hamptons Cottage. Said Geek goes Public and the Goldman Pigmen set up an IPO for him and Pension Funds fork over megabucks to him buying the stock. In a year out of college, the dude goes from Nerd beating off to Internet Porn in his Dorm Room to Master of the Universe dipping his wick into Ford Models after he stuffs their noses full of enough Coke to energize the entire Defensive Line of the Dallas Cowboys. The “Virtuous Cycle” of wealth creation, right? Problem of course is Guitar Hero is just a fad, the Pension Funds that bought the IPO lose their shirts, but the Goldman Pigmen did quite well by underwriting the IPO and so did the Nerd that wrote the original software. Does he CARE that Guitar Hero went Belly Up? Hell no, he collected up $200M or so in the IPO, made some more money while it was a fad, then the company goes belly up, BFD. He’s still got plenty of money to buy $5000 Hookers, and he now has plenty of time to work on his next project, Hooker Hero. His Goldman Pigman buddies will package up that Turd ALSO and PROVE to you why it’s the greatest fucking Investment of ALL TIME.

Obviously the whole thing was going to implode, and implode it did in 2008. Bang, all the LIARs start defaulting on their mortgages, the Banks are in crisis and Hank the Skank Paulson rides to the rescue with his Bazooka pointed at the CONgress Critters, explaining to them that if they don’t simply shower the TBTF Banks with MORE Funny Money, Human Civilization as we know it will come to an end. This actually was and remains more or less true. Despite what some pundits here in the blogosphere believe, once we let the TBTF Banks fail, other smaller banks well run and managed won’t ride to the rescue like the 7th Cavalry of George Custer. The TBTF Banks are the OWNERS of the Fed, and when they go, so also goes the Fed, and so also goes the Dollar. All the mortgages, all the securities issued by the TBTF Banks go worthless, which means practically everybody’s Pension gets wiped out. You can’t fix this with a few prudent small banks who watched their pennies stepping in here, because there simply won’t be any functioning money for them to step in with. Virtually all of this money is debt which would be repudiated once you let the TBTF Banks fail.

Anyhow, this brings us from 1970 to where we are today, and the questions here are, was this avoidable, and would it have made a difference if J6P Union Man had taken the pay cut from $20/hr to $15/hr to keep the industrial job in His Hometown? My answer to that is no it would not have made a difference.

You see, if J6P had taken that pay cut, it would have reduced by 25% his discretionary income to buy the products he was making. In fact it would have reduced it by more than that, because he has quite a few fixed costs that are not getting reduced while his paycheck is. At this point the Capitalist will be selling fewer products, so unless he gets J6P to take another pay cut to further reduce the product cost so he can sell more of them he is going out of biz anyhow. Add to that the fact that energy keeps increasing in its real price, his margins are going to get squeezed no matter what here. I don’t even think the timeline would have been all that much different had the Union dudes taken the haircut, though without injecting more debt into the system through the time period we would have seen an ever decreasing standard of living and perhaps might have eased our way into a power down. As it was, by utilizing cheap Chinese labor and taking on infinitely more debt we sold to those SAME Chinese slaves, we were able to perpetuate the ILLUSION of wealth for around 30 years. Although clearly that illusory wealth was not evenly distributed as the rich got richer and the poor got poorer.

Now, the poor really cannot get any poorer, certainly not in Egypt anyhow. Who is left to get poorer then? Well, first the Middle Class will become poorer, then the Rich will become poorer. A few Power Brokers at the top will remain Rich a while longer, but they will all begin Cannibalizing each other as they fight to retain control of a failing system. In the end, we should see quite a leveling across all societies resulting from this spin down.

Unions were a by-product of the Industrial Era, at the beginning they served to prevent the kind of exploitation that the modern Chinese factory worker faces. This of course was the time of Tom Joad and the Grapes of Wrath. That they became corrupt and in many cases in fact counterproductive is without question, but whether in the Private Sector or the Public sector, their fundamental job was to get the best wage and bennies package they could from the employer for their members, be it a Private Enterprise Capitalist or Da Goobermint. That is essentially a Free Market idea, the Worker is Free to Organize, the Capitalist is free to pitch him out on his ass if he thinks he can replace ALL of them at the same time. This was of course done many times in many ways, the most popular modern example being Ronald Rayguns firing all the Air Traffic Controllers en masse back in the 1980s. Generally speaking though, trying to replace everyone in a Union at the same time is pretty difficult, so rather than doing that the Capitalists made a whole heck of a lot of Promises they could not keep. Read that generous Pension packages and so forth. This kicked the can down the road some, until of course the workers started retiring en masse and the math no longer worked. Corporation goes Belly Up, Capitalists walk away with all the profit they sieved out of the company for those years, and the Pensions get chucked into the soup of the Pension Guarantee fund the Federal Goobermint currently runs to handle this problem.

By paying the Union Workers the good wage they negotiated, for a while at least their members got to live a decent Middle Class life, able to afford a House and a Car. They hardly got rich, not Pigman rich anyhow. A few Union Bosses got Pigman rich though, and a few Pension Fund managers got Pigman rich, that is for sure. The GM Production line UAW worker could afford to buy the car he himself helped to produce, he could afford to buy a nice little house which some other J6P Carpenter built, earning his wage as an effect of the GM worker having a good wage. Whether the GM worker took a pay cut or lost his job completely, a spin down in standard of living all through the chain would have begun back in the 1970s without the expansion of credit and taking on the irredeemable debt. By offshoring the production to China, we first got the benefit of their cheap labor, and second got the benefit of handing them all our irredeemable debt. Got a nice 30 year long party out of it. The Chinese are stuck with the worst hangover, they ended up with the most polluted and degraded environment, and moreover they never got to Party like its 1999. Well a few of their Elites did, but not most Chinese.

As we move into the future here, it is a foregone conclusion that what is left of the Unions will be broken once and for all, but so also of course will the Capitalists be broken with them. You see, they all depended on the Thermodynamic Energy of Fossil fuels for this system to run. In this sense Karl Marx was quite wrong in his perception of the future, because he predicated it on the industrial model continuing onward. This will not happen because “proletariats” he writes about are Industrial workers, and they are going the way of the Dinosaur here, along with the Capitalists who run the show.

What will replace this model? Well, nobody can be quite sure of that, and likely different solutions are undertaken in different places. There may be a return to Feudalism in some places, along with a return to explicit slavery. There may be experiments with Agrarian Communism. There may be Fascist Dictatorships in some places. There may be Mad Max and complete Anarchy in some places. And in some places very far from the center of Human Civilization with very low populations and good resources, there may be a return to Tribal living. What there will NOT be in any of these places is quite the number of people living in them that currently are living in them, of this you can be quite sure. Nor will there be whole heck of a lot of Freedom anywhere through the spin down. Even in complete Anarchy with NO Goobermint are you very free, because you are constrained by the danger which lurks about you. No law to protect your property, no safety from the Highwaymen you will run into each day you venture out of your house.

In the end, if Humanity is to survive, some sort of Social Contract will be established again somewhere so that the People can work together cooperatively to build a Better Tomorrow. Where will that place be? I don’t have the answer to that one either, but I can tell you for damn sure where it will NOT be, and that is in the Big Shities. For myself I am unlikely to see where it will be during the rest of my time walking the earth. See it I will though, from the Great Beyond.

See YOU on the Other Side.


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