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March 07, 2009

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China is a uniquely attractive destination for manufacturers because Chinese labour is both cheap (for now) and high IQ.

In most thrid world countries, labour is cheap because the population has mediocre to low IQ. Outsourcing to low IQ countries saves money but the population doesn't do a very good job because the laborers aren't very sharp.

On the other hand, high IQ nations such as Germany have skilled labour forces, but are expensive because the labour is of such high quality.

China has the best of both worlds, they have dirt cheap and plentiful labour and their labour force - unlike other countries such as India, Bangladesh, Kenya, etc - is high IQ.

However, as Chinese wage inflation increases outsourcing to China will slow down.

"One thing the Unites States exports is status. Rich people in China want to wear expensive American brands of clothing to lord their high status over their less economically successful brethren. That’s quite a scam we have going. The Chinese do all our manufacturing for us on the cheap so the richest of them can consume the most overpriced American products. Our marketing-based economy transfers value from China to the United States. If the Chinese ever wake up, and decide that their own Chinese brands are more prestigious than American brands, we are screwed."

France and Italy also export status/fashion despite having mediocre economic growth.

US and European civilization is still the cultural and fashion leader of the world and is likely to remain so. Japan has had a first world economy for many decades but how many yuppie Whiter People or upper class people in third world countries like India pay much attention to fashion trends in Japan compared to whatever is going on in Europe or Manhattan?

Modern Japan is a good proxy for what China is likely to become and based on Japan's current cultural influence it is doubtful Chinese economic growth will lead to Chinese cultural dominance (economic dominance is a different question).

One thing the Unites States exports is status. Rich people in China want to wear expensive American brands of clothing to lord their high status over their less economically successful brethren.
Actually, the Chinesse are more into European luxury brands. LV,Channel, and Gucci sell very well in China.

Can someone give me a useful definition of "wealth" and "value"?

This depression is a very good thing. For too long young people in America have gone in to economically useless fields.

Google "shortage of nurses" - because it has been so easy to get a high paying job in the past, millions of americans that could have become nurses went in to a useless field. Now that unemployment is high, young americans will go in to nursing

my point is that our society benefits from tough times - tough times steer people to useful stuff

Back during the recession of the early 1990's there were all sorts of dire prognostications about the remaking of the American economy, a wrenching paradigm shift, a complete change in the whole nature of work, and so on. One thing that was heard a lot at the time was the endless touting of entrepreneurship, the idea that if jobs were scarce starting one's own business was the key to success. "Bitten by the entrepreneurial bug" articles were a dime a dozen.

So what happened? After some rough times economic conditions finally improved, and everyone forgot about the paradigm shifts and entrepreneurial bugs and all that.

[HS: We shifted from an information economy to a marketing economy. Huge shift!]

Our economy has not changed drastically since the early 1990's. Some sectors of the economy have contracted, some have expanded, but most have more or less chugged along.

I see this every day at work. Last September was my 15th anniversary at my job. In my department of about 25 people, at least half have been there longer than me, and several others started just a year or two after me. There's no reason to believe my workplace is all that unusual, a higher percentage of people than one might imagine have been at their present jobs for years.

Also, in terms of what fields are good and what ones are bad, there's probably been less change over the years than you might think. Engineering and health care have had ample job opportunities for many years, maybe decades, while liberal arts graduates have had it tough for many years too.

China will develop economically, but what will keep her behind the west and Japan is the lack of respect for intellectual property. Brand knock-offs, software piracy, DVD copying is rampant. While it can be bad even in the US it is not the normal course of business here. Case in point -- I have Chinese grad student who on the side to her Ph.D. research was working on a portable detection system to one of many unfortunate additives to their foods. Essentially there's no market for such a device here. She was very interested in developing it for the home country. I finally had a talk with her, she realizes even with US and international patents the chemistries can be reversed engineer and readily copied. There's no reward in China for being such an inventor. Unless that changes (and it might) China will always lag the US.

At least before the downturn, China was showing signs of not being a bottomless well of cheap labor. Wages in factories had risen over 25% within the last several years, and factories had to relocate farther inland to get at more cheap labor. It is quite likely that they will move up the value chain in the next two decades, and the low-quality manufacturing jobs, having moved from Japan to Taiwan/South Korea to China, will move on to places like Vietnam, Cambodia, and Thailand.

"Nevertheless, there is a fixed amount of status in society. Thus the high priced jeans don’t create status, they merely transfer status from people wearing less trendy pants."

There is a fixed amount of status only if there is one coherent status hierarchy, which there isn't. We could very well look at branding as a way of diversifying status hierarchies. E.g. if "True Religion" are the "upper class" jeans, another jean company could use branding to appeal to hipsters, or country, or hip-hop, or old folks, or social justice, or rock, etc, with their own brand/s.

It just sounds like "value creation" is about inventing needs anyway. So branding is psychologically equivalent to engineering. The engineer builds a radio into a pair of jeans and it creates a new need among teens. The marketer puts soccer moms in a series of jeans ads and creates a new need among soccer moms.

Jason is right that there is no single status hierarchy -- when you go into Wal-Mart, you don't observe people striving, within their means, to emulate the upper-middle or upper classes. Indeed, trailer park people wouldn't be caught dead in True Religion jeans. ("That's for spoiled brat girls and fags.")

Branding is not about transferring status -- it is about signaling membership in some group. You don't have forever to figure out who is and is not in your group, so ethnic markers emerge to signal membership. It's the solution to a coordination game (from game theory).

Non-SWPL folks have their own silly and expensive ethnic markers. Souped up cars, expensive computers that they get into arguments about, gigundo plasma TVs, pricey fly fishing rods, home gyms, etc.

As far as luxury brands go, the US doesn't have any compared to Europe. The most high status fashion, accessories, jewelry, and cars are all European. Aside from Ivy League educations for the Chinese elite, I don't believe it's correct to say that the US exports status.

What the US does "export" to China is simply dollars, and the US basically serves as a giant and secure warehouse for the Chinese to store the dollars they've earned through trade. The Chinese fully understand this. They may not be getting decent goods and services imported from the US to consume, but they are getting the world's reserve currency, which they've been using to buy real tangible resources throughout the world, namely in Africa and South America.

"Non-SWPL folks have their own silly and expensive ethnic markers. Souped up cars, expensive computers that they get into arguments about, gigundo plasma TVs, pricey fly fishing rods, home gyms, etc."

Fly fishing may not be SWPLish per se, but it's very definitely an upscale activity. Fly fishermen look down on bait fishermen.

"while liberal arts graduates have had it tough for many years too"

One could argue that humanities and social sciences grads are a bunch of middle class strivers who want middle class status, but lack the intelligence to be lawyers and doctors, and the inclination to be in specialized fields like nursing or engineering. Essentially, this group (including myself) goes to school to avoid becoming dirty and blue collar, but there's sadly less of need for us in the economic sphere, and the last bastion of such graduates, the government is stuck in hiring freezes at the state and local level.

Some may say that we liberal arts grads should force ourselves into other degrees, but if we did that, the surge of additional graduates in a certain field would end up depressing the high wages caused by labour shortages which defeats the purpose of going into those fields in the first place.

"Google "shortage of nurses" - because it has been so easy to get a high paying job in the past, millions of americans that could have become nurses went in to a useless field. Now that unemployment is high, young americans will go in to nursing"

According to my sister (who is a nurse practitioner), there is no shortage of regular RN position, only of nurses willing to work the graveyard shift, at terrible clinics, extreme specialized care etc. You can make good money as a graveyard shift nurse, but if you have worked graveyard shift at any job, you know its a lonely way to live.

"my point is that our society benefits from tough times - tough times steer people to useful stuff"

I hate to break it to you, but our population isn't what it used to be. How many NAMs are going to be doing anything useful? Stay employed as long as you can, millions on welfare depend on you!

By implying we're transferring wealth instead of creating it, this implies that the American economy is relying too much on capital and wealth that was created in the past. We're not creating anything new, but merely transferring existing capital to each other. We're not sending people to school to enter professions that create value. I think Thomas Sowell echoed these same sentiments in an interview on Fox News.

The phenomenon that you speak of has been going on for at least as long as Western traders have sold highly-valued foreign cloth (ironically, oriental) in European market stalls. If fashion hasn't killed us in 500 years, I doubt it will do so any time soon.

Old economy:

1. Take out home-equity loan. (From '00-05, one in four housholds took out one.)

2. Buy stuff from China.

3. Sell T-bills (debt) to China.

4. Repeat.


Number one on that list has been torpedoed. And with that critical piece of the machine gone, the rest can't function.


I anticipate that the U.S. will become a great exporter again. We will be the "cheap labor," as our dollar falls in value.

[HS: To add more symmetry to the above steps, the Chinese would buy mortgage-backed securities, the kind that are now worth less than half their value.]

You have to tip your hat to Sigma, he pretty much got this post spot-on. Thats a very apt description of the economic climate.


BTW----I remember as a teen in the early 80's, people were willing to pay forty-five bucks to wear Ralph Lauren Polo shirts and Izod Lacoste shirts with polo player and alligator insignias on them, while you could have a similar quality non-decript shirt for about one-third the money. These shirts were probably made in the same factories for all we know. The mark-up was comic.

We have come a long way from Izod, pleated slacks, thin belts and penny-loafers though.....LOL

I think the current economic system of manufacturing being exported to China and other places will collapse due to other factors:

*Long term, energy becoming far more expensive, limiting even the most fuel efficient ships ability to move manufactured goods to America and Europe.

*Increase in global piracy on the high seas, limiting shipment of goods. This is already happening around the Suez Canal as Somali pirates venture deep into the ocean in mother ships, sometimes 500 to 1000 miles offshore.

*Huge political pressures in developed countries for protectionism, already happening in Europe and America, as government becomes the spender of first and last resort.

*Collapse of the US and other currencies, likely widespread adoption of the Gold standard and thus the desire to limit imports and push exports.

The last is probably the first factor to come into play. Most governments, China's included, but also the US and EU, are spending like crazy, basically printing money. China has more reserves, but still must spend more to contain social unrest, 70,000 factories and 20 million workers idled is a recipe for revolution and they know it. Eventually a currency becomes so Weimar inflated it's worthless and is replaced by a gold standard, particularly for the US since there is no other stable currency to peg to, ala Hong Kong or other "pegged" currencies.

Long term, demand for oil is going to increase while political constraints within developed nations keep supply low ("Green" mania etc) making supply less than demand, which is at some point inelastic (electricity must stay on cities, minimal amount of buses and trains must run, etc.) Even though oil is low now, there is no reason to think even in a depression that it will stay low because people all over the globe want electricity and cars, scooters, motorcycles, etc. During last summer before the economic melt-down, trade was considerably lower because high oil prices made shipments just too expensive for cheap sneakers.

Long term, I think economic protectionism and various closed trading blocks, particularly as transport becomes far more expensive, will push manufacturing up. Particularly since we will probably see a "lag" between the war of SWPL Gentry wanting "Green" stuff and the rest wanting high-paying manufacturing jobs. It's easier to ramp up manufacturing with coal fired plants than it is to provide new oil sources and thus cheap transport upon which Chinese manufacturing is ultimately based. Let alone destabilizing enterprises sure to be launched by Russia and Iran to pump up oil prices short term (since they need sky-high oil prices to keep their internal patronage networks going).

According to the latest CIA factbook data (2008)

The Chinese have a per capita of 3,174 versus the American 47,165.

So they still have a long way to go. But the gap closing could happen unbelievably fast.

If China holds to 8-9% growth over the next 2 decades then their per capita will be $10,000+. It will be a whole different world.

Comparing China to Japan is a mistake. Japan does have brands that are Japanese that the Japanese believe are superior to Western brands and they want to buy them. This has been ingrained in them through nationalism, this includes some fashion. There are clothes popular on the streets of Japan and Osaka that can not easily be found in Western Europe and they are Japanese made. Japanese told me on upshot of Japanese designers is the clothes actually fit Japanese people's body size, many Western clothes don't. Try to wear capri pants when your legs are equal size to your torso, they end up looking like "high water pants" because they drop to low.

That being said people are right that fashion and much "high culture" still comes from the West, particularly Paris, Milan, London, New York, and L.A.

Now think about this. Chinese are far far more nationalistic than Japanese (on the mainland) and every Chinese person I met in China (the times I have been there which total 3, which include 6 months living in Shanghai) felt compelled to remind me at some point that China was "5,000 years old" and therefore superior and just having a lull in their history the last 500 years, which they consider a very short time period and something that only occurred due to internal Chinese weakness and invasion by foreigners (Manchu) who provided bad leadership.

Japan has about 120 million people so how much influence could they have over Europe and America? Despite that if you know anything about Asia fads that come out of Japan are competitive with fads that come out of the West in East and Southeast Asia. Even Koreans, who tend to still hate the Japanese copy their fashion and pop culture, the Taiwanese do and the Hong Kongers and spread it into Mainland China after it has been somewhat "sinafied" and the Koreans also spread it into China. For those who think Japan, as a developed nation, has no cultural influence over nearly 1 billion people don't know much about what really is going on outside the West.

Now, Japan has 120 million people.

China has 1.3 billion.

WHat happens in 50 years if China is as developed as Japan was in the late 1970s or early 1980's...when Chinese businessmen with a strong internal protected market go about the world buying up stuff.

Do you really think 1.3 BILLION + will not have a much strong effect on world culture than Japan? The sheer economy of scale and the less xenophobic (nationalism does not necessarily mean xenophobia...Japanese are fairly xenophobic but often have little internal pride in Japan after WWII, the Chinese are almost opposite this).


China (Taiwan, Korea, and Japan will be about 1.6 billion wealthy Asians.

Are you seriously in thinking for one minute they will not seriously be competitive with Milan, Paris, L.A., NYC, and London?

LOL

What you are seeing is what Europeans started doing to Asia 500 years ago. European goods were considered crap in China, but for weapons. The Chinese didn't want anything European and the Europeans often made money by shipping things into China from OTHER ASIAN countries (Indonesia, India, Malaysia, and Japan) that were banned due to Chinese xenophobic Ming Emperors...this is how the Dutch and Portuguese made their initial profits, as well as selling Asian stuff in Europe.

It was not until trade was forced and backed up with military and economic clout did people in Asia start thinking European goods had any value or were a mark of a good culture and later maybe a superior one, it wasn't really until the industrial revolution could they compete on price and quality.

If want just that Europeans went to Asia and said "we are white so you can see our stuff is superior, buy it" lol

I think some of you will be shocked by your grandkids or great grandkids world it won't look like your Eurocentric one. The world is returning back to what it was previously, nothing more.


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