| « | The Annan Conundrum |
»
|
|
Friday, December 10, 2004
Finding The Waste Line
In the course of some Christmas shopping a few days ago, your Curmudgeon overheard a distressingly familiar statement from a floor assistant in a large electronics store, to the effect that "nothing's made in America anymore." It made his ears prick up, and sure enough, the speaker continued by declaiming on the impossibility of competing with foreign workers willing to toil at monotonous jobs for pennies an hour.
The notion is not entirely untrue. However, it begs a compelling question: Since American wages and standards of living have been appreciably higher than those abroad for a long, long time now, why is it that physical production appears to have relocated to other shores only these past thirty years or so? It's worth looking closely at our domestic scene to determine whether something other than wage differences might also be at work.
Production of anything requires two kinds of input -- raw materials and labor -- and will produce two kinds of output -- goods and wastes.
The observation about input is economically fundamental: you cannot make anything new out of a single input. All production involves a combination of some kind of working substance with some kind of labor. This observation goes back to John Locke, and possibly before him.
The observation about output is a consequence of physical law. In a sense, it's mandated by the Second Law of Thermodynamics. But for those not enthused about ensemble mechanics, continuity equations, or transformations of state, a simpler path to understanding is available: try it. No matter what you set out to make, no matter what your ingredients might be, there will be some waste. You might sweep it into the trash. You might wash it down the drain. You might open the window and let it waft away on the breeze. But it will be there.
In the United States, all four of these items are heavily regulated:
- Raw materials, both their acquisition and their handling, are regulated by various agencies concerned with conservation and environmental protection.
- Labor, the conditions of labor, and the recompense for it, are regulated by the federal and state Departments of Labor, and by various specific laws.
- Goods are regulated by numerous consumer-protection agencies, some of which are governmental and thus act with the force of law.
- Waste, in both its production and its disposal, is regulated by Departments of Sanitation and by environmental protection agencies.
If we add the frequently visible fifth component of capital plant, another set of regulatory bodies is called into action: zoning boards, building inspectors, open-space-preservation-and-acquisition agencies, and legions of non-governmental "community activists" with far too much clout. At this time, all of these regulatory groups are de facto more powerful than anyone who might want to undertake production -- and far too adept at getting their hands into his pocket.
It's not a matter of amassing the money and the land any more. Not in America. It's more about getting permission from an ever-expanding gaggle of third party meddlers. Some of them can call the cops to enforce their will. Others are skilled at trading their influence for bribes of various kinds, though the transaction is seldom baldly described as such.
Let it be said at once that conditions in the usual destinations for production flight -- the Third World and Pacific Rim Enterprise nations -- are far from ideal. That doesn't exculpate the mini-tyrants on these shores who've created so powerful a set of incentives to move production abroad.
The forms of enterprise that remain firmly rooted in American soil have been the ones that offer the fewest and smallest targets to the regulators. They're characterized by office buildings filled with desks and computers. They minimize their use of physical resources, with the conspicuous exceptions of electricity, phone lines, and CD-ROMs. Their laborers are "white collar": highly intelligent, mostly highly educated, accustomed to hard thought and concentration. The goods they produce directly are more often than not bundles of information: software, databases, entertainment, advertising, and so forth. Their waste is mostly bad sitcoms and heat.
It is noteworthy that "heartland America" is filled with unused, rusting capital equipment. No, it's not the most modern sort of gear, but it's not yet pointless to operate. Much of it could still be used to produce goods at a profit, even at American wage scales. Indeed, much equipment of the very same kind is functioning profitably today in other countries. Yet it lies idle. Why?
Look to the regulators. In many cases, the machines are illegal to operate for environmental, safety, or "humanitarian" reasons. In others, nearby communities of interest have discovered some other nuisance arising from those plants, and have persuaded legislators or judges to demand either cessation or compensation. The result has been to tip the revenue-versus-cost balance into the red.
In a number of particularly poignant cases, the owners of those plants were eager to modernize them, to make them safer, more pleasant to work in, less noisy and less pollutive, but were stopped by zoning boards, environmental regulators, or interest groups nevertheless. They simply wanted the firm to go somewhere else. Perhaps they had no objection to the firm or its products, as long as they weren't made nearby. It hardly mattered to the result.
One of the critical studies in production economics is "finding the waste line": that is, determining the point at which it makes more sense to jettison a piece of old capital equipment in favor of new gear than to keep it in repair and operation. In their relentlessness, our domestic regulators, by imposing endless costs and restrictions on the captain of industry, has pulled the waste line near to never making anything at all. Tragically, when localities lose jobs as a consequence of regulatory interference, it's the captain of industry who gets the blame. But the results are what matters, and the results are always the same:
What are the roots that clutch, what branches grow
Out of this stony rubbish? Son of man,
You cannot say, or guess, for you know only
A heap of broken images, where the sun beats,
And the dead tree gives no shelter, the cricket no relief,
And the dry stone no sound of water. Only
There is shadow under this red rock,
(Come in under the shadow of this red rock),
And I will show you something different from either
Your shadow at morning striding behind you
Or your shadow at evening rising to meet you;
I will show you fear in a handful of dust.[T. S. Eliot, The Waste Land]
Comments
Francis, that was well done. I’ve not thought about the regulatory aspect on why traditional manufacturing continues to move outside of the United States, but it makes perfect sense to me.
Posted by on 12/10/2004 at 10:23 AMYou would think that those wanted to keep American at the height of competitiveness would look to the most successful industry in American for the last forty years - computers and software. Any objective person would note that it is also one of the most unregulated industries in the nation.
But those who desire control are always completely uninterested in examining reasons why their control might not be ineffective or even damaging.
Posted by on 12/10/2004 at 11:26 AMAs someone who deals with those industries daily, I have to say, you are spot on.
It begs the question: How did this happen?
When I began my machinist’s aprenticeship at a major Indiana steel producer in 1980 (was that really 25 years ago?) Smokestack industries still provided a huge portion of the employment in the area.Those selfsame smokestaks proved to be a major downfall; the EPA and other regulatory agencies started looking at that smoke and raising hell.
Te EPA had the power to levy fines. That specific mill would get a fine of perhaps $100,000 per year for the pollution it caused. Chuckling, they’d say “oh, we’re real sorry about that, here’s the check” knowing full well that the 100k wasn’t a drop in their bucket. It wasn’t, a steel mill in those days made that much in a few hours, if not less.
That 100k which was chump change to the steel mill, was the cash cow that allowed the EPA and other regulatory agencies to increase their power until one day, when the steel mill said ‘we’re sorry about the smoke. here’s the check!"(giggle) the EPA, instead, said, “we’re sorry, you’re closed.”
When people talk about the slippery slope, that’s it. It builds on itself and gains strength by small degrees until eventually, it takes over.
Still: Small lean businesses do well, sometimes. I have a customer who makes a product so inexpensively he ships them to china, the chinese can’t compete with him. Those companies are one in a million, though.
Posted by og on 12/10/2004 at 11:34 AMSpot on, Fran. When I sold a small manufacturing company ($6 mil annual sales) in NJ, the NJEPA required $250,000 worth of groundwater monitoring under their ECRA law, for what turned out to be (someone else’s)upstream pollution. No refunds, no apologies, no appeals. And therefore, no sane business wants to locate in that state any more; the folks I sold to immediately moved the plant elsewhere. Brownfields’ (land previously used commercially) value plummeted, and only virgin land was safe to develop. Otherwise, you were opening yourself to the EPA nightmare that made you responsible for any existing pollution, whether you did it or not. In typical nanny-state fashion, the exact opposite of the law’s intent (protecting land from pollution/developement) was acheived.
Much more satisfying to blame the evil corporations, though. Until they’ve all gone elsewhere.
Posted by Joe on 12/10/2004 at 12:33 PMSo ... the steel mill owner, instead of cynically cutting a minimal check, year after year, might instead have respected the EPA’s intent in demanding the fine, and gradually improved systems for pollution control so that once the EPA had the power to close it for non-compliance, it was not so far out of spec that it could not affordably be upgraded and remain in place, providing profits for him and jobs for the community.
Why didn’t he do that? Probably because it’s simpler and more profitable to relocate the mill (or rather, close the mill and relocate the capital) to a place where they let you poison the air and water, give the kids cancer, pay earnest and desperately-dutiful laborers 1/50th of US union wages, and have the local government and the family of the victim apologize to _you_ if a worker gets a leg sheared off in your machinery.
I’m not sure it’s fair to blame the unions, interest groups and regulators, on the one hand, or bemoan the natural rapacity and opportunism of mobile capital, on the other. Better to look at the whole problem, and figure out why our overly-complex, adversarial system is failing to negotiate adequate compromises among the needs to generate wealth through competitive industry, create jobs, and protect the global environment.
A good first step might be to bite the bullet, admit that some strategically-important industries are dirty, accept that they will pollute and that pollution may cause undesirable side-effects, agree to tolerate these without excess litigation, providing the industry complies with a simple, fixed package of regulations, abatements, etc., with a fixed term (e.g., 10 to 15 years), negotiated with the industry itself and other legitimate stakeholders in some rational order of priority. This would leave ONLY innovation as an avenue for improving profits, and would help speed up the historically slow pace of change in capital-intensive manufacturing.
Getting rid of regulations won’t work. But setting up a relatively “headache-free” system, where the goalposts don’t move around with each election, might be achieveable, and might give people a chance to work out survivable business models. Consumers, after all, will pay a premium for convenience—so might banks and businesses.
Posted by on 12/10/2004 at 12:55 PMJoe...much as the details of your story make me weep for our nation’s lost soul, I nevertheless must smile some at what may be the most politically perfect example of the law of unintended consequences I’ve ever heard.
Posted by Matt on 12/10/2004 at 01:09 PMWhen LOBBY GROUPS like the Business Software Alliance declare themselves to have the power to levy fines nationally with, as far as I can tell, no Congressional or Executive backing whatsoever, there’s at least a teensy-weensy problem with third-party groups, don’t you think, John?
Posted by Dave on 12/10/2004 at 02:13 PM"So ... the steel mill owner, instead of cynically cutting a minimal check, year after year, might instead have respected the EPA’s intent in demanding the fine,”
This is a wonderful idea.Unfortunately, it is also nearly impossible. The emission restrictions imposed on most of the steel mills in the Northwest Indiana region make it physically impossible to operate. Little if any coke production takes place in the USA because of the need to completely encapsulate the entire operation and scrub every particle that exits the equipment. The logistical equivalent to building a dome over, say, Cleveland. As far as those union workers, I was one. So were the 185 guys on my crew. As soon as the whistle blew, 75 percent of those guys went to find hiding places, where they could drink, smoke dope, shoot heroin. Believe me, I could write a book. Waste and corruption on all sides. The answers are never as easy as they seem.
Posted by og on 12/10/2004 at 04:41 PMI’m not so sure any of this is a bad thing, per se.
If The People want their government to regulate industry to the third world, that’s their choice (I guess).
Regulating business out of existence and then whining about it… well, that’s the part that bothers me.
So we’ll become, again, a nation of peach pickers, tenement farmers, living nobly off the land, traveling the rails, and making hobo stew from other people’s garbage. Folk music will once again become the fad.
Better that than deal with pollution.
As long as folks are aware of what the consequences are.
snort
(I didn’t think I’d be able to maintain a straight face all the way to the end. Mission accomplished.)
Posted by Mrs. du Toit on 12/10/2004 at 05:50 PMThere’s two other very serious problems that almost always arise in a system with overly-onerous regulations: moral hazard and regulatory capture. The EPA regulations on, for example, endangered species are a perfect example of the former. P. J. O’Rourke asks us to imagine we have found a Rembrandt in our attic, but the law says we must display it in public, permit all who want to see it to do so, at our expense, and if any harm comes to it we will be held liable. Whoops, time to fire up the barbecue.
Regulatory capture is, if anything, even worse. Big business has deep pockets and hordes of lobbyists, and huge amounts of purportedly well-intentioned legislation has been perverted so as to raise barriers to entry and so forth. It’s a general corollary that red tape is often not opposed by big business and in some cases even welcomed. A company with 50,000 employees can afford to hire someone to fill out regulatory paperwork. One with fifty often can’t.
Posted by on 12/10/2004 at 06:09 PM
Comment Form
Commenting is not available in this weblog entry.
