How We Do the Work Is As Important As Where We Do It

Repatriating supply chains to home shores has become an increasingly fashionable topic in the wake of the COVID-19 pandemic. Part of the rationale is to ensure that adequate redundancy and resiliency are built into our economies, even at the cost of “just in time” inventory accumulation practices (which have prioritized short term profitability at a cost of the kinds of supply shocks we are experiencing today). But the other aim, to paraphrase former Treasury Secretary Lawrence Summers, is to ensure that the economy works more for the benefit of “Detroit Man”, and not exclusively for “Davos Man”.  That means reversing many of the trends that have turned the United States into an industrialized shell, in which the quality of jobs (as measured by the weekly dollar income they generate) has deteriorated as a consequence of transitioning from a goods-producing economy to one dominated by lower-paying service sector employment.

Deteriorating job quality is not only a function of the type of work we do but is also a byproduct of the incentives and organization that govern corporations. Regarding the former, “prioritizing immediate increases in share price and payouts at the expense of long-term business investment and growth—a behavior we refer to as short-termism—has driven the inequality crisis in America and weakened our economy”, as the economist Susan Holmberg has persuasively argued. This is in part a product of financialization, and the related problem associated with Milton Friedman’s doctrine of “shareholder capitalism”. Friedman’s idea posits that the only social responsibility of a corporation is to increase its profits, laying the intellectual foundation for the idea that shareholders, being the owners and the main risk-bearing participants, ought therefore to receive the biggest rewards, not the employees, customers, or the community at large.

The latter issue of organizational structure is a recurrent theme in the world of Professor Seymour Melman, whose scholarship largely focused on domestic production and worker centered economics. In his first book, “Dynamic Factors in Industrial Productivity”, Melman noted that an economically “virtuous cycle” would emerge if management paid workers more, because competent managers would compensate for higher wages by using more and better machinery, and by improving the way work is organized. That in turn would generate higher profits, higher wages, leading to better machinery/organization of work, and therefore enhanced productivity. It should also be noted that the higher wages make it possible to boost the demand for the products enough to compensate for the higher wages. Melman, like many others before him, recognized that labor was a source of demand, as well as a cost variable. The corollary also applied, according to Melman: which is to say that cutting or stagnating wages (largely in the interests of short-termism) reversed this virtuous cycle; by electing to outsource, businesses generated increased unemployment, paradoxically removing a principal source of demand for the goods ostensibly made cheaper by automation.

Optimizing that virtuous economic cycle entails considering alternative ownership structures, such as Germany’s co-determination model (which involves the right of workers to participate in the management of the companies they work for) to ensure a better distribution of wealth and profits. Senator Elizabeth Warren proposed this last year, and France’s budget minister, Gerald Darmanin, also suggested that President Emmanuel Macron’s government should expand the use of mechanisms created by former French President Charles de Gaulle in the 1960s: namely, to distribute more capital and profits to workers as and when these global supply chains are redomiciled.

These alternative ownership structures actually enhance profitability (the ostensible goal underlying shareholder capitalism). As a concrete illustration, consider the contrast between the Japanese and American economies. The former has not only continued to prioritize domestic manufacturing capacity, but also embraced a “cluster model” in which related manufacturing processes are intricately linked geographically. This stands in contradistinction to the far-flung geographic outsourcing typically favored by many American multinationals. Japanese auto manufacturers such as Toyota therefore have easy access to Japanese machine tool makers, which means they can achieve machine tool advances way before GM and Ford. Their proximity becomes a competitive advantage.

The fruits of this approach are becoming self-evident: in multiple surveys reflecting both profitability and customer satisfaction, Toyota  consistently ranks near the top of the 20 leading automobile manufacturers. The company was also recently recognized “as No. 30 among the Top 50 ‘All-Star’ companies surveyed, which included companies from various industries,” by Fortune Magazine.

Beyond Detroit’s Big Three car companies, there is Boeing, which has become a poster boy for all that has gone wrong with the American economic model. In addition to the polluting influence of increased military production, there is much evidence to support the idea that the degeneration of Boeing’s civilian aircraft division accelerated as they increased outsourcing outside a localized area of production, especially after the company’s development of the 767 (which was largely produced under the unionized workforce in the state of Washington). As the journalist Andrew Cockburn noted, “outsourcing drives up costs in a variety of ways, for example by requiring the transportation of components to the ultimate manufacturer for final assembly. It also ensures delays, quality-control problems, and serious safety consequences, given the complexity of assembling parts produced under different management hundreds or thousands of miles apart.” Gary Pisano and Willy Shih provided a perfect illustration of the problem in regard to the production of the 787 Dreamliner:

“Boeing could outsource major chunks of its aircraft development and manufacturing to subcontractors around the world and then assemble the planes in its factories in the state of Washington. But in the 787 Dreamliner program, the shift from aluminum alloys to carbon-fiber-composite materials changed things. The old modular design rules could not fully account for stress transmission and loading at the system level—something that Boeing did not get right initially. As a result it encountered problems assembling the pieces (such as the horizontal stabilizer from Alenia Aeronautica in Italy and the wing box from Mitsubishi Heavy Industries in Japan). Significant redesign and rework were required, and the program suffered major delays.”

The problems with Dreamliner persist, to say nothing of the ongoing Max 8 737 challenges, all of which point to a much more profound systemic manufacturing issues, associated with excessive offshoring.

To be sure, redomiciling will almost certainly be accompanied by a degree of increased mechanization.  But such automation per se may not be a bad thing.  Much depends on how it is deployed. Machines can replace manual labor completely (e.g., washing machines replacing domestic labor).  But they can also complement labor, allowing a worker to be more productive via partly automated, partly human assembly lines. In both cases, jobs (or unpaid household labor) are lost, but the mechanisms are different. One is pure labor substitution; the other is productivity- and labor-enhancing.

As an example of the latter, the use of robots has mitigated the considerable health risks posed to labor from COVID-19, as the experience in Denmark’s meatpacking industry illustrates.  Among the 8,000 employees in Danish Crown, one of the largest pig slaughterhouses in the world, fewer than 10 workers have tested positive for COVID-19, and. none of its plants have had to close or slow down production. This stands in marked contrast to the experience of American companies, such as Tyson Foods (where hundreds of workers perished) or Smithfield, where some “1,200 workers are still absent from the Smithfield plant in Sioux Falls due to COVID-19 related precautions”, according to the Argus Leader.

In order to maximize the benefits of automation, we must re-establish a linkage between real wages and labor productivity which for much of the post-World War II period was, as the economist Bill Mitchell has argued, “the source of increasing living standards for workers and allowed them to maintain growth in consumption expenditure commensurate with the growing output of the economy.” That link has been severed over the past 40 years, as business’s attacks on labor and unionization intensified. Restore it, and workers have little to fear from automation.  Indeed, there are considerable benefits to be derived: if productivity-lowered prices and productivity-linked wages give workers more discretionary income and they spend it on labor-consuming services, there will be new jobs in labor-intensive sectors (or household activities) that cannot be automated, and correspondingly less reliance on credit, as opposed to income-generated growth. The latter is inherently more stable, as it makes the economy less prone to credit booms and busts.

All of this points to the need for a profound re-think in how we do things in America. Production and automation must be more linked to worker-centered economics and alternative modes of ownership. In reality, shareholder capitalism and global outsourcing were less doctrines to enhance profits; rather, they were bogus business models that facilitated (and legitimized) corporate predation. As a result, the U.S. economy is characterized by levels of income distribution that pertained in the 1920s, which in turn has contributed to lower levels of industrial production and inefficient growth. Consequently, as and when we bring jobs back home, the way we organize the work is as vital a consideration as to where we redomicile it.