The Problem with Profit

The other day, I ran across an article in a prominent business publication [Bloomberg Businessweek] that made the point that bringing back manufacturing jobs to the United States – as President Trump promised – might not be the great thing that Trump and his backers seem to think.

As Bloomberg pointed out, manufacturing has declined to twelve percent of gross domestic product from twenty-six percent some fifty years ago, but total U.S. manufacturing output is actually higher, and the U.S. still accounts for nineteen percent of total global manufacturing, more than Germany’s and Japan’s shares combined, if somewhat behind China’s twenty-five percent. More important, in Bloomberg’s calculus is the point that profit margins of companies actually engaged in physical manufacturing is far lower than in companies such as Apple (with profit margins of 21% on revenues), and which manufactures nothing, but subcontracts out all manufacturing and parts to largely off-shore companies that only make profit margins in the middle single digits [and most of the U.S. suppliers offshore part or all of their contribution]. Yet Apple employs some 80,000 people.

Bloomberg also makes the point that the only way to increase manufacturing jobs in the U.S. is to, in one way or another, raise the price of imported manufactured goods, and that raising the price of imports might well decimate the retail industry, which accounts for 25% of all U.S. jobs and which is already struggling. Yet the bulk of the jobs in the retail sector are among the lowest paid positions, along with food service.

The Bloomberg conclusion is that “Trump should press for an even freer global exchange of goods and services so U.S. corporations can best organize their operations to maximize profits.”

Especially in the retail and service sectors, maximizing profits means minimizing wage costs, relying on part-time employees in order to avoid the higher cost of paying benefits.

The problem with this outlook, as I see it, is that the “high profit” model creates an employment structure where a comparatively small percentage of the workforce is well-paid at creative and professional jobs and where an ever-larger percentage of the middle-class, particularly the formerly modestly well-paid semi-skilled workers, must compete for lower-paid service positions in retail, sales, and other service positions.

What often gets overlooked is that in 1955, U.S. Steel had nearly 270,000 employees, as opposed to 43,000 today. General Motors had 570,000, compared to 200,000 today. Today, the largest employer in the U.S., is Walmart, with something like a million and a half employees in the U.S. Now, high-tech firms pay well, but those high-paying jobs are limited. There’s a reason why the labor force participation of men from 25-54 is the lowest ever — there aren’t enough jobs for which they’re qualified that they want to take. According to Labor Department figures, there are currently some four million unfilled jobs, but there are ten million men in the 25-54 age group who aren’t looking for work, for one reason or another.

But when national growth depends on spending, and the profits go to people who spend a smaller percentage of their income, the high-profit model just might not be the best one for the country as a whole, which doesn’t seem to bother all too many of those who are the beneficiaries of that model.

8 thoughts on “The Problem with Profit”

  1. CEC says:

    Bloomberg has long ignored the greater financial stability that comes from a more balanced economy, and the concomitant value that stability creates through increased persistency of demand. Many other sources of financial news are equally guilty of this particular form of shortsightedness, so I probably shouldn’t (just) pick on Bloomberg.

  2. Tim says:

    In the UK Government figures increasingly show more people are in employment. However it turns out that an increasing number are registered as self-employed. Companies (such as Uber) appear to like to use the services offered by these people and so avoid the obligations of an employer to their employee, such as pension provision.

  3. Tom says:

    “According to Labor Department figures, there are currently some four million unfilled jobs, but there are ten million men in the 25-54 age group who aren’t looking for work, for one reason or another.”
    Predicted by the futurist of the late 20th century and true now for most of the ‘developed’ nations. Is there a solution other than some form of government employment or support (as in the 1920’s and 1930’s): if yes, which ‘developed’ country is using the solution?

    1. At this point, I don’t know of any “developed” country that’s found a total solution. Germany does a better job of training young people overall, but their system, from what I can see, tends to break down when dealing with immigrants. As I’ve said before, the U.S. relies too much on “college education,” when we’re often short of people with technical skills. The other problem we have is that, these days, most households require two incomes, and often jobs for both working members of that household are not available in the same locale. In the 1950s, vast numbers of unemployed people from the south flooded northern industrial cities, where wages in the auto, steel, and other industries were high enough for a single breadwinner to support a family. For most American families today, that model doesn’t work all that well.

  4. Roy says:

    One of the key values to look at is GDP – it’s a measure of the country ‘growing and producing’. When your income (and your friends income) is growing, you’re freer with your spending and you have more things to spend upon and more opportunities to save. One aspect of GDP that is not well discussed in the news (financial or otherwise) is that GDP is almost directly related to the number of available working people in the country. Prime working age (25-54) people peaked in the US in 2007, then dipped. It may soon be coming back to that peak (2017 or 2018 (http://www.calculatedriskblog.com/2017/06/prime-working-age-population-near-2007.html) but for the last _10 years_ it has been basically stagnant.

    Since population, and who is in what age group is important, it also means that population projections are important. Population includes people who live in the USA whether they have grown up here or immigrated. The last projections from the census in 2014 have unreasonably high projections from 2016+; primarily due to an assumption that net immigration would increase starting 2014 and this hasn’t happened (http://www.calculatedriskblog.com/2017/06/lawler-reasonable-population.html).

    What does this mean? My take (and I’m not an economist though I heartedly endorse the blog I’ve been making reference of) is that we have a systemic background that may be contributing to how portions of the US population _don’t_ feel the growth claimed in the news. They hear unemployment is down, and things are going great, but they don’t _feel_ that there is more activity in the economy based on their, and their neighbor’s spending habits.

  5. John Prigent says:

    I suppose that simply stopping payments to the idle who avoid getting jobs would be out of the question? I’ve met those people, they even brag about finding excuses to reject the jobs they’re offered.

  6. Alan Naylor says:

    Part of the difficulty with unemployment numbers is that they’re very subjective. Unemployment numbers generally consider only those who are looking for jobs. Not the total number of employable but not currently employed.

    The unemployment number that is usually released most recently was 4.3% (8.3 million). This number is grossly understating true unemployment. The number of people who could work and do not is much, much higher. Now I wouldn’t go so far as Trumps 93 million unemployed as that number includes students age 16-22 and seniors 65+. If you take those out and you’re down to ~45 million. The idea of separating those who are called ‘discouraged’ workers, because they gave up on job hunting instead of finding work is ridiculous. They’re still employable and currently unemployed.

    I don’t know that I’d go with the lower figure of ~21 million which some economist claim is the actual unemployment number, as I think it’s probably 10 or 15 million too low. Best guess, 9.5%?

    A number of people on the state/federal dole in one form or another are actively encouraged not to find better work/full time work because they would loose benefits. There are bad gaps in the social safety nets we have in place. You can make just enough not to qualify for them, but once you do you don’t make enough to keep afloat which encourages people not to improve their situation beyond a certain point due to the great difficulty inherent in going from receiving benefits to making enough not to need benefits.

    Of course, there are the lame and lazy as well, or people who game the system, though they’re a far smaller number than most people think they are. Unfortunately for me, my eldest is in this category, he has no interest in work or doing anything but playing games and being on the computer so long as others will take care of his basic needs.

    Where I live near Cincinnati OH service jobs abound. Every single shop and store near me has a sign up that says they’re hiring. This is just in the service industry, mall stores, fast food, etc. There are a number of production facilities which are also hiring, most at 8 an hour. The plant I work at doing automation in has over 40 jobs, 10 of them in maintenance, which start at 12 an hour. There are jobs, plenty of them, but people don’t want to take them or don’t see that taking them would improve their quality of life.

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