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The Bear’s Lair: Eroding Western living standards Here is Martin Hutchinson’s latest at Prudent Bear, quietly informing bovine optimists that globalisation carries profound and profoundly depressing implications for more than the benighted working class in the West. Tata Motors’ emergence as front-runner to buy Jaguar and Land Rover from the ailing Ford brings one question uppermost to a commentator sitting at a wealthy Western desk: Precisely which economic sectors can be relied upon in the future to provide jobs for Westerners at wages higher than are obtainable in the Third World? Will there continue to be opportunities to improve Western living standards, or are those living standards destined to descend to some kind of population-weighted average between Boston and Benin? Tata is a typical and highly capable example of that new breed: the third world multinational company. Part of the multi-industry Tata Group, over a century old, from which it had access to both capital in its formative years and steel currently, it has established itself as the premier manufacturer of light trucks in India and as one of the top three automobile manufacturers. At the bottom of the market, it has announced plans to being out a 100,000 rupee (about $2,500 currently) automobile, which if successful will undercut its major competition by more than 30% and greatly expand the market for automobiles among the still impoverished Indian people. Conventional Western business analysts have no problem with Tata manufacturing mini-cars for the Indian market, or indeed for developing country markets in Africa and elsewhere. They imagine that Tata is able to use its comparative advantage of cheaper labor to squeeze costs out of the manufacturing process, thus achieving what in the West would be an impossibly low price. They point knowingly to the expensive environmental features that the new automobile will lack, and imagine smugly that the it will be both tiny and of low quality, adequate for the noble impoverished of the Third World, but not seriously to be imagined as competition on the roads of London, New York or Stuttgart. The announcement that Tata is to buy Land Rover and Jaguar has thus caused a considerable amount of cognitive dissonance. Land Rover and Jaguar are both icons of British automobile manufacture, hand crafted by generations of British skilled labor. Admittedly in the 1970s Jaguar’s quality control became so poor that Jaguars rivaled the Moskvich or the Yugo for frequency of repairs, but since 1979 or so quality has improved and the marque has established a cherished if not particularly profitable niche among the luxury automobiles of the world. Moreover, would Western buyers shell out the substantial cost of a Jaguar if they knew it had been manufactured in India; after all, how could the quality be relied upon? Such thinking betrays a limited understanding of modern automobile manufacturing. Fifty or eighty years ago, you could reasonably contrast mass produced automobiles such as the Ford Model T or the Morris Oxford with luxury automobiles such as Mercedes and Rolls Royce. The former were manufactured on assembly lines to relatively low tolerances, whereas the latter were hand built one by one, with parts being filed down to precision so that everything fit precisely. Mass produced automobiles rattled, luxury automobiles didn’t; it was as simple as that. With the advent of automated manufacturing, this distinction has disappeared. The only differences between a cheap automobile and a luxury automobile today are materials and gadgetry; the manufacturing process is the same. Both Mercedes and Ford are made by robots. The only exceptions are a few models such as Aston Martin and Maserati, where production volumes are so small that it’s not worth buying a full set of robots, so highly skilled craftsmen remain cheaper. In such a world, Tata is just as capable of manufacturing Jaguars as Ford; it can use the same computerized manufacturing techniques, merely substituting cheaper Indian labor for the expensive and recalcitrant British workforce. To the extent that expensive automobiles still require more labor than cheap ones, it is in such areas as finishing, skills that can quickly be learned by an intelligent and diligent Indian community. As for marketing, Tata will have a substantial domestic market among the emerging Indian wealthy, for whom British nostalgia still represents quality – a lingering and very valuable dividend from the Empire – while internationally it can either play down its national origin or start a marketing campaign based on the vast fleet of Jaguars no doubt owned by the Maharajah of Patiala in the 1930s. Design and research can through modern communications easily be subcontracted to Western boutiques, but after a few years’ Indian experience with the marque there will be every possibility of carrying out those functions also using Indian labor. In summary therefore, there is no sector of the automobile industry that cannot be mastered by an Indian manufacturer of adequate skill in modern manufacturing and inventive marketing. Since Indian labor costs less than a tenth of British, German or U.S. labor, it is likely if the ethos of globalization and free trade remains that after a moderate period of transition the vast majority of automobiles, cheap, mid-priced and expensive will be designed, manufactured and marketed from India, China or similar economies that retain large skilled workforces and relatively low wage rates. The idea that, by subcontracting manufacturing to a low-wage-cost country, a wealthy country might be extinguishing its own business contravenes David Ricardo’s 1817 Doctrine of Comparative Advantage. This states that every product should be manufactured in the country where its comparative costs of manufacture are lowest, and that both rich and poor countries gain from enabling this. However, Ricardo’s theorem assumes a static world. In reality the world was not quite static even in 1817, and it has been growing progressively less static ever since. In Ricardo’s time, it might have taken a Third World manufacturer a couple of generations to acquire not only the manufacturing techniques but also the design, control and marketing know-how of its Western counterpart. Today however, with modern business education, widespread travel and ubiquitous communications, that process can be accomplished in well under a decade. Hence the calculus of comparative advantage changes quickly once outsourcing and technology transfer are undertaken, generally substantially to the disadvantage of the wealthier country’s workforce. The example of the automobile sector strongly suggests that there are few manufacturing businesses in which Western workforces are truly competitive in the long run. In some areas, such as pharmaceuticals, conventional wisdom has held that new drug advances come only from the well funded laboratories of the majors, or from entrepreneurial biotech companies that rely on the uniquely innovation-friendly California environment to thrive. However companies such as the Indian Dr. Reddy’s and the Eastern European Pliva and Richter Gedeon suggest that innovation can easily come from out-of-the-mainstream areas. The belief in large research and development facilities may have been a 1950s fantasy; it is notable that Bell Laboratories, the quintessential such operation, has been progressively downsized and is now owned by the French Alcatel. Nevertheless, the education facilities of advanced countries represent a huge physical and intellectual capital, which appears likely to continue paying dividends. Virtual communication across the Internet remains less effective than physical communication over a coffee in the Faculty Lounge, and this is unlikely to change. At the very sharp end of innovation therefore, it seems likely that the most skilled Westerners will continue to give their countries a comparative advantage against emerging markets. However, there is no guarantee that these research-intensive sectors are likely to support the entire Western population, far from it. They are highly cyclical, benefiting hugely from an active stock market and venture capital market. Further there is no evidence that innovation itself, as distinct from the fruits of recent past innovations, is significantly expanding as a percentage of output—indeed, research expenditure has if anything declined. A number of service sectors also seem likely to survive. Financial services, like Scotch whisky manufacture, require ample supplies of cheap capital, which would normally give an advantage to wealthier countries. That advantage has been squandered by the decade of excessively low interest rates worldwide, which both eliminated the comparative financing cost advantage of rich countries and forced their citizens’ savings rates down to derisory levels. At this stage, the rich world’s banking systems are in trouble while developing countries have piled up record levels of foreign exchange reserves. It thus seems likely that the financial services business will also migrate to cheap-labor markets, although possibly to a lesser extent than automobiles. At the bottom of the scale, there are a wide range of services that are location dependent, so impossible to outsource. A haircut in Boston will be essentially identical to one in Bangalore, but will cost much more and employ a correspondingly better-paid barber. Construction by definition takes place where facilities are being constructed. Hotel and retail services are also location-dependent, hence can employ large numbers of low-skill workers in rich countries at wages far above those available in Africa. Since the majority of location-dependent jobs in Western countries are low-skill it therefore follows that if governments wish to protect local living standards, they need to discourage low-skill immigration. Except in Japan, they have not been doing so; both in the EU and the United States low-skill immigration, frequently illegal immigration, has got completely out of control and is immiserating the working classes. The Economist and the Wall Street Journal calling for looser immigration laws are like Reform Bill-era Whig grandees calling for the workhouse; their urgings are theoretically driven by aristocratic concern for the poor, but in practice betray a complete lack of understanding of what the poor actually want and need. From the summary above, it is pretty clear that income levels in the West are converging with those in the more competently run emerging markets. The bad news is that in the years ahead this is likely to happen through an absolute decline in Western living standards. The populations of India and China greatly exceed those of all the rich countries put together. Further, as discussed above, the greater part of Western economies is vulnerable to low-wage competition. Thus the economic histories of a high proportion of the Western population under 30, except the very highly skilled, will involve repeated bouts of unemployment, with job changes involving not a move to higher living standards but an angry acceptance of lower ones. By 2030, it is possible that the median real income in the United States and Western Europe may be no more than 50-60% of its level today. A number of factors will exacerbate this trend. High low-skill immigration will introduce domestic as well as international competition for low and medium skill jobs, thus quickening the decline in their wage levels. The gigantic baby factories of the poorest Third World countries will provide an ugly Malthusian competition at the very bottom, forcing living standards down still further. Expansive governments will employ ever higher proportions of Western populations in unproductive ways, thus increasing exponentially the burden on their unfortunate taxpayers and quickening the exit of jobs. The solution oddly enough lies among the very poorest countries, sub-Saharan Africa, Bangladesh and the worse run areas of Latin America. If their governance can be brought up to an acceptable standard, they too will participate as recipients in the outsourcing of Western industry. However in becoming richer they will inevitably reduce their rate of population growth, as well as increasing demand for Western luxury goods, a sector that seems likely to migrate only slowly to lower-wage countries. Once the world competes once again on a level playing field, with high quality education and infrastructure as available in Bangladesh as in Baltimore, and no gigantic surplus mob of the unskilled, living standards will begin to increase in tandem worldwide, with both the ex-rich countries and ex-poor countries benefiting. However, until the Malthusian pressure from low-end overpopulation is broken, that desirable point will not be reached. Thus a combination of improving governance and population control at the very bottom and enlightened economic and social policy in rich countries could both raise world growth rates and slow the convergence of Western living standards with the Third World. This would lessen the drop in Western living standards that must occur before equilibrium has been reached. One is not optimistic however that enlightenment will win out. Martin Hutchinson is the author of Great Conservatives Comments:2
Posted by Mark on Wed, 09 Jan 2008 15:36 | # Wealth is relative; I welcome declining income in the US as long as I maintain my modest wealth. It just makes me that much richer. Whites have embraced the welfare state, now they will be embraced by it; and that won’t be pretty, but will be well-deserved. 3
Posted by Alex on Wed, 09 Jan 2008 23:05 | #
I’ve always thought those Citroen cars, like the ones in the photo, were pretty cool. Does anyone know? 4
Posted by Guessedworker on Thu, 10 Jan 2008 01:20 | # Alex, Production ceased some time in the late seventies, I think. A long time back, anyhow. They had a certain leaky rag-top Gallic charm, notwithstanding their useless performance and appallingly polluting little engines - the equivalent of several thousand Gaulloise in every lung-full of exhaust gas, I shouldn’t wonder. During my youth they were the preferred transport of the sandal brigade - people who now clear 120 K (Sterling) of our taxes for some PeeCee job they found in Society Guardian. Of course. ‘Kin lefties. 5
Posted by Lurker on Thu, 10 Jan 2008 03:05 | # I think 2CV production soldiered on until the late 1980s (though should I defer to GW withd his petrol head credentials?). Killed off by some damn fool regs from the EU I heard, probably they would still sell otherwise. I saw someone describe them somewhere as the AK47 of personal transportation. Aha! According to wikipedia, which I just checked, it ceased production in 1990. 6
Posted by Alex on Thu, 10 Jan 2008 06:14 | # Thanks GW and Lurker. The car was certainly different. 7
Posted by Guessedworker on Thu, 10 Jan 2008 10:31 | # Don’t defer to me, Lurker. You are correct. I should have checked. Here is the new People’s Car for India:-
From the BBC article:-
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Posted by Guessedworker on Thu, 10 Jan 2008 10:50 | # We have, of course, been here before, with the 1950s Iso Isetta “Bubble Car”:-
Production was widely licenced, the most famous local variant being the BMW Isetta 250. The Isetta lost its place to the Fiat 500:-
... which the Agnellis saw as the vital component in the “motorisation” of the Italian public. Tata’s owner said yesterday, ““I observed families riding on two-wheelers - the father driving the scooter, his young kid standing in front of him, his wife seated behind him holding a little baby. It led me to wonder whether one could conceive of a safe, affordable, all-weather form of transport for such a family.” 9
Posted by Fr. John on Thu, 10 Jan 2008 15:09 | # “Once the world competes once again on a level playing field, with high quality education and infrastructure as available in Bangladesh as in Baltimore, and no gigantic surplus mob of the unskilled, living standards will begin to increase in tandem worldwide…” I will venture to iterate something few have done or thought of, but, which appears only logical and just, in light of the fact that giving away one’s patrimony is just as heinous as giving away one’s cultural capital. For there never was, never will be such a thing as a ‘level playing field.’ God is not a Unitarian Universalist, after all, but has only ONE race, ONE chosen people as the ‘apple of his eye,’ and it ISN’T some tribe in a ‘sh**ty little country’ halfway across the globe, FYI. Here’s my idea: Why should we give the third world the education to enable them to overpower us? Why squander White intellectual capital, for a few measly dollars/Euros/pounds? Do we not see that we are exchanging our ‘mess of potage’ for the quick fix of immediate gratification? Just as anti-immigrant sentiment in the American Political race acknowledges that our land cannot sustain millions of third world ‘citizens’, so, too, would a radical government ‘closed doors’ mentality stop this ‘brain drain’. Give them fifty years of non-access to White Western intellectual sources of power, and let’s see how THEY can develop THEIR civilization. Yes, I know it sounds racist, unfair, is a remnant of an imperialist mentality, etc. Frankly, my dear, I don’t give a dam* anymore. ‘My race, my family, my kith and kin are worth more than an Indian fingernail,’ to paraphrase a jewish racial supremacist…. 10
Posted by Alex on Thu, 10 Jan 2008 18:39 | # The Isetta. I just knew the car from that old Depeche Mode video had to have a name!
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Posted by Alex on Thu, 10 Jan 2008 20:27 | # Money should be strictly a tool of man and man not a tool of it. Otherwise you end up with the peoples of the world literally being merchandized and sold as those who promote the ideology of multi-culturalsim are trying to do now. The ignoring that the peoples of the world that make up humanity exist, and are quite real, is one of the multi-cult’s primary dysfunctions, amongst others. Here’s a couple of articles from 1847 and 1850 respectively not much different in sentiment than the article which leads this thread. I suspect that neither effort got too far at the time, but it wasn’t for lack of trying. ‘It is represented to us that they now consider it hopeless to expect any great revival of trade in this country, and that they are beginning to direct their attention to other lands, where nearly every element of manufacture is cheaper, and where they could gain direct access to the original market of the raw material, and find at the same time a quick demand for the manufactured goods.’
Originally in the November 28, 1846 issue of Brittania and republished here in the January 2, 1847 issue of Littel’s Living Age pg 5-6 12
Posted by Alex on Thu, 10 Jan 2008 20:47 | # ‘A PROTECTIONIST Nemisis is prophesied in the form of the most singular invasion ever threatened to Great Britain - an invasion of American manufacturers, who are to set up factories in the West of Ireland, to compete with the factories of Lancashire…’
A link to the full article which first appeared in a summer 1850 edition of The London Spectator and which is reproduced here in the August 24, 1850 issue of Littel’s Living Age pg 344-345 13
Posted by Desmond jones on Thu, 10 Jan 2008 23:26 | # Alex, Great stuff. It’s not necessary to move factories, any longer. Huge profits can be accrued simply by moving people. Italian-American Charlie Fote, ex-CEO of First Data/Western Union, saved Western Union from bankruptcy by exploiting that very concept.
How do you convince Charlie Fote, and all the other Euro CEOs to give up their vast wealth, which benefits them and their families so extensively, but portends such a deleterious impact on their “less intelligent and less conscientious” kin? If Fote doesn’t act, Western Union goes bankrupt and he and his family suffer. The data shows time and again that wealth enhances reproductive fitness. The children are better educated, are more likely to survive to adulthood, show less morbidity, even if they are a lower IQ offspring, and generally live longer than their poorer cousins. It has been the case, at least since Lincoln’s pronouncement that the relationship between blood and soil is not through descent but through love of freedom and liberty. The very same freedom and liberty, that George Fitzhugh, writing at about the same time as Lincoln, encouraged wage competition.
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Posted by Guessedworker on Fri, 11 Jan 2008 08:30 | # Some carbon-relevant facts and figures on the Tata Nano from the Independent:-
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Posted by Fox Bark on Fri, 11 Jan 2008 13:37 | # Actually the best and most profitable motor industires are located in Germany and Japan, and in both cases international customers seek out their products (every Arab wants a Mercedes), because of QUALITY not QUANTITY. 16
Posted by Fred Scrooby on Fri, 08 Feb 2008 07:02 | # I bet this kid’s got some good stock-market tips. (OK OK I admit it. I posted that just to try to make all these white career-woman types change their minds and want to start having babies.) 17
Posted by Fred Scrooby on Fri, 08 Feb 2008 14:39 | # For any who didn’t “get” commenter Fox Bark’s reference to “pathetic ‘I’m alright Jack’ antics,” he’s referring to a classic British film comedy of the early 1950s, I’m All Right, Jack starring Ian Carmichael, Terry Thomas, and Peter Sellers. It’s hilarious. If it ever comes on TV or if you can rent it, watch it. You won’t be disappointed. It shows how the labor unions ruined British industry (and U.S. industry, French industry, Belgian industry, and the industry of most Eurosphere countries) with pig-headedness and how management and the owners were, in their own dirty ways, no better. As a seventeen-year-old following my first year in college I had a summer job working in the U.S. Post Office in New York City and can attest to the union nonsense depicted in that film being one-hundred percent accurate: that was exactly the way the union representative behaved in that post office branch I worked in. 18
Posted by Fred Scrooby on Fri, 08 Feb 2008 14:42 | # I don’t know why that Wikipedia link doesn’t work. Go to Wikipedia, type in I’m All Right, Jack, and the article should come up. 19
Posted by Al Ross on Tue, 02 Feb 2010 11:12 | # Fred, you have reminded me of one of my favourite films. If, like me, you have a taste for Ealing Comedies combined with micro - nationalism, then’Passport to Pimlico’ might amuse. 20
Posted by Fred Scrooby on Tue, 02 Feb 2010 13:33 | # Al, I’ve never seen that one but I’ll keep an eye out for it — judging from the following description, and knowing the old Ealing Studio standard, it must be hilarious! Post a comment:
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Posted by melba peachtoast on Wed, 09 Jan 2008 04:07 | #
“Once the world competes once again on a level playing field, with high quality education and infrastructure as available in Bangladesh as in Baltimore, and no gigantic surplus mob of the unskilled, living standards will begin to increase in tandem worldwide, with both the ex-rich countries and ex-poor countries benefiting.”
Yeah, right.