Business Is Booming

From our March issue

When he was CEO of General Electric, in 1998, Jack Welch pithily summarized his vision for corporate America: "Ideally, you'd have every plant you own on a barge to move with currencies and changes in the economy."

Since then, corporations have discovered that they don't need barges in order to unmoor themselves from the American economy. As corporate profits skyrocket, even as the economy remains stalled in a deep recession, Americans confront a grim new reality: Our corporations don't need us anymore. Half their revenues come from abroad. Their products, increasingly, come from abroad as well.

Consider, for example, the crucial role that a company called Foxconn plays in the American economy. Scarcely any Americans had heard of Foxconn until a wave of worker suicides shook its immense factory complex in China's city of Shenzhen last spring. Within the space of a few months, 10 workers inside the company's walled-off Longhua industrial village, a 1.2-square-mile development where 400,000 employees live and work, killed themselves.

What made the stories particularly troubling, though, were the revelations about Foxconn's place in the American industrial system. It's at Longhua that Apple's iPhones and iPods are manufactured (which is why Longhua is also referred to as "iPod City"). At Longhua and Foxconn's other Chinese factory complexes, 937,000 employees also make computers for Dell, games for Nintendo, and several products for Hewlett-Packard. Indeed, the number of Foxconn employees who assemble these companies' products often exceeds by a wide margin the number of workers these companies employ directly in the United States. At Apple, the ratio of Foxconn employees at work on Apple products to U.S.-based Apple employees is 10-to-1: 250,000 Foxconn workers to 25,000 Apple workers. The same ratio exists at Dell.

The role that even the most widely admired American companies, such as Apple, Hewlett-Packard, and General Electric, have played in offshoring American jobs has long been a subject of controversy. Their zeal for offshoring has lowered the prices of the goods Americans buy while increasing our trade deficit, shrinking our manufacturing sector, and flattening our wages. But to look at the employment numbers at Foxconn, Apple, Dell, or IBM -- whose total worldwide workforce expanded from 329,000 employees in 2005 to almost 400,000 in 2009, while its U.S. workforce shrank from 134,000 employees to 105,000 -- is to come away with an even more disquieting thought: With each passing year, and even more so during the recession, America's leading corporations grow more and more decoupled from the American economy. Their interests grow increasingly detached from those of our workers, our consumers -- and our economic future.

This growing detachment is certainly reflected in their revenues. In 2001, 32 percent of the income of the firms on Standard & Poor's index of the 500 largest publicly traded U.S. companies came from abroad. By 2008, that figure had grown to 48 percent. Although precise figures on offshoring are unavailable from either companies or governmental bodies, the evidence of the growth of offshoring is overwhelming. A 2008 survey of 1,600 companies conducted by Duke University's Fuqua School of Business and the Conference Board (a group of leading corporations) found that 53 percent had an offshoring strategy -- up from just 22 percent in 2005. "Very few" companies, the survey concluded, "plan to relocate activities back to the United States."

The implications of this shift in the conduct of American big business are profound -- and terrifying. At a time when small business can't expand because high unemployment and the decline of home values have depressed consumer demand, big business is increasingly committed to expanding its sales and production abroad rather than at home. That's why the current downturn is different from its predecessors: Unlike any recession in American history -- including the Great Depression -- this one has come at a time when America's leading employers can return to profitability without rehiring large numbers of American workers.

This grim new reality has yet to inform our discussion over how to come back from our mega-recession. The existing debate pits those who believe that the downturn is cyclical and that public spending can restore prosperity, against those who believe that it's structural -- that we have too many carpenters, say, and not enough nurses -- and that we should leave things be while American workers acquire new skills and enter different lines of work. But there's another way to look at the recession: that it's institutional, that it's the cumulative consequence of our leading banks and corporations investing in job-creating enterprises abroad rather than in the U.S. Thus, the disjuncture between the record-high profits of American corporations and the otherwise dismal indices of national economic health. Corporate profits for the third quarter were the highest on record -- $1.659 trillion -- and were 28 percent higher than third-quarter profits one year previous, the highest year-to-year increase on record, beating the old record set in the previous three months.

This rise in profits, however, has not been accompanied by a rise in employment, wages, or national income. Official unemployment hovers just under 10 percent, and the Federal Reserve is predicting that it will stay at around 9 percent throughout 2011. Gross domestic product increased by just 2.5 percent during the third quarter of 2010. The Wall Street Journal has calculated that as a result of this combination of high profits and stalled prosperity, after-tax second-quarter profits of American companies as a percentage of national income were the third-highest of any quarter since 1947.

The multinationals' profits depend not just on their sales and production overseas but also on reducing labor costs in the U.S. by pushing down wages and the size of their U.S. workforce. In theory, a robust recovery in the United States, boosting demand and thus revenues, would be an event they would welcome. In practice, many of our leading corporations don't need it: They have developed a business model for a globalized economy in which they can chug along happily even if the American economy continues to stagger.

With small business floundering at home, and big business flourishing abroad, where, exactly, will the economic recovery come from? Who will do the hiring? America's private-sector economy is no longer structured to generate anywhere near the number of jobs it would take to return us to the levels of employment we had in 2007, before the crash.

When the financial crisis hit, America's employers laid off many more workers than did their counterparts in other mature economies, and they haven't rehired them. It's not because the overall economy has contracted more steeply here. Between 2008 and 2009, the U.S. GDP dropped 2.4 percent, compared to 2.6 percent in France and roughly 5 percent in Germany, Japan, and Britain. But U.S. unemployment has increased by approximately 5 percentage points since 2007, compared to an increase of just 1 point in France and Japan and 2 in Britain. In Germany, unemployment has actually dropped a point since the downturn began and now stands a full 2 points lower than ours.

Discharging workers can't be a permanent pillar of profitability -- companies cannot slip beneath certain employment levels. But keeping labor costs low in the U.S. -- by avoiding rehiring, substituting temporary for fulltime workers, increasing productivity, depressing wages, and shifting employment abroad -- can be an ongoing boost to a company's bottom line, particularly if its revenues increasingly derive from foreign rather than domestic consumers. America's leading employers are pursuing all of these strategies.

The high level of joblessness has obscured another troubling story: the declining incomes of the employed. The median annual wage of American workers declined by $159 in 2009 from the previous year, to a mere $26,261 (that means half of all employed American workers make even less than that). The hourly wage for new hires in manufacturing plants, both union and nonunion, today is roughly $15 -- about half of what it was just a few years ago.

One way American employers depress wages and avoid benefits is to hire temps. Indeed, of the 1.4 million net jobs created since the economy bottomed out in September 2009, 494,000 have been temporary. In November 2010, employers hired 40,000 temps -- a number exceeding the total of 39,000 net new jobs created that month.

As a result of these trends, profits and wages have recently moved in sharply different directions. As Andrew Sum and Joseph McLaughlin of Northeastern University's Center for Labor Market Studies have documented, pretax corporate profits increased during this period -- the second quarter of 2009 to the first quarter of 2010 -- by a whopping $388 billion, while wages increased by just $68 billion. This disparity stood in sharp contrast to the experience of earlier recoveries. At a comparable point in the 1981-1982 recession and recovery, corporate profits constituted just 10 percent of the combined uptick in profits and wages. This time around, they amounted to 85 percent.

But in 1981-1982, workers in the private sector, roughly 25 percent of whom belonged to unions compared to just 7 percent today, had more power to defend their pay levels than they do now. The same goes for health-care costs. According to a September survey by the Kaiser Family Foundation and the Health Research & Educational Trust, employee insurance premiums rose by 13.7 percent in the preceding year, while employer contributions dropped by 0.9 percent. Employers have been free to impose the costs of the recession and the costs of doing business on their workers -- and keep all the proceeds for themselves.

The hiring that is going on, moreover, isn't located in the higher-wage manufacturing sector, which has been declining steadily as a percentage of the workforce as a result of both offshoring and productivity increases. We are, in effect, trading good jobs for lower-paying jobs. According to a survey this summer from the National Employment Law Project, only a third of the jobs lost in 2008-2009 were in industries paying less than $15 an hour, but fully three-quarters of the job growth in 2010 came in these same low-wage industries. Among the industries that grew in 2010, the top three occupations were retail sales clerks, cashiers, and food preparers with a median hourly wage of less than $10.

The recovery, in other words, is every bit as alarming as the recession. The America emerging from the financial crisis of 2008 is distinctly downwardly mobile.

In earlier times, downwardly mobile American consumers would have posed a huge problem for American corporations. Today, as those corporations look abroad for their sales and labor, that problem is much diminished.


From 1995 to 2008, the American economy grew by a yearly average of 2.9 percent. During that time, the yearly economic growth rates in the world's two largest nations, China and India, averaged 9.6 percent and 6.9 percent, respectively. Increasing U.S. presence in the Chinese and Indian markets followed as the night the day.

As growth in the U.S. economy continues to lag behind that of much of the rest of the world, those U.S.-based companies able to sell more abroad gain a clear advantage over those companies whose sales are more domestic. An analysis by The Wall Street Journal's Justin Lahart of the 30 companies included in the Dow Jones industrial averages concluded that the 10 with the largest share of their sales abroad were projected to increase their revenues by an average of 8.3 percent over last year, while those with the lowest share of sales abroad were looking at increased revenues of just 1.6 percent. This puts Coca-Cola, which gets 75 percent of its sales overseas, at a distinct advantage over the Dr Pepper Snapple Group, which gets 90 percent of its sales in the U.S.

In industry after industry, foreign markets are offering more opportunity than domestic ones. The foreign affiliates owned in part or in full by U.S.-based multinationals now bring in just about as much money to their parent corporations as their domestic counterparts. A study published last year by the Business Roundtable and the United States Council Foundation concluded that in 2006, 48.6 percent of profits of U.S.-based multinationals came from their foreign affiliates, compared to just 17 percent in 1977 and 27 percent in 1994. What this means is that the equilibrium between production, pay, and purchasing -- the equilibrium that Henry Ford famously recognized when he upped his workers' wages to an unheard-of $5 a day in 1914, the equilibrium that became the model for 20th-century American capitalism -- has been shattered. Making and selling their goods abroad, U.S. multinationals can slash their workforces and wages at home while retaining their revenue and increasing their profits. And that's exactly what they've done.


Is it necessary to move jobs abroad, just because more and more of the customers are abroad? A look at Germany suggests otherwise. Despite the global downturn, the German economy has been booming, exporting so many goods to the expanding markets of the developing world as well as to the rest of Europe that its net trade surplus -- the net value of its exports over its imports -- comes to 7 percent of its GDP, the highest of any major nation. Germany is anything but a low-wage country: The average hourly compensation -- wages plus benefits -- of German manufacturing workers is $48, well above the $32 hourly average for their American counterparts. Yet Germany is an export giant while the U.S. is the colossus of imports.

German multinationals have their own affiliates overseas, but they have also maintained robust, high-quality production at home. Siemens, which is more or less the German equivalent of General Electric, has hundreds of thousands of employees who work abroad, but it recently announced a deal with its major union, IG Metall, that included a pledge not to make any unilateral reductions in its 128,000-employee German workforce. BMW, ThyssenKrupp, and Daimler have gone even further, signing deals with IG Metall to maintain a fixed number of employees in Germany.

These domestic employee-retention pacts are an outgrowth of Germany's more consensual, stakeholder version of capitalism. German workers' organizations have a far greater say than American workers do in the conduct of their employers. By law, employees in large companies get the same number of seats on corporate boards that management does. Unions and management collaborate to ensure that German manufacturing retains and expands its high-quality products and markets. IG Metall has been working with automakers, for instance, to train workers to mass-produce electric cars. "Our goal is to really retain high-value-added manufacturing in Germany," Martin Allspach, the union's policy director, told me when I visited IG Metall headquarters in Frankfurt in November.

The German experience also shows that the structure of finance can have a profound effect on the retention of manufacturing. An entire stratum of German banking, municipally owned savings banks, provides the funds that enable the nation's prosperous, largely family-owned midsized manufacturers, the Mittelstand, to upgrade themselves into export dynamos. About two-thirds of Germany's small and midsized businesses get their loans from these banks, which shun capital markets and are restricted to doing business in their own towns. "Over the past decade, banking largely became a self-fulfilling activity," says Patrick Steinpass, the chief economist of the national organization of savings banks. "But our banks are restricted to doing business in their regions; they have to concentrate on the real economy."

The Mittelstand is thus able to remain largely immune from many of the pressures that financial markets, with their pressure for ever rising profits and share prices, inflict on American businesses. Klaas Hubner, a former member of Germany's Parliament and the owner of a Mittelstand company that sells axle-box housings to Chinese and other nations' high-speed railroads, believes that this freedom from American-style markets is the key to Germany's success. "We don't have short-term strategies, only long-term strategies," he told me. By preserving a vibrant sector of small-scale manufacturing, Germany also has a local capitalism. "I live where my company is located," Hubner said. "I want a good reputation in the town I live in."

No such localism can be found among American business leaders, whose brand of capitalism is keyed solely to their shareholders and top executives. "For a lot of American companies, their actual and psychic energy is focused abroad," says Matthew J. Slaughter, associate dean at Dartmouth's Tuck School of Business and a member of George W. Bush's Council of Economic Advisers from 2005 through 2007. The American way of business is aptly summarized in the McKinsey Global Institute's 2010 report on U.S. Multinational Corporations: "U.S. multinationals must pursue new growth opportunities and continually improve operations to remain globally competitive," it says. "They go where the markets are expanding, where the talent lives, and where they can earn superior returns."


Just how mobile are these rootless corporations in their global chase for profits? It's hard to know, because they're anything but forthcoming about the extent of their employment abroad, much less the number of formerly U.S. jobs they've actually offshored. Some companies reveal the number of their foreign and domestic employees in their annual 10-K reports to the Securities and Exchange Commission, but many don't, as there's no requirement to do so. The Commerce Department's Bureau of Economic Analysis (BEA) releases its own report annually on the total number of workers employed by U.S. firms here at home and by their foreign subsidiaries. But there are almost no figures on how many employees work for foreign firms with which American companies contract to make all or part of their products -- the Foxconns of the world.

Still, looking at the BEA data on foreign and domestic employment from 1982 through 2008 (the most recent year available) gives us some sense of the shift in the employment patterns of U.S.-based multinationals. In 1982, 26 percent of the workers at these companies worked for their foreign affiliates. As recently as 2000, that figure had increased only to 28.9 percent, but by 2008, it had risen to 36 percent. The same growing shift toward foreign employment is evident for leading multinationals. In 1992, Ford reported that 53 percent of its employees were in the U.S. and Canada; by 2009, the share of its workers in North America (including Mexico as well) had shrunk to 37 percent. In 1993, Caterpillar's workforce was 74 percent domestic; by 2008, it was just 46 percent domestic.

The flight of the multinationals to distant climes means the flight of our most advanced employers and of our best jobs. Though less than 1 percent of U.S.-based companies are multinationals, they account for 74 percent of the nation's private-sector research and development spending since 1990. They also pay better than other American employers -- 37 percent higher. The employees of their foreign affiliates come considerably cheaper. The BEA 2008 report on multinationals put the average (mean, not median) level of pay and benefits for U.S. employees at $65,067, while the figure for the employees of their foreign affiliates was $43,236. The figures for employees of unaffiliated contractors are almost never reported by the contractors or by the multinationals whose products they make; indeed, the very identity of many such contractors and subcontractors is not publicly known. What we do know is that the Bureau of Labor Statistics reports that the average hourly compensation for manufacturing workers is $4.04 in Mexico and $1.36 in China.

As is not the case in Germany, then, America's leading companies are as close to barges as you can get, with the ability and incentive to move their operations abroad and to employ fewer workers, at lower pay, at home. Their failure to resume domestic hiring prolongs the high unemployment that makes it particularly hard for small businesses, which can't go abroad, to increase sales, get loans, and add new workers.

So what are we to do?

President Barack Obama, for one, understands the problem. "What is a danger is that we stay stuck in a new normal where unemployment rates stay high," he said in an interview aired on 60 Minutes the Sunday following the midterm elections. "Businesses make big profits. But they've learned to do more with less." They've also learned to do more elsewhere.

In the absence of private-sector hiring, the recession will just keep rolling along unless the government radically shifts its trade and industrial policies and expands its own role in creating jobs. One approach, as Andy Grove, the former CEO of Intel, termed it in a BloombergBusinessweek article this summer, is to "rebuild our industrial commons." Grove proposes we levy a tax on imports from offshored labor and direct the proceeds to the kind of innovative high-tech company that he once led -- if and only if such companies mass-produce their inventions here in the U.S. Tax credits for domestic manufacturing and job creation, tax cuts for corporations that invest and hire at home, and "Buy America" stipulations for government procurement are other ways to bolster domestic manufacturing and the creation of good jobs in the U.S. No such provisions, however, were included in the semi-stimulus package of tax-cut extensions that the White House negotiated with congressional Republicans in December -- extensions that will provide a modest boost to American consumers but likely not enough to jump-start small-business hiring.

Another alternative to economic stagnation is a massive dose of investment in America's increasingly decrepit infrastructure, where employment is by its nature tied to place. Much of the funding would have to come from the government, but by no means all. A growing number of pension funds are investing in infrastructure projects alongside governments, though much of it is abroad: CalPERS, the nation's largest pension fund, owns almost 13 percent of London's Gatwick Airport. What we need to bring such investments home are infrastructure banks, on both the federal and state level, that could leverage public and private funds for infrastructure projects in the U.S.

In an impressive display of industrial-strength chutzpah, corporate America is now demanding lower tax rates even as it daily disinvests in its home country. Worse yet, the new Congress seems likely to grant its wish -- lowering taxes indiscriminately on those rare corporations that invest in America and on those more numerous corporations that abandon it. Is it too much to ask of the government that it discriminate between friend and foe? How about rewarding companies that pledge, as Siemens, Daimler, and BMW have in their own country, to keep or create a specified number of highly skilled jobs here at home? How about mandating, as Germany has, that companies put worker representatives on their boards, as a means of slowing corporate flight? America's economic decline is at bottom institutional, and reversing it requires institutional solutions that change the structure of American corporations.

Absent such reforms, the future trajectory of American corporations is clear. They will drift off, each on their barges, leaving behind them an America receding into penury and squalor.

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