By any reasonable measure the states of Mississippi and Louisiana are bankrupt, their economies demolished by Hurricanes Katrina and Rita. The economies of Michigan, Indiana, Ohio and Pennsylvania may be next, and no hurricanes are involved. Let me explain.
It's easy to see what happened along the Gulf Coast. The photos are vivid and the images are lingering: Hundreds of thousands of people lost their homes and jobs. There is insufficient revenue to support state and local governments and thus insufficient revenue to support schools, police, trash pick-ups and everything else governments provide. Property taxes, sales taxes and income taxes are irrelevant when property is devalued, stores are closed and people are unemployed.
State economies will need to be re-started -- most likely this will be done with massive re-building projects that will create a new property and income base. As the Gulf area re-populates, state treasuries will be refilled over time, assuming still other massive storms do not hit the area.
The disaster now apparent across the Rust Belt is different. It involves not nature but the reality that global wage rates are beginning to impact U.S. incomes.
General Motors, according to The New York Times, is now building a truck in China for local consumption. The "Wuling Sunshine" minivan is tiny by U.S. standards, but it gets 43 MPG and sells for roughly $5,000. One reason for the low price is the local wage rate: Workers are paid $60 a month. (See: G.M. Thrives in China With Small, Thrifty Vans , August 9, 2005)
In the Rust Belt, U.S. workers at Delphi, the huge auto parts supplier that has some 215,000 employees worldwide, have been getting $27 -- an hour. You don't need an MBA to see the problem: If workers in China are paid $60 a month and workers in U.S. plants are paid $27 an hour, U.S. workers and companies are in trouble. Delphi, for its part, filed for a Chapter 11 bankruptcy on October 8th and according to the Detroit Free Press is hoping to reduce worker wages to $10 to $12 an hour. (See: Delphi's move another blow to workers , state's economy, October 8, 2005)
Under Chapter 11 Delphi will remain in business. But even if Delphi is able to successfully re-organize, how are workers expected to maintain their homes and lifestyles if wages fall by 50 percent or more? And if worker wages drop, what happens to local home values, mortgage payments, neighborhood businesses and community tax revenues?
The traditional standard of a fair day's work for a fair day's wages -- wages that can support a decent standard of living -- is being demolished. The new standard seems to be that some salary, any salary, is better than no salary, a stark choice for workers.
If Delphi can reduce wages on the factory floor, other companies will pursue similar policies. If Delphi is not successful, then how will it continue in its present form? One would have more sympathy for the company -- a company that lost $338 million in the second quarter -- had it not both laid off 6,175 workers over a 15-month period and given increased potential severance packages for top executives.
We have seen jobs going overseas before: "Maquiladoras" were established just across the Mexican border, call centers were built in India and Ireland and textile production was exported to Malaysia, Indonesia and the Philippines. The issue this time is radically different: Instead of moving jobs overseas, lower wages are moving here.
Don't be smug if you're a white collar worker or a corporate poobah. Declining wages at factories, mills and plants will soon spill over into skyscrapers, office parks and country clubs. If you're a company owner, executive or a shareholder, the value of your employment, shares and retirement are tied directly to corporate income and profits.
It's not just big companies that a new wage structure would impact. We are all sellers of goods and services, whether peddled directly to the public or indirectly as suppliers to others. In all cases there must ultimately be buyers for whatever it is that we sell. The question is: If worker incomes are slashed, who will buy? And what can be paid?
What's happening at Delphi is symbolic of a wider problem. The employment base of the United States is being fundamentally devalued. One issue -- serious, but often overstated -- is outsourcing, sending jobs beyond our borders. The far larger problem is the combination of low-wages worldwide and open markets at home that are forcing both companies and workers to re-trench.
But re-trench to where? If we elect, we can manipulate national tax policies to limit overseas outsourcing, but what can we do about foreign workers paid $60 a month? Do we stop imports at our borders to create an insulated domestic market? What future do we have without international trade -- and what future do we have with it? Do we tell Saudi Arabia that we will no longer accept their oil? If we tell China we can't take more of their exports will they refuse to buy more of our debt -- or will they just ask for more interest?
Five or ten years from now it's likely that the Gulf Coast will be both re-built and vibrant. It's also likely that $10 an hour will be far more than the typical wage in many areas of the world. Hopefully the stealth challenge of wage devaluation will get as much attention as the very visible problem of hurricane repair -- and hopefully such attention will start now.
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