Progressives for Immigration Reform

Donald A. Collins
January 23, 2012

The trend is unmistakable, but we are reminded that generals always prepare to fight the last war not conflicts of the future. Like building up our air superiority to fight counter-insurgency battles on the home turf of native warriors without uniforms or battle lines.

This is what an important January 17th Wall Street Journal article by Timothy Aeppel, entitled “Man vs. Machine, a Jobless Recovery: US Companies Are spending to Upgrade Factories, but Hiring Lags; Robots Pump Out Sunny Delight” is telling us about the immigration debate.

While the politicians are bleating about creating jobs, industry has NOT been hiring but spending its profits to keep from hiring. As Aeppel tells us,

“In no other U.S. recovery since World War II have companies been simultaneously faster to boost spending on machines and software, while slower to add people to run them.

Part of this is the old story of substituting capital for labor. But a combination of temporary tax breaks that allowed companies in 2011 to write off 100% of investments in the first year and historically low short- and long-term interest rates have pushed that process into overdrive.

Hiring, meanwhile, is too slow to bring the unemployment rate down rapidly. Employers have added workers at a monthly rate of 142,000 for the past six months, half the pace needed to significantly reduce unemployment, which is now at 8.5%.”

One reads comments all the time such as “most of those wonderful high paying middle class jobs are never coming back” and for obvious reasons. One can get a lot of cheap labor in Asia, but here at home businesses large and smaller are finding the route to survival is mechanization!

For example, the article tells us, Billy Cyr, chief executive of Sunny Delight Beverage Co., a Cincinnati-based beverage company, says he is buying new machinery partly because it is a bargain. “When the cost of capital goes up, it is harder to justify an equipment purchase and may, instead, result in higher employment using existing equipment,” he says, such as by adding shifts or overtime for existing workers. Today, the opposite is happening. Instead of hiring, companies such as Sunny Delight and chain-saw maker Stihl Holding AG are investing in technology or other ways to make existing operations faster and more productive. History suggests that an investment that increases productivity will eventually create jobs and raise living standards. The mechanization of the farm and the automation of the factory both raised fears of permanent unemployment that were unrealized, as efficiencies in production of basic commodities created jobs in all sorts of services.

Now we should hearken to the seminal work of Louis O. Kelso, the economic business philosopher who I shared offices with in San Francisco for many years. He invented what he called Abinary economics, whose primary device was the employee stock ownership trust, which by leveraging a company’s success; employees could acquire capital through the trust and become capitalists! Oversimplifying, one can argue that binary (two) factors are involved in work, labor (which economists claim is the only factor) and tools (which means a man with a shovel can out produce a man without one). Louis had a vision that mastering the distribution so that we could all become capitalists would serve to allow enjoyment of many other activities without beggaring or enslaving most of the world’s population. In his words:

The basic moral problem that faces man as he moves into the age of automation, the age of accelerating conquest of nature, is whether he is really fit to live in an industrial society; whether his institutions will adjust rapidly enough; whether he will rivet himself with an absurd institution like full employment in the economic order when it is not only unnecessary but unadministratable in anything but a slave society; whether freed from the necessity to devote his brain and brawn to the production of goods and services, he can address himself to the work of civilization itself. [Louis O. Kelso, 1964.]

That is certainly the heart of automation and the Journal article notes, Amost economists say today’s surge in productivity will have the same beneficial effect — in the long run. In the short-term, however, this burst of efficiency allows companies to delay hiring.

And that is happening more in this recovery than in the recent past. Spending on gear and hiring usually are more synchronized. Since the economy began growing again in 2009, spending on equipment and software has surged 31%, adjusted for inflation. In the postwar period, only in the wake of the 1982 and 1970 recessions has such spending grown faster. Private-sector jobs have grown just 1.4% over the same span. Only recoveries following the 1980 and 2001 recessions saw slower job growth.

So the relationship to the need for more foreign workers gets mighty obvious, doesn’t it? Having mindlessly allowed the cheap labor crowd and the ethnic and ideological attackers of our precious citizens’ rights, we saw the import of well over 100 million aliens, only a fraction of whom are fitted for the reduced needs of our present businesses.

This is not a new phenomenon we learn. Erik Brynjolfsson, a Massachusetts Institute of Technology economist, says companies began stepping up labor-saving investments in the first half of the last decade. The turning point, he says, came during the recession, when companies realized they could do far more than they expected with fewer people.

Even as demand has drifted back, companies are keeping that ball rolling by spending more money on machinery that automate functions. “It’s as if the economy had a pent-up potential for labor savings that hadn’t been harvested until the recession,” says Mr. Brynjolfsson, author of a new book on automation. Now, if there ever was a critical time to stop further “immigration overload” as my readers will recall, the time is NOW.

Business needs the confidence of regulatory certainty, not the flip flopping of tax policy and politicians playing for temporary advantage by offering ideas which will never be enacted. Why not now make E-verify permanent and allow our states a voice in its application? Those who complain that they can’t find workers need to reassess their business plans, not scream for more cheap imported workers.

The article is clear that spending money for automation makes great long term business sense. Sunny Delight is spending $70 million to upgrade its five U.S. juice factories, a record annual investment for the company, which was split off from Procter & Gamble Co. in 2004. A big chunk of that spending goes toward upgrading an aging complex that sits astride a railroad siding in Littleton, Mass., outside Boston. Improvements there include a new, brightly lit “filler room” where machines fill four flavors of juice simultaneously on one high-speed line. Previously, flavors were filled on separate lines, scattered in different corners of the plant. Each line required its own operator. Only two people tend the new combined line.

Coming early next year, automated vehicles will replace the factory’s fleet of forklifts and drivers.

“Some people who drive forklifts now will shift to supervise the automated vehicles,” says plant manager Dan Gray, leading the way through the cavernous facility, where the heated mix of liquid coursing through overhead pipes gives the air a sweet smell. “But others will have to move to other jobs in the plant.”

The upshot will be fewer people. Littleton will shed 30% of its original 140 workers by the time the renovations are done.

This really makes a point that the Obama Administration and his enemies on Capitol Hill need to heed. It will never be politically easier to fix our broken immigration system that right now. Sadly, the rhetoric of a presidential election year may drown out reason again, but it is surely worth those with diverse views to listen to the facts of automation.

Instead of pursuing “growth”, why not pursue “well being” of our citizens? The magical benefits of “growth” have little to do with how well taken care of individual families are. How many more McDonald stores or shopping malls need to be added to our cluttered, crowded urban and suburban lives when increasingly people order on their iPhones or iPads?

Admittedly, the tax break (on depreciation) that Congress legislated for last year is having the desired effect. . . “It just makes the decision easier,” said Brandyn Chapman, president of Phoenix Stamping Group, LLC. The closely held company is getting tax breaks on $1.5 million in machines he bought for his two Atlanta-area factories.

Mr. Chapman is buying equipment because there’s growing demand for his products, which include parts used in farm machines and heavy-duty trailers. “The cost of capital certainly helps that decision,” he says. Phoenix is hiring because of the demand growth. He plans to add 12 production jobs to his current staff of 115. The trend toward using labor-saving machines and software isn’t limited to factories. W. Brian Arthur, an economist at Xerox Corp.’s Palo Alto Research Center, says businesses are increasingly using computers and software in the place of people in the nation’s vast service sector. Many companies, for instance, use automation to process orders or send bills.

“It’s not just machines replacing people, though there’s some of that,” Mr. Arthur says. “It’s much more the digitization of the whole economy.”

So there you have it. While some less farseeing business people see cheap labor as the nirvana to their futures, more enlightened firms know that the last business war, when the US dominated in an almost monopolistic manner, every market after WWII up till the 1970’s has morphed into a challenge to innovate and reduce costs with machines and fewer people. Thus the education of our citizens takes front and center, not the importing of aliens who we think are better than Americans or cheaper temporarily.

The Journal article continues citing the power of automation:

The U.S. today is second only to Japan in the use of industrial robots. Orders for new robots were up 41% through September from a year earlier, according to the Robotics Industries Association trade group. That has helped fuel a larger boom in productivity. Output per hour worked in nonfarm businesses has increased 6% during the recovery. Hours worked are up only 1.5%.

Mitch Free, chief executive of MFG.com, a website that manufacturers use to buy and sell parts and packaging, says the weak economy has produced a buyer’s market for businesses shopping for equipment and software.

“We’re still hearing that companies are having a tough time getting credit,” he says, “but those that are able to buy are loving the deals they get on equipment right now.” Machinery is a bit like housing, he says, “there’s a glut.”

Peter Mueller, executive vice president of the U.S. arm of Germany’s Stihl, says he would buy robots and other machines even if they were far more costly. In Virginia Beach, Va., he recently opened the company’s most advanced factory for making chain-saw guide bars, the metal frames that hold the chains in place.

The plant has 120 robots that run around the clock every day, with only seven workers on each shift. Next year, the company plans to spend $10 million for machines and software that will allow the plant to double its output. It will only need six more workers to do that.

Mr. Mueller says companies that want to produce in the U.S. and compete globally against low-cost producers in places like China need the latest technology or risk getting steamrolled by the competition. Mr. Mueller says the cost for a chain saw made in Virginia is just 1.8% higher than one his company makes in China. “It shows you the power of automation.”

Finally, there are other voices who add to my contention that business will soon realize that importing people is a losing game, as only the few they really need will be useful and the others, largely uneducated workers will prove a long term drag on the economy and not be the kind of consumers their businesses need.

Writing in the January 19, 2012 issue of the Financial Times, Ed Crooks’ column; “Business returns to US as Asia loses edge”, cites another case which illustrates the above thesis.

A Bruce Cochrane’s family furniture business illustrates what may be the start of a US industrial renaissance. His story also offers insights into the opportunities and the pitfalls facing manufacturers wanting to build up their US production.

The Cochranes were in the furniture business for five generations, employing more than 1,000 people in the early 1980s. But by 1996 the going had become too hard and they decided to sell out. Under the new owners, their factory in Lincolnton, North Carolina, was closed, the equipment was dismantled and production was moved to Asia.

Mr. Cochrane worked for 12 years as an import consultant, advising companies on how to source furniture from Asia to sell in the US. But by last year, he had come to the view it was viable to make furniture in the US again, even against competition from China. “Back in 2000, the average wage in China was about 50 cents an hour; now it’s $3.50,” he says. Non-wage costs have also risen in China. The Chinese authorities have become “much more aggressive” about environmental regulation, he adds. “Taking into account the higher productivity of US workers, and shipping costs, the competitive advantage of Asian manufacturing was disappearing,” he said.

Oh, by the way, don’t forget us old folks, people a lot younger than my 80 plus years, who have great skills and realize that retirement can be a one way ticket to oblivion. Working part time at tasks businesses and other organizations need has become commonplace and very desirable, again a hidden but powerful reduction of costs for the public benefit. Going south and going senile is no longer a magic key to a successful golden age!

So, CEOs, let’s not fight the last war, the cheap labor war now tamping down in Asia. Get your pals at the US Chamber and Frank Sherry’s office to recognize that your interests no longer align with those of the RCC or La Raza. You can easily be for American citizens, the middle class, and all working Americans by bringing your businesses back home. Reform immigration, pass E-verify, recognize illegal and legal immigration for what it truly is, “immigration overload”, and get the Congress and the White House to climb aboard your powerful platform.

About the Author
Collins, a free lance writer living in Washington, DC, is Co-Chair of the National Advisory Board of the Federation for American Immigration Reform (FAIR). His views are his own.