10 Apr The domino effect of "cheap" IT labor
Many financial experts and economists have yet to connect the dots while analyzing financial indicators and determining why things are happening in the economy.
The economy is inter-related and that could not have been better expressed in the recent Congressional Hearings where Federal Reserve Chairman Bernanke emphasized the grave consequences if Bear Stearns was not bailed out. Although he did not allude to all the details, he stated that the Fed had to step in and prop up Bear Stearns so that there was not a domino-effect on other financial firms.
Having said that, why can’t the experts figure out that allowing too many cheap foreign workers upsets the equilibrium of that same economy? How much empirical evidence do they need?
The myth of cheap labor
In a recent column under the American Dream Hierarchy, I noted:
With companies bringing in cheaper labor, they are upsetting the complex churning of the economy from several perspectives. They are getting cheaper labor. While this is perceived as good for them, many of those cost savings haven’t been passed onto the consumers. Instead, they have been used to create mega bonuses for executives, fund failing initiatives, and in some cases more value for the shareholders.
The drawback is that the cheap labor they bring in isn’t cheap, and the costs have become a burden to the consumers. They have put a strain on schools, hospitals, and other institutions that require more funding to handle the increased demands.
If we upset the balance of alpha, beta, and gamma consumers, we damage the economy. The erosion of Alpha consumers has been happening for at least the last eight years. To me, this clearly fuels the acceleration of credit indebtedness.
The strain on institutions like hospitals could not be better-exemplified by the recent closure of 410-bed St. Francis Hospital that had to close its doors due to too many patients not paying any of their bills. From a Chicago Tribune article:
Saddled with tens of millions of dollars in losses from uninsured patients who could not pay their medical bills, St. Francis would be abandoning its core mission of caring “for the people of its communities regardless of their ability to pay.”
Unfortunately, in spite of St. Francis’ outstanding clinical reputation, reimbursement from commercial insurers could not cover the cost of providing care to the growing number of Medicaid and uninsured patients,” said Sister Mary Jean Ryan, SSM’s chief executive officer.
“Currently, one out of every two people who come to the emergency department and one out of four people who are admitted to the hospital either have no health insurance or are covered by Medicaid [insurance for the poor]” Ryan said. “No hospital can survive over the long term without being able to cover its costs.”
The vortex of declining economic contributors keeps pulling down economic viability both locally and regionally. The hospital closure effects the healthcare situation for the Blue Island area. More importantly, scratch another 1,400 good jobs that contribute to the tax revenues of not only that city, but also Cook County. Those jobs are NOT replaced by opening up a corner Starbucks.
A remarkable note is that no healthcare association would even consider picking up the hospital – even for free! Out of 28 potential buyers – ALL said, “No thanks.” That speaks volumes that a concentration of people with no healthcare are a real drag on regional viability and a clear negative economic indicator that “red flags” any healthcare-related economic development.
So much for the false premise of “cheap labor.” Cheap labor costs everyone else millions of dollars and in this particular instance, no healthcare association wants to pick up the pieces. It’s bad for their bottom line.
Those that say we must compete in a global economy are missing the point if they think that eroding the standard of living to a third-world status is progress.
Closing a hospital with an economic viability that is so bad that it cannot even be given away to any of 28 potential buyers is a clear proof-of-concept that putting the burden of providing healthcare benefits onto the Alpha Consumers for Beta and Gamma Consumers just does not work.
More Alpha Consumers need to be made. Alpha consumers? They are consumers who have good jobs that include healthcare benefits.
Student loan tsunami: Are cars next?
Dr. Gene Nelson, a reader and source, sent a Bloomberg article by Steven Church and Jody Shenn. Here is an excerpt:
The Education Resources Institute Inc., the U.S. lender that says it’s the largest nonprofit, private guarantor of student loans, blamed its bankruptcy filing on bond-market turmoil. Known by the acronym Teri, the company filed yesterday for bankruptcy protection in Boston while it reorganizes, listing debt of as much as $1 billion and assets of more than $1 billion in its Chapter 11 petition. The company helps students fill the funding gap left when government-backed loans aren’t enough to cover the costs of college. “Because of the recent turmoil in the financial markets, demand for bonds backed by student loans has evaporated,” company Chief Financial Executive Officer Willis J. Hulings III said in a statement filed in court papers. The lack of investor demand has made it harder for student lenders to raise money to finance their operations. CIT Group Inc. and NorthStar Education Finance Inc. last week said they will stop making new loans to U.S. students because lending costs have soared. Only two student loan companies sold debt in the asset-backed securities market last month and no new private-loan bonds of the type that Teri specializes in have been bought this year.
Defaults among student borrowers have increased as the economy has soured, driving up Teri’s costs. The company must buy back loans that go bad.
Reading between the lines, Dr. Nelson observes:
The real reason why the student loan holders defaulted is that there are very few jobs for American recent college graduates as a consequence of employer preference for specialty work visa holders, since they are cheaper and are essentially indentured. Total admissions over all of the work visa programs shows that over a million visas are granted annually. See the 1.757 million admissions in 2005 in the table “American Citizens Can’t Apply for These Jobs” in the author’s January 2008 article:
Looks like those that counted on re-paying student loans are left in a quandary. Are we are relegating new college graduate job seekers into a Beta Consumer class before they even get into their careers? This re-affirms my earlier economic insights:
Why do we still have a skyrocketing rate for foreclosures, huge underemployment of highly skilled workers, and billion-dollar deficits in local and state government budgets? My observation is that as more people get pushed out of good-paying jobs, and as cheap labor fills those jobs, the economy slides down another notch. Beta consumers can’t buy into the full American dream hierarchy.
Car loan defaults are also rising dramatically
Read this passage note is from a recent Boston.com article:
“The suddenness with which we saw repossessions hit the market at the beginning of the year has been unusual and appears to reflect not only the general economic slowdown, but some spillover from the mortgage crisis,” said Tom Kontos, chief economist at Adesa Inc., which runs 58 car auctions across North America. “With folks getting resets on adjustable-rate mortgages, it forces many people to decide whether to default on their home loan or default on their car loan. When they have that kind of choice, predictably, they gravitate toward defaulting on car loan.”
Nationwide, repossessions are up about 15 percent so far this year, Kontos said.
Another perspective on car loans crashing comes from this article:
Auto payment defaults doubled last year and are expected to get worse – a situation similar to the crisis in the home mortgage industry. A CBS 5 Consumer Watch investigation found actions made by consumers, dealerships, and lenders are contributing to the auto loan crisis.According to Power Information Network, 1.85 of the 9.6 million customers in 2006 who leased or financed a new car were sub-prime borrowers or consumers with weak credit.
So all the economic experts who said that the sub-prime crisis would be contained to only the sub-prime mortgages forgot about 2,000,000 car loans those same people got approval on. The economy IS inter-related.
CARLINI-ISM : Cheap labor is not cheap. Their benefits have to be picked up by others.
Recent articles by James Carlini
• James Carlini: Building IQ expands with broadband connectivity
• James Carlini: On Patton and getting back to real organizational leadership
• James Carlini: Column on abuse of H-1B program ignites feedback
• James Carlini: H-1B is broken, but which candidate will fix it?
• James Carlini: Blueprint for big broadband not quite big enough
See James Carlini interviewed by the STRASSMAN REPORT out of California. The 30-minute video discusses the need for planning Gigabit network infrastructure today in order to be globally competitive tomorrow.
This article previously appeared in MidwestBusiness.com, and was reprinted with its permission.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.