Thursday, November 18, 2010

The New Law of Diminishing Returns

            Economists throughout the world are still clinging to the flawed theory of John Maynard Keynes regarding “stimulating the economy” with huge infusions of money (our money) by the government.  It is flawed in that it never took into account human nature to save and preserve whatever money people have in savings, rather than spend it to induce production.  People aren’t going to blow every penny they have tucked away when times are bad unless they are absolutely sure the light at the end of the tunnel isn’t a train heading their way.

            But I digress, somewhat.  This is about a new law of diminishing returns.

            During the past two decades China has been touted as a huge new “emerging” economy, one which will grow incredibly in the near future.  China also offered extremely low labor costs, which would increase the profit margins of just about any manufacturing company you can name.  In the infinite wisdom of previous presidents and Congresses, the doors to American commerce were thrown open to China, allowing US companies to build factories there.  “Most Favored Nation” status was given to China, allowing virtually unchecked importation of Chinese goods to this country.  Wal-Mart was ecstatic.  CEOs were rubbing their palms with dreams of huge bonuses and returns to stockholders.

            But, wait, something is happening.  Americans are discovering that much of what we’ve been buying with the gold “Made in China” sticker just isn’t holding up like the products we used to have.  Here are two cases in point:

            From 1980, when I bought my first Hathaway shirts (Maine, USA) on sale, until the factory closed down because of uncompetitiveness, I was truly pleased with their product.  Never lost a button (trademark 3-hole), never had a flaw, and wore them until they were truly “worn out.”  Shopping for a replacement, the men’s-wear salesman said, “I’m sure you will like Eagle® shirts, they are really good quality.”  So, I bought three, then several months later, four more, and four more, etc.  Now, three years later, I’m finding that the buttons are disintegrating, the collar buttonhole is tearing, and the button-down collar buttons are actually coming off with a piece of the fabric it’s sewn to.  The fabric is also yellowing.  I’m unhappy with this Chinese product and will not buy any more.

            I’m a veterinarian, and I operate on pets nearly every day.  The first instrument I usually use is a scalpel blade.  For decades I bought blades made in England and Germany.  Now, supply houses offer a much “less expensive” blade under a variety of names, made in China.  I’ve gone through a few hundred of them, and today decided not to buy them anymore.  The one today cut like a dull hacksaw blade, roughly dividing the skin and requiring a second and third pass.  I ignored this problem many times before with these blades.  They have a high percentage of poor quality sharpening jobs.  I’ll pay more for a good product, and ordered my staff to find better quality.  Same goes for gut suture material on reels, skin staples, catheters and needles.  No more.  I’ll gladly pay triple for German Braun® suture that I can trust wasn’t actually made from cat gut.

            I’m sure mechanics across our country are experiencing the same problem with tools, as are carpenters and others who work with their hands and tools.  The tools are less expensive, but in the long run, need to be replaced much more often.  Heritage tools that are passed down from generation to generation will soon become a thing of the past, because now we are buying throw-away tools, since that’s just about all you can find in the stores.  Unless you become very selective.  I had six or seven different brands of hammer to choose from at my local big box supply store.  I picked Estwing®, made in my hometown of Rockford, IL.

            So, for all you CEOs out there, please take notice.  Your decision to put all your eggs in a Chinese basket were short-sighted.  You have reaped the benefits of cheap labor at the cost of millions of jobs lost here at home.  Our manufacturing base has been pared down to bare bones.  You have experienced increased profit margins from low-cost labor, but will see sales begin to decline due to unemployment and experience with inferior products.  Let’s call this the “Human Factor of Diminishing Returns.”  This applies to a wide range of products, from canned fruit to frozen seafood, electric toothbrush heads to jewelry, and hand tools to automobiles.  Time to rethink your decisions, and that goes for Congress, too.

            Throughout my lifetime we Americans have enjoyed being able to buy the finest products in the world, and we produced most of those things right here at home.  Great timepieces, like Hamilton®, Elgin®, and Waltham® were respected around the world, but died when equal and superior accuracy was achieved for less money in other countries.  High quality for fewer dollars won the marketplace.  American clothing prospered, like those Hathaway® shirts, and we could trust all the food produced in the USA.  Poor quality and marginal quality products were soon rejected by American buyers because we had dozens of other choices, and the nature of free market enterprise eventually weeded out the junk.  That will continue to be our ace in the hole, as long as we have alternative choices and are knowledgeable about what we are buying.

            So, American consumers, be aware of what you are spending your money on.  Do you want it to last, or pay less and have to replace it later?  What would be the end cost of this buying habit?  It will usually be more expensive in the long run.  We have been  fooled into believing that we are getting the same thing for less money.  Sometimes that’s true, but today it’s usually false.

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