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To: Lizzie Tudor who wrote (158546)	7/14/2003 8:48:22 PM
From: stockman_scott	Respond to of 164684

Tectonic Shifts in the American Class System By Mohnish Pabrai 07/14/2003 01:00 PM EDT URL: thestreet.com As a recent transplant from the Midwest to California, my friends warned me to brace myself for the tectonic shifts I'd experience periodically. I've been witnessing a massive one since I got here, but it's quite different than what I had imagined. Over the past few decades, the U.S. has seen a gradual erosion in the size and scale of its manufacturing sector as businesses have relocated plants to leverage low-cost Mexican or Chinese labor. Businesses needed both size and scale to offset the significant effort and price tag that such moves entailed, so as a result, we saw mostly Fortune 500 companies and their suppliers embrace the offshore manufacturing phenomenon early. Stronger Offshore Current However, in the past five years, the Internet has played a very large role in making it much easier and cheaper to set up shop offshore. As a result, even relatively small businesses are moving beyond simply sourcing from China. They've started experimenting with offshore manufacturing, IT services, call centers and even accounting. Finding credible offshore partners and doing due diligence are getting easier by the day. The numbers today are tiny. Businesses in the U.S. with less than $10 million in annual revenue still have negligible dollars invested in foreign assets. But the situation is rapidly changing and, I'd argue, accelerating. There are about 20 million nonfarm businesses in the U.S. Each year about 1.5 million new ones are formed, and about 1.5 million old ones cease to exist. Well over 90% of the businesses that exist today are unlikely to be around 20 years from now. And businesses that are being formed by entrepreneurs today tend to be ones that fully leverage the global economy and the connectivity enhanced by the Internet. I'd go so far as to speculate that if we had no automobiles and Henry Ford started the Ford Motor Company (F:NYSE - news - commentary) in 2010 instead of 1910, it would look nothing like your father's Ford. All manufacturing operations would be based in Guangzhou, auto design teams would be based in Milan and Los Angeles, all inbound call centers would be based in Gurgaon, while the basic back-office functions like IT, legal, accounting and financial services would be run out of Bangalore. Indeed, the company would end up with well below 1% of its workforce in Dearborn. It's not so farfetched. General Electric (GE:NYSE - news - commentary) already has a team of 300 lawyers based in India who do nearly all of the firm's internal legal work. The average GE lawyer in India earns well under $10,000 per year. China has a nearly limitless workforce of 300 million people who are unemployed and ready, and are willing to work for $100 per month. The American Impact These trends have broad implications for the U.S., which provides perhaps the best nurturing environment for entrepreneurs. So I do believe that the companies and industries that create the most wealth in the 21st century will be born and based here, but most of their respective workforces won't be. The shareholders of these businesses will do very well. The richest 2% (entrepreneurs and large shareholders) will get richer, and the bottom 80% is likely to end up poorer as nearly every type of white- or blue-collar job becomes portable offshore. This is a massive tectonic shift, and it's heavily responsible for the prolonged recession we've been undergoing. It's why 13 Fed cuts -- bringing interest rates to 40-year lows -- have failed to stimulate the economy. Alan Greenspan can take interest rates to zero, and it won't make much of a difference. Because it is a fundamental shift, I don't believe coming out of this recession anytime soon is in the cards. The official unemployment rate of 6% in the U.S. is a fairy tale. It counts the worker who went from a $40,000 salary to $7 an hour at McDonald's as fully employed. It also does not count the "discouraged unemployed," who haven't been able to find a job for more than six months and have simply given up. I believe the real unemployment rate is easily in the double digits. If you include folks who found new jobs but make much less money than before, it approaches 20%. When I first moved to the U.S. 20 years ago, one thing that most impressed me was the breath and depth of its middle class. The striking similarity in lifestyles of families in the top and bottom 25% has always been one of the best aspects of America for me. The rich have always had bigger homes and fancier cars, but nearly all seemed to find the American Dream within reach. Here in Southern California, for the first time I've seen clear evidence of a widespread dual-class society: One routinely sees a beater car parked outside a fancy home -- domestic help is widely and easily available. You don't see the same scene in the Heartland nearly as often. And while this situation is exacerbated in Southern California by a continuous flow of illegal migrants from Mexico, we'll see the same phenomenon play out in the Midwest, only the domestic help will be laid-off workers. A strong and vibrant middle class is fundamental to a healthy America -- and we're witnessing its gradual erosion. These are troubling realities, but we'd be far worse off if we erected trade barriers as a response. The good news is that, over time, the average standard of living will rise outside the U.S., resulting in a reduced wage differential and a greater ability to export U.S. goods and services. But until then, it will be painful as we live through these tectonic shifts. -------------------------------------------------------------------------------- Mohnish Pabrai is the managing partner of Pabrai Investment Funds, an Illinois-based value-centric group of investment funds.