On paying Foxconn workers like Americans and paying Harvard grads to gamble on credit

Much has been made of the NYT story that ran last week on the conditions for workers at Foxconn and the meager pay.  To put aside, for a moment, the issues of the Chinese government addressing the health and safety of its own people, I want to examine the idea that one solution is for Apple to better pay the employees in their factories, perhaps at the rate of American factory workers.  Maybe the employees would need to work less, or maybe they would be happier to work the long hours, or maybe they would get massages with their outsized salaries in order to offset their long working hours.  Sounds great.

Apple profits would drop, which isn't a big deal at the moment but would have been a death sentence in 1997.  We could pretend that they are so well run that they won't ever see tough times again, and we'd pat ourselves on the back for having pushed this profitable company to give away its profits for nothing in return.  But what would the effect be on the larger labor market in China?

1. In the aggregate, nothing.  About a million people work for Foxconn, and less than 25% of those are making Apple products.  250,000 people in a population of over 1,000,000,000 is a small drop in a very large bucket.
2. For those 250,000 jobs, competition would become fierce.  People in traditionally higher paid professions (teachers, doctors, and engineers) would leave their chosen profession for jobs putting together iPhones.  In a country that, only 40 years ago, was in worse shape than Africa, telling the expanding middle class that working in factories is the most valuable use of their time seems like a step backward.  More on that ahead.
3. If Apple were to hit tough times - a lull in innovation or a sudden drop in demand for one of their products - they might no longer be able to compete with the Samsungs and LGs of the world, and they would need workers that they could pay at the same competitive rate as those competitors.  Wages are sticky, so they would need to lay off workers and hire new ones.  The cash pile would be gone and we'd be back where we started, except that a small group of workers had a temporary bump in pay.

Don't get me wrong - it's not ideal that these workers make $22/day working long shifts with little leisure time.  However, it's a) better than having no job or a job in agriculture on land that is exhausted, and b) a problem best solved by time and public policy.  Apple can continue to fight to improve things for the workers in its supply chain, and it will likely continue to be thwarted by companies that demand a premium for it and then deliver on none of it anyway, because they aren't held to any of the standards by their government.  China may need to solve this one on its own, and companies that try to stand up to the Chinese government rarely find success.

This all got me thinking about another industry where I believe workers have been overpaid, and where the smartest people fight like dogs for the best positions instead of doing something that creates value.  Our top college grads go into the most lucrative field there is - finance.  In the last decade, far more compensation money has come out of Wall Street and into workers' pockets than has been created for our economy.

Finance provides banking (a safe place to keep your money and earn modest returns on it), investing and hedging (a way to shift risk from people who want it to people who don't), and funding for businesses via loans, bond markets, equity markets, and private equity.  All of those things are good, and all of them are things that our economy can't live without.  However, none of them should involve tons of risk or tons of reward; banking is an old profession and a boring one.  You borrow money from depositors at a lower rate of interest than you lend it to creditors, and you pay yourself and insure yourself on the spread.  It should be competitive, boring, and anything but lucrative.  Monkeys that do math could be bankers.

Enter complex financial instruments, greedy investors, and as much leverage as you want.  People with money wanted geniuses to park it with who would claim that their black box would spit out tons of money in the future.  The Harvard kids quickly realized that someone was willing to pay them hundreds of thousands of dollars per year to create such black boxes and sell slices of them at great profit (oh, and keep some slices for the banks - we can thank those slices for the bailouts that were required).  This had little to do with reducing risks for investors or providing finance to businesses, and a lot to do with bonuses and paychecks on the backs of investor zeal for assets that they wished were worth much more than they were.

So in piled the Harvard kids (and all the other smartest kids - I don't mean to pick on Harvard here).  The financial crisis and economic downturn aside, this was the grandest tragedy of the Wall Street boom in the last two decades.  Thousands of people who could have been developing cancer drugs, software to make cars safer, or businesses to deliver fresh produce most efficiently, were instead figuring out how to sell garbage to people hoping to make a buck.  Finance has a place for 5% of Harvard's graduating class.  It shouldn't have a place for 30% of them.

So should Apple pay Foxconn workers what they would pay American workers?  Only if we want the best and brightest Chinese students to spend their days in factories putting together iPhones.  I, personally, would rather they start the businesses and do the research that will allow the 2 billion Chinese workers of the next century to have the working conditions that we'd like to give to 250,000 of them today.

Update: This is happening.  Americans now get to be relieved of their guilt while using their iPads, the average Chinese worker is not better off, and more high-skilled Chinese workers are utilizing fewer of their skills in order to divert themselves into making iPads for high wages.  Thanks, America.