U.S. must actually make things to compete in the global economy

As American Democrats lick their wounds this week from a mid-term electoral pummeling brought on by financial malaise and high unemployment, China manufacturing growth leapt past forecasts as it continues to lead the recovery of the global economy along with other emerging countries like India and Brazil, according to numbers posted in the October Purchasing Managers’ Index.

Some pundits are attempting to link Tuesday’s Democratic defeat to Obamacare, however, although Bush signed the massive bank bailout into law, President Obama signed his party’s death certificate when he appointed the same people who caused the financial crisis as his economic advisors, such as Timothy Geithner and Lawrence Summers, whose policies further enabled Wall Street to prosper while Main Street suffered.

MIT professor Noam Chomsky wrote yesterday that the tea party movement’s grievances are legitimate, considering for more than 30 years real incomes for the majority of the population have stagnated while wealth has accumulated in very few pockets, leading to unprecedented inequality. Meanwhile, official unemployment stays at near double-digit rates while manufacturing remains at Depression levels with one in six out of work.

Chomsky said the economic fallout sprung from the financialization of the economy since the 1970s and the corresponding hollowing-out of domestic production, spurred by deregulation mania favored by Wall Street and supported by economists mesmerized by efficient-market myths.

In an interview last week Chomsky underlined how Obama is no different and is in bed with the bankers from where the core source of the funding that got him elected stemmed.  Although they are the largest part of the economy, Chomsky found it questionable if these financial institutions contributed anything to it.  Talk-show host Thom Hartmann expressed similar sentiments earlier this year with regards to the non value-add of the financial sector, and bemoaned America’s transformation from a manufacturing to a “service-centered” society:

About 25 percent of all profits being generated in our economy right now are in the financial services sector - the billions in profits and bonuses going to a few thousand bankers, mostly on Wall Street.  Historically this was a tiny slice of our economy, because banks don't actually manufacture any product that adds value to our economy.

Additionally, since we moved from a manufacturing to a service economy under Reagan-Bush-Clinton-Bush we've seen manufacturing fall from about a quarter of our economy to only 11 percent of it.  That means we no longer make anything of value here.  Without making things, we don't create true wealth - we just move money around.  You wash my car, and I'll mow your lawn - a so-called service economy - leads to economic disintegration over time, as eventually the car will fall apart and the lawn needs to be re-seeded.

Yesterday Adam Hartung in Forbes painted this vivid transformation with some startling facts. In 2009 there were 12 million Americans in manufacturing jobs, the lowest number since 1941 when the U.S. population was only 133 million compared to over 300 million today.  In 1959 manufacturing was 28% of U.S. economic output and today it’s 11.5%.  Since 2001 42,400 factories have closed and since 2000, America has lost 5.5 million manufacturing jobs (32%), while from 1999 to 2008 jobs in foreign affiliates of U.S. companies grew by 2.3 million.

But there is this myth that these are all low-end low-skill jobs and its incumbent upon Americans to adapt and develop innovative talents more fit for the new global economy.  However, author Ian Fletcher in a book published earlier this year, "Free Trade Doesn’t Work: What Should Replace It and Why", throws cold water on this theory:

“The US economy has ceased generating any net new jobs in internationally traded sectors in either manufacturing or services,” he notes. “The comforting myth persists that America is shifting from low-tech to high-tech employment, but we are not. We are losing jobs in both in shifting to non-tradable services–which are mostly low value–added, and thus ill–paid jobs. According to the Commerce Department, all our net new jobs are in categories such as security guards, waitresses, and the like. The vaunted 'new economy' has not contributed a single net new job to America in this century. Not one.”

Chris Matthews wrote in The Huffington Post yesterday that voters throughout America’s industrial heartland voted Democrats out of office on Tuesday because the American manufacturing heart has been cut out:

We used to build trains and subways and airplanes for the world. Now we read about trains running three hundred miles an hour in France and China and we piddle along on Amtrak like we're on a buckboard.

Why can't we build railroads -- rapid railroads to unite this country instead of making the vast continent between New York and LA "fly-over country" for the bi-coastal elite to look down on? Why don't we build "anything" anymore? Would we build the subway systems of our country today? Would we build the Empire State building or the Golden Gate Bridge? Would be build this beautiful capital of Washington today?

You know the answer. We don't build because we have neither the money nor the courage to do it. Republicans don't believe in public investment, not even real capital investment that builds the economy. They think tax cuts are the one and only way to promote economic progress. Democrats are afraid to challenge them. And while we worry about today, China never stops thinking about tomorrow... investing and spending and creating the jobs we should have right here.

But Matthews arrives at the crux of the problem by asking Mr. Obama to be more than a great orator:

Yes, Lincoln spoke well, Mr. President, but he also built the intercontinental railways. Ike couldn't speak as well as you, but he did build the intercontinental highway system. Kennedy spoke well but he also got us to the moon! What are you going to leave as your monument? Health care is great. But we need jobs to pay for health care. There's still time to get started, Mr. President. You have to explain to the country why creating things matters. We need to build.

And there are plenty of good reasons why the U.S. needs to build, according to Joel Popkin of the National Association of Manufacturers. For one, an increment to manufacturing production in the U.S. creates more economic activity both within and outside the sector than does a similar increment in any other major sector. Historically, manufacturing’s innovations and investment raised its productivity faster than other large sectors and has added substantially to overall U.S. productivity.

But the answer isn’t a partisan one either – it is one focused on policies that strengthen manufacturing, which include, get ready for this: tax cuts.  Popkin advocates reducing the corporate income tax rate on profits earned from production in the U.S. to match those of our major trading partners.  The U.S. also needs to begin emphasizing policies that accelerate and strengthen manufacturing production here in the U.S.; in particular, encourage investments (private and public) that enhance productivity, such as those in R&D, capital goods, worker training, and early education that nurtures math and science proficiency.

As Paul Krugman from the New York Times has said in the past, the U.S. needs to be stronger in our dealings with “rogue economic nations” such as China, who have abused their currency policy to rig the market in their favor to make their products cheaper at the expense of U.S. workers.

I’ve also written in the past of how China does not adhere to the rules of the free market like other players in the global economy, and China’s policies - such as subsidizing, price dumping, protectionism and supply restriction - have provided it with unfair competitive advantages.  Some of it is plain common sense considering countries like India and China have import tariffs on U.S.-made cars that range from 20% to 40% while ours sit at 2%.

And despite the fact that China has been exploiting resources globally to feed their economic engine – it has not been a two-way street because they’ve been hoarding raw materials on their end. China produces 95% of the world’s 17 rare earth elements which are used in lasers, computer monitors, fiber-optic cables, cell phones, ceramics and stainless steel. Nigel Tunna of Metal Pages pointed out that China is simply protecting against foreign ownership of strategic resources and at the same time creating incentives for foreign companies to bring their manufacturing plants to China.

Thom Hartmann said China is doing exactly what Alexander Hamilton prescribed for the United States in 1791 in his Report on Manufacturers by saying: “we’re not going to export these things anymore or if we do we’re putting a huge export tariff on them.” Hartmann concludes:

Because it was law in the United States from 1793 until Ronald Reagan became President. And during that time we built a country which was the largest exporter in the world of finished goods, the largest importer of raw materials, we brought raw materials in cheap, we shipped out finished goods expensive and therefore countries borrowed our money from us to buy our things. We were the largest first world nation in the world.

Now we’re the exact opposite. We are the largest importer of finished goods and our raw materials, we export them. We export trees, we export coal, and we export iron ore to China.

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