Reforming our Economy and Economic Policy

Now, anybody who thinks that we can move this economy forward with just a few folks at the top doing well, hoping that it's going to trickle down to working people who are running faster and faster just to keep up, you'll never see it. – Barack Obama

Contrary to the belief of some, Americans do NOT need great economic conditions all of the time. What people want, as the election of Barack Obama showed, is a reason to hope. They want to believe that in four, eight, ten, or twenty years, they could be better off than they are today. More importantly, they want to know they will be leaving the next generation a better place than the one they were given. They will go through hell as long as those two things become become true.

How do we know that? Look at the Great Depression and WWII. People went without, they worked hard, and they did whatever they could to meet our national goals. In the case of WWII, people sacrificed and did without in order to support the war effort and our servicemen overseas. In our age, it will be to make a better nation. Now, all that is missing for a return to economic power is for Americans to answer the call to greatness once again.

So what is the issue? The problem is two-fold and I will attempt to address each one individually. First, in the 1970s, America lost its manufacturing dominance. The economies of Europe and Japan were rebuilt and became true competitors to the United States. Developing nations were, at the same time, creating and growing their own industry. New economic giants like China, South Korea, Taiwan, India, etc were growing rapidly and offering competition to a US economy that had been the only show in town for two decades.

As the 1970s turned into 80s and 90s, American industry just could not keep up. A focus on man-power driven, heavy manufacturing with high wages, high benefits, and high costs tied to a continually diminishing quality of product (when compared to other nation’s output) caused American industry to wither on the vine. A visit to any American store will show this. Situation is the same as it was in the 1960s: any number of consumer goods that Americans could purchase had competing products from American companies and overseas companies in 1960; but today, one can not purchase an ‘American’ TV, computer, appliance, car (with the exception of two foreign nameplates and luxury automobiles), and American textiles have become a niche industry.

As industry faded away, the U.S. transitioned to a service economy, or so politicians told us. The Internet boom was part of this transition. However, the difficulty with this transition is that, unlike the slow changes during the decades of manufacturing, the advance of technology during the transition to a service economy was exponential. The advances in communications and computer technology allowed for, in short order, many of these service jobs to be sent overseas as well, creating the current outsourcing problem.

Today, we are a nation of menial wage service (retail) jobs. Although unemployment has not reached historic levels (set during the Great Depression), what goes unsaid is that the current economy eliminated $22.00 an hour manufacturing jobs and replaced them with $8.00/hr service jobs. This means that, job for job; it was not an equal exchange, even if the number of jobs has remained relatively constant.

The second thing that happened was the rise in the 1980s of deregulation and the return of free trade/laissez faire economics. This is, in many ways, how the problem above developed and was exacerbated. As deregulation began, American corporations began focusing on the bottom line rather than the security of the nation and the workforce as a whole, which is much different than the corporations of other nations or American companies in the early to mid twentieth century. The ‘Me’ generation was born.

If a single CEO could improve his income, as well as, the stock value for a few (or maybe a few hundred) stockholders at the cost of tens or hundreds of thousands of American jobs, there was no second thought: they would make the move, cut jobs, and deposit the check. This led not to outsourcing, as described above, but the transfer of those jobs to countries with cheaper labor costs. In most cases, these countries also have terrible human rights histories and no environmental protection laws.

As the American economy adjusted to the loss of manufacturing jobs to more ‘technical’ or ‘service’ jobs there was a boom in that sector. However, as technology allowed for easier and cheaper instant communications, even these jobs were sent overseas to cheaper labor sources, in service to the bottom line.

On current US economic, trade, and money policy: "If you've been in a poker game for 30 minutes and you don't know who the patsy is, you're the patsy." - Warren Buffet

What does this problem really mean for America? Every corporation is looking to cut costs. The lower costs with constant or rising prices means more profit for the corporation. More profit means higher incomes, generally for executives, and high stock prices for investors. This is not a bad result. However, it must be tempered against the impact on the rest of society.Though the leadership class (some might say caste) may benefit greatly, it leads to fewer jobs for Americans AND the divestment of capital to other countries. Sending jobs overseas means that workers in America remain unemployed, and responsively trade deficits rise as products are imported. The divestment of capital to other countries (expenditure of corporate profits on capital investment in other countries and the reduction of investment at home) means that the return of those jobs is not likely, and other positions will be created overseas, never creating a job in the US. This, obviously, further negatively impacts the economic growth of our country.

Further, this is the cause of the global ‘race to the bottom’ where countries seek lower wages and lower environmental and health standards to appeal to investments of multi-national corporations. Some argue that this is a 3^rd world problem, but the U.S. is no exception. One must only listen to the calls, generally from free traders and neo-conservatives, to bust the unions, remove ourselves from environmental and human rights treaties, and further deregulate to see this ‘race to the bottom’ in its American form.

What impact has this had on our country? I have already discussed many of the problems, but there are others waiting. The most pressing may be the rising deficits and mounting debt. Every year that our trade balance remains a deficit, our budget will never get out of deficits either. Another, perhaps more pressing, issue is about the outsourcing of our defense industry.

Many Americans would be frightened to know how much of our military technology is produced in countries that, one day, we may call an enemy. For instance, the technology that turns explosive metal tubes into smart bombs (the JDAM package) and cruise missiles, are produced in China. Everything from spare tank parts, to soldiers’ uniforms, to the flags soldiers’ carry and wear is made overseas in South, Southeast, or East Asia- some in countries which are not so friendly to the US. Imagine diplomacy fails and war becomes necessary with any of these countries, or with a country they consider a close ally. In WWII, the domestic economy geared up and started pumping out military materials. Today, that would not be possible and our ability to defend against an attack or to fight a foreign war may be very limited. Some other implications, while not as important as the previous two, certainly do have an impact.

The use of overseas manufacturing and assembly has meant that a black market of hundreds of millions of dollars, which means losses of the same amount, of the intellectual property and copyrighted material, not to mention other types of technological piracy. The question is, relating to the above point, if these countries will allow the black market to ‘knock off’ these products, why wouldn’t they do the same to the military technology they have access to.

“it’s the economy, stupid’ – written on the Clinton ’92 ‘war room’ wall, attributed to James Carville

The question must be asked of why we made the transition from manufacturing to service economies. Economists and politicians said that it was the natural progression of a capitalist economy. They claimed that a manufacturing economy is not an advanced economy. Thus, we needed a focus on service and technology. However, there are examples around the world that show that an advanced modern economy and manufacturing economy can be one and the same.

The Japanese and German economies are based in manufacturing. They advanced the technology of manufacturing rather than staying in the traditional manufacturing format, which was the flaw of the American manufacturing system. Thus, the solution is not to move away from manufacturing, but to have manufacturing the right way, and many studies support this conclusion. It is possible for America to return to economic greatness, and the support of a manufacturing system will be key to that recovery.

An overview of the problem can be reduced to this: the shift from a manufacturing economy to a service economy has never been done- and it is failing. Not for everyone, the leadership class is doing extremely well, but for the American worker, nothing could be worse.

“Capitalism is the childish idea that there is no such thing as too much.” –Anonymous Street Art, Baltimore City

Further, the free trade/free market/laissez faire system has not been truly, fully implemented. That system only truly works when the corporate ownership/control acknowledges and embraces the concept of a modern noblisse oblige, as the early industrialists did in their own time. In the age of the first industrialists, they renewed the sentiment first held by the gentry of Europe and the antebellum South that the wealth they had was taken at the expense of the people. It was not wrong to be wealthy, and it was not wrong that it came at a cost, but they felt they must use some of their wealth for the public good.

From this era come organizations like Carnegie-Mellon University (though Carnegie and Mellon were just two of many). Further, the tycoons of the late 19^th and early 20^th century did not forget about the workers on whose backs their fortunes were built. While Standard Oil and Ford had almost complete monopolies on their products, prices remained low. They did not feel the need to gouge the consumer to make a dollar today, forgetting that there is always a tomorrow.

In a way, Bill Gates can be an expression of both of these concepts. Microsoft held a virtual monopoly on the home PC market. Yet, Windows remained an affordable program, and eventually became standard on any non-Macintosh computer platform. Though he became the richest man in the country or world, Gates has spent his way out of the top position by giving away more money than he makes per year. His foundations and endowments have helped people all over the world. He is a shining example of the best of the laissez faire system. However, he is the exception, and not the rule. In most cases, free trade/laissez faire economics has left us with high underemployment, high unemployment, rising inflation, rising divestment, soaring trade deficits and infrastructure breakdowns. Contrary to the example set by Gates, today, the wealthy build wealth for it’s own sake with no regard for the public who not only buy the products and services they produce, but work for the companies that build their wealth and pay the taxes which create the subsidies that support their business.

Many Board Members and businessmen around the country cry foul. How dare we say that they must remember the consumer, the worker, and the country in which they made their wealth! Where were these parties when they were making the executive decisions that created the wealth? Where were they through the trials and tribulations of business life? What so many forget is whether you are a luxury hotel magnate (Hilton) or a rock-bottom priced super retailer (Walton), that wealth was not created in a vacuum.

To all of those executives, we must ask to remember that public money was spent to create a highway system that could speed goods and tourists to spend their money and create your profit. When criminals or fire threaten your business, it is public money that offers protections. In so many ways, public funds have been expended and it is by taking advantage of these expenditures that the opportunity for your wealth was created. Is it unfair to return to the public treasury a portion of that which, but for the outlaying of public funds, would not be yours?

I offer that it is more than fair. Any person in this country can be an entrepreneur and strike it rich, but all must acknowledge that wealth is not created independently and of itself.

“Accordingly, globalization is not only something that will concern and threaten us in the future, but something that is taking place in the present and to which we must first open our eyes.” -Ulrich Beck

Why did we let this happen? These corporations ARE the special interest groups who spend money on politicians to ensure that the legislature keeps this system operating.

So what can we do? I’ll break down the argument into international and national changes to try and make it a little easier to swallow.

Internationally, we need to realize that free trade does not work. This is plain and simple. Organizations like the WTO have been organized to maintain order in international trade, but they are inept to handle all situations that arise when a nation is actively trying to deceive, rather than work within the system. (For more on this, check out my review of In the Jaws of the Dragon about the rising Chinese economic dominance and the Confucian truth ethic that allows them to bypass the WTO here) Free trade has done nothing but skyrocket our trade deficits, send millions of jobs overseas, and made our debt reach catastrophic highs. So the first step is to remove the US from the WTO and other international free trade agreements, including NAFTA and CAFTA. Then, we eliminate the current Most Favored Nation status of some of our trade partners and reinstitute trade tariffs. Nations will be able to renew free trade with us, after a period of reexamining the trade relationship to ensure that free trade is actually occurring and American business and industry is not suffering. (There will be other concerns as well, that I will address in later posts- such as to be a free trade partner a country will have to have higher wages, as well as, human rights and environmental protections.)

Then, we must set about to undo the damage at home that has been done by this activity. First, we must pass bid-rules on government contracts that do not allow non-US based companies to bid on those contracts. Thus, companies that were formerly American but have been re-incorporated in the Bahamas or Bermuda or other tax havens, will have to return to the US and pay taxes to get the benefits of these contracts. Further, foreign corporations will have to organize US subsidiaries to bid on these contracts; subsidiaries that will also pay US taxes in order to bid on those contracts. Along with the pride of having our corporations back, a boom in corporate tax payments will also result.

The country will then feel no guilt in giving these industries some subsidies that will allow them to re-tool factories and re-train a work force to do those jobs. Pittsburgh will once again be the home of US Steel, Detroit will once again make American automobiles, and all over the country industries long gone or that never were will make an appearance. Basically, this means two things: jobs for Americans and the chance for our citizens to once again buy American.

This cannot occur in a vacuum however, and there will have to be some concessions. We can no longer employ 400 Americans to make a car when other nations use 40 and robotic assembly. In order to qualify for the subsidies, corporations will have to show that they are joining the 21^st century of production, not returning to the 18^th. American unions can no longer make the high demands that they once did. Their role as protection against corporate largesse and abuse will remain, but we need to have realistic goals for benefits and pay. The government must stand as a bulwark between the unions and management, as they did in the first industrial boom.

As American industry once more becomes competitive and Americans once more go back to work, the government will keep a keen eye on competition and pricing and adjust tariffs to respond to these. This is not about eliminating capitalism, it’s about ensuring that the American worker and the American consumer are getting the best deal for both of them. Are the tariffs protectionist? You bet. Are they against the grain of free trade and globalism? Yes absolutely. Are they necessary? Without a doubt. We have spent three decades breaking down our manufacturing capacity. Had we adjusted relentlessly rather than allowing our corporations to dismantle our hard fought gains, this would not be necessary. However, I think most would agree, it is necessary. Without taking this step, we may never economically recover. Things are as bad as they possibly can be.

What will result from this plan? After a period of high tariffs, economic recovery will lead to true competition from American companies. Yes, an American family car might still be $2,000 more than an Asian competitor, but the American consumer has the choice based on quality and national pride, which today is not available (All American cars are assembled, and most parts are made, overseas/across borders. Often an ‘American’ car is little more than a nameplate with the parts manufactured in Mexico and shipped to Canada for assembly. The only true American cars, with the exception of some luxury cars, are made by foreign nameplates in American factories). That choice is at the heart of this plan.

There are some additional benefits as well. First, as industries come back to America, there will be an improvement in the numbers of pollutants put into the environment. With stricter environmental protections already in place, these industries will have to fall in line with Western ideas of pollution, reducing the total pollutant output in the world. In addition, other countries will be forced to address these issues in order to compete with US companies. This will create a ‘race to the top’ reversing the current trends.

On another tangent, we would return pride to Americans by putting them back to work, putting them in control of their own destiny, and offering consumers an American alternative. Not to mention that the currently dwindling middle class would be revived and a return of the true American dream could be a reality.

Naysayers may argue many things. First, and most loudly, they will cry isolationism. They will talk of the ruin of the world economy. They will talk about Smoot-Hawley Act, which some economist claim turned an American Recession into a world-wide Depression. They will talk about the ‘need’ for American leadership in the economic world. What they will fail to note is the detrimental effects that these policies have ALREADY had on this nation. The question is- must we be willing to lose ourselves, our economy, our nation to line the pockets of a few and support those very things in another state.

Critics will point to the post-WWII era of growth where the seeds of free trade were planted. They fail, however, to note that America stood alone in manufacturing at that time. There were no ‘tariffs’, to be sure, but that is because war had dealt America the tariff of monopoly. Second, the critics may argue that such policies would cause prices to soar. This, in fact, is most likely true.

Prices will rise. This is a fact that we must accept. When you institute tariffs, the low priced items that we have been used to disappear. These products remain of course, but the prices will rise when the tariffs increase them. Ideally, with higher prices, comes competition. This is because profit can be gained in a shorter term than would be possible when a new company must compete with an older competitor with artificially lower prices. If you’ve been following along, creation of competition is the POINT. While the economy is adjusting, before wages rise and jobs are created, cuts must be made.

Critics, however, fail to take into account that with the rejuvenation of the economy, wages will rise across the board. The first few years will be rough and there will be difficulties. Modern America is not one to take this type of situation well. We are used to getting more and more for less and less money. What must be remembered is that in the long term, this crisis will pass and on the other side, the country will be better for our sacrifice. As I said above, it has been done before for far less important reasons than reforming the political and economic system of the United States for the better. In the end, to steal a conservative idiom, a rising tide WILL lift all boats.

I believe this is possible, and many experts agree. We must only be willing to suffer through the opening stages, like any period of advancement, to achieve progress and success.

© Robert Cheek, 2011, 2013