Many see the U.S. economy as recovering. Still, there are structural changes in the economy that are subtle but very important. The U.S. is ignoring manufacturing, budget deficits, trade deficits, China’s manipulation of their currency, the decline of R&D, the loss of our technologies to China, and the decline of good paying jobs for the middle class. I would like to make the argument that the economy is in trouble and long-term growth is really not assured.
The Fundamental Problems
Before jumping to the solutions, I think it will be useful to review some of the fundamental reasons behind the decline of American manufacturing and how they will affect the future.
- Manufacturing Jobs – One of the most visible issues is the loss of good jobs with good wages. Since 1977 we have lost 10 million manufacturing jobs that pay, on average, about $20,000 more per year then other average private sector jobs.
- Secondary Jobs – Manufacturing stimulates employment in other sectors at a greater pace than other industries. On average, each $1 million in final sales of manufactured products supports eight jobs in the manufacturing sector and six jobs in other sectors of the economy.
- R&D – Manufacturing performs about two thirds of the total money annually invested in R&D in the U.S., but, the reduction in manufacturing companies, workers, and industries is showing a reduction in R&D expenditures. In fact, a lot of American R&D is going overseas along with production and jobs. In December, the Chinese made a new rule requiring all foreign manufacturers with plants in China to move their R&D and patents to China. In 2010 they decided that all imported electronic goods must reveal their source codes to a government agency. When are we going to wake up to the fact that others are after our technologies and we are allowing it to happen?
- Exports - Manufacturing contributes more than 60 percent of American exports. But, with the continued decline of manufacturing, the U.S. is now the number 3 exporter behind China and Germany. President Obama has set a goal of doubling exports in 5 years, but this goal cannot be attained as long as we allow our trading partners to manipulate their currencies. In addition, our trade deficit (which is the largest of any country) is not sustainable.
- State Economies – The bureau of Economic Analysis shows that “During the last 10 years, manufacturing corporations have paid 30 to 34 percent of all corporate tax payments for state and local taxes, social security and payroll taxes, excise taxes, import and tariff duties, environmental taxes, and license taxes.” In light of the current crisis in state budgets, states cannot afford continued loss of manufacturing tax revenue or they may never overcome their financial and unemployment problems.
- Defense – Many industries like aerospace, high technology, software, and others build the products that allow America to have the world’s most powerful arsenal. Basic industries like the chemical, petroleum, and mining and electronics industries are part of our strategic and defensive reserves. Maintaining these industries, and the suppliers and skilled workers in them, is a matter of national security.
- Threat to Other Industries – Manufacturing directly supports distribution networks, communications, transportation, utilities, and trade. 80 percent of all goods hauled by trucks and 80 percent of all goods hauled by railroads are manufactured goods. The decline of manufacturing will automatically force a reduction in these industries as well as all of the OEMs that supply them equipment.
- Outsourcing – The large companies continue to outsource and there is little effort to create U.S. jobs. In fact, the large companies that have invested in China do not want any threats to their Chinese partners that would threaten their Chinese businesses. Using organizations like the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable, they lobby Congress to oppose any legislation that the Chinese oppose. These giant U.S. manufacturers seem to be indifferent to the future decline of the American consumption economy.
- Unfair Currency Manipulation – China continues to manipulate its currency, which is under-valued by 40 percent. This makes China very attractive for American manufacturers seeking ways to lower costs, and it makes Chinese imports superficially cheap. It also makes any attempt at increasing exports or solving the trade deficit very unlikely.
- Illegal Subsidies and Tariffs - China also competes unfairly by employing illegal subsidies and tariffs. For instance, Caterpillar recently decided to build its new mini-excavators in China. To have built the machine in the U.S. for export to China, it would face a 30 percent import tariff.
- Trade Agreements - Trade agreements like NAFTA and the recent Korean Agreement may be good for trade but they have not been good for well-paid manufacturing workers. These agreements have and will result in the long-term hollowing out of the middle class.
A Sustainable Mass
The long term economic picture is actually very simple to explain. Our economy is based on 70 percent of GDP being consumption – that is, American consumers buying products in our country with their wages. If the consumers of the future can’t find good family wage jobs, or if their incomes and wages continue to decline, then consumption will decline and so will GDP growth. The obvious solution is to create good paying jobs that allow them to continue to consume.
In a 2007 economic report by Joel Popkin, he said: “The success of the U.S. manufacturing sector requires a certain mass to be sustainable. This mass must be large enough to encourage R&D domestically, conducted by our scientists, and to encourage U.S. business to invest in capital goods and human capital in the United States. Once that mass has diminished below its critical value, the process by which prosperity has been generated may never be recovered. If that is permitted to occur, the growth rate of the U.S. economy may drop to half its historical average. If the U.S. manufacturing base continues to shrink at its present rate and the critical mass is lost, the manufacturing innovation process will shift to other global centers. Once that happens, a decline in U.S. living standards is all but assured.”
This statement is much closer to the true picture of what may happen in our economy. It says that the key to GDP growth, innovation, R&D, jobs, and living standards is manufacturing.
Next month’s column will offer solutions to these problems.
Mike Collins is the author of Saving American Manufacturing. You can find him on the web at www.mpcmgt.com.