26
Oct
11

How Did We Get To Here? What Happened to the Clothing Manufacturing? Part I

Mainpoint – The economy of the USA has changed for the worse. We will look at some of the root causes- Part I will look at the basic economy – the Gross Domestic Product and Trade Deficits;  Part II will look at loss of American manufacturing and government intervention; Part III will look at consumer attitudes, changes in corporation practices and possible solutions.

How Did We Get From an Economic and Manufacturing Powerhouse to an Ailing Economy, 2% Clothing  Manufacturing and No Plan to Revive The Economy?

Time Capsule

The year was 1952. Former General Dwight D. Eisenhower was President of the United States of America. The country was mostly rural and agricultural-based. There were no freeways. Telephone service hadn’t reached the entire nation yet. There was very little commercial  air travel. Television was the new fad. Nationally, the US was #1 in manufacturing by infinite margins. The U.S. made almost 100% of things that were used in the country. There were no other major importers. All other major manufacturing countries were re-building after World War II. The individual income tax rate was high and extremely progressive: 22% over $4,000; 42% over $10,000; 60% over $20,000, 80% over $60,000; 92% over $250,000. The corporation tax rate was 30% under $25,000; 52% over $25,000.  The unemployment rate was 6%. 34% of workers were in unions. There was only one person working per household. The motto was: a happy worker is a productive worker. There were no CEO’s, only Presidents of corporations. These Presidents made good money but not extremes. The middle class was prospering, there was no class warfare. The reason for this: everybody had survived a difficult 15 years, a decade of Depression and 5 years of WW II, everybody, rich and poor, had to pitch in for the war effort and hundreds of thousands friends and relatives lost their lives, we were a kindred spirit. Employers gave jobs to injured vets, without Federal coaxing, Congress passed the GI Bill to help retrain the vets and  gave low interest mortgage rates for housing. Brotherhood was the flag that was most saluted.

Present Day

The year is 2011. The President is Barack Obama, the nation’s first black President. The country is urban. Only 1% of the population is farmers. The whole nation is connected via satellites and DSL/cable. Global travel is the norm. Because of no overview of the Banking Industry and Wall Street, there has been another crisis which has caused yet another recession (this time quite serious, because the housing market has been hit, and not just due to over-speculation) with an unemployment rate averaging 9% over three years. The United States is # 2 in exporting (depending on who you listen to). We manufacture only 5% of the things we need. Clothing manufacturing is only 2% . The trade deficit with China is $252 Billion (that is per year). The national deficit is $15 Trillion. The individual tax rate is mildly progressive: 10% over $17,000, 35% over $335,000. The corporation tax rate is 35%, but with many loopholes, corporations paying about only 6.6% of total income tax revenues. Many households have two people working. 12% of people are in unions. Class warfare has slowly progressed over 30 years. Money and profits are the flags that most salute. And there is a quiet revolt occurring – Occupy Wall Street.

Money and the GDP

So how did we get to here? We will look at government involvement (in part II) and the economy. But before we get to that, we will have to go into some very basics before we attempt to tackle the GDP (Gross Domestic National Product) and why it is important. Let us start with the most basics of basics, money. Going back to near prehistoric times, people have always valued “pretty stones”. Over time, the “pretty stones” became Gold and Silver. As time passed, gold and silver were pressed into coins. The bigger the coin, the more the worth of the coin. Incidentally, the reason they put ridges on the side of the coins was to protect the coins from people shaving them down. Because coins are heavy, it became rather impractical to haul coins all over, therefore there was the development of paper money. Government banks held on to the “pretty stones” – gold and silver – and issued the paper, promissory notes. At one time, most countries were on the “gold standard” – meaning they held on to reserves of gold – and supposedly printed up and distributed money based only on the reserves of gold they had. At that time, whoever had the largest gold reserves was the richest country.

Local Banks

Meanwhile, local banks, which did not have any gold reserves, have been the distributing point for paper money and coins. They accept deposits for safe keeping, and make money by loaning money at a certain interest rates. What is not common knowledge to most people is that the bank does not physically have enough money to give back to depositors if there is a “bank run” (when everybody wants to take out all their money at the same time).  This is still a possibility today if there is a financial panic. This potential problem has been exacerbated with modern technology, funds are electronically transferred from one account to another all the time. It would just take a very small bank run before the banks would have to close their doors. The Bank Bail-Out of October 2008 was passed so there would not be a run on the banks. So, do you feel less secure about the monetary system? Wait till you get to the GDP! Money and banks (like religion) exist because there is faith. Without faith, there would be no banks and therefore no economy. For a modern example, let us take Japan after their 1980’s real estate collapse, the Japanese lost faith in their banks. Because of this, they did not put their savings in the banks, instead stowing their savings away in large safes at home. They also didn’t purchase much, causing a very prolonged and painful recovery. The safes seemed secure enough until the tsunami in Northern Japan washed many of them out to sea, taking away many of their hard-earned life savings. So, nothing is safe (pun intended). But as long as everybody suffers from the same shared hallucination that banking and the stock market are safe, then they will be.

GDP (Gross Domestic National Product)

The United States has been off the “Gold Standard” for many years. Without gold, how do you measure the wealth of a nation? This is where the GDP (Gross Domestic Product) comes in. It is the measuring stick. Put as simply as possible, the GDP is the total quantity of goods and services produced in a country (in a certain period of time).  The GDP for USA 2011 is approximately $15 Trillion (interestingly, is about the same amount as the current deficit). The GDP is, also, used to determine if the country’s financial health is improving or declining, the GDP is great for this. To demonstrate how bad things were just recently, we can look at the GDP and the Housing/Banking collapse. For the first time since the Great depression, the USA went through an actual shrinking of the GDP for four straight quarters! ( From the third quarter in 2008 to the second quarter in 2009:  July – Sept (Q3) 2008  -3.7%; Oct – Dec (Q4) 2008 -8.9%; Jan – Mar (Q1) 2009 -6.4%; Apr – June (Q2) -0.7%.) In Quarter 2, one can see the effects of the economic stimulus as it started to work. The GDP has been positive since then, but only meekly, since the stimulus has run its course. So, there is growth, but slow and sustained but not fast enough for us impatient Americans.

Mirror, Mirror, Who Is The Wealthiest Nation Of All

To determine who is the wealthiest of  nations – apply the following formula: take the GDP and divide it by the population (GDP per capita) – this will tell you how the U.S.  compares to other countries in the world, which is about # 10. The Scandinavian countries are doing better. So what else do we need to know about the GDP? Actually quite a lot if we want to know how the trade deficit figures into this, which is one of the easiest portions of the GDP that can be changed. I will not go into extreme details of the GDP, but enough so that one can get a handle on things.

Measuring the GDP

The Gross Domestic Product can be calculated in three separate ways. #1 – Measuring the products that are made. This would be the most accurate, but it is the most time-consuming and (correct me if I am wrong) can only be determined yearly. #2 – Measuring of income. The theory behind this is that income will be equal to the value of products. This can be determined only yearly (through Income Tax records). The first two methods certainly are dependent on jobs and to a lesser extent the production of goods. #3 – Measuring of expenditures – the most frequently used. The theory behind this is any money you spend is income to somebody else. For every debit there must be a credit – basic accounting principles. This can be determined each month, which is handy. The number of jobs indirectly affects the GDP by increasing or decreasing consumer spending.

Now let us look at how they determine the GDP in #3. The formula takes into account four factors: Consumer spending (C), Investment (I), Government Spending (G) and Exports vs imports (N for Net, X for Exports) . The formula is: GDP = C + I + G + NX.

Consumer Spending

Consumer spending is far and away the largest driver in the calculation of the GDP. It accounts for 70% of the GDP. So, when the recession hit, people stopped spending and the GDP went down. So, does this mean you have to spend more money to be patriotic and pump up the GDP? The answer is no. The US already spends a higher percentage of their household income than any country in the world. We, actually, should be saving more than we have been. Maybe spending smarter should be the axiom.

Investment

Investment: This is the money that corporations invest on new capital goods such as buildings, factories and equipment. Investment has been down in the past couple of years and there has been a lot of hand-wringing because corporations who have done quite well and have trillions of dollars, usually used for investment, are sitting on them. If they would just invest, then our GDP would go up. Are they unpatriotic for not investing?  No, they have never been patriotic since they became multi-national in the 1980’s, not that they were all that patriotic before that. But, obviously, investing would help our GDP (the measurement of our economic health).

Government Spending

Government Spending: In most countries, the government consumes a large portion of the GDP. In Europe, it is about 50%. In the United States, it is between 35 – 40% of our GDP. Government buys goods and services from taxation and borrowing. As strange as it seems, more government spending increases the GDP and is therefore, good for the economy. Decreasing government spending will slow down economic growth. You would think that decreasing a national deficit by decreasing government spending would help, but in reality, it really hamstrings the economy. Now, let us say that our deficit was more like $150 Trillion and not $15 Trillion, then that indeed would cause trouble, because then the government may have difficulty securing loans and borrowing  money to purchase goods and services. No country in the world is worried that the US won’t pay back its debts, unless it has to do with political shennanigans. To think even more grandly, if the US ever really defaulted, the entire world economy would collapse. China and Europe have Billions if not Trillions tied up in US Bonds as do banks, stock traders, everybody. The world economies are linked at the hip. So, when you hear a politician talk about the US defaulting because of a $15 Trillion deficit, just give them a good laugh for me. Not that we shouldn’t be serious about trimming our deficit, it’s just that $15 Trillion is small potatoes in the large scheme of things.

Net Exports

Net Exports -or more precisely, exports minus imports. Exports have been the driving force of economic growth for decades. At first, it was the US, then it was Japan, and now it is China. When you are exporting more than you are importing, it means economic growth. In 1993 the US had a $1.6 Billion trading surplus ( exports > imports). In 2010, the US had a $9.72 Billion deficit (imports > exports) and remember we have a $262 Billion deficit just from China, which means we have made up the differences on the other countries.

Trade Deficit

A trade surplus is where your exports exceed your imports, which raises your GDP, therefore, you look like a richer country. A trade deficit is where your imports exceed your exports, which decreases your GDP, makes you look poorer, right? Well, kind of. In reality, the importer is purchasing assets. For example let us say you purchased a fighter jet for your military, like the de-commissioned F-22 Raptor for $150 million. Now you have a real asset in your bank, but it shows up as a deficit on your GDP. Now, let us say you buy a bunch of cheap junk that will make it to the landfill in three months, then you have no assets, more trash in your country and a trade deficit. Some free trade economists see this last example as not all that bad either. Their reasoning: Americans spend more money on cheap products and therefore increases the GDP, which partially offsets the trade deficit.

Conclusion to Part I

Now we can see some of the drivers and inhibitors of the economy in general terms. Things that drive the economy or factors that improve the GDP are: increased consumer spending, increased investment, increased government spending (and, of course, jobs) and increase in net exports. In Part II, we will investigate how the government involvement has changed over the years, and how we lost manufacturing jobs. Part III will view, the change in consumer’s attitudes, changes in corporation practices  and possible solutions to all the above.

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