Mainpoint – In Part II we look at the decline of American manufacturing and clothing manufacturing and the effect of government.
In Part I we looked at what the country and its economics looked like in 1952 compared to today. And we went over the basic measures of the economy by using the Gross Domestic Product (GDP).
In Part II, we will look at some of the factors that have lead to the destruction of American manufacturing in particular clothing manufacturing placing emphasis on government attitude and some of the relaxation of protective measures that have accelerated the process. I will try not to be political, but when talking about economic policies, it often does get into some politics.
The Decline in manufacturing
The United States has been an economic power since the late 1800’s, mainly due to the Industrial Revolution. Manufacturing has been the heart and sole of the US economy up until now. In 1965, manufacturing accounted for 53% of the entire economy. The US manufactured 95% of what it needed. Manufacturing has rapidly decreased since the late 1970’s. In 1988, manufacturing has slipped to 39% of the entire economy. And by 2004, manufacturing accounted for only 9% of the economy. Today (2011), the US manufactures only 5% of what it uses and only 2% of its clothing. We are no longer a manufacturing powerhouse, in fact, manufacturing is on life support. Now, we are a nation of service people. Who has ever heard of an economic powerhouse based solely on service? All economics experts agree that in order to improve our economy we need to increase our exports. So,what are we going to export? Service? I think one answer is certainly not agricultural products but manufactured goods. And to have manufactured goods, you have to have manufacturing industries and jobs, but, yet, I hear no solutions to assist manufacturing in the US. The reason for it, many economics think manufacturing is a lost cause. That is true for most European nations as well except for Germany which so happens to have the strongest economy in Europe. Germany’s manufacturing makes 30% of what it uses, compared to the US of 5%.
The Causes for the Loss of Jobs in Manufacturing
1) Globalization. The loss of manufacturing jobs began in earnest in the 1970’s due to global competition. Other countries started making high quality, lower priced steel and the Steel industry was the first major industry to feel the pinch. This was the first modern day victim of what was to be called globalization. Globalization is the increased mobility of goods, services, labor, technology and capital throughout the world. Several factors have improved mobility: air travel is easier; communications via phone, internet and conference calls are extremely fast and dependable – facilitating easier opening of businesses and continuation of business ventures; technologies can keep track of inventories, supplies and labor/ cost over-runs. Now the entire world is a competitor for US jobs.
2) Improved efficiency in manufacturing. Even if jobs had not been sent overseas, many jobs would have been lost in manufacturing (as well as service) through improved efficiency. Improved technology, software programs, automation and managerial skills specializing in cutting back labor have caused a loss of 20 – 25% of manufacturing jobs alone.
3) Outsourcing (or Offshore Outsourcing). This is the movement of production/jobs to another country. This movement started in the 1990s and caught fire in the 2000’s. The reasons companies offshore/outsource are the following: 1) Decreased labor costs – most CEO’s say that outsourcing saves about 8 – 10% of total expenditures to make a product (compared to US workers); 2) Decreased benefits to workers such as no Social Security, no Health care, no vacations, no overtime, no pension, no worker safety issues, and no lawsuits regarding worker maltreatment; 3) special corporate tax rates with possible tax deferrals and special restructuring if needed; 4) decreased value of money in outsourced country (especially yuan); 5)no special business licenses or certifications needed; 6) to break unions; 7) less bureaucracy (if you know or pay the right people); 8) tax breaks from the US to move the company overseas; and 9) special stipends from the country your company into such as a Country Club membership, new automobile, new house, or even cash for the company’s Board of Directors (they are called kickbacks in this country, but they are legal in many countries.)
4) Free Trade Agreements. This is an agreement between countries that they will waive any import taxes to each other, such as the North American Trade Agreement (NAFTA) – the trilateral agreement between the United States, Canada and Mexico. One major critic of NAFTA and outsourcing was 1992 Independent Presidential candidate, Ross Perot, who said in a national televised debate, [it would create]” the giant sucking sound” [of jobs going to Mexico]. NAFTA passed in 1994. Now, Ross Perot has a workforce of more than 7,000 in India. The Central America Free Trade Act (CAFTA) was an agreement between the US, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua passed in 2004. Last month, the US passed another free trade agreement with South Korea, Panama and Columbia. Free Trade Agreements remove an important disincentive to outsourcing, which makes it very attractive to many companies to outsource.
5) Removal of Import Quotas. All of the above together, but especially this last one has been the death knell for American clothing manufacturing. The World Trade Organization Agreement on Textiles and Clothing as part of the 1995 Uruguay Round Agreements, mandated a phase out of import quotas sanctioned for decades under agreements like the 1974 Multifiber Agreement. This called for a full phase out by 2004. Since 2004, there has been a massive avalanche of slave-labor clothes dumped onto American shores (especially from China) and this has caused a massive loss of American clothing manufacturing factories. Isn’t it strange that you can buy jeans now for less than in 1980? Back in 1980 how much did you have to pay for a gallon of gas? ($ 1. 19 per gallon), For a 1/2 gallon of milk? ($0.85), For a new car? (Average $7,210). And we pay less for clothing than we did in 1980?
Is Globalization Good?
Globalization has been regarded by many economists as a very good thing. The experts say globalization has decreased prices of goods and, therefore, stimulates spending, which is one measure of the Gross Domestic Product (GDP). However, if you look at the formula of the GDP (as clarified Part I: Consumer Spending + Investment + Government Spending + (Exports – Imports) = GDP, then if you spend one dollar on an imported product, you have: + $1.00 for Consumer Spending, and then -$ 1.00 for Import for a resultant $0.00. For the other measures (Measuring the products made, or measuring income), they would also be $0.00. However, if you bought American, the result would for that one dollar would be +$ 1.00 to the economy. If that item was also exported, and was purchased for $1.00, the result would be +$ 2.00. ( I do realize that spending $1.00 on imports is not really $ 0.00 to our economy, but it does not plug into the computations of the GDP. I agree that selling goods [whether homegrown or imported, but still much better homegrown] does help to employ people and help the economy as does profits to the company [if that company is a tax paying US owned company]).
There has never been an easier time in history to move your company out of the country without any ramifications, even if it means slave labor or child labor is happening in those other countries. If there is a story of a sweatshop say in California, it is a big news story, a real public outrage. But when it happens overseas, we say nothing. One reason nothing is said is because we don’t see it, and it is hushed up. But, on the other hand, if you receive a phone call from a credit card company and that representative on the phone talking to you has an East Indian accent, many times that representative gets an earful. Out of sight, out of mind.
Globalization and the technology have erased the boundaries of countries. The economies have become interdependent, all tied at the hip, for better or worse. It is as the economist, Tom Friedman titled his book “The World Is Flat”. The problem is that the United States will have to “compartmentalize” itself to keep its economy running. Let us imagine the United States and its job creation in the following way: the world is cold and barren, void of jobs, but the United States is a powerful furnace warming up a great area with new jobs and opportunities. Outsourcing is the placing of many ventilation shafts and siphoning the heat from the United States. The problem is that the economy of the United States is not large enough to heat all of Asia, Central America, India, etc. The United States has economically improved certain sections in China and Singapore, but at the expense of its own economy. Plus, we have lost the ability to create the “great fire”, from loss of infrastructure and manufacturing. In addition, the US is competing with the rest of the world for jobs, this creates a tremendous downward pressure on wages. And as the US continues to try to warm up the rest of the world, wages will continue to go down for the middle class forever. And as wages continue to stagnate or decline, the price of real estate should also stagnate in the future.
Historically, America’s wealth grew when profits from manufacturing were re-invested into buildings, machinery and technological changes. But now outsourcing is diverting income, wealth and technology to foreigners. Do you remember the trickle down theory of economics? The theory goes, if you gave more money to the rich people it would trickle down to the middle class and poor (not that there was any evidence that it did). This theory certainly does not work now because the money is invested in other countries like China and that money does not trickle far from there. Maybe if you invest trillions upon trillions for the next 40 years, maybe the Chinese will buy American made products or maybe there will be hordes of Chinese tourists coming to visit the U.S. Maybe it is better to dig a hole in China, put a trunk of money in the hole, bury it, and see if it comes out the other side of the world in the United States.
What may be surprising to some people is how much the Government effects: the economy; businesses and growth. And conversely, how no government intervention can slow the economy. For example, the past three years except for the bail-outs and a very small stimulus package, the Government really hasn’t done much to invest in the country and growth has been very slow. Government has been getting out of the way while big businesses make big money yet no growth (in the US, but good growth in Asia). The main problem has been there is no big vision plan on the economy from Government since the 1970s. Another side, that bad government decisions in deregulating and removing of protective barriers instead of growing the economy can actually destroy the economy. The best example is the allowance of the almost complete gutting of the American manufacturing sector and loss of millions of service jobs as well (see above).
We started this scenario with the Eisenhower administration. Eisenhower’s great vision for the economy was the creation of the Freeway system. It was an incredible boost not only to the economy but also the country to create a brand new infrastructure that greatly improved commerce. (But, it did destroy the railway systems). It created millions of new jobs in construction, engineering, and transportation. Also, it created many new business opportunities, businesses (restaurants and hotels) along the new freeways, increase of sales of cars and recreation vehicles. This was all due to massive government intervention and investment. For John F. Kennedy it was the “Space Program”. For Lyndon Johnson, it was Urban Renewal and the big push for education. Other strong government investment in the past has been in areas such as: jet airliners; computers; materials handling; mechanization; automation; and the internet. Of course, I forgot to mention that the continued investment in the military and department of defense which never gets cut, no matter what administration is in power.
Examples of economic “Bad” policies from government: Shrinking government investment in education(especially higher education), decreased investment in research and development and infrastructure (except for Defense); passing the Free Trade Agreements such as NAFTA; and the elimination of import quotas.
Many free trade economists are against anything that may hinder free-trade with anybody or any country. Their idolatry of the economics pioneer, Adam Smith, has only grown. In 1776, he wrote “The Wealth of Nations”. He theorized that self interested competition in the world will indirectly promote the good of society (through an invisible hand) and that anything interfering with this makes things worse. The problem is there is no invisible hand. Time and time again, we have proved this. (The Great depression is the best example, non-regulation caused the problem and no intervention for four years by the government extended the Depression). But still, we have many stalwarts and for some reason they are getting louder, obviously never learning from history.” Protectionism” – protecting the country’s self interest through intervention has become a dirty word by too many modern economists. Maybe, we shouldn’t use the term protectionism but “Self-Preservation”. In order to do this, I will use an extreme example that many Adam Smith followers will not like: Suppose you are the lone maker of a commodity, and you are a self-interested entrepreneur. You find that another country will buy all of your products, at twice the price than your home country will pay. So, as a business person, obviously you would sell all of your product to the other country, correct? Now let us say, your commodity was nuclear warheads? As a business person in unfettered capitalism, this should make no difference. It, also, means that if you sold even one of your products to your home country at the lower price, you are practicing “protectionism”. I like to think instead of “protectionism”, we are practicing “self-preservation”. And “self-preservation” has not been practiced here since the 1970s. We are literally selling our manufacturing industries to the other countries, leaving ourselves totally dependent on other countries manufacturing goods for us (as well as continuing to be dependent on our number one import – oil).
Dependency on Imports
The problem with being dependent on imports is as follows, taking a very current example. As we all know, the United States has an on again – off again relationship with mainland (Communist) China for years, both politically and economically. Now, China has become one of our country’s largest loan holders (creditors) and our number one importer of goods – it accounts for 19% of all of the total imported goods into the US (2nd is Canada – 14.5% mainly because we import 70% of our oil from Canada). Let us say sometime in the near future something strains our relationship with China, like a trade war, or China decides to takeover Taiwan, because they believe it is part of China anyway. Then what would happen, us being so dependent on their money and imports? I would say panic would probably be the normal response. We could offer other countries much more money to make up for the loss of imports from China – which would the most probable response from the Government because it is the easy and lazy thing to do, but it will cause flagrant inflation by doing so. A more pragmatic approach would be to build up our own manufacturing base to the level that it will produce at least 20% of what we need, thereby easing our dependency on imports, so that in time of crisis, we simply increase input from our own factories, avoid inflation, as well as improving the economy.
Criticisms of Increasing Manufacturing
1) “We don’t need manufacturing – our manufacturing numbers declined yet our economy improved.”
The reason our economy improved was a once in a lifetime technological bubble. From 1970-2000, there was the two phases of this technological bubble. The first portion was the invention of the computer, computer chips (Silicon chips), word processors. At that time, we still built things ourselves, creating the new computers, constructing multiple new buildings, manufacturing plants, businesses and creating new jobs. The second phase was later, “The Internet Bubble”. The story of the Internet, if you hadn’t heard goes like this. A member of the Department of Defense, Vinton Cerf invented the “Internet” for the Defense in 1972. (Remember Defense always gets funds for research). The internet is basically data that is sent in packets at first through telephone lines, then radio waves and presently through optic cables. Senator Al Gore met with Cerf in 1986. Gore had just informally asked what Cerf had been doing, and Gore thought that maybe commercialization of the internet might be a good idea. The end result was in 1991, a bill passed called The High Performance Computing and Communication Act of 1991. It is now called the Gore Bill. The government heavily invested money and the rest is history. The problem is that the boom is still going on, and we have been sitting on the sidelines since 2000. We have sold ourselves short. We do not make the computers, the Droids, the Ipads, the Ipods, the e-readers or the video games. We no longer make silicon chips in Silicon Valley anymore. We are in an economic recession while there is a huge boom going on, enjoyed by China, and maybe some of the 1%, but not for the American people. And what do the brilliant economists say will bring us out of this recession ? Their answer – maybe another technological miracle will happen in the future. But look at this advice seriously, let us say, we did discover a great new world changing technology, how long could we hold on to it? I suspect only three years maximum, because we won’t be producing them, the technology will be sent overseas, copied, produced and sold back to us just like today’s cell phones.
2)” Who cares about low skill, low paying jobs anyway?”
These are the thoughts of most economists today – “That the battle has been lost, let’s move on”. I clearly remember the lecture of John Naisbitt, author of Megatrends in 1982. He correctly predicted that in the near future that America was going to get out of manufacturing and that America was going to become a country of service people, especially in the high tech world and would lead in that manner. But little did he realize that after the manufacturing jobs left, then so did the service jobs, and the highly skilled jobs, and the engineers as well. This was one of the rare cases where the “Slippery Slope” argument was correct – once you lose one, you eventually lose them all. (He was correct about the banks getting bigger and bigger as well as insurance companies getting bigger and bigger, hence the name Megatrends.) So, now, here we are, that is how we got here. Adam Smith’s invisible hand is trying to drown us. Government intervention if placed in an intelligent manner may be quite helpful to get us back on track.
Part III will deal with consumer attitude, corporation practices and possible solutions.
“No fashion has ever been created expressly for the lean purse or for the fat woman: the dressmaker’s ideal is the thin millionaires.” – Katherine Fullerton Gerould