Posts Tagged ‘offshoring

20
Jan
17

The Oaf of Office – More USA Jobs or Less?

This is written specifically for Inauguration Day. With Donald Trump being sworn in as the 45th President, the question is whether his administration will be good for the American worker and the Made in USA movement which ultimately means more jobs for Americans.

What Can We Expect for Made in USA jobs under the Trump Administration?

Will the Trump administration increase Made in USA jobs or will the Trump administration continue the Republican doctrine and do the opposite: to decrease good paying jobs in the USA? To predict these two outcomes, we have to know what Trump believes by what he has said (which is sometimes difficult as sometimes he is on both sides of the same issue). We know that he agrees with the ultra-right of the Republican Party on all issues except possibly two: first, the GOP has always been wary of Communism and Russia. Interestingly enough, Trump has expressed the exact opposite of this wariness. Second, the GOP are in full support of Free Trade, exporting US jobs and maximizing profits for the company’s CEOs. While Trump had previously offshored jobs and has his Trump clothing line (and his family’s products) made outside of the U.S, suddenly, in mid-campaign, Trump said that he is against Free Trade treaties.

Policies of the Republicans and Therefore, Trump and its effect on the USA.

So let us quickly look at some of the policies of the Republicans (and therefore, Trump) and see how it would effect US jobs. These include minimum wage, income taxes, Immigration, Free Trade, Energy, Mergers, Economic Growth, Free Press.

Wages and the Minimum Wage

For the past 100 years, the traditional view of Republicans towards business has always been on the side of owners of businesses.  This has not changed. Republicans have always been against all issues that would make the bosses pay more: minimum wage, vacations, 40 hour work week, overtime pay, social security, unions, pensions, employee health care, disability, child labor, worker’s compensation,  and workplace laws that outlaw discrimination or harassment. These issues were fine when the United States was an overwhelmingly run by small businesses. But, since 1980, the USA has become the Mega company capital of the world and many of these giant companies are multi-nationally owned. In fact, large corporations (since 2007) employ more Americans than small businesses (small business being defined as less than 500 employees). The US is so top-heavy (big corporations dominate) that just 6 companies made 50% of all profit in the US in 2015 (according to USA Today) and 28 companies made 50% of the profit to the S & P. So, sometimes it seems ludicrous that the Republicans go to great lengths to protect the mega-Rich, who already have their own lobbyists, but very little for small business owners. So, what about the workers? Workers compensation has been stagnant especially when compared to corporate profits and CEO pay. Workers wages are just starting to go up over the past two years, but many workers depend on the Federal Minimum Wage to make a living. The Minimum Wage has been unchanged since 2007 (as passed by a Democratic Congress), it is still $7.25 per hour (Louisiana and Tennessee do not follow the federal minimum wage). It has been shown by many economists that the minimum wage has not kept up with inflation. And at the present time, an employee working a forty hour week at minimum wage would still put one at the poverty level. Critics (mainly Republicans) have charged that the raising of the minimum wage kills jobs. This has never been proven, in fact, there evidence to the contrary (Business Insider) and (US News).

History of US Federal Minimum wage to Nominal Dollars

History of US Federal Minimum wage to Nominal Dollars

What is the opinion of Trump? He wants to repeal the minimum wage. But, of course, he has flip-flopped on this issue multiple times (see Washington Post Flip-flops on minimum wage). But if Trump follows standard Republican orthodoxy, and many expect that he will, Trump will try to repeal the minimum wage. What does this mean for American workers? The prospects don’t look good. It is assured that the Federal Minimum Wage will not be raised. However, some Democratic states have, on their own, voted to increase their own state minimum wage. These states have shown the greatest economic growth. Growth in these states will be great, because they are innovative, and despite the efforts of the Trump administration.

Income Taxes

Trump has promised to change the tax code. It has always been hard to pin down Trump, especially when what he says does not match what he says on paper. But the written Trump Plan is a basic Republican plan, First, it gets rid of the Inheritance Estate Tax which would help only the top 1%. Second, it decreases the corporate tax rate from 35% to 15%. Third,  it would decrease the rate of the top income makers from 37% to 33%. The group of $91,150 – $110,000 per year  would also get a small tax break from 28% to 25%. There is no change from $37,500 – $91,150. In fact, most may be paying more. (You can see more on the Trump Tax Plan/NPR analysis). The final verdict: This is classic trickledown economics, giving more money to the top 1%. It didn’t work with Reagan did it, it won’t work now. When you give more money to the rich ,they do not spend it (there is no trickledown), they invest it. Additionally with substantially less income coming to the government, the cost to the government is $62 Trillion per year (greatly increasing the deficit). Final Cost to the worker: more taxes paid by the middle class, less money from the corporations, less money from the top 1%, less money for the government to finance infrastructure. In fact, this is the exact same policy that caused the middle class to disappear in the first place.

income-tax

Immigration

Historically, there have always been groups that have hated immigrants: at first, it was directed at the Irish, and then the Germans, then the Chinese and Japanese and then later, the Hispanics. The Republicans haven’t always been about deporting immigrants. For Republicans, this is a relatively new phenomenon. I mean there were always a sub-group of Republicans – the KKK, the John Birch society, the segregationists, and other White Supremistist groups (they had been Democrats until the Civil Rights Acts of 1965, then they became Republicans) whose voices have always been minimal until recently. Now they are quite vocal. The cause of this movement? It happened after President Reagan repealed the Fairness Doctrine in journalism and Media. This is when Right Wing Media went into action. It encouraged prejudiced people who were previously silent to speak out publicly. And this is where Trump has made his connection. Trump loved to inflame this crowd with hatred towards immigrants: He said he would build a wall. And then he said Mexico would pay for it. Of course, it was talk, just saying outrageous things to get people to listen.

trump-minority

The Wall Between the US and Mexico

So, how serious is the possibility of building the wall between the US and Mexico? Even Trump supporters didn’t take this idea seriously, but they loved the hateful rhetoric anyways. Let us look at the 119 mile wall between Mexico and the United States. The Washington Post said that building just the wall would cost $25 Billion (not million- and it doesn’t consider surveillance). But, we know the actual costs are always more than estimated by three to four times. So, that would make it approximately $100 Billion. And Mexico is sure not going to pay for it. So, guess who is going to pay for a wall that won’t keep immigrants out? You are, the American tax payer. Estimated cost per person $308.

trump-wall                                                                                                    The Trump Wall

Republicans know that immigrants are a vital source of labor for certain business especially the farming community. In fact, the Senate had passed a Comprehensive Immigration bill in 2013 (that is right – both Democrats and Republicans worked together). However, some Republican Tea Party members scuttled the bill in the House and now, we are in the same state as before. Final decision: I can’t see Trump getting enough Republican votes to build the wall. Some Republicans are thinking about the future of their party. They know they can’t stay in power as the all-white Party about increasing their chances of getting Hispanics to vote for them. The Republican can’t stay the all-white Party, not without a lot of tricks anyways (like the ones they are already employing – gerrymandering, voter suppression), so they will need to lure some Hispanic voters. Theoretically, what if Trump built the wall , and deports all the ones he said he would (11 million), many industries would be hit hard: agriculture, construction, Home Health, Hotels, Motels, restaurants, landscaping, wine growers, etc. Some anti-immigrants say that this will “free up jobs for Americans.” My experience, Americans don’t take those jobs. When the Great Recession hit in 2009, how many Americans did you see working on the farm or Home Health? Practically none. Americans would rather collect unemployment than do the heavy manual labor that the immigrants do.

Free Trade

Free Trade is a Republican creation, taking root under the Reagan administration. It undermines what our Founding Fathers had started which was, in order to protect fledgling U.S. businesses, the government would levy tariffs on products coming from other countries. The first Free Trade Agreement passed was the North American Free Trade Agreement (NAFTA) which was an agreement between the US, Canada and Mexico. The next Free Trade agreement was a whopper. It was the World Trade Organization (WTO) which brought in tons of more countries, including China. And guess what happened, just as previous President contender, Ross Perot predicted, this created “a giant sucking sound” of American jobs to other countries. By eliminating import tariffs, it made imports much cheaper, American products suffered, businesses closed, and, then, American business owners joined the foreign competition by closing down American factories and sending the jobs to China, Mexico, Vietnam, India, Bangladesh, etc. (where labor is cheap and regulations minimal). Multiple industries in the USA have been hurt, severely injured and many are on life-support. A lot of good paying manufacturing jobs had been eliminated in the United States, which has created a giant vacuum in the US economy – that vacuum is from the loss of the middle class.

Trump had always been a Free Trader, in fact, he has offshored his Trump clothing to places like China and Mexico. He was never against Free Trade until, during his campaign, he had read a survey where people felt it was important that jobs be kept in the USA. During the campaign to whip up this anti-trade talk, Trump had made insinuations that he would raise the tariffs on China.

Buick Envision made in China

Buick Envision made in China

It is interesting that Trump has targeted companies auto companies that have planned to off-shore to Mexico, but does he say anything about China bringing cars into the USA? No. How about the Buick, Chinese – made, Envision? Nope, not a word. Then, there is the new all-electric car, Atieva which just changed its name to Lucid, to make it look like it is American, which is totally financed by Chinese businesses, will Trump comment on this? Nope. Trump will only comment once there is enough publicity to make it worth commenting on it. It is not like he really cares whether it is US made or not.

Will Trump raise tariffs on Imports from China?

So, the question is whether Trump will levy tariffs of 35 or 45% like he threatened. My prediction is No. Trump has too many ties to China (from Time Magazine). He has plans to build 20 Hotels in China over the next 10-15 years and not to mention that the Bank of China is his biggest tenant in Trump Towers. If Trump really infuriates the Chinese government, the Chinese could impound his company that makes Trump clothing and they could jail all of his employees and managers as spies, because totalitarian governments are like that. This is called conflict of interest. Federal policy is being influenced on how it effects hid business personally. Another potential conflict of Interest: The Obama administration has filed a suit against Fiat-Chrysler . Fiat is hoping that can make a deal with the Trump administration. Fiat might be thinking instead of being sued or paying a fine, maybe we could just make a contribution to some Trump business?

So How Will Trump Save American Jobs?

If  import tariffs on Chinese products are not raised, then, how will Trump save American jobs? My prediction is he won’t. What he will do, is what he has been doing since being elected? He will tweet and threaten a company who have had thoughts about building factories in Mexico. (See Ford and Toyota – Washingon Post). Also, see Fiat-Chrysler. In all cases, Trump took credit where no credit was due. He did not change the course of their company. Think about it, do you think corporations make millions of dollars in investment just because of a tweet? This is not a charity auction. (“I bid 30 milllion dolllars to bring jobs back to the USA!”) These corporation have been formulating these plans for years. (In reality, Trump should be thanking Obama for all these actions, but Obama is not one to be a credit hog.) Will he truly go after NAFTA which would hurt his most loyal constituents, the Farmers? Maybe, but Trump has no loyalty and no interest in agriculture.

Will there be serious reforms towards Free Trade? I truly doubt it. Trump will give the outward appearance that he cares. In the meantime, American companies will continue to off-shore, and companies that come back (re-shore of jobs), instead of being little noticed (like the present time), it will be crowed about by Trump who will take all the credit where none was due. One good thing to come out of this is that traditional Republicans like Paul Ryan are looking to decrease taxes on American products that are to be exported, they haven’t gone so far as to say that they will increase tariffs on foreign imports or getting rid of tax exemptions for moving expenses for companies as they move their company from the USA to another country. At least, the Republicans are entertaining some Democratic ideas, but don’t let them hear that.

Other Issues That May effect the Economy

Health Care

Health Care can strongly influence consumer’s pocket book. At the present, Trump and the Republicans are ready to repeal The Affordable Care Act (ACA). If the Republicans do replace the Affordable Care Act with a comprehensive Health Plan that covers everyone, providing good health care at less cost, this would be one of the greatest breakthroughs in the history of American government. But will the GOP take that giant and brave step. Not a chance.

The Evaluation of the Affordable Care Act (ACA)

The ACA did many great things, it insured an additional 20 million Americans, the highest percentage of insured Americans ever in the history of the nation. It controlled expenses, brought down the price of healthcare, paid for preventive health and eliminated exclusion based on pre-existing conditions. But, the ACA wasn’t close to a perfect system. One of the main problems with the ACA was that is was based on the obsolete notion that companies wanted to give their employees health insurance. Today, companies bend over backwards to make sure employees are not full-time and, therefore, does not have to pay benefits). In fact, companies like Macys keeps track to the minute any employee that comes close to qualifying for benefits, and makes sure that it does not happen. My belief was that the ACA was a band-aid to the health care system, to decrease its expenses – to delay the eventual bankruptcy of the nation from health care for several more years.

obamacare-insurance-rates

The Cost of Repealing The Affordable Care Act

There are a couple of problems with the idea of repealing the ACA. One is the Republicans have no replacement policy. Even though Trump says they have a plan and it is close and Everyone will be covered, better care, less cost. This is definitely a case of over-promise and under-deliver. (Especially if Medicare for everybody is off the table.) The other problem with the Affordable Care Act is that it is a Republican idea from the Heritage Foundation. The only “real” thing that the Republicans don’t like about the ACA is that President Barack Obama takes all the credit for it and therefore, for political expediency, it had to be demonized. The idea behind the ACA was to add more competition between the insurance companies (health insurance exchanges) and, therefore, decreases costs. The only wrinkle from the GOP brain trust, thus far, is that the insurance companies can compete across state lines. Wow, what a change. (Oh yeah, Health Savings Accounts which are available in the ACA, great idea). The problem with the ACA and the GOP wrinkle is that insurance companies can drop out of the competition at any time (because many times there are “agreements” between oligopolies) which raises the price of insurance premiums. The fact is the Republicans want to repeal only the name of Obamacare and leave the rest of the system untouched. They don’t want to go back to the extremely expensive  and dysfunctional old system. But that is the only way. So, what the GOP did under the dark of night was to hide the fact that repealing the ACA will cost the nation trillions of dollars, the GOP wrote a resolution that repealed a mandate that The Congressional Budget Office keep track of how much repealing the Affordable Care Act would cost. In the same article, it highlighted:The result of repeal is estimate that $140 billion of federal funding would be cut to states by 2019, resulting in the loss of 3 million jobs by 2021, loss of $1.5 trillion in gross state products and a $2.6 trillion reduction in business output. State and local tax revenues will fall by $48 billion. Obviously, the repeal of the ACA will be very costly, and it is very probable that the average American will be paying a lot more for Health Care. And expect a lot more Americans to declare bankruptcy due to medical expenses. The AP reported than premiums will increase by 25%, that 18 million more people will be uninsured one year after enactment and 32 million more uninsured by 2026. Look at it another way, the Trumpcare model will be so expensive and exclude so many people that it would rapidly drive the nation and individuals into bankruptcy, that the electorate would be willing to give the model of Medicare-for-all model a very serious look many years sooner. (But, the Republicans are very serious of getting rid of Medicare by privatizing it based on a model like Obamacare).

obamacare-repeal-vote-cartoon-luckovich

Energy

Trump has nominated Rex Tillerson, CEO of Exxon, as Secretary of State. What does this mean? Well, detente with Russia, of course. But, with regards to oil, we should expect to see more widespread drilling everywhere including the Oceans, the Arctic and National Parks. Expect more pipeline projects across the United States. And, you will definitely be spending a lot more for gasoline. The price of gasoline is not actually based on supply and demand (as people traditionally think) but rather on speculation (see my blog entry: Wall Street and the price of Oil). The price of oil hit a low in January 20, 2016 at $27 a barrel. Now, with the election of oil friendly politicians, the price of oil has increased to close to $54 per barrel (this is definitely not due to increased demand or decreased supply). It is estimated that in 2017 the cost of oil per barrel will be in the $60s, however, I believe this is severely underestimated and that speculators will push this up much higher. Remember it wasn’t all that long ago when a barrel of oil was $114 (in June, 2014). So, expect to pay a lot more at the pump.

take-me-to-your-leader

Mergers

Trump and the GOP believe in the government staying out of the way when it comes to businesses. We know from history that the natural outcome of unfettered capitalism is monopolies. But since this was outlawed by Theodore Roosevelt, the natural end point is oligopolies (a few companies that own everything). By collusion (oligopolies say instead “a gentleman’s agreement), a few companies can drive prices up without actually competing. For 2017, one can expect many new giant mergers to pass without fight from the Federal government. AT&T with Time-Warner will merger as will Monsanto and Bayer. Even Fortune Magazine has made this prediction with their headline A Trump Presidency Could Unleash a Pharma Merger Boom. So, maybe Pfizer and Allergan could try a try another merger (it was thwarted by the Obama administration). The effect for consumers: Pay More for Less Choice.

merger

Economic Growth

One thing that people forget is that the United States is at near maximal employment, the US economy is very strong (all economist believe this, maybe not political pundits). The economic growth has been steady at 2% per year. Yet, enough people (not a majority) still wanted a change. Here is what Goldman-Sachs predicts for 2017:

Donald Trump promised economic growth of 5-6%. No other economist is coming close to predicting this. It is another case of over-promising and under-delivering. In fact, some are thinking that Trump may slow the economy and Citi group thinks that it is a 50% probability that Trump will not even finish out his term. The next year – there will be growth and it will be all due to the Obama administration. Plus, there is no evidence of weakness in the economy, unlike years previous to The Great Recession. However, after that, it will be Trump’s baby. Sometimes, growth and recession have nothing to do with the President and there are swings that naturally occur or sometimes things occur can effect the economy (9/11). I predict based on the cycles of the economy, that we are due for a “slowing” as we have never seen this many consecutive years of positive growth ever. Certainly, President’s do make a difference. Sometimes it takes several years to really see the effect – but is plain when you evaluate Reagan’s legacy both on the United States and on California, (back when he was governor). The United States and California have never recovered. There is distrust in government, the government tax base is shrinking, infrastructure has almost collapsed. Are there any great infrastructure projects in the USA anymore? (Just compare the USA to China’s incredible growth, we look like Ancient Rome).

Conclusion

Trump’s policies are like Reagan’s. It is Voodoo economics. Bad for everybody except for the 1%. There will be more large corporation mergers, Health Care will become much more expensive, the middle class will have to pay more in income taxes, the Federal deficit will explode, oil prices will increase, the rich get richer and no real change in jobs coming back to the USA. The only potential bright lights for the economy are: Republicans working on adjusting their Free Trade policies and a “big” infrastructure project. The infrastructure project could be done right, but I severely have my doubts with this group of Republicans. As Trump takes the oath of office, he becomes the oaf in office. This inauguration is like scene from a parallel universe, like what if Hitler didn’t attack Russia, or what if we didn’t discover Penicillin. The American public have not grasped that we are living in a great time, but have decided that we needed a “change”. People for some reason can’t grasp the concept that change can be for the worse, sometimes much worse. So, for the people who to vote for a temper-“mental” man without one day of public service, “You reap what you sow”. If the economy goes south, you go bankrupt, you lose your health insurance, well you brought it upon yourself. 70 million Americans voted against your choice. As far as bringing jobs back into the USA, Trump will bring none, not even his Trump clothing line from China.

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Free Press

This last issue does not have to do with economic issues, but there has been a disturbing trend. With the rise of right-wing news groups, Breitbart, Fox News, Alex Jones, it is getting difficult for Republicans to know what is real news and what is fake news. Trump only reads the most extreme right wing news, so he does not know what is real news versus fake news. And if Trump is confronted by the real truth, he belittles the Press. Trump is kicking the Press out of the White House to limit access. He didn’t allow the regular Press to ask questions during his so-called “Press Conference”.He has threatened to sue the Press or jail them like other dictators. In the meantime, they have hired KellyAnne Conway as the Reich Minister of Propaganda (ala Joseph Goebbels). I believe that if he can intimidate the Press, then he can intimidate any Americans who disagree with him. My idea is that all networks should fact-check in real time – which means while a political participant or President speaks, at the same time, in close captioning – it says whether the person is lying. It would be easy because almost all of these TV shows are tape-delayed.

free-pressWe need to support the Free Press and they should be free from the intimidation of a dictatorial President. And we need to stay strong against the Trump and his trolls who threaten violence and vitriol on all who disagree with Don the Con.

 

07
Jan
17

Following Up: More on Why Tariffs Can Bring Back Much U.S. Manufacturing

What a shame that David Barboza’s New York Times article on all the help from government in China that powerfully shaped Apple’s investment decisions was published during the holiday. So starts the follow up story by Alan Tonelson. Barboza’s article shows exactly how China’s hands-on approach to economic policy has been a major success to uplifting China’s status to the number one economy in the world. Tonelson opines that it is tariffs than can bring U.S. manufacturing back.

Source: Following Up: More on Why Tariffs Can Bring Back Much U.S. Manufacturing

Following Up: More on Why Tariffs Can Bring Back Much U.S. Manufacturing

What a shame that David Barboza’s New York Times article on all the help from government in China that powerfully shaped Apple’s investment decisions was published during the holiday week – when so many Americans are paying so little attention to the news . A Pulitzer-worthy piece of reporting, it also adds to the abundant evidence debunking two critical claims often made about the globalization of manufacturing.

First, the article makes clear how much offshoring of American industry has taken place due to foreign government decisions that clash violently with the idea of “free trade.” And second, it exposes further weaknesses in a related, though more recent, claim that most offshoring during the 21st century has stemmed not from foreign tariffs and similar interventionist economic policies, but from technological innovations that enable effective management over far-flung international manufacturing operations. This second claim is especially important, since it’s also been used to demonstrate that American tariffs will be unable to reverse this offshoring significantly.

made-in-america1

Apple’s chief manufacturing partner in China, Foxconn, claims that the government supports it receives in the PRC are “no different than similar tax breaks all companies get in locations around the world for major investments.” And Barboza mistakenly seems to confirm this argument, characterizing China’s various market-distorting practices as “not unlike” those “in other countries, “including the United States, where states and cities vie for companies” – except that they are much greater in scale and much more secretive.

But the author himself provides key examples to the contrary. For instance, the Chinese province in which Apple’s manufacturing is concentrated is actively encouraging Foxconn to export. And when the company meets these targets, it gets hefty bonuses. Exports were also fostered via rebates for the value-added tax Foxconn would otherwise pay for at least the first five years of its operation.

Nor was China’s central government simply a bystander. Of course, the value of its currency was manipulated – which artificially lowered the price of goods China exported (including those from factories affiliated with foreign companies like Apple) and raised the price of imports for Chinese individual and certain business consumers. But there was also this scheme described by Barboza:

“Since China began opening its economy to the outside world in the 1980s, the government’s policies have encouraged manufacturing and exports with the creation of special economic zones. But those same policies have discouraged domestic consumption of overseas brands.

“Most products made in China by big multinationals had to be physically shipped out of the country and then brought back so that they could be taxed as imports — hence, the U-turn employed by many companies.”

Revealingly, these arrangements stayed in place well into the 21st century, and similar export-focused zones can still be found all over China.

Barboza’s reporting also bears out arguments I made in a post last week on this subject – that technological change has been a necessary, but not sufficient, condition for the export of advanced manufacturing capacity, and that much offshoring was encouraged by the guarantees of wide-open access to the U.S. market provided by trade policy decisions like backing China’s entry into the World Trade Organization.

As the author notes, “When Apple first moved into China, the country was largely a low-cost production site.” That was in the late-1990s. He also quotes a former long-time executive for Wal-Mart and other multinationals as stating that most of these firms’ China investments represented “supply chains good at making things in the East and selling them in the West.”

China’s domestic market has of course developed impressively since then. But as I observed last week, the continuing importance of exports to these firms’ business models has been spotlighted by their loud protests of Donald Trump’s plans to erect trade barriers against production they aim at American customers.

But it’s also crucial to point out that this initial offshoring of production set in motion a dynamic with huge future implications for America’s economy and for today’s claims about “knowledge-based” offshoring of scientific and technical knowhow – and jobs – that supposedly are immune to trade policy overhaul. Simply put, the offshoring of production made the export of manufacturing’s more knowledge-based activity inevitable in case after case.

The two main reasons: First, super low-cost developing countries are full of smart, people that are highly educable, and trainable by multinational corporations; and second, manufacturing production and innovation rarely exist in isolation. Their relationship is typically interactive, and fueled by continuing and close contact between the researchers and engineers and product designers etc who come up with new products and processes, and the production supervisors and other workers who need to translate their ideas into real world products.

And don’t take my word for it. Listen instead to the late Andrew Grove, founder of Intel. Or Hank Nothhaft, retired Chairman and CEO of Tessera Technologies. Or former Allegheny Technologies executive Jack Schilling. Or the Defense Science Board (both quoted in this 2010 study).

In other words, Apple has found success in locating its manufacturing “brain work” thousands of miles from its production work.  But that formula appears to be the exception, not the rule, in manufacturing, including in advanced manufacturing.  And interestingly, this tech giant has recently announced it’s building its first two research and development centers in China.

So the United States has a fundamental choice ahead of it.  It can keep listening to multinational companies and their hired guns, pretend that the keys to long-term prosperity move around the world purely or even largely due to market forces, and run ever greater risks of sliding into second-class status.  Or it can finally recognize Washington’s immense potential power over globalization, and use it to make sure this process works for its own citizens and domestic producers as well.


Editor’s Note

Most economists are still Free-Trade advocates even though almost all economists have seen the devastating effect of NAFTA and the World Trade Organization which has caused havoc on the US economy: severe losses in US manufacturing, a decreasing middle class, an exploding Trade deficit and crippling effects to the many small towns across the US who had their manufacturing plants offshored to China and Vietnam. These economists love to use the derogatory term “Protectionism” if anybody interfered with the do-no-wrong plan of Free Trade. Even if any policy saved American jobs, improved the economy, made America a great manufacturing power again – all of these great things would be belittled by the term “protectionism”. It is these same economists who are also skeptical that raising tariffs would indeed create more jobs, more manufacturing and a better US economy. But, of course, these tariffs would do this. It has been proven over and over again for centuries. That is why our Founding Fathers imposed tariffs on imports, so nations like England and the Netherlands wouldn’t swamp our businesses with products that would damage our fledgling US businesses. If the U.S. government increased import tariffs, it would greatly reduce companies wanting to offshore. And if we could get rid of the tax breaks that make it easier for US companies to offshore, this would also keep businesses here. Like it or not, import tariffs are the only way to level the playing field for American businesses and the only way to forever stop businesses from abandoning the United States. Don’t use the derogatory word “Protectionism” use the term ABSP – American Business Survival Policy.

10
Nov
16

Lessons From the 2016 Election

It is Deja Vu except With Lots of Heartburn

This is Deja Vu except with lots of heart burn.  There was a popular President who had ushered in great economic growth yet his Party lost in a disputed electoral college loss (while winning the popular vote) and lost to an unqualified opponent. In 1992, George W. Bush brought in an immediate recession, dismissed warnings from the Clinton administration about a character named Osama Bin Laden, who, then, brought down the Twin Towers, which accelerated the Recession. Then, Bush committed the ultimate blunder (by consensus) by unilaterally attacking Iraq for no reason, allowing ousted Iraqi Sunni soldiers to become ISIS. If all that wasn’t bad enough, Bush brought in The Great Recession – (don’t kid yourself, 2008-2010 was a Great Depression) – causing millions to lose their homes, their life savings and their jobs. Then, came the election of  Barack Obama. This was followed by seven years of solid  and uninterrupted economic growth (you can’t turn around a Depression in less than a year), he brought unemployment down from 10% to 4.9%. Wages were going up, jobs were plentiful. And then came the 2016 Election. And now here we go again. Get ready for the Republican Party to make us slide into another Recession.

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Lessons From the 2016 Election

  1. Hate Trumps Love
  2. Lies Trumps Truth
  3. The Electoral College is obsolete
  4. Cheating (Voter Suppression, Election Rigging) always beats the ones that play by the rules.
  5. Bigotry always beats Tolerance and Acceptance
  6. Outside agencies (The Russians, the FBI) in the Presidential election will never have to pay the consequences.
  7. Fake campaign promises always beat realistic solutions.
  8. Going low always beats going high.
  9. No transparency beats high transparency.
  10. Timing of scandals just prior to the election is the key to winning.
  11. The gullibility of the American people knows no bounds.
  12. Fake scandals trump real scandals.
  13. For a so-called “Christian” country, a candidate who possessed the least amount (ever) of Christian values was elected, I guess the lesson from this fact, is that “Hypocrisy” is King in the United States.
  14. The strategy of total obstruction, government shutdowns, never compromising, lying, and opposing everything the President wants is the blueprint to take over the Presidency in the next election cycle.
  15. The Media normalized Donald Trump, and were guilty of carrying out a double standard.
  16. The American Dream is a myth.

I would say the Republicans have shown the way to take over the topple the Presidency. I would recommend the Democrats from Day One do the same thing that the Republicans did – to never work with Trump and show no respect towards him as he has never shown any respect to anybody else.

 

The Issue that Galvanized the Populace: The Rejection of Free Trade

Let me stress one important fact. Free Trade is the bedrock of the Republican Party ever since Ronald Reagan and his financial guru Alan Greenspan introduced it to Washington, DC in the 1980s. It is ridiculous to think that the continuation of Free Trade was part of the Democratic platform (somehow, low information voters thought it was). After the Economic Depression caused by Deregulation and the Big Bank/Housing crash, people started rethinking whether Free Trade is good or bad. Free Trade is where we stop charging import taxes on products from other countries. The premise was: by decreasing the cost of imports, the US can buy more stuff which pumps up the US economy. Just a little hitch, as the cost of import products went down, it made American products comparatively more expensive, ultimately costing American jobs. And then larger corporations started taking advantage of lower costs of living (plus no import taxes) in other countries, by moving US jobs directly to the other countries (offshoring).

The Democratic Party has always been the political party against Free Trade. Backed by Unions who felt that Free Trade jobs would take away American jobs – the unions were correct. Today, unions within private businesses comprise only 7% of companies where it used to run about 45-50% in the 1950s. The Democrats who have been for Free Trade are the so-called “Business Friendly” Democrats. During the 1990s, when Free Trade was the most popular, the split was 60% against Free Trade and 40% for Free Trade. Today, the Democratic Party is 80% against Free Trade and 20% for Free Trade. The Republicans are 85% for Free Trade.

For example, let us look at the vote on the recent controversial Free Trade treaty, the Trans-Pacific Partnership (TPP) – an agreement between the USA and 13 other countries. In 2016, the vote in the Senate: passed 60-38 (Yeas: 47 GOP, 13 Dems; Nays: 7 GOP, 31 Dems & Ind.). The House vote: The vote was 218-208 (Yeas: 190 GOP, 28 Dems, Nays: 50 GOP, 158 Dems). This vote allowed the treaty to be brought up for vote without allowing any amendments. This bill still sits in Congress. It is feared that the GOP will try and secretly pass the TPP bill during the lame duck session.

The Candidates Remedies for Free Trade

Donald Trump rallied against Free Trade yet his policy was lacking of any substance. Many times, even during the campaign, Trump would say: “I am the biggest Free Trader”, yet he was ready to impose a tax of up to 45% (as a threat), which makes it the exact opposite of Free Trade. Realistically, Trump could not by Executive Order impose a 45% tariff on a country. Trump also said that we need to renogotiate the Free Trade Treaties, but what does he really mean? Would Republicans go along with Trumps popular sentiment of being against Free Trade? Highly unlikely – the GOP is the party of the 1%, big banks and multi-national corporations. Now, that Heir Trump is President, I believe that the Free Trade issue will be untouched and Trump will continue to make his clothing in China, Vietnam and Mexico. There will be no new jobs from “changing” Free Trade. I predict a recession within the next two years. Trump voters deserve what they get.

 

 

30
Sep
16

Manufacturing Has Been the Economic Engine of the USA

Manufacturing has been the Economic Engine of the USA

I want to remind everybody about the importance of manufacturing and its vital importance to the U.S. economy. Manufacturing has been the heart of the soul of America. It has been the main “Job Creator” since the 1800s. It is too bad we have abandoned manufacturing by offshoring millions of these U.S. jobs to other countries over the past three decades. It is not only the United States that has had to deal with the loss of manufacturing, but, also, the countries in Europe (except Germany) and Australia. It has been a very difficult adjustment for all of these countries. This one of the major reasons why there is so much unrest in these countries. For the United States, the areas that have been hardest hit have been small towns. Once upon a time, these small towns were agricultural (farming). Over time, with less need for people to work in the fields, these previous “farm” towns became great places to set up for manufacturing because of its lower cost of living. Many jobs were ciphered from the large cities to the small towns. Many big cities have been able to adjust (not all) with this transition. However, the small towns have been decimated by the loss of manufacturing since 1980.

Let us look at a few issues regarding history and globalization.

Is Globalization good?

It depends on how you look at it. Globalization has meant there has been a great improvement of infrastructure to many third world countries. Global poverty has greatly improved over the past three decades. For Europe and the United States, globalization has meant the loss of manufacturing to these third world countries. In the USA, it has caused the loss of 20 million manufacturing jobs to these lower-cost countries since 1980 (8 million manufacturing and 12 million associated manufacturing jobs). Globalization has meant economic hardship for the US, Europe and Australia.

Manufacturing: The Heart of the US economy for More Than a Century

Question: When did the United States first become a major player in economics?

Answer: 1870. The United States was re-building from the civil war. Government was free to complete infrastructure projects such as building railroads, making new trails, canals, and new shipping ports. Industrialization with its ability to make mass-produced, cheaper and newly innovated products created new jobs. And with its newly improved infrastructure, the US could send its products to its ever-expanding borders as well as exporting its products to other countries. Soon, American steel production surpassed the combined total of Britain, Germany and France. By 1890, the USA surpassed Britain for first place in manufacturing output.

 

A Graph of the Greatest World Economies from Year 1 A.D. to 2008

In the early years it was China and India who had the greatest economies based on their shipping of its wealth of goods.

The following graph shows the history of the World’s GDP and the percentage contribution by major countries.

(Source: History of World GDP)
The shrinking of the US economy started when the U.S. deliberately allowed manufacturing to disappear with the passage of Free Trade Acts in the 1990s. China, as of 2015, is the number one economy in the world.

Why is Manufacturing so Vital for the US Economy?

  1. According to the Bureau of Economic Analysis, every dollar spent in manufacturing generates $1.48 in economic activity, more than any other major economic sector.
  2. Each manufacturing job creates three other jobs. In the U.S., the Economic Policy Institute has found that each manufacturing job supports three other jobs in the wider economy, through something called “the multiplier effect.”
  3. The growth of manufacturing machinery output, (and technological improvements in that machinery), are the main drivers of economic growth.  Just consider the explosion of the Internet, iPhones, and the like — all made possible by a small subset of production machinery called semiconductor-making equipment (SME), which itself is dependent on other forms of production machinery.
  4. Global Trade is based on goods, not services. A country can’t trade services for most of its goods. According to the WTO, 80% of world trade among regions is merchandise trade — that is, only 20% of world trade is in services.
  5. Services are mostly the act of using manufactured goods.
  6. While manufacturing is only 12% of the U.S. economy, it accounts for two-thirds of all private spending on R&D. While it provides only 9% of U.S. jobs, it employs one out of three engineers. Fully 60% of royalties from licensing intellectual property go to manufacturing firms.
  7. Manufacturing is the engine that drives U.S. innovation.

There are still Free Traders who feel that U.S. manufacturing is not important. Of course, the Free Traders have a hard time contradicting the following graph.The graph demonstrates what happens to the middle class when we abandon supporting manufacturing.

When we employed Top Down Economics – We cut taxes. Technology and competition from abroad started whittling away at blue collar jobs and pay. The financial markets took off. And so when growth returned, it favored the investment class — the top 20 percent, and especially the top 5 percent (and, though it’s not on this chart, the top 1 percent more than anybody).

Pew_History_Middle_Class_Families_Income_History-thumb-615x447-96949

How Free Trade Has Hurt The US Economy

Since the beginning of the United States, in order to protect U.S. Businesses from being overrun by products from other established countries, our Founding Fathers did what other countries did to protect their own country’s businesses, they levied an import tax. The import tax kept the price of foreign goods more expensive, giving our own business a fair playing field. The import tax fee was anywhere from 50 – 200% on each item.

Then, in the 1970s, some new school economic geniuses thought that it was silly to stay with the tried and true. So, they pressed for “Free Trade” – which meant import taxes are eliminated. It meant lower prices for imported goods, people would spend more. A win/win situation thought these geniuses. These same geniuses also thought Trickle-down economics would also be beneficial – which has caused 90% of all profits to go to the top 1% and caused the greatest economic inequality since the 1920s. The Free Trade agreements (NAFTA, CAFTA, WTO) did eliminate many import taxes especially into the USA, but corporations started to notice that they could maximize profits by moving their companies to other countries with their lower cost of living. So, they started new companies in China, Mexico and started closing factories in the United States to open factories in these third world countries (offshoring). This is our present situation. The United States is still a Free Trade nation with manufacturing continuing to wobble – making only 4% of what Americans need.

Which Political Party is for Free Trade?

The Libertarian Party is the greatest backer of Free Trade by far. Gary Johnson, their Presidential candidate has said they are definitely Free Trade at all costs and would like to pass The Trans-Pacific Partnership Free Trade Treaty – a deal with the USA and 13 other Asian Nations (not including China at this time).  The TPP waits is Congress waiting to be ratified. The Libertarian Party is Pro- Big Business, feels that consolidation of business into fewer larger corporations (monopolies) is fine, thinks that the “Citizen United” decision is good – Corporations can put unlimited money into elections. They are against “entitlements” like Social Security, Medicare and Medicaid.

The Democratic Party has always been the political party against Free Trade. Backed by Unions who felt that Free Trade jobs would take away American jobs – the unions were correct. Unions within private businesses comprise only 7% of companies where it used to run about 45-50% in the 1950s. The Democrats who have been for Free Trade are the so-called “Business Friendly” Democrats. During the 1990s, when Free Trade was the most popular the split was 60% against Free Trade and 40% for Free Trade. Today, the Democratic Party is 80% against Free Trade and 20% for Free Trade.

The Republican Party has always been Free Trade. They are still 95 to 98% Pro Free Trade. The exception is Donald Trump. Now, the question is whether Donald Trump is truly against Free Trade. He has always said I have been the greatest Free Trader. Trump has always been a follower of polls and once he saw that a substantial number of Americans were skeptical of Free Trade he changed his tune. But he has really no plan. He rarely tells the truth. The question is whether the Republican Party is the Trump Party and would get rid of Free Trade (highly doubtful) or that Donald Trump is Pro- Republican and nothing would change (it is more likely that the TPP would pass silently under the cover of darkness under his administration).

The future is now.

02
Jul
16

Donald Trump Has Long Benefited From Trade Practices He Now Scorns – The New York Times

As a businessman, Mr. Trump has relied on the type of cheap foreign labor that he vows to clamp down on if elected president.

Source: Donald Trump Has Long Benefited From Trade Practices He Now Scorns – The New York Times

Trump Lays Out Plans on Trade

Donald J. Trump, speaking on Tuesday in Monessen, Pa., promised to renegotiate international trade deals if elected president.

By REUTERS. Watch in Times Video »

Donald J. Trump vowed on Tuesday that as president, he would put an end to policies that send American jobs overseas, threatening to impose tariffs on Chinese imports and promising to punish companies that relocate their manufacturing to countries with cheaper labor.

“It will be American hands that remake this country,” said Mr. Trump, the presumptive Republican presidential nominee, standing before a hunk of aluminum at a recycling plant in western Pennsylvania.

But such declarations are at odds with Mr. Trump’s long history as a businessman, in which he has been heavily — and proudly — reliant on foreign labor in the name of putting profits, rather than America, first. From cheap neckties to television sets, Mr. Trump has benefited from some of the trade practices he now scorns.

Far-flung apparel

Besides construction, Mr. Trump is big in the clothing business. But most of his line of suits, ties and cuff links bear a “Made in China” label. Some also come from factories in Bangladesh, Mexico and Vietnam. He has blamed China’s currency manipulation to argue that it is almost impossible to find garments that are made domestically these days, or that they are prohibitively expensive.

“The answer is very simple,” Mr. Trump told ABC News when asked about his merchandise in 2011. “Because of the fact that China so manipulates their currency, it makes it almost impossible for American companies to compete.”

Despite that claim, some companies such as Brooks Brothers continue to make clothes in the United States.

Furniture from abroad

In 2013, Mr. Trump teamed with Dorya, a Turkish maker of luxury furniture, for his Trump Home brand. In a news release at the time, the Trump Organization promoted the craftsmanship of the pieces, which furnish some of Mr. Trump’s hotels.

“The entire production process, from the moment the raw wood is cut until the product is finished or upholstered occurs in Dorya’s Izmir, Turkey, production facility,” the release said.

Mr. Trump also invested in a line of crystal bearing his name to go with his Trump Home line. The collection was produced in Slovenia, the home of his wife, Melania. Mr. Trump told The New York Times in 2010 that the production facilities were first class.

“I’ve seen factories over there; their glass and crystal works are unbelievable,” he said.

Putting Romanians and Poles to work

Mr. Trump has not held back when it comes to his concern that undocumented immigrants are taking jobs from American workers, but he has used them on occasion.

In 1980, a contractor hired by Mr. Trump to demolish the Bonwit Teller building in New York and make way for Trump Tower used undocumented Polish immigrants who reportedly worked round-the-clock and even slept at the site. Mr. Trump said that he did not know they were undocumented and later settled a lawsuit over the matter.

Last summer, The Washington Post found that Mr. Trump was using undocumented immigrants for the construction of his Trump International Hotel at the site of the Old Post Office Pavilion in Washington.

And The Times reported this year that Mr. Trump had employed hundreds of foreign guest workers from Romania and other countries at his Mar-a-Lago resort in Florida. Mr. Trump said that he found it difficult to find qualified local people to work there during the high season.

For outsourcing before he was against it

While Mr. Trump has for years railed against trade and currency policies that he says are unfair, he has not always been opposed to outsourcing.

Writing on the Trump University blog in 2005, Mr. Trump acknowledged that foreign labor was sometimes needed to keep American companies from going out of business.

“If a company’s only means of survival is by farming jobs outside its walls, then sometimes it’s a necessary step,” Mr. Trump wrote. “The other option might be to close its doors for good.”

Mr. Trump usually makes the case that foreign labor is necessary to keep production costs down, but in an interview with David Letterman in 2012 he also offered a humanitarian argument for outsourcing. Teased for selling dress shirts that were made in Bangladesh, Mr. Trump expressed pride that he was creating jobs around the world.

“That’s good, we employ people in Bangladesh,” Mr. Trump said. “They have to work, too.”


Many of us knew that Donald Trump was having his clothing made in other countries such as China, Vietnam, Bangladesh and Mexico. However, many of us didn’t know that he also has his Trump Home furniture and crystal made out of the country. And often used foreign workers to construct and to work in his Trump hotels. Donald Trump says he is like Bernie Sanders in one respect – it is against Free Trade. The difference is Bernie Sanders has been against it since NAFTA came out in 1994. Donald Trump came out against it in October, 2015.

Trump Free Trader

26
Jun
16

Brexit – Implications for the USA

There is nothing like a good story to breakup writer’s bloc. Brexit was a surprise story that has lots of parallels between United States and England. England voted to leave the European Union because of the following reasons: they were unhappy with its present economic malaise; there was a  feeling that government was not listening to them; and there was fear of more immigrants coming into the country.

One of the sad points of the story, however, is the misinformation which got the vote passed.. It is true that all nations in Europe and the U.S. have been suffering through less than vibrant economic growth. The incorrect assumption is that immigration is the cause of loss of good paying jobs. Which is totally wrong. For example, in the United States, many Americans blame immigrants, especially from Mexico, of taking away many good paying jobs. But the loss of good paying jobs has, mainly, been in manufacturing and its associated jobs, which has nothing to do with immigration. Most of the jobs that immigrants take are very poor paying jobs (often less than the federal minimum wage). And a large percentage of these jobs are in agriculture (and believe me, they are almost no Americans willing to take those jobs – I have seen it in the 2009 recession). Certainly, there are small exceptions, for example, in Southern California, there are immigrants that make clothing, but the pay scale is close to minimum wage. Other than that, immigrant workers are not in the manufacturing area, except for the foreigners which come through working visas (which is altogether different problem that needs to be handled).

The real reason for the economic malaise is globalization and free trade. Put simply: tons of cheap stuff is being made by slave labor, sent without import tax (into US and Europe), underselling home made products. This phenomenon causes the loss of good-paying home-made manufacturing and associated jobs. US businesses pile on to the problem by eliminating American jobs and opening up plants in China, Vietnam, Mexico and India (offshoring). The impact hits hardest on the small towns and small businesses.

There is definitely a correlation between England’s Brexit Vote and the upcoming United States Presidential election. The electorate in the US is, also, quite angry (although for different reasons). The Left is angry due to economic inequality. This is basically The Occupy Wall Street movement which has a mistrust of the Big Banks and large corporations who have passed laws against the will of the people (like the Free Trade agreements such as NAFTA and the WTO and the on-going Trans-Pacific Partnership (TPP) agreement being negotiated). The Occupy movement is tired of the Republican policy of trickledown economics that have sent all the profits going to the top 1% of the population and destroying the jobs and depressing the wages of the middle class. The Right is angry, because it is just angry. This is the Tea Party. It is part nativism – fear of immigrants and people of color and part just angry in general which seems to be all directed at the 44th President of the United States and all government. They do not seem to have a plan for improvement but are against things in general. That is why year after year, the Republicans elect people to obstruct government from working.

Implication for the 2016 U.S. Presidential election.

Anger about the current situation is good, especially if you know the circumstances that are causing it and voting intelligently to reverse it. I can not say the Brexit vote was voted on intelligently – it seemed to be more of a protest vote. As many Pro-Brexit voters said afterwards, “I just voted to protest, I didn’t think it would pass.”  Well, it did pass and now their future is uncertain. Whether the decision for Britain to exit the European Union is good or bad, remains to be seen. If the British government just concentrates on immigration, then most asssuredly the British economic situation will  not improve because it is not the problem for the economic malaise in the first place and it would result most likely will cause a moderate to severe recession.

A lot of people who vote for change for the sake of change, never entertain the possibility that things could get worse. Take, for instance, recent U.S. history. In 2000, the American people were not satisfied with its best economic growth in decades with its rapid decline of the US federal deficit, so the US decided for a change. George W. Bush was elected. Instantly, he put the US into a two year recession and then 5 years later, the greatest depression since the Stock Market crash of 1929. Now, we are looking at replacing a President that has been behind 7 years of continuous economic growth, granted it is not robust, but it never will be – not until the Republican policies of trickle down and unrestricted Free Trade are eliminated.

The Candidates

The Presidential candidate for the Republican Party is Donald Trump who is pure Tea Party. He is a born-millionaire who has never talked to a middle class or poor person in over 50 years. The only issue that separates him from classic Tea Party is “Free Trade”. He says he is all for Free Trade but wants to change the treaties we already have, but without any specifics. Personally, he continues to outsource all of his clothing to China and does not talk about bringing these jobs back to the USA. Also, in a May rally in California, besides the chants for “Build the Wall” one of supporters said “Down with Free Trade and no to the TPP”. The supporter started the chant “No TPP”. Trump joined the chant saying “No PPP”. The fact that Trump who is against certain Free Trade agreements does not even know what the TPP is shows that he is truly clueless. He is definitely not serious about Free Trade or offshoring of US jobs. Nor does he talk about breaking up the big banks, he wants to repeal regulations placed on Wall Street which caused the Great Recession in the first place, and his tax plan gives more tax  breaks and decreased taxes for other millionaires like himself. He is the exact opposite of the Occupy Wall Street movement. His continuance of trickledown economics, his ideas of letting big corporations running things unabated and the continued off-shoring of US jobs is a giant disaster ten times worse than the election of George W. Bush, who was a horrible President.

The other candidate from the Democratic party is Hilary Clinton. She has stated she is for more regulation on Wall Street and the Big Banks. She has said that she is against the Trans-Pacific Partnership (TPP). ALthough, previously she said she was for it. Clinton is also in favor of raising the federal minimum age (Trump is against this). The knock on her is that her competition, Bernie Sanders, who is much more left, had vowed to break up the Big Banks and has been consistently against all Free Trade agreements for years. Sander’s message has resonated with the extreme left. Clinton’s more moderate views have left some Democratic voters without the fiery passion that Sanders brings.

The Outcome of the Presidential Election

The outcome of the United States will be determined by many things. The nativism movement – dislike of anybody that is otherwise white and of Western Europe- is popular in about 30% of the US population. This 30% will vote for Trump no matter what other policies he supports. The fear of immigrants is a large issue that touches a broader section of the USA. If Trump can convince Americans that immigrants are the problem, similar to Hitler convincing Nazi Germany that Jews were the problem, then Trump will win.

Mexico is not the problem, there is no net immigration from Mexico for years, they are not coming over the border to take good-paying American jobs. The bigger problem is American companies eliminating American manufacturing jobs, moving these jobs to Mexico. The work visa are actually a bigger problem to good paying jobs and this needs to be fixed.

Free Trade is a double edge sword. Free Trade is great for countries that have the same values, but it puts American jobs at risk in dealing with more impoverished countries with different values.

Financially, the United States is financially strong, it is resistant to recessions of many other countries. However, the middle class has diminished and the new profits need to be shared. Getting rid of trickledown policies would help this. Changing Free Trade policies with impoverished countries including China and investing in more American manufacturing would remedy this. If we don’t do this, eventually we will have no choice but to destroy the whole political process. But I do not think we are at that point – not for another 15-20 years.

Go figure that the American public thinks that Trump would be better for US economic situation. Yeah, if you want to file Chapter 11.

13
Jun
16

American Capitalism’s Great Crisis | TIME

Over the past four decades, the rules that govern the United States free-market system have been warped. That, Rana Foroohar argues in her new book, Makers and Takers, seriously imperils every American’s economic future. How we got here ad how to fix it,

Editor’s Note: This is the best article about our ailing economy in many years. It is complex, yet straightforward. Like other articles I have re-printed, after the end of the article  (if you don’t want to read the five page article), you can skip to the bullet points.

Source: American Capitalism’s Great Crisis | TIME

How Wall Street is choking our economy and how to fix it

A couple of weeks ago, a poll conducted by the Harvard Institute of Politics found something startling: only 19% of Americans ages 18 to 29 identified themselves as “capitalists.” In the richest and most market-oriented country in the world, only 42% of that group said they “supported capitalism.” The numbers were higher among older people; still, only 26% considered themselves capitalists. A little over half supported the system as a whole.

This represents more than just millennials not minding the label “socialist” or disaffected middle-aged Americans tiring of an anemic recovery. This is a majority of citizens being uncomfortable with the country’s economic foundation—a system that over hundreds of years turned a fledgling society of farmers and prospectors into the most prosperous nation in human history. To be sure, polls measure feelings, not hard market data. But public sentiment reflects day-to-day economic reality. And the data (more on that later) shows Americans have plenty of concrete reasons to question their system.

This crisis of faith has had no more severe expression than the 2016 presidential campaign, which has turned on the questions of who, exactly, the system is working for and against, as well as why eight years and several trillions of dollars of stimulus on from the financial crisis, the economy is still growing so slowly. All the candidates have prescriptions: Sanders talks of breaking up big banks; Trump says hedge funders should pay higher taxes; Clinton wants to strengthen existing financial regulation. In Congress, Republican House Speaker Paul Ryan remains committed to less regulation.

All of them are missing the point. America’s economic problems go far beyond rich bankers, too-big-to-fail financial institutions, hedge-fund billionaires, offshore tax avoidance or any particular outrage of the moment. In fact, each of these is symptomatic of a more nefarious condition that threatens, in equal measure, the very well-off and the very poor, the red and the blue. The U.S. system of market capitalism itself is broken. That problem, and what to do about it, is at the center of my book Makers and Takers: The Rise of Finance and the Fall of American Business, a three-year research and reporting effort from which this piece is adapted.

To understand how we got here, you have to understand the relationship between capital markets—meaning the financial system—and businesses. From the creation of a unified national bond and banking system in the U.S. in the late 1790s to the early 1970s, finance took individual and corporate savings and funneled them into productive enterprises, creating new jobs, new wealth and, ultimately, economic growth. Of course, there were plenty of blips along the way (most memorably the speculation leading up to the Great Depression, which was later curbed by regulation). But for the most part, finance—which today includes everything from banks and hedge funds to mutual funds, insurance firms, trading houses and such—essentially served business. It was a vital organ but not, for the most part, the central one.

Capitalism How to Save It Time Magazine Cover
TIME photo-illustration

Over the past few decades, finance has turned away from this traditional role. Academic research shows that only a fraction of all the money washing around the financial markets these days actually makes it to Main Street businesses. “The intermediation of household savings for productive investment in the business sector—the textbook description of the financial sector—constitutes only a minor share of the business of banking today,” according to academics Oscar Jorda, Alan Taylor and Moritz Schularick, who’ve studied the issue in detail. By their estimates and others, around 15% of capital coming from financial institutions today is used to fund business investments, whereas it would have been the majority of what banks did earlier in the 20th century.

“The trend varies slightly country by country, but the broad direction is clear,” says Adair Turner, a former British banking regulator and now chairman of the Institute for New Economic Thinking, a think tank backed by George Soros, among others. “Across all advanced economies, and the United States and the U.K. in particular, the role of the capital markets and the banking sector in funding new investment is decreasing.” Most of the money in the system is being used for lending against existing assets such as housing, stocks and bonds.

To get a sense of the size of this shift, consider that the financial sector now represents around 7% of the U.S. economy, up from about 4% in 1980. Despite currently taking around 25% of all corporate profits, it creates a mere 4% of all jobs. Trouble is, research by numerous academics as well as institutions like the Bank for International Settlements and the International Monetary Fund shows that when finance gets that big, it starts to suck the economic air out of the room. In fact, finance starts having this adverse effect when it’s only half the size that it currently is in the U.S. Thanks to these changes, our economy is gradually becoming “a zero-sum game between financial wealth holders and the rest of America,” says former Goldman Sachs banker Wallace Turbeville, who runs a multiyear project on the rise of finance at the New York City—based nonprofit Demos.

It’s not just an American problem, either. Most of the world’s leading market economies are grappling with aspects of the same disease. Globally, free-market capitalism is coming under fire, as countries across Europe question its merits and emerging markets like Brazil, China and Singapore run their own forms of state-directed capitalism. An ideologically broad range of financiers and elite business managers—Warren Buffett, BlackRock’s Larry Fink, Vanguard’s John Bogle, McKinsey’s Dominic Barton, Allianz’s Mohamed El-Erian and others—have started to speak out publicly about the need for a new and more inclusive type of capitalism, one that also helps businesses make better long-term decisions rather than focusing only on the next quarter. The Pope has become a vocal critic of modern market capitalism, lambasting the “idolatry of money and the dictatorship of an impersonal economy” in which “man is reduced to one of his needs alone: consumption.”

During my 23 years in business and economic journalism, I’ve long wondered why our market system doesn’t serve companies, workers and consumers better than it does. For some time now, finance has been thought by most to be at the very top of the economic hierarchy, the most aspirational part of an advanced service economy that graduated from agriculture and manufacturing. But research shows just how the unintended consequences of this misguided belief have endangered the very system America has prided itself on exporting around the world.

America’s economic illness has a name: financialization. It’s an academic term for the trend by which Wall Street and its methods have come to reign supreme in America, permeating not just the financial industry but also much of American business. It includes everything from the growth in size and scope of finance and financial activity in the economy; to the rise of debt-fueled speculation over productive lending; to the ascendancy of shareholder value as the sole model for corporate governance; to the proliferation of risky, selfish thinking in both the private and public sectors; to the increasing political power of financiers and the CEOs they enrich; to the way in which a “markets know best” ideology remains the status quo. Financialization is a big, unfriendly word with broad, disconcerting implications.

University of Michigan professor Gerald Davis, one of the pre-eminent scholars of the trend, likens financialization to a “Copernican revolution” in which business has reoriented its orbit around the financial sector. This revolution is often blamed on bankers. But it was facilitated by shifts in public policy, from both sides of the aisle, and crafted by the government leaders, policymakers and regulators entrusted with keeping markets operating smoothly. Greta Krippner, another University of Michigan scholar, who has written one of the most comprehensive books on financialization, believes this was the case when financialization began its fastest growth, in the decades from the late 1970s onward. According to Krippner, that shift encompasses Reagan-era deregulation, the unleashing of Wall Street and the rise of the so-called ownership society that promoted owning property and further tied individual health care and retirement to the stock market.

The changes were driven by the fact that in the 1970s, the growth that America had enjoyed following World War II began to slow. Rather than make tough decisions about how to bolster it (which would inevitably mean choosing among various interest groups), politicians decided to pass that responsibility to the financial markets. Little by little, the Depression-era regulation that had served America so well was rolled back, and finance grew to become the dominant force that it is today. The shifts were bipartisan, and to be fair they often seemed like good ideas at the time; but they also came with unintended consequences. The Carter-era deregulation of interest rates—something that was, in an echo of today’s overlapping left-and right-wing populism, supported by an assortment of odd political bedfellows from Ralph Nader to Walter Wriston, then head of Citibank—opened the door to a spate of financial “innovations” and a shift in bank function from lending to trading. Reaganomics famously led to a number of other economic policies that favored Wall Street. Clinton-era deregulation, which seemed a path out of the economic doldrums of the late 1980s, continued the trend. Loose monetary policy from the Alan Greenspan era onward created an environment in which easy money papered over underlying problems in the economy, so much so that it is now chronically dependent on near-zero interest rates to keep from falling back into recession.

This sickness, not so much the product of venal interests as of a complex and long-term web of changes in government and private industry, now manifests itself in myriad ways: a housing market that is bifurcated and dependent on government life support, a retirement system that has left millions insecure in their old age, a tax code that favors debt over equity. Debt is the lifeblood of finance; with the rise of the securities-and-trading portion of the industry came a rise in debt of all kinds, public and private. That’s bad news, since a wide range of academic research shows that rising debt and credit levels stoke financial instability. And yet, as finance has captured a greater and greater piece of the national pie, it has, perversely, all but ensured that debt is indispensable to maintaining any growth at all in an advanced economy like the U.S., where 70% of output is consumer spending. Debt-fueled finance has become a saccharine substitute for the real thing, an addiction that just gets worse. (The amount of credit offered to American consumers has doubled in real dollars since the 1980s, as have the fees they pay to their banks.)

As the economist Raghuram Rajan, one of the most prescient seers of the 2008 financial crisis, argues, credit has become a palliative to address the deeper anxieties of downward mobility in the middle class. In his words, “let them eat credit” could well summarize the mantra of the go-go years before the economic meltdown. And things have only deteriorated since, with global debt levels $57 trillion higher than they were in 2007.

The rise of finance has also distorted local economies. It’s the reason rents are rising in some communities where unemployment is still high. America’s housing market now favors cash buyers, since banks are still more interested in making profits by trading than by the traditional role of lending out our savings to people and businesses looking to make longterm investments (like buying a house), ensuring that younger people can’t get on the housing ladder. One perverse result: Blackstone, a private-equity firm, is currently the largest single-family-home landlord in America, since it had the money to buy properties up cheap in bulk following the financial crisis. It’s at the heart of retirement insecurity, since fees from actively managed mutual funds “are likely to confiscate as much as 65% or more of the wealth that … investors could otherwise easily earn,” as Vanguard founder Bogle testified to Congress in 2014.

It’s even the reason companies in industries from autos to airlines are trying to move into the business of finance themselves. American companies across every sector today earn five times the revenue from financial activities—investing, hedging, tax optimizing and offering financial services, for example—that they did before 1980. Traditional hedging by energy and transport firms, for example, has been overtaken by profit-boosting speculation in oil futures, a shift that actually undermines their core business by creating more price volatility. Big tech companies have begun underwriting corporate bonds the way Goldman Sachs does. And top M.B.A. programs would likely encourage them to do just that; finance has become the center of all business education.

Washington, too, is so deeply tied to the ambassadors of the capital markets—six of the 10 biggest individual political donors this year are hedge-fund barons—that even well-meaning politicians and regulators don’t see how deep the problems are. When I asked one former high-level Obama Administration Treasury official back in 2013 why more stakeholders aside from bankers hadn’t been consulted about crafting the particulars of Dodd-Frank financial reform (93% of consultation on the Volcker Rule, for example, was taken with the financial industry itself), he said, “Who else should we have talked to?” The answer—to anybody not profoundly influenced by the way finance thinks—might have been the people banks are supposed to lend to, or the scholars who study the capital markets, or the civic leaders in communities decimated by the financial crisis.

Of course, there are other elements to the story of America’s slow-growth economy, including familiar trends from globalization to technology-related job destruction. These are clearly massive challenges in their own right. But the single biggest unexplored reason for long-term slower growth is that the financial system has stopped serving the real economy and now serves mainly itself. A lack of real fiscal action on the part of politicians forced the Fed to pump $4.5 trillion in monetary stimulus into the economy after 2008. This shows just how broken the model is, since the central bank’s best efforts have resulted in record stock prices (which enrich mainly the wealthiest 10% of the population that owns more than 80% of all stocks) but also a lackluster 2% economy with almost no income growth.

Now, as many top economists and investors predict an era of much lower asset-price returns over the next 30 years, America’s ability to offer up even the appearance of growth—via financially oriented strategies like low interest rates, more and more consumer credit, tax-deferred debt financing for businesses, and asset bubbles that make people feel richer than we really are, until they burst—is at an end.

This pinch is particularly evident in the tumult many American businesses face. Lending to small business has fallen particularly sharply, as has the number of startup firms. In the early 1980s, new companies made up half of all U.S. businesses. For all the talk of Silicon Valley startups, the number of new firms as a share of all businesses has actually shrunk. From 1978 to 2012 it declined by 44%, a trend that numerous researchers and even many investors and businesspeople link to the financial industry’s change in focus from lending to speculation. The wane in entrepreneurship means less economic vibrancy, given that new businesses are the nation’s foremost source of job creation and GDP growth. Buffett summed it up in his folksy way: “You’ve now got a body of people who’ve decided they’d rather go to the casino than the restaurant” of capitalism.

In lobbying for short-term share-boosting management, finance is also largely responsible for the drastic cutback in research-and-development outlays in corporate America, investments that are seed corn for future prosperity. Take share buybacks, in which a company—usually with some fanfare—goes to the stock market to purchase its own shares, usually at the top of the market, and often as a way of artificially bolstering share prices in order to enrich investors and executives paid largely in stock options. Indeed, if you were to chart the rise in money spent on share buybacks and the fall in corporate spending on productive investments like R&D, the two lines make a perfect X. The former has been going up since the 1980s, with S&P 500 firms now spending $1 trillion a year on buybacks and dividends—equal to about 95% of their net earnings—rather than investing that money back into research, product development or anything that could contribute to long-term company growth. No sector has been immune, not even the ones we think of as the most innovative. Many tech firms, for example, spend far more on share-price boosting than on R&D as a whole. The markets penalize them when they don’t. One case in point: back in March 2006, Microsoft announced major new technology investments, and its stock fell for two months. But in July of that same year, it embarked on $20 billion worth of stock buying, and the share price promptly rose by 7%. This kind of twisted incentive for CEOs and corporate officers has only grown since.

As a result, business dynamism, which is at the root of economic growth, has suffered. The number of new initial public offerings (IPOs) is about a third of what it was 20 years ago. True, the dollar value of IPOs in 2014 was $74.4 billion, up from $47.1 billion in 1996. (The median IPO rose to $96 million from $30 million during the same period.) This may show investors want to make only the surest of bets, which is not necessarily the sign of a vibrant market. But there’s another, more disturbing reason: firms simply don’t want to go public, lest their work become dominated by playing by Wall Street’s rules rather than creating real value.

An IPO—a mechanism that once meant raising capital to fund new investment—is likely today to mark not the beginning of a new company’s greatness, but the end of it. According to a Stanford University study, innovation tails off by 40% at tech companies after they go public, often because of Wall Street pressure to keep jacking up the stock price, even if it means curbing the entrepreneurial verve that made the company hot in the first place.

A flat stock price can spell doom. It can get CEOs canned and turn companies into acquisition fodder, which often saps once innovative firms. Little wonder, then, that business optimism, as well as business creation, is lower than it was 30 years ago, or that wages are flat and inequality growing. Executives who receive as much as 82% of their compensation in stock naturally make shorter-term business decisions that might undermine growth in their companies even as they raise the value of their own options.

It’s no accident that corporate stock buybacks, corporate pay and the wealth gap have risen concurrently over the past four decades. There are any number of studies that illustrate this type of intersection between financialization and inequality. One of the most striking was by economists James Galbraith and Travis Hale, who showed how during the late 1990s, changing income inequality tracked the go-go Nasdaq stock index to a remarkable degree.

Recently, this pattern has become evident at a number of well-known U.S. companies. Take Apple, one of the most successful over the past 50 years. Apple has around $200 billion sitting in the bank, yet it has borrowed billions of dollars cheaply over the past several years, thanks to superlow interest rates (themselves a response to the financial crisis) to pay back investors in order to bolster its share price. Why borrow? In part because it’s cheaper than repatriating cash and paying U.S. taxes. All the financial engineering helped boost the California firm’s share price for a while. But it didn’t stop activist investor Carl Icahn, who had manically advocated for borrowing and buybacks, from dumping the stock the minute revenue growth took a turn for the worse in late April.

It is perhaps the ultimate irony that large, rich companies like Apple are most involved with financial markets at times when they don’t need any financing. Top-tier U.S. businesses have never enjoyed greater financial resources. They have a record $2 trillion in cash on their balance sheets—enough money combined to make them the 10th largest economy in the world. Yet in the bizarre order that finance has created, they are also taking on record amounts of debt to buy back their own stock, creating what may be the next debt bubble to burst.

You and I, whether we recognize it or not, are also part of a dysfunctional ecosystem that fuels short-term thinking in business. The people who manage our retirement money—fund managers working for asset-management firms—are typically compensated for delivering returns over a year or less. That means they use their financial clout (which is really our financial clout in aggregate) to push companies to produce quick-hit results rather than execute long-term strategies. Sometimes pension funds even invest with the activists who are buying up the companies we might work for—and those same activists look for quick cost cuts and potentially demand layoffs.

It’s a depressing state of affairs, no doubt. Yet America faces an opportunity right now: a rare second chance to do the work of refocusing and right-sizing the financial sector that should have been done in the years immediately following the 2008 crisis. And there are bright spots on the horizon.

Despite the lobbying power of the financial industry and the vested interests both in Washington and on Wall Street, there’s a growing push to put the financial system back in its rightful place, as a servant of business rather than its master. Surveys show that the majority of Americans would like to see the tax system reformed and the government take more direct action on job creation and poverty reduction, and address inequality in a meaningful way. Each candidate is crafting a message around this, which will keep the issue front and center through November.

The American public understands just how deeply and profoundly the economic order isn’t working for the majority of people. The key to reforming the U.S. system is comprehending why it isn’t working.

Remooring finance in the real economy isn’t as simple as splitting up the biggest banks (although that would be a good start). It’s about dismantling the hold of financial-oriented thinking in every corner of corporate America. It’s about reforming business education, which is still permeated with academics who resist challenges to the gospel of efficient markets in the same way that medieval clergy dismissed scientific evidence that might challenge the existence of God. It’s about changing a tax system that treats one-year investment gains the same as longer-term ones, and induces financial institutions to push overconsumption and speculation rather than healthy lending to small businesses and job creators. It’s about rethinking retirement, crafting smarter housing policy and restraining a money culture filled with lobbyists who violate America’s essential economic principles.

It’s also about starting a bigger conversation about all this, with a broader group of stakeholders. The structure of American capital markets and whether or not they are serving business is a topic that has traditionally been the sole domain of “experts”—the financiers and policymakers who often have a self-interested perspective to push, and who do so in complicated language that keeps outsiders out of the debate. When it comes to finance, as with so many issues in a democratic society, complexity breeds exclusion.

Finding solutions won’t be easy. There are no silver bullets, and nobody really knows the perfect model for a high-functioning, advanced market system in the 21st century. But capitalism’s legacy is too long, and the well-being of too many people is at stake, to do nothing in the face of our broken status quo. Neatly packaged technocratic tweaks cannot fix it. What is required now is lifesaving intervention.

Crises of faith like the one American capitalism is currently suffering can be a good thing if they lead to re-examination and reaffirmation of first principles. The right question here is in fact the simplest one: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer at the moment is mostly no. But we can change things. Our system of market capitalism wasn’t handed down, in perfect form, on stone tablets. We wrote the rules. We broke them. And we can fix them.

forooharbook

Foroohar is an assistant managing editor at TIME and the magazine’s economics columnist. She’s the author of Makers and Takers: The Rise of Finance and the Fall of American Business.
This appears in the May 23, 2016 issue of TIME.

TIME Ideas hosts the world’s leading voices, providing commentary on events in news, society, and culture. We welcome outside contributions. Opinions expressed do not necessarily reflect the views of TIME editors.




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