Let's Jump-Start U.S. Business

Thursday, 21 Jul 2011 11:32 AM

By Hans D. Baumann

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I worry about my country. We used to be wealthy, owed nobody money, had a balanced budget and low unemployment. So what happened?

The answer is, we stopped producing wealth. Wealth is typically produced by three activities: Agriculture, which was the predominant  in the 18th century, mining (including oil production) which was prominent in the 19th century, and finally manufacturing, reaching its peak in the 20th century.

What changed all this? Starting at the close of the last century, we have seen a very rapid decrease in U.S. manufacturing capability forced by outsourcing of labor and capital to foreign countries. The reasons typically given for doing this was that hourly wages in countries such as China or Mexico were lower than in the U.S.

This did not always make sense, since cost of labor constitutes only about 10 percent to 18 percent of the sales price of a product. From these apparent savings you have to deduct the cost of transportation, increase overhead, import duty and perhaps extra inventory.

However, there is another motivation for outsourcing which understandably is much less advertised. That is, by manufacturing abroad, corporations can hide assets abroad, relocate profits and finally by leaving profits abroad, they can save substantial sums of U.S. corporate income taxes. This is one of the reasons why, with an official corporate tax rate of 35 percent, the actually collected rate is only around 23 percent!

Primarily as a result of the outsourcing activity, the percentage of people employed in manufacturing went from 26 percent of the working population down to less than 8 percent today (there was some decrease due to automation, but this was minor).

The apologists of outsourcing say, Do not worry, we still manufacture more than China to the tune of 1.7 trillion dollars per year. This is highly misleading since it counts all manufactured goods produced by U.S. companies abroad (about 60 percent of the total). This then leaves only a dismal $700 billion produced in this country.

We had to import more and as a result, our foreign debt soared, increasing by over 800 billion dollar in 2006 alone and reaching a grand total of about 6.5 trillion dollars today.

Add to this our budget deficit and you get the present over 14 trillion dollars US national debt.

When I combined our debt data from the Treasury Department with the employment data from the U.S. Dept. of Labor statistics, I found a direct correlation between the decrease in manufacturing labor and the increase in our national debt. For example, in 1980, we had lost 22 percent of industrial workers and the national debt stood at 32 percent of GDP, yet, in 2010 we had lost 68 percent of the manufacturing work force resulting in the debt increasing to 91 percent of GDP.

Lesson: the fewer the workers, the higher our national debt. This has to be reversed.

We now are a nation of consumers where private consumption amounts to 71 percent of GDP. Contrast that with China where consumption only reaches 34 percent of GDP, yet they have a current account trade surplus of 9 percent of GDP. Compare this to our -5 percent current account (The Economist, Pocket World in Figures, 2011 Edition).

We are importing about $400 billion per year on goods ranging from auto parts to toys. Practically all of this could be manufactured here. Such a move back could add 4 million factory workers to the payroll.

Considering that one factory worker could in turn support about two employees in the service sector, this would mean an increase in employment of 12 million persons, enough to practically wipe out unemployment in this country.

How can we get out of this mess? Here's what industry can do. Repatriate the approximately $1.2 trillion (per CNBC-TV) of profit made in foreign countries and invest these sums in our country in order to increase our manufacturing capacity.

Regardless of what President Barack Obama says, we cannot double our exports in the next five years without first doubling our manufacturing capability.

Here's what the government can do. Give tax advantages to U.S. domestic manufacturing (i.e., reduce the corporate income tax to 22 percent). This will discourage manufacturing abroad. Then, subsidize loans for building new manufacturing plants.

The government should feed stimulus money into the manufacturing sector and provide loan guarantees to exporters. It should focus federal job training programs towards metal working jobs, and force repatriation of corporate profits from abroad. Then reintroduce vocational training in high schools. Finally, allow the U.S. dollar to depreciate further in order to make our goods more competitive abroad and to reduce imports from abroad.

The time to act is now!


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