Government policies are de-industrializing the US.
Taxes and regulations coupled with free trade treaties are destroying industry in the US. by David S
(libertarian)
Wednesday, July 28, 2010
Government policies are de-industrializing the US.
Some will say that the following comments are protectionist. But the policies we follow now are in fact reverse protectionism. Our government gives all the advantages to manufacturers in China and other low cost countries while at the same time giving all the disadvantages to our own domestic manufacturers. Let me give a few examples:
US manufacturers pay income taxes to the federal and state governments. That amounts to billions of dollars per year.
Chinese manufacturers pay no income taxes to the US.
US manufacturers must pay payroll taxes on every employee. That adds 7% to the cost of labor.
Manufacturers in China don'thave to do that.
US manufacturers pay property taxes to local communitieson their plants.
China doesn't.
US manufacturers must comply with OSHA and EPA regulations. That costs money.
China doesn't have to do that.
In China the wage for manufacturing labor is about a buck-an-hour.
In the US even the minimum wage by law is 7 times that amount.
When you add up all those factors the advantage for the low cost countries becomes insurmountable. Even industrial robots can't compete against $1 per hour labor. The cost of a robot might be a quarter of a million dollars and that cost can't be justified vs. $1 per hour labor.
After WWII the US emerged as the world's powerhouse in manufacturing. And manufacturing provided decent paying jobs for millions of people who didn't have high level skills. Those jobs are rapidly disappearing now or are being replaced by low paying jobs. And that is certainly adding to our current economic mess. People who were making $20 per hour could afford their mortgage payments. But if they are now making $10 per hour they can't. So it's increasing the foreclosure problem too.
And the high tech jobs that were promised as replacements for manufacturing jobs haven't really materialized either. If you call a helpline for assistance with your PC or software the odds are you'll be talking to someone in Mexico or India, not the US.
All of the differentials mentioned above were known before NAFTA and GATT were adopted. In fact all of those differentials are the direct result of laws imposed by government. The taxes, the regulations, the minimum wage and the free trade deals are all imposed by government. And the collective result of those laws is that American manufacturers are now forced to compete in a situation where they are legally prevented from being competitive. Their only option is to move their operations off shore or go out of business. It didn't take a genius to predict this outcome. What did government think would happen? Ross Perot predicted it during his 1992 presidential bid. One wonders how many unemployed workers who voted for Clinton would change their vote now if they could.
There is a simple way to help remedy the situation. The US Constitution clearly authorizes congress to levy tariffs on imports, and in fact this was done throughout much of our history. Some folks will claim that the Smoot Hawley tariff caused the great depression. But there are two facts that contradict that claim:
1) Smoot Hawley was passed after the depression began so it could not have caused it.
2) Before Smoot Hawley there was the Fordney McCumber tariff of 1922. It raised tariff rates almost as high as Smoot Hawley but it was not followed by a depression.
We can either sit back and watch as America becomes a non-industrial nation or we can demand that congress tax the imports and take taxes off our own manufacturers. What's your opinion?
Disclosure: It's only fair that I tell you I'm a retired automotive engineer and I still collect a pension from my former employer.
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Smoot Hawley most assuredly did not cause the Great Depression, but there is also very little doubt that it contributed to extending the Depression far longer than it needed to last. Exports under Smoot Hawley declined by 61%...hardly a formula for economic recovery.
The solution to jobs going overseas is to allow competition to the current monetary system via separate, independent, limited money supplies in the form of gold, silver, or other precious metals, not to block other countries' workers from competing with U.S. workers. It's the debt-based dollar which has driven the cost of U.S. labor higher than foreign labor, thereby both creating extensive poverty abroad while simultaneously driving up the cost of living at home.
Monetarists like to argue that Smoot Hawley had very little impact on the Depression, but that's because they like to focus on the rapid contraction of the money supply which drove the Depression, a contraction which was caused by Presidents Wilson's, Harding's, Coolidge's, and Hoover's Fed-driven monetarist policies in combination with the forced indexing of paper to gold forced for so long to trade at $20.65 per ounce in the first place. If the price of gold had been permitted to float in exchange for paper money, the entire scenario would have played out dramatically differently, and for the better. In fact, it's likely that there would have been no Depression, and that paper money would have driven itself out of favor entirely. Only tying paper to gold at a fixed rate allowed paper to flourish (in the form of legalized counterfeiting via expanding bank deposits through bank loans, aka fractional reserve banking) while giving President Roosevelt the opportunity to blame gold for all the country's woes.
The most important reason Smoot-Hawley did not have a serious impact on the Great Depression is that at the time trade was too small to have done that much damage. Trade was 6 percent of GDP and declined to 2 percent. A 4 percent decline is not enough to do all that damage. Most of what we imported at the time was products used to make other products. In Ben Bernanke’s “Essays on the Great Depression” there is the claim that such imports actually decline in price with the increased tariffs due to weak demand.
Even before Smoot-Hawley the United States was the most trade protected in the world and had been for more than a hundred years. Much of what the middle class gained from a long period of trade protection we have forfeited in a short period of free trade.
Posted By: David S
Date: July 28, 2010 12:56:44 PM
Walt
I have no disagreement with your comment that the depression was caused by the forced indexing of paper to gold, coupled with monetary policy. But your proposed solution to jobs going overseas would not alter the cost differentials I mentioned. It would not change the tax penalty paid by US manufacturers, but not by China. It would not relieve US manufacturers of OSHA and EPA regulations nor would it inflict them on China. And it would not affect the wage differential.
I think eliminating the taxes on US manufacturers would be a good idea. Streamlining the OSHA regulations might be good although I would not recommend eliminating them altogether. I know three people personally who lost fingers in punch presses years ago. That was common in the past but has been greatly reduced by mandatory safety features on the machines. That's a good thing, but it costs money and China doesn't care about it.
But the biggest difference is the wage. China pays a subsistence level wage of about $1 per hour. Their US counterparts make a more comfortable wage of $10 to $25 for manufacturing jobs. Would your proposed change cause US wages to fall to $1 per hour? In the US that would not even be a survival level income. Would it cause Chinese wages to rise to $10 per hour? China is still a communist country. The wage is whatever they say it is, so if they say their wage is $1 per hour then it is. And their government likes the low wage since it gives them a huge trade advantage. They also have resisted any revaluation of their currency for the same reason.
I'll be the first to admit that the US labor unions have driven wages and benefits to an unrealistic level. Before the recent recession, unskilled workers on automotive assembly lines earned as much as $25 per hour and their medical plans were better than what doctors have! They definitely needed a whack on the head to bring them back to reality. But the free trade deals have given them a bullet to the head. They have no chance in this situation.
But the question you fail to address regarding the wage, the same question most people fail to address, is WHY the wage differential is so great. Mostly, it has to do with inflationary money. Cutting off free trade will do NOTHING to address that issue.
To a lesser degree wage differences also have to do with differences in skill levels. The market tends to take care of that too. Many U.S. companies, for instance, that jumped at Indian labor rates in computer-related fields have since pulled back because they found that Indian laborers simply didn't have the same skill levels (in addition to language barriers, etc.). And as Indian labor skills have increased, so have their labor rates.
Again, let me reiterate...protectionism will do nothing to address either of those two sides of the issue. And as you say, wage is the big issue.
Hi David, tariffs are never good as they simply allow local un competitive producers to have an advantage over foreign goods. they also raise the cost of living for consumers at home and punish foreign laborers.
what about this.............shipping is a cost of doing business in a faraway place. yet, the transportation infrastructure is built by the state. why not charge full cost for the use of any transport system, whether train, road, airports, etc.? this would level the playing field for local production, not to mention take the burden of the shipping subsidy off taxpayers.
also, if the government is going to charge income taxes on goods, then local and foreign producers should be subject to the same rules. multinationals shouldn't be allowed to "sell" their own in house products to themselves from offshore to onshore at inflated prices [to lower profit shown at home] in order to avoid income taxes that local producers have to pay.
Posted By: David S
Date: July 28, 2010 07:38:00 PM
In my opinion two things make America a great place:
1)Freedom
2)The prosperity that has resulted from it.
China is a little short on both of those things. In America, prior to the recession, we reached a level of prosperity where we could work 40 hours a week, make enough to cover basic expenses and still have enough money for a few amenities. In China most people work much longer hours just to get a survival level income. These videos give a hint at their conditions. http://www.youtube.com/watch?v=Y2TLl6Nj6Oo http://www.youtube.com/watch?v=yQPrbwWWUD4&NR=1
That's why their wages are so much lower. Now instead of thinking of wages in dollars think of wages in terms of what they get for their labor.
In the USA for 40 hours work per week you can get food, clothing, a modest house, a car and maybe a few toys.
In China you work 12 hours a day 7 days a week to earn a subsistence level income and a really dumpy place to live.
So if American workers want to compete against Chinese workers they have to be willing to accept the same conditions as the Chinese workers. But why would we want to subject our fellow Americans to such a hellish existence?
My wife and I were out shopping, and it suddenly occurred to me that there's an excellent example about what high tariffs and other forms of protectionism did here in America for the steel industry. The combined efforts of American steel companies, unions, and the governments fought hard against foreign imports. The results are admirably summarized by Billy Joel:
Well we're living here in Allentown And they're closing all the factories down Out in Bethlehem they're killing time Filling out forms Standing in line.
Well our fathers fought the Second World War Spent their weekends on the Jersey Shore Met our mothers at the USO Asked them to dance Danced with them slow And we're living here in Allentown.
But the restlessness was handed down And it's getting very hard to staaaaaaaaaaaaaaaaaaaaaaaaaaaay aaaaaaah aaahhhhh ooooooooh ooooooh ohhhhhhh.
Well we're waiting here in Allentown For the Pennsylvania we never found For the promises our teachers gave If we worked hard If we behaved.
So the graduations hang on the wall But they never really helped us at all No they never taught us what was real Iron or coke, Chromium steel.
And we're waiting here in Allentown. But they've taken all the coal from the ground And the union people crawled awaaaaaaaaaaaaaaaaaaay aaaaaaaaaaaaaaaaaaaah aaaaaaaaaaah aaaaaah.
Every child had a pretty good shot To get at least as far as their old man got. If something happened on the way to that place They threw an American flag in our face, oh oh oh.
Well I'm living here in Allentown And it's hard to keep a good man down. But I won't be getting up todaaaaaaaaaaaaaaaaaayyyyyyyy aaaaaaaaaaah aaaaaaaaaaah aaaaaaaaah.
GUITAR SOLO
aaaaaaah aaaaaaah aaaaaaah oh oh oh.
And it's getting very hard to staaaaaaaaaaaaaay. And we're living here in Allentown.
david, your comment leaves out quite a few things.
our prosperity was more than in a little part due to the fact that we took over a land mass that was already occupied, that happened to be to richest source of resources left on the planet in unmolested form. Europe was entirely depleted and the euros had depleted central and south america and the african continent.
it was also due to the exact same conditions you describe in china, folks working sixty hour work weeks in order to survive, the exact industrial conditions our country was built upon. the "later" prosperity that you are dwelling on is only the result of the union movement and the compromise of the welfare state. without that, we would still living in the "robber baron" era, workers heads being blugeoned by police batons. no doubt our labor would then be competitive.
our freedom has always been relative. a native american, woman or black living in the 18 and 19 hundredss would find little solace in our freedom.
Posted By: David S
Date: July 30, 2010 02:12:49 PM
Walt
I'm sorry but I don't think I know how to debate a song.
gede
Much of what you say is correct. There was certainly exploitation of labor in the early years of the US. And Unions did help to solve those problems. Where the unions went wrong was they went too far. They drove wages and benefit costs to unrealistic levels. And they created crazy policies like giving laid off employees 95% of their pay. That's no way to compete. But yes they did bring about greater fairness for employees and made it possible for working people to have good lives. The free trade deals would either put us back into the days of the Robber Barons that you mentioned, or put us out of business. Current experience seems to show the latter to be happening.
Yes the US was rich in natural resources. The former USSR was rich in natural resources too. But it's economy was smothered by decades of socialism. What it was lacking was a free enterprise system and entrepreneurs who could make things happen. The US had those things and our economy flourished.
Yes there was slavery in the US. It's also true that women and blacks did not have the right to vote either. Fortunately both of those problems were corrected by Constitutional amendments many years ago. I maintain that the US offered more freedom to its people throughout its history than most other countries at the same point in time.
The song was apropos to the topic, which is why I mentioned it. Learning from history is important, and the history of protectionism is very, very bad.
I think it's also no coincidence that after experimenting with protectionism starting with the 1970s, we now find ourselves with so little liberty left 30-40 years later here within the U.S. When one is willing to trade liberty for jobs internationally, the trend away from liberty is also likely to occur domestically as well.
I don't have time to do a complete article on the subject, David. I suggest you do some reading of history on your own. You might start with the Wikipedia article on the subject of Bethlehem Steel which says in part, "Inexpensive steel imports and the failure of management to innovate, embrace technology, and improve labor conditions contributed to Bethlehem's demise. Critics of protectionist steel trade policies attribute the cause of this lack of competitiveness to American steel producers like Bethlehem having been shielded from foreign competition by quotas, voluntary export restraints, minimum price undertakings, and antidumping and countervailing duty measures which were in effect for the three decades preceding Bethlehem Steel's collapse." (My emphasis)
Bethlehem Steel, of course, was originally headquartered in Allentown, PA.
The Law, by Frederick Bastiat (See in particular the section containing this quote: "As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.") as well as the section that follows it, entitled, "Slavery and Tariffs Are Plunder"
Also, it should be noted that tariffs were a major cause of the American Civil War.
what you mention about the excesses of unions was the devil's bargain they made with big industry and the state. they gave up the right to very effective techniques and methods of striking in order to enforce many of their demands through law as opposed to contract. unions stopped representing "all workers" and begin to represent specific classes of workers, advantaging them over other workers.
what you refer to as our "free enterprise" system was and is actually corporate socialism. we may have benefitted in some ways from our government subsidizing our industry and business, but we never had or have free enterprise, unless you consider what is out there free. Certainly a nation of taxpayers donating to the creation of a monopoly industrial system will further that system much more than say russia, where the spoils of an inefficient system is divided and consumed by a few.
The USSR also never had near the agricultural capacity that the US has due to the largest swath of temperate zone climate in the world.
Our economy is now being "smothered by decades of socialism" of a different sort. the average difference between the costs of a corporate industry product and the selling price in America is fifty percent. Where is the competition in that statistic? Where are the firms that will sell for a markup of say 42% or 37%?
Labor input varies but 30% of selling price might be a high figure. how can the product "sell" when the wage is 30% of selling price before wage taxes, which are consistently higher than any other sector? who do you sell the product to?
Economic problems we have are systemic and inherent to the controlled system. I would never call that free enterprise.
Posted By: David S
Date: August 9, 2010 03:44:01 PM
OK I'm back from vacation
Walt
The Wikipedia article also says: Bethlehem Steel was also one of the largest shipbuilding companies in the world and one of the most powerful symbols of American industrial manufacturing leadership. [B]Bethlehem Steel's demise is often cited as one of the most prominent examples of the U.S. economy's shift away from industrial manufacturing and its inability to compete with cheap foreign labor.[/B]
Anyway the point of my article is that US manufacturers are boxed in by US laws which make it impossible for them to compete against dirt cheap foreign labor.
Let me make you the CEO of a hypothetical US manufacturing company. Your products are being undersold by products made in China. If you don't do something you will go out of business.
You can't reduce your labor costs below the minimum wage.
You can't avoid paying social security taxes
You can't avoid other taxes
You can't avoid federal regulations
OK now what will you do to save your company from bankruptcy?
Let me make you the CEO of a hypothetical US manufacturing company. Your products are being undersold by products made in China. If you don't do something you will go out of business.
You can't reduce your labor costs below the minimum wage.
You can't avoid paying social security taxes
You can't avoid other taxes
You can't avoid federal regulations
OK now what will you do to save your company from bankruptcy?
Very simple. We must change the currency and banking laws. This is what I alluded to earlier. What you don't seem to realize is that debt-based money is the root cause of this problem (just as it is the root cause of virtually every other political issue we face today). It's not "cheap labor". It's the fact that the cost of living has been driven so high in this country by debt-based money, in combination with those self-same laws you referred to, such that manufacturers often can't stay in business.
But the cure isn't to ban foreign labor. Global markets always punish countries that engage in protectionism. That's a given. So instead of looking in that direction, look toward the money supply and banking system itself.
Fiat, debt-based money not only forces our cost of living up, it forces people in other countries to continue to live in poverty. It increases the gap between rich and poor. This is, in part, due to the fact that the dollar (as weak as it is) is a global reserve currency, while the currencies of other countries are much weaker (and that's saying something!). The net result is that the only way for foreign workers to scrape together a living is to accept pittance wages, while their economies continue to flounder and their corrupt politicians line their pockets. Pay special attention to the World Bank and the International Monetary Fund, both of which have a long history of doing their level best to make debtors out of third world countries at huge levels that can never be paid off. Why do they do it? Because they don't care about the loans. That money never really existed in the first place. They care about collecting the interest, and it's the interest that is bankrupting those countries. The U.S. is now the largest debtor nation in the world (although we are not the most in-debt in comparison to our economic output...see Europe and Asia for those "leaders").
Now, look what happens when you allow currency competition and legalize the use of gold and silver as money. Because the hard currency can't be manipulated anywhere nearly as easily by the guys on top, and because hard currency is more desirable to hold than soft currency, gold and silver would quickly become leading currencies here in the U.S. Despite the complaints that the rest of the world like to make about the U.S., the fact is that they would feel pressured to follow the same lead and permit the use of hard currency, in order to keep up economically. Meanwhile, debt-based currency quickly goes into hyperinflation due to the influence of the competing hard currencies, and the overall trend tends away from separating rich from poor. A side benefit is that differences in labor costs between countries starts reducing.
It's important to allow hard metals to operate as separate currencies, not only from debt-based currencies, but also from each other. The main reason why the gold standard failed was the forced indexing of paper and gold at a fixed price. A similar thing happened in the late 19th century, when "bimetalism" forced the indexing of gold to silver, making us prime targets of British bankers who convinced the U.S. Congress to stop producing silver coinage. This was the root of the "Free Silver" movement, and in combination with country's balance of payments measured in gold wreaked havoc on the American economy in the last 30 years of the 19th Century.
Want to speed up the process even quicker? Make it illegal for banks to lend out depositors' money which does not belong to the banks without the depositors' permission on a case-by-case basis, and make it illegal for banks to lend out money long-term that they promise to return to investors in the short-term. This would eliminate the ability of banks to lend huge amounts of money by creating it out of thin air (by virtue of taking deposits in the first place), thereby preventing the money supply from skyrocketing in the short term and reducing the cost of living for all in the long-term. The result: prices would actually begin to decrease at a slow, steady rate, which they're supposed to do in a market economy (and certainly would do if we had a free market). People would have the incentive to put more money aside in the form of savings, knowing that the value of that savings won't erode away over time.
The whole process would happen a lot quicker than you might imagine. For instance, in colonial times, after colonies experimented with paper money for years with disastrous results, once the people abandoned fiat money and started using gold and silver instead, economies righted themselves in remarkably short times, usually a year or less.
It's interesting to note that most industrial manufacturers financed their ventures heavily using all the debt-based money poured out by our banks. In the long-run, all that debt bit them in the butt and destroyed their businesses. Of course, while they carried the debt, the system forced them to pay higher wages and global markets forced the price of their products down...always a bad combination when you're deep in debt. Bethlehem Steel, for instance, ultimately fell into bankruptcy due to its high debt levels. The wikipedia article doesn't discuss this at all, so you'll need to look at other sources for details. Here's one: http://www.mcall.com/topic/all-bethsteel-c8p14,0,3222690.story
We should also note the role that the unions played in fomenting the protectionist policies that made Bethlehem Steel, among others, go out of business in the first place. They were firmly in favor of those policies because they "saved American jobs". Of course, in reality, all they did in the long-term was to destroy those same jobs, because they prevented Bethlehem Steel from being able to compete in a global marketplace. The reason the unions got worker support for those measures was that the cost of living in the U.S. kept going up, up, up. Workers felt that the only way to survive that tendency was to unionize. But take away the engine that drives the monetary debasement and drives the cost of living up, and workers will be much, much less interested in unionizing, because they won't need to!
Posted By: David S
Date: August 10, 2010 12:39:59 PM
Walt
I agree with much of what you say but the job I promoted you to was CEO of a US manufacturing firm, not president of the world. The suggestions you made are far beyond the power of a CEO to accomplish. The point I'm trying to make is that manufacturing firms in the US have been put into a situation where they cannot survive unless they offshore their operations. If you agree with that then you agree with at least the title of this post. If you disagree then put your CEO hat on and tell me what you as a manufacturer could do.
I have no problem with making gold and silver legal currencies, competing with the dollar. I also agree that gold and silver should not be artificially tied to the dollar or to each other. I suspect though that that would not solve the problem. Even though the precious metals would not be pegged to the dollar I think you would find that people would hold their precious metals and spend the paper dollars before they depreciate. That would be similar to the situation that exists today. Further there is no guarantee that other countries would follow suit. China might simply keep their currency pegged to the dollar at the same rate as today. Then nothing would change. Without being president of the world you cannot force them to revalue their currency or switch to precious metal.
But the trade problem isn't just about currencies. It's also about the standard of living. In China people are willing to work long hard hours in exchange for a survival level income. They do this for two reasons; 1) its better than what they had in the past and 2) China is still a communist government so you do what they say or they kill you.
In the US workers are accustomed to a more comfortable living standard and reasonable work hours. What's so bad about that?
David: my point was that when you appointed me CEO of the steel manufacturing company, I recognized that I should close the company, because under the current banking and currency system, such a company has little or no chance of being profitable in the long run. You continue to think that such a company must be able to somehow be profitable under the currency/banking system we have, that it's just a question of finding the right combination of protectionist laws, but you're wrong. In the long run, so long as we stick with debt-based currency and fraud-based banking, all manufacturing in western countries that doesn't use cheap labor overseas is doomed to fail. That reality is inescapable under the current currency/banking system, no matter how much wishful thinking we choose to engage in.
I agree about the tendency of people to save hard currency and spend paper dollars when two currencies are forcibly pegged to each other by law, as happened under the gold standard. This is known as Gresham's Law. If the currencies float compared to each other, however, then the desirability of accepting paper at all disappears very quickly, and the desirability of spending metal increases until metal dominates the currency market. Paper cannot compete with metal on a level playing field. It can only compete (and dominate) when metal is declared illegal or paper is pegged to metal at a fixed price, while paper is forced on us as legal tender.
It's not a question of being president of the world. It's a question of focusing the attention of the freedom movement. Right now, freedom advocates are stretched out over a wide range of issues, in many cases placing freedom advocates against other freedom advocates as a result. I would call that counterproductive. As a result, nothing (or very little) changes. But if we all focus on the one, and only, issue (the currency/banking system) we can achieve substantial change that will have a huge, rippling effect across ALL issues.
You're wrong that the important point is standard of living. Rather, the important point is cost of living. "Cost" is much more important than "standard" where issues of this kind are considered. While there's nothing wrong with being accustomed to a certain standard of living, it doesn't make sense from an economic point of view to make broad economic decisions based upon it instead of basing them on cost of living. For one thing, using "standard" instead of "cost" provides one more way to divide people rather than unite them. If one person's standard of living is good, and another's is not good, your choice to emphasize "standard of living" has already divided them, because by your measure they are already at odds with each other. But by emphasizing cost of living, we discover that everyone's cost of living has eroded over the last 50 years...not just in America, but everywhere else as well. Losses due to higher cost of living is a pattern that cuts across economic, class, and party lines.
While the standard of living is higher in America than in other parts of the world, the cost of living in America is also much higher than it was in America 50 years ago, and it's monstrously higher than it is in other countries. Rent, for example, used to account for 15-25% of a worker's wage here in the U.S. Now, it accounts for 40-80% of that same wage, depending on the worker's situation. Does it really matter that the standard of living is better when the cost of living has gotten so bad?
In fact, if your complaint is about the way China treats its own workers, you should be an advocate for major currency/banking change. Debt-based currency and modern banking practies is a major tool of tyranny, not freedom, and China has both recognized and embraced this fact. It's currently their best, most effective tool for grinding the Chinese worker under the boot of the Communist Party's "leadership".
