How to Rebalance the Economy and Create Jobs At Home

Since 1990 American has run a cumulative deficit on our traded goods account of $ 9 trillion dollars. Much of this money was re-circulated fueling the increasingly larger budget deficits and the over consumption of American consumers.     American economists and politicians have been blinded by the promise of the advantages of free trade while ignoring the obvious costs to American security and prosperity of our increasing dependence on foreign suppliers for everything from food products to finished manufactures. Even our defense sector, below the level of our prime contractors, has been hollowed out by the outsourcing of production to distant sources of supply.

Since 1990 American has run a cumulative deficit on our traded goods account of $ 9 trillion dollars. Much of this money was re-circulated fueling the increasingly larger budget deficits and the over consumption of American consumers.     American economists and politicians have been blinded by the promise of the advantages of free trade while ignoring the obvious costs to American security and prosperity of our increasing dependence on foreign suppliers for everything from food products to finished manufactures. Even our defense sector, below the level of our prime contractors, has been hollowed out by the outsourcing of production to distant sources of supply.

 

 Since the 1980’s when the American deficit on its foreign trade accounts swung from positive to negative and the post-World War II supremacy of American manufacturing ended, the deficit on our traded goods account has led to the loss of employment in American factories.   It has been growing each year since then – in good years and in bad ones too – until 2009 when the long-term effects of reducing employment opportunities and the stagnation in real incomes of millions of American workers finally gave way to a wholesale retreat from over consumption with the resulting damage to both employment and American prosperity.        

 

Over this long period the economy shifted from being balanced with a strong manufacturing sector to an economy that was oriented towards services. To support our addition, the retail sector increased adding jobs to meet the demand for everyday low prices made possible by increasing share of imports; we had technology and information management boomlets that offered a false sense of security in the 1990’s without recognizing that laying off a $ 20 an hour worker and hiring one for $ 7.50 were hardly equivalent and insufficient to keep demand for their services growing. To pay for our over consumption – the imbalance on traded goods increased from 1% of GDP in 1990 to a high of 7% by 2006-07—and consumer debt rose to new heights to support this over consumption. We relied upon a growing financial sector using houses and open credit limits as piggy banks.

 

Robert Reich wrote about the new economy and what it meant for the workers convincingly in his book The Work of Nations. He organized labor into three categories – the highest form were the symbolic analysts gaining from the new global economy, the more protected workers were those in the service sectors that could not be outsourced (at least he believed before the revolution in telecommunications and the Internet), and the third class, the production workers whose lot would be a continuous decline in wealth and opportunities in the new economy of the 21st century.    Through this long period American economists have been cheerleaders for the benefits of free trade. Worried more about opening the door to protectionism, they have ignored the consequences of losing entire industries and the hollowing out of others to mere shells unable to produce finished products without significant foreign content.  

 

The trade deficit today is still close to $ 500 billion and will be as greater next year if there's any real growth in the economy.   Much of the trade is with wholly owned subsidiaries, but most of the profits are reinvested overseas. Growth in GDP over the 1990’s and 2000 decades has been driven by increasing corporate profits, not by a growing wage share as in the past. Productivity increases are a false indicator as manufacturing companies have substituted foreign content for direct labor while maintaining management, marketing, and design, in this country. Thus as the labor share of manufacturing has declined from 20% of total employment in 1990 to 10% in 2009, while the manufacturing share of production remained nearly constant at between 28 to 30% of total output.  

 

Macroeconomic economists turned a blind eye content to believe that we could grow out of the problem through an increasing share of exports.   Development economists saw it as the hope for ending poverty in the world, but have ended up with a growing imbalance between the emerging markets and the poor, impoverished countries they thought would be helped. The increasing importance of concentration of manufacturing in China has also meant that even these countries have been exploited by mercantilist practices of Chinese companies. The international economists worried about starting a round of protectionism by voicing worries. They ignored mathematics that suggested that the sheer size of American consumption was such that it could not be rebalanced by exports, more over if you didn’t produce the products here to export anymore, then there was no reason to ship something from China to the United States and the United States back to China. Between 1990 and 2000 the increase in the American deficit accounted for nearly 6% of the growth in worldwide production of traded goods. The deficit in 2007 was equal to 3% of non-US production of traded products. The politicians were blinded by the myth of a free markets forgetting that the most successful imposition of friction in free trade came when the Japanese agreed to Voluntary Export Restraints in the 1980’s that led to the building of factories here to produce cars thus saving an automobile industry for America. The Europeans practice this through European content rules and labor laws that make it hard to lay off workers thus raising the costs and forcing manufacturing companies to export to insure adequate revenues.    

 

If the trade had been in balance then the unemployment rate for much of the period would have been in the low 2% range. A careful analysis of the impact on labor in America of the trade imbalance—product by product and taking into account the employment gained through both finished products and indirect purchases from other companies to support these finished products—while also taking into account productivity gains shows that the deficit on our trade account by 2007, the height of the deficit, eliminated over 7.6 million jobs or 5% of the total employed base. While the losses were mainly in traded products (manufactures and primary), the impact was also measured by over 1 million jobs lost in service suppliers to these companies. Add to this the lost employment through service outsourcing (not counted) and the lifeblood of the American economy was drained away leading to the crash that began in late 2008 and accelerated in 2009 and continues today. Double this number of jobs lost to take into account the secondary impacts on employment as a result of employment multipliers in communities large and small.

 

There is a reasonable solution that will not violate our international obligations to the WTO. Simply put we need to return to free, but balanced trade. To do this we need to make companies understand that to sell in this country, to consumers, they need to also contribute to the economy through job and income creation. To do this the corporate tax rates need to be adjusted to reflect their net contribution to American prosperity (not just the prosperity of owners of capital, but to the country as well). The easiest way to do this is to initially lower the base corporate tax rates from 35% to 25% thus meeting the needs of being fully competitive with other countries rates. Companies would then have to calculate the ratio of their sales in this country relative to their sales worldwide to their purchases of goods and services (including labor services) in this country relative to their purchases worldwide. The ratio of these two would then be multiplied by the tax rate and applied to their profits. A company selling 70% in this country but purchasing 35% here would pay a rate twice that of a company selling 35% in this country and purchasing 70% here would pay half that base rate.

 

There are a number of advantages—it is not protectionist in character; it allows companies to make decisions about sourcing while reducing the advantages of sourcing from abroad to shareholders; and it begins the process of gradually rebuilding American manufacturing as publicly traded companies calculate benefits and cost of outsourcing on their after tax profits. 

Stimulus for jobs has to come from the one sector of the economy that, in the past, has provided both the strength of character of America and also has maintained American preeminance within the ranks of major countries, i.e. the manufacturing sector.  For too long we have allowed profits to dictate our policies alone without recognizing that economic systems perform best when they are balanced and beneficial to all classes of society.  It is one thing to call for improvements in educational achievement, while failing to recognize that not all children will be capable of reaching these lofty heights.  It is as important that we have young men and women working in factories here as to support the growth and prosperity of China.  It is time we became cognizant of the issues that matter.  

An economy is a terrible thing to waste and waste we are if we keep assuming that economic systems are self correcting, they are not!