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How did the United States get into such a deep hole of underproduction and debt dependence?
Emerging triumphant after World War II as the world's unique economic and technological superpower, and with most of the world in rubble fearing the Soviet Union, U.S. policy emphasized consumption, taking for granted our vastly superior private companies and production capacity. At Bretton Woods, N.H., and elsewhere, U.S. leadership created a network of international institutions and programs to promote reconstruction and production abroad -- including by our own companies -- while building "the American dream" of middle class affluence and consumption in the United States.
With the successful reconstruction of Europe, Japan and others, this temporary period of vast U.S. superiority began coming to an end. In 1971, when the United States suffered its first annual post-WWII current account trade deficit, President Nixon reversed the commitment made at Bretton Woods pegging the global value of the dollar to gold at an uncompetitively high value. This lowered the dollar's value and restored the current account surplus, but it also lowered the revenue of the world's dollar-based commodity producers, particularly those producing oil. Two rounds of sharp oil prices hikes in 1973 and 1978 threw the United States and world economies into chaos, largely undermining empirical models of the U.S. economy based on post-WWII experience.
President Reagan stepped into this vacuum with his view that government was the problem and unregulated "free" markets were the answer. When his tax cuts failed to pay for themselves, as promised, public debt began to explode and financial deregulation soon led to an explosion of private debt and asset inflation. Similarly, when a flood of lower-cost imports did not pay for themselves with higher valued upstream exports, the United States plunged into ever-worsening trade losses moving relentlessly upstream to ever more sophisticated goods and services.
Despite soaring financial debts and trade deficits -- and immense fees and power in the financial services/debt industry -- the collapse of the Soviet Union was sold as an uncontestable victory for anti-government, unregulated "free" market forces. This crusade became essentially bipartisan in 1993 with President Clinton's no-holds-barred fight for NAFTA and "free" trade and investment in very low wage, virtually unregulated Mexico.
Aside from the debt industry, its chief sponsor and propagandist, the two key sectors involved in the NAFTA debate were textiles/apparel and autos. Most executives in the capital-intensive textile segment of their industry were led to believe that moving the labor-intensive apparel segment to low-cost Mexico would safeguard textile production and, by lowering the cost of final products, allow U.S. textile firms to regain market share from Asia.
These executives soon re-learned the basic rule of business is to be close to your customers. Today, 15 years after NAFTA was implemented, U.S. spending for textile and apparel products has doubled, but U.S. textile production is down by 40 percent. Apparel production is down by 62 percent. The industry has lost 1.1 million jobs and all but a few of its firms have gone out of business.
Auto executives were also convinced that moving more labor-intensive production to cheaper Mexico would allow them to lower total costs enough to take back market share from Asian and European rivals. Yet the industry's trade losses mounted steadily over the past 15 years, totaling $1.6 trillion, including a loss of $1 trillion in just the last eight years and over $106 billion this past troubled year alone. Despite constant claims that much higher overall U.S. productivity would more than offset Mexico's cost advantages, today the United States faces persistent $30 billion per year trade losses with Mexico in the auto sector. The United States also imports half-again as many cars from Mexico as U.S. producers -- including the transplants -- export to the entire world.
Even in the dynamic category of manufactured goods that the Commerce Department defines as the most advanced technology products (ATP), the U.S. surplus of trade and production was lost in 2002. Record ATP deficits are now half again larger than any past surplus and are worsening every year, including in 2008. The U.S. ATP deficit with China is far larger than the entire U.S. surplus in intellectual property royalties and fees.
Virtually every economic sector that is exposed to imports (or capable of exporting) lost jobs over the past generation. Over the past eight years, of the three million net new jobs created from $12.4 trillion in new debt, 1.7 million were created in state and local government agencies and another 1.4 million in private bars and restaurants. While the overall number of jobs in the rest of the economy was unchanged, there were key shifts, for example, with 4.1 million highly productive/higher wage manufacturing jobs lost and 3.7 million jobs added in far less productive/far lower wage private health care and education bureaucracies.
Perversely, the utter failure of every major claim for unregulated "free" markets has been used to set Americans against one another rather than to drive them to common purpose. For a generation, American culture, business and politics have been dominated by a new self-centered globalization fallacy: if my neighbor's wages are cut or (better yet!) if his job is sent to China, my taxes should be cut and my costs and interest rates should be cheaper. Even today many Americans do not believe that we are all in this economic crisis together.
-- Dr. Charles W. McMillion is President and Chief Economist of MBG Information Services, a former Contributing Editor of the Harvard Business Review and former Associate Director of the Johns Hopkins University policy institute.
cont. Source: Manufacturing and Technology News January 16, 2009 Volume 16, No. 1
Emerging triumphant after World War II as the world's unique economic and technological superpower, and with most of the world in rubble fearing the Soviet Union, U.S. policy emphasized consumption, taking for granted our vastly superior private companies and production capacity. At Bretton Woods, N.H., and elsewhere, U.S. leadership created a network of international institutions and programs to promote reconstruction and production abroad -- including by our own companies -- while building "the American dream" of middle class affluence and consumption in the United States.
With the successful reconstruction of Europe, Japan and others, this temporary period of vast U.S. superiority began coming to an end. In 1971, when the United States suffered its first annual post-WWII current account trade deficit, President Nixon reversed the commitment made at Bretton Woods pegging the global value of the dollar to gold at an uncompetitively high value. This lowered the dollar's value and restored the current account surplus, but it also lowered the revenue of the world's dollar-based commodity producers, particularly those producing oil. Two rounds of sharp oil prices hikes in 1973 and 1978 threw the United States and world economies into chaos, largely undermining empirical models of the U.S. economy based on post-WWII experience.
President Reagan stepped into this vacuum with his view that government was the problem and unregulated "free" markets were the answer. When his tax cuts failed to pay for themselves, as promised, public debt began to explode and financial deregulation soon led to an explosion of private debt and asset inflation. Similarly, when a flood of lower-cost imports did not pay for themselves with higher valued upstream exports, the United States plunged into ever-worsening trade losses moving relentlessly upstream to ever more sophisticated goods and services.
Despite soaring financial debts and trade deficits -- and immense fees and power in the financial services/debt industry -- the collapse of the Soviet Union was sold as an uncontestable victory for anti-government, unregulated "free" market forces. This crusade became essentially bipartisan in 1993 with President Clinton's no-holds-barred fight for NAFTA and "free" trade and investment in very low wage, virtually unregulated Mexico.
Aside from the debt industry, its chief sponsor and propagandist, the two key sectors involved in the NAFTA debate were textiles/apparel and autos. Most executives in the capital-intensive textile segment of their industry were led to believe that moving the labor-intensive apparel segment to low-cost Mexico would safeguard textile production and, by lowering the cost of final products, allow U.S. textile firms to regain market share from Asia.
These executives soon re-learned the basic rule of business is to be close to your customers. Today, 15 years after NAFTA was implemented, U.S. spending for textile and apparel products has doubled, but U.S. textile production is down by 40 percent. Apparel production is down by 62 percent. The industry has lost 1.1 million jobs and all but a few of its firms have gone out of business.
Auto executives were also convinced that moving more labor-intensive production to cheaper Mexico would allow them to lower total costs enough to take back market share from Asian and European rivals. Yet the industry's trade losses mounted steadily over the past 15 years, totaling $1.6 trillion, including a loss of $1 trillion in just the last eight years and over $106 billion this past troubled year alone. Despite constant claims that much higher overall U.S. productivity would more than offset Mexico's cost advantages, today the United States faces persistent $30 billion per year trade losses with Mexico in the auto sector. The United States also imports half-again as many cars from Mexico as U.S. producers -- including the transplants -- export to the entire world.
Even in the dynamic category of manufactured goods that the Commerce Department defines as the most advanced technology products (ATP), the U.S. surplus of trade and production was lost in 2002. Record ATP deficits are now half again larger than any past surplus and are worsening every year, including in 2008. The U.S. ATP deficit with China is far larger than the entire U.S. surplus in intellectual property royalties and fees.
Virtually every economic sector that is exposed to imports (or capable of exporting) lost jobs over the past generation. Over the past eight years, of the three million net new jobs created from $12.4 trillion in new debt, 1.7 million were created in state and local government agencies and another 1.4 million in private bars and restaurants. While the overall number of jobs in the rest of the economy was unchanged, there were key shifts, for example, with 4.1 million highly productive/higher wage manufacturing jobs lost and 3.7 million jobs added in far less productive/far lower wage private health care and education bureaucracies.
Perversely, the utter failure of every major claim for unregulated "free" markets has been used to set Americans against one another rather than to drive them to common purpose. For a generation, American culture, business and politics have been dominated by a new self-centered globalization fallacy: if my neighbor's wages are cut or (better yet!) if his job is sent to China, my taxes should be cut and my costs and interest rates should be cheaper. Even today many Americans do not believe that we are all in this economic crisis together.
-- Dr. Charles W. McMillion is President and Chief Economist of MBG Information Services, a former Contributing Editor of the Harvard Business Review and former Associate Director of the Johns Hopkins University policy institute.
cont. Source: Manufacturing and Technology News January 16, 2009 Volume 16, No. 1