United States Domestic Manufacturing vs. Free Trade

Domestic Manufacturing vs. Free Trade
This post is prompted by comments posted here and here, so if you haven't read those, two references might elude you: "Darwinian Capitalism" and "obsession with manufacturing." Not to worry, you'll get the point.

I have never witnessed “Darwinian Capitalism,” nor has anyone else that I’m aware of, so I can’t comment on it. What I can comment on is the variant I live under, and the variants that I witness, directly or indirectly, around the world. All of these flavors of capitalism are manipulated to the advantage of the most powerful participants -- the capitalized (those who derive incomes from investments), as opposed to wage earners. Such manipulation takes the form of favorably lax regulation and regressive income taxes, and these tend to stratify society by concentrating wealth at the top. Rather than thinking about “safety nets” for the poor, we should think about “restraining nets” for the rich to minimize the corrupting influence of wealth.

One way to do this is through progressive taxation, which provides government with the resources to monitor (regulate) the creation of wealth, compensate (educate) victims of exploitation, and clean up the environmental disasters visited on us all by the heedless behavior of amoral business ventures. Another way to minimize the corrupting influence of wealth on an industrialized economy is through trade unions. Through collective bargaining, trade unions counter the leverage exerted by management and give wage earners some of the same insurance against boom/bust cycles that the capitalized enjoy, i.e. a cushion of resources: unemployment and health insurance for workers, investments for the capitalized.

As far as an “obsession with manufacturing,” I can’t comment on the views of others, but for myself, manufacturing is not an obsession. In fact, I’m not that fond of the idea of a “consumerist” society inundated by cheap, throwaway crap. But manufacturing is a means to an end: survival. So are agriculture and hunting-gathering. None of which, by the way, are mutually exclusive, so I don’t really see them as a linear, evolutionary progression with one replacing the other as some describe it. We still have plenty of agriculture, though now on a much larger, unsustainable scale. And we still have hunter-gatherers. OK, hunter-gatherers are fewer in number, but they exist, even in industrialized countries -- witness various forms of squatting, trash sorting, and scrap metal recycling.

And as a means to an end slightly more desirable than mere survival -- broad prosperity -- manufacturing has done reasonably well, provided we have strong trade unions, muscular regulation, protective tariffs, and progressive taxation. When those constraints on capitalism are in place, our society has flourished, and by flourished I mean nearly everyone benefited, not just a miniscule subsection at the pinnacle of the food chain. Think of the constraints as a sturdy fuselage to hang the wings of capitalism on. Without one, the other is useless. (Except to wing builders who profit from the mess created by flimsy aircraft falling out of the sky.)

In a balanced economy, with some hunter-gatherers, some agriculture, some manufacturing, some service and finance every reasonably industrious member could find a niche. Sure, productivity and efficiency gains fostered by improved technology would eliminate some jobs in every sector, but improved technology would create new jobs in other sectors, notably manufacturing. Technology continuously obsoletes one manufactured device in favor of another, whether it’s a consumer toy like a DVD player, or a machine used in a plant that manufactures DVD players. Thus, manufacturing plants are continuously re-tooling to manufacture the latest product at the least cost (provided there is fair competition to insure the necessity of such investment).

Since the 1970’s the middle class and poor have been the victim of diminished domestic manufacturing and exports replaced by foreign manufacturing and imports. Since the 1980’s, most of the new wealth in the U.S. has been generated in the finance sector, where salaries are disproportionately -- insanely -- high at the top, and poverty-line low at the bottom (and not that numerous, and not unionized). This does not represent a natural economic evolution of society. It is a trend induced by an affluent minority who depend on investments for their income.

Since this affluent minority traditionally invested in American manufacturing, and with tariffs on foreign imports low, and with manufacturing capacity restored in post WWII Japan (followed by Hong Kong, S. Korea, Singapore, Indonesia, Malaysia, Thailand and finally China), investors pressured management to increase short-term profits. The best way -- the only way -- to yield these short term profits was to eliminate expensive, well-paid, unionized, pensioned, health-insured, worker-safety protected, environmentally responsible jobs in favor of cheap, underpaid, non-unionized, un-pensioned, un-health-insured, workers with unsafe jobs in environmentally catastrophic overseas plants. That is, a return to the conditions that existed in the United States and Europe at the turn of the 19th century before trade unions and environmentalists fought long hard battles to improve our lot. How come off shoring didn’t happen sooner? Because, throughout the industrial revolution, up until about WWI, the U.S. maintained tariffs that protected U.S. manufacturers against a flood of overseas products. Then we had WWI, followed by the Great Depression, followed by WWII, all of which discourage imports, and, or decimated manufacturing capacity everywhere but in the United States. So, it wasn’t until the 1970’s that imports began to nibble away at our manufacturing primacy.

So, yes, as a whole, the United States has grown wealthier as manufacturing declined, but that wealth is now nearly as concentrated at the top as it was before the industrial revolution -- the middle-class is dying on the vine. So we have cheaper consumer products, but steadily flat or declining middle-class incomes and standards of living, and more two-income households that barely survive.

And, we’ve sold off our creative prowess. Sure, we still have the movie industry. We can export a few movies. And sure, we still have Boeing (barely); and Caterpillar (barely); and a bunch of pharmaceuticals and banks and niche manufacturers. But those are a drop in the bucket compared to all the stuff we need to survive -- manufactured stuff. Stuff manufactured overseas. Hence, our huge and economically menacing trade deficit. On the “free trade” governed world market, we buy tons of stuff, but we don’t sell much. So, it’s not so much free trade that we participate in, it’s free shopping. And if you keep shopping without any income, you’re gonna go broke -- which we are.

Imagine now, instead, that we manufacture our own shoes and shirts and dresses; and electronic components and cell phones, and TV’s and cars (preferably trains and buses); and electricity generator components; and cables and wires to connect all this high-tech stuff; and... you get the idea -- we manufacture stuff here, our income stays here. And we continue to invest in broad prosperity -- elevating the middle class, and poor. And we preserve our intellectual capacity to design the manufacturing plants and products of the future. Skills that now, to our collective shame, we are allowing to atrophy (skills, such as machine tooling, I assure you, most bankers can not even conceive of).

And yes, if we manufacture stuff here, and pay people reasonable wages, and insure them against old age and health catastrophe, and protect our shared environment, we will pay more for stuff. But, we will have a constant supply of well-paid jobs for everyone, not just essayists with PhD’s who promote free trade, and creative financiers who sell hedge funds to insulate the wealthy against tanking domestic markets. Besides, if free-trade worked as advertised, that stuff we buy overseas should cost a lot more soon enough as foreign manufacturers...wait for it... pay people reasonable wages, and insure them against old age and health catastrophe, and protect our shared environment... or will they? Not likely, considering the state of governance in most of the countries we buy from. Anyway, it hasn’t happened in the thirty years since off shoring got so popular.

Make whatever predictions you want about the rosy future under free trade, but we do not yet have the much touted and oft-promised highly educated workforce of the future. We have a partially highly educated workforce, a partially moderately educated workforce, and a partially not that well educated workforce. A large fraction of those folks will always be content to clock-in at an assembly line, and bang out their eight-hour day in return for a reasonable living standard and reasonable protections against bankruptcy induced by the vagaries of human health. What’s wrong with that? Every immigrant wave that came here and built this country started there? Why pull the rug out now, when all we get in return is a really rich upper crust with big houses for the rest of us to admire from outside the gates?

My preceding free trade post is here: Free Traders: Friends or Foes?

Here's a bracing rundown of NAFTA's caustic effects from Robert E. Scott at the Economic Policy Institute (www.epi.org): The high price of ‘free’ trade

Former Senator Fritz Hollings seems to concur:
We Are in Real Trouble
Politics Like Cancer

Here's a nice roundup of NY Times articles on NAFTA: http://topics.nytimes.com/top/reference/timestopics/subjects/n/north_american_free_trade_agreement/index.html

And here's a nice little Wiki history of tariffs in the United States: http://en.wikipedia.org/wiki/Tariff_in_American_history