Manufacture Or Borrow (Until We Can't)

When things are going wrong it is often good practice to go back and review the basics, and start again. In baseball you go back to batting and fielding practice. To master a musical instrument you practice your scales every day.

Things have gone wrong with our economy. So let’s go back to some basics and see if we can figure out where we went wrong. Let’s start with the most basic of basics in an economy: wealth comes from making things that you can trade with others.

It is a simple concept worth repeating: if you make something you can trade it for things other people make. As you make things and trade them you build wealth. In an economy making and trading things creates good jobs and brings to the people income and goods they need.

So obviously manufacturing is the key to a healthy economy. Trade means fairly trading the things you manufacture for things that others manufacture. And it is a simple jump from there to understanding that if you don’t make things you have to borrow to be able to pay for things other people make, or you go without. You can borrow and borrow – until you can’t.

Everything else in the economy flows from the manufacturing. When it comes down to it you can't have a healthy service sector unless you are manufacturing items to sell and trade because you can't pay for the restaurant bill or insurance or hotel room or lawyer or even the doctor if you don't make something to sell and trade. And mostly you can't keep buying the things made elsewhere. You can only borrow for so long.

But somehow as country we have lost sight of this most basic idea. Instead of maintaining and promoting manufacturing we say it isn’t important anymore. We say that we have instead transitioned to a “post-industrial” service economy and/or a knowledge / information economy. (What does that even mean -- instead of making and trading, we serve and think? And borrow I guess.)

I read an important post about this yesterday, It's All About Jobs! [1] by Leo Hindery, Jr., Leo W. Gerard and Sen. Don Riegle – a CEO, a labor leader, and a former Senator. They come to us from these different sectors of society to warn us that giving up our manufacturing has meant giving up our jobs. They wrote,

“Importantly, we need to be just as worried about the fact that our economy has mostly hemorrhaged jobs in the very sector -- manufacturing -- that must grow in order for us to move permanently away from debt-financed consumption as the principal engine of economic growth. And it is the current and now decades-long persistent manufacturing jobs collapse that unites the three of us as friends and as colleagues, despite coming from very different backgrounds.”

And how do they feel our country’s “transition” away from a manufacturing economy is working out for us?

“Just since this recession began, manufacturing has lost 13% of its workforce; manufacturing industries now represent a meager 11.7% of GDP; people working in manufacturing now account for only 8.7% of the jobs in the country; a quarter of the nation's 282,000 remaining manufacturing companies -- 90,000 in all -- are now deemed severely "at risk"; and we have run an average annual trade deficit in manufactured goods of more than $500 billion over the past five years.”

What do they say we need to do about this?

“Congress and the Administration, working together, need to immediately enact a robust industrial policy that puts American workers first and is comparable to the policies of our major trading partners. And then we need to integrate this policy with efforts to be the world's dominant manufacturer of green technologies and components, which offer us such enormous opportunities.”

So again back to basics: Trade requires giving and getting. And you can’t trade FOR things without having things TO trade. Which means that you have to have manufacturing. The more you have manufacturing, the stronger your economy. Pretty basic, no?

As I said above, it is a basic that if you don’t make things to trade you can, for a while, borrow to buy the things that others make. And for some time, since we started this transition to the “post-industrial” economy we all have been borrowing to buy the things we need. Individual, business and government debt started increasing rapidly at the same time as people started believing that we were undergoing such a transition. Our trade deficit has shot up through the roof, and now we collectively now owe a tremendous, massive debt to others.

But guess what? When you have a lot of debt, someone is making a lot of money. In The Quiet Coup [2], Simon Johnson writes,

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.

Paul Krugman has noted [3] a similar trend,

On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

Ethan Porter, reviewing [4] Kevin Phillips' book, Bad Money, drives the point home,

In 1950, manufacturing contributed 29.3 percent to the GDP, and financial services 10.9 percent. By 2003, the totals were almost reversed: manufacturing made a 12.7 percent contribution; financial services, 20.5 percent.

[. . .] All this is a fancy way of saying that we don’t make things anymore. We import most of our products from overseas.

So what they are saying is that what we have been doing, namely packing up our factories and sending them to the trading partner countries, isn’t “trade” it is something else. (The word “stupid” suggests itself.) And as a result of doing that we have a massive, massive “trade deficit.” We buy things but we don’t sell enough things because we don't make enough things anymore. And over time this means we get poorer and poorer. We borrow more and more, which drives up profits in the financial sector - while the borrowing continues. That can only go on so long.

So here is the question that we face: what are we going to do about it? And by we, I mean We,the People. So what’s the plan? What is our plan, our strategy, our policy for rebuilding and maintaining our manufacturing base? We obviously have a national financial strategy (a strategy that involves even more borrowing to execute) but none for getting back to the basics of creating wealth by manufacturing things.

Having a national policy for manufacturing is about as basic as it gets. China does. India does. Japan does. Russia does. France does. Germany does. Et Ceterastan does.

What is America’s manufacturing policy? What is our strategy? What is our plan?