He said build something; I said with what?— kavips

Some of you remember the “giant sucking sound”?

Ross Perot, Reform Party candidate for the US President in 1992, coined the term during one debate (4:45) to represent how dropping protective tariffs for NAFTA… would suck our manufacturing jobs to undeveloped nations south of our border…

Today we see evidence that it was true. Although China, India, and Southeast Asia are contenders for stealing our manufacturing base as well.

There is no real industrial manufacturing base left in the United States, which is one of the reasons that bailing out our car manufacturers has become a national emergency. At the exact moment when we need a manufacturing base to prime the pump of our economy, it is missing. Gone. It is not there.

The Free Trade agreements do well for our nation’s consumers; they bode ill for those working at high wages. I remember buying the cheapest shovel I could find for $25 dollars back in ’92. Last summer the same brand was still on the shelf for $25 dollars, but the one I bought cost me $4. I figured I could buy 6 replacements before breaking even…. My choice gave me $21 dollars to spend on other items…. Free Trade works for American consumers…

But for someone costing more than $1 a day, for someone with pension costs, health insurance costs, and vacation costs, free trade is something to fear. For the sucking sound of job loss continues up until the point occurs where the cost of doing business here, drops down to meet the climbing rate of the cost of doing business elsewhere……. At $18 dollars an hour here, and $1 dollar an hour there, when both settle out around $9 the flow of jobs is abated.

But you can’t force a company to not make money. If it gets so bad that they can’t stay in business, they have every reason to shut their doors…. Even if WE were able to close off the imports of all products made more cheaply elsewhere than domestically…… we would be paying much more than necessary for those products we bought. Most of us would choose to go without that unnecessary expense, before paying what we considered exorbitantly high prices.

Furthermore, closing down imports would turn us into a trade island. Other nation’s $4 shovels would continue to be snapped up on the world market, while we sat on a huge inventory of $25 dollar ones…. As soon as our nation’s market was saturated, its one shovel plant would have to close, (provided no bailout was forthcoming to keep it solvent and afloat….) They could not sell any more of what they had….

I mentioned in a previous chapter that it was lower labor costs which were responsible for propelling Germany, Japan, and South Korea out of their economic paralysis following the ends of wars. Writing on the wall says that for us to survive… we probably will have to do the same.

Just having health care removed from corporate responsibility, could significantly impact how this is done. If the burden of providing huge sums for medical insurance was suddenly lifted off of business’ shoulders, its cost of doing business in the US would drop significantly without touching the amount paid out in wages.

So what would it take to get manufacturing jobs to come back to the United States of America.

Bottom line….the entire process from raw materials to final delivery, needs to be cheaper here ….. than somewhere else…

That cheapness doesn’t mean we are forced to sacrifice wages… After all, wages are the fuel that drives our economy. After all, wages are what buys those goods and services which America makes. After all large scale cutting-back on wages, cuts back on the money supply that buys what we produce…. Cutting wages is the final resort: our very last line of defense. It is in other areas where we need to look if we wish to get our nation to bypass this economic bump in the road…

One different and novel method would be to shorten the accounting rule on how one claims depreciation. One of the reasons that trading in mortgage securities was so profitable and lucrative was because the full cost of buying those securities was immediately deducted from the purchased amount creating an expense that matched the asset. However upon buying a piece of equipment under depreciation, a large amount of capital is required up front… and is not costed out except in little pieces over a very long time.

Building a business is capital intensive. Buying securities … was not. Considering the global shortage of capital right now, changing the rules for even a short time, could be considered to be sort of a tax break. If banks were lending (those loans guaranteed by the Federal Reserve), and…. purchases made this year could be written off totally… meaning no taxes would be paid on that amount…. this would be the goldmine year for a business to expand, buy, update, renovate, modernize, and become more efficient. And if each one of every businesses started ordering materials, …..well, you see what that would do to our economy…….

Since a business will be carrying a lot of expenditures this year, the chances are that their tax payment will be minimal. That does not do well for our nation’s Treasury… we sorely need that money… but, if one waits long enough… upon the following year, all those new pieces of equipment will have been completely depreciated, so that when the rules return to normal, the profit below the depreciation line is higher than it would have been had we left everything alone! And the Fed’s taxable portion of that amount, would be higher in its dollar amount, even though its marginal rate did not change. The same boost in more taxable dollars, would occur each year up until that time when the equipment would have finished its cycle of depreciation. Basically for the Federal treasury, it is the same principle as having a business skip a monthly mortgage payment, by agreeing to pay a token amount more each month after that grace period to achieve balance.

Another concept is to change our definition of what constitutes manufacturing… The old days are gone, thanks to technology. If one looks at our assembly lines today, one does not see a myriad of men running around at breakneck speed to keep up with the assembly line… Instead one sees (in the words of Robert Reich) “a lot of numerically- controlled machine tools and robots, and a few technicians sitting behind computer consoles. The old-style assembly line factory worker is going the way of the bank teller, telephone operator, and service-station attendant.”

“But there’s a different way to think about manufacturing, and here we’re doing much better. Take a close look at any manufactured item — a pen, a cup, a car, a dress — and see who’s actually earning what portion of its purchase price. Much of it goes to Americans, even if the factory that made it is located in Asia. More and more of any item’s value is going to researchers and designers, engineers, entrepreneurs, marketers, advertisers, distributors, bankers, lawyers, wholesalers, retailers. None of them is considered a manufacturing worker, but they are the future of manufacturing. ” a different way to think about manufacturing, and here we’re doing much better.”

“The loss of blue-collar manufacturing jobs is a huge problem for America. That’s because many young people with only high school degrees no longer have access to middle-class wages. But that problem, which has been growing for years, won’t be solved by an Assistant Secretary for Manufacturing or any get- tough trade policy. To solve it we need good schools, ready access to technical skills and community colleges, and companies that continuously retrain and upgrade their workforce.” Robert Reich 2003.

Robots are here to stay. What is needed to maintain them, is an educated workforce that can design them, program them, maintain them, market them, and sell them…. Education puts higher costing jobs back on the family’s table. If America is to compete, then we need to be the ones making the most technologically advanced pieces of machinery that are bought by technicians from other countries… We don’t want our workers competing for $1 an hour jobs, yet we need those products which are cheaply made so we don’t have to spend prodigious amounts of our income on simple necessities. We waste a lot of time in today’s schools. Currently Delaware schools lose 1 month every year talking up Black History month. We need to start asking hard questions on how that helps America compete against someone from India or China? It doesn’t? One example of where our priorities are wrong, and we know it, but we do it anyway.

If one asks Americans whether we need more manufacturing, the choice is overwhelming…. In one unscientific poll, 99.13% said they would be willing to pay more for a product if it was made in America. The unscientific nature of that poll is suggested by the lack of determination of just “how much” those Americans would be willing to pay over the cost of a foreign import…. As in that true story about Lowe’s $25 dollar shovel… are they willing to pay 600% more? If you remember … this one shopper wasn’t… He figured the could get six shovels for the price of one, and bet that his shovel would hold up well against those odds. (He was right too, by the way).

Another traditional way to protect local manufacturing jobs, would be to forcefully devalue our currency. If we artificially keep our currency at a lower rate per exchange with other nations as does China, our products, even if costing the same to produce, will be cheaper to buy… Again this would be a short term solution, since as our economy began to grow due to an increase of factory orders, our currency would gain value and then rise.

The downside is that it would make traveling through Europe expensive, but that would be a small price to pay for not having the Great Depression at our doorstep. A more significant negative would be that the global economy would prefer to peg their prices upon the Euro, and the once almighty America dollar, would fall quickly out of favor…

Speaking of traveling, the high fuel prices paid last summer point to another element as to why manufacturers would want to return to America. Keep in mind that many manufacturing jobs went offshore for cheaper labor. The downside of doing so is that one must pay to transport the product back here to market. With the influx of $4.33 dollars for a gallon of gas, the cost of getting foreign products into stores, climbed rather significantly. At some point it will be cheaper to again build in America and pay the American rate, instead of building cheaply offshore and then giving back the savings to those responsible for transporting ones product back to our shores to sell…. If a fuel tax is levied as has been discussed, it could turn America into a land of new manufacturing opportunities. The less miles traveled… the lower the cost that would be incurred.

In the same vein, the imposition of Carbon taxes would bring manufacturing back to America. If America imposes Carbon taxes and China does not, then all those Chinese products being imported are subject to carbon tax tariffs making them too expensive and unmarketable on these shores. Carbon taxes especially when coupled with high energy costs, make manufacturing closer to home, the cheaper alternative.

Cheap energy can really bring American manufacturing back onto these shores. That energy would be wind at 2.3 cents per kilowatt/hour, being made with free fuel turning the rotors of 7MW generators perched on tall towers dotted across America. Pushing forward with subsidies to initiate the building large wind farms, would be advantageous in not only putting workers to work on building the towers as well as installing the rotors, but also in lowering our energy costs so that any company moving here would still do better than it’s competitor languishing oversees.

Some say our brand new baby boom may bring jobs back to America. In 2007 America broke its record for the most births per year. That last record had held from 1957. With a workforce growing by 4,300,000 persons per year, and China’s one baby policy still in effect, our labor pool may appear more attractive 18 years into the future. This may not sound as far fetched as one would initially think. Most business decisions are sketched out over a fifteen year time frame… which means in most better run companies today, some employee has already started the research that will ultimately become the foundation of the plan… The idea is to get companies to reinvest here… not elsewhere. Grand trends that happen in our future can be a valid part of convincing someone to open an American manufacturing plant….

Likewise tougher and better American regulation can return manufacturing back to America. That may not make sense to anyone who has not done business in third world environments, where capriciousness blows with the wind. One of the classic blunders invested in the third world is the huge oil investment made in the Niger delta, now rendered cost prohibitive by the actions of local guerrillas. Another occurred last winter, when toy manufactures suffered significant losses because toys contained lead. And it was last year when animal enthusiasts bought everything American so that their pets would not keel over dead? In an arena where paying off a string of corrupt politicians is considered just a cost of doing business, the uncertainty of knowing just how long those politicians will last, has firms thinking again about the stability of doing business on American shores… RegalWare. Inc has brought back all of its plastic manufacturing back to Kewaskum, Wisconsin. As their CEO Jeffery Reigle states:

About three years ago, the company, with the guidance of consultants TBM, started evaluating its operations to become more efficient. A particular concern was how long it was taking to deliver cookware to customers. The overseas manufacturers emerged as a key bottleneck. Since the company brought production home earlier this year, delivery times to one major customer, Reigle says, have gone from 30 to 60 days to as little as 24 to 48 hours.

Even if Regal Ware’s prices are 8% to 10% higher than buying direct from China, the its cash flow from Regal Ware products has increased 10% because the seller can turn over inventory more quickly.

Other pressures that motivate a manufacturer (or outsourced work) to move their manufacturing back from overseas: 1) bad experience with foreign vendors, partners, suppliers, local government, employees, 2) updated product portfolios and the pursuit of short lead-time or customization, 3) good utilization of automation, 4) overheated competition and lack of patient protection from improving foreign competitors, and 5) finding the made-in-USA label sells really well overseas. Not to mention liability issues where shoddy work, or tainted raw materials can upon being discovered, totally disrupt normal business flow.

The overall rising costs in China, from wages to taxes and to utilities, are definitely in the spotlight. American businesses may have realized through the years, from observing work transfer first to Mexico and then to Asia, that no country will be low-cost forever. Low cost is not everything. Consistency and trust in the quality also considerations a consumer factors in when making a purchasing decision. Tightening our quality standards, our environmental regulations, and stressing our attention to detail, will have the effect of increasing the value of the label “Made in America” That label is already the one preferred by wealthy Chinese who like us, have care and concerns for their children as well… Knowing how their countrymen sometimes operate, they prefer American.

So far missing in this analysis is all mention of imposing tariffs on imports for any reason. Pat Buchanan has been making the argument to stem free trade for years.

To date one of the more interesting aspects, is his distinction between how foreign trade works with VAT taxes and against corporate taxes… VAT (Value Added Tax) are used by almost every civilized state other than us. American’s have held off because of the huge populist sentiment that permeates their politics. (VAT’s being a consumer tax, are regressive). The VAT works on this principal: at each step of a manufacturing process, just the value added … is taxed. In America, when one buys a bag of flour on sale at $2 dollars a pound, and assuming a 6% sales tax, one pays 12 cents additional in sales tax. In Europe, Japan, and other industrialized nations, each step is taxed and the consumer pays the final price posted, Over there the fuel, seed, and fertilizer used in the growing of the wheat is taxed. When harvested, the silo operator taxes the farmer, who in turn has the taxes paid on his raw materials, deducted from the amount he is called to pay. The regional distributor taxes the silo operator, who in turn deducts the amount of tax he paid to receive each farmers wheat. The mill operator tacks on his charge which is paid for by the regional distributor, and when selling the product to a distributor, he credits the amount he paid… and so it goes right up to the last person to sell you the bag of flour.. Each entity buys the product with the tax attached, attaches their tax and gets credit for the tax they paid when they purchased their raw material. That way, each entity is taxed only on the value they added to the product.

Since just my telling of it appears so complicated, one can get an idea of how keeping track of every step in the process, must run tax agencies bonkers. Instead of trimming the IRS, we would be growing it by leaps and bounds. Which is why in frugal America… VAT’s have not yet been moved out of any committee….

The bright side is that this amount replaces corporate income taxes: zero corporate income tax. The downer is that we would be paying $2.12 for our flour …. before a state even had a chance to tack on their 6% sales tax. Together, we would be paying a 12.36% tax on all products. Your $150 grocery bill would cost $168.54. Whereas that seems like a lot to Delaware citizens who are used to no sales tax, to those in other states already immune to a 6% sales tax, the difference would be only an additional $9.54 dollars.. The average American would be paying roughly per month, four times that amount on groceries or $38.16 for the privilege of doing away with corporate income taxes…

But… and here is the argument when applied to free trade….

Foreign cars arriving here, have their portion of the VAT’s deducted by their home corporations. We, without a VAT, must pay the full amount of the VAT expected in foreign countries, when we drop our cars off there. Roughly a 15% charge is added to the purchase price of any American car in a VAT country, while they receive a 15% credit for selling cars in ours… It is hard for American cars to compete as imports.

Perhaps we could recognize this constraint being placed on what is now, … the taxpayer’s car company, and use this opportunity to initiate a VAT solely on the car manufacturing sector of our economy to see whether or not its principal holds up under actual international trade. The worst case scenario is that American cars may cost us 15% more, and the best case is that US manufacturing plants go into full production due to the overseas high demand of affordable “American quality” vehicles….

Finally, we come to the heavy hitter part of the intellectual argument. If we are talking about changing import taxes, what about tariffs?

Tariffs limit free trade. How? Tariffs make imports more expensive, thereby making domestically produced products cheaper by comparison. Tariffs become a means of keeping prices higher for all Americans thereby enabling American companies to remain solvent as well as increase their profit margins. Tariffs once imposed, cause retaliatory tariffs against us which shut out our imports from entering new markets, causing plant shutdowns and layoffs.

Protectionist tariffs are often blamed for the increase in the severity of the Great Depression which occurred after the passage of the Smoot Hawley Act of 1930. Intended to protect America businesses and force up prices by limiting cheaper foreign competition, those companies protected went under, because no one bought any of their higher priced goods. Imports plunged 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports fell 61% from US$5.4 billion to US$2.1 billion, both drops far more than the 50% fall in the GDP.

It did little to protect America jobs. Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.

Today, one cannot help but to invoke the image of Ronald Reagan when discussing “Free Trade”. Above anyone, he is the person responsible for bringing that term into modern consciousness. However, even the harbinger of free trade was quick to slap tariff duties on “motorcycles over 7 liters” to protect Harley Davidson from going under.

The Cato Foundation was quick to criticize this action. In a policy piece titled “Taking America For A Ride” they were quick to point out the economic hardship facing America. Concluding that:

“the new tariff will unambiguously prove to be a setback for the American economy. ITC specialists predict that the tariff hike will raise prices 10 percent the first year. Other officials believe that the price increase might be as high as 17 percent. The ITC estimated an increase of 12.5 percent for the second year.

They went on to predict that 20,000 less motorcycles would be sold the first two years, with an increase of 8,000 to 10,000 Harley’s being sold over the same period…

But they were wrong. Initially the goal was to jump the current tariff of 4.4 percent to 49.4 percent and keep it there for a year; lower the rate to 39.4 percent in the second year, to 24.4 percent in the third year, to 19.4 percent in the fourth year, and to 14.4 percent in the fifth year. After the fifth year the tariff is to return to 4.4 percent. During the amendment process lines were added that allowed numbers of BMW’s, Italian, and English manufacturers to slip through unaffected. The Japanese were given the same amount as were the other foreign bikes in without tariffs, but… due to the size of their market share, a large percentage of their imports were affected.

Bottom line: Harley Davidson is still around today. They would not have been had this tariff not been imposed. Harley Davidson took this time to retool, refinance, and modernize their brand, becoming a better company for it. Able to make better motorcycles, their market share increased to make them enough profit allowing them to call for the removal of the tariff a year earlier than planned.

Furthermore, solely because of the tariff, two Japanese companies, Honda and Kawasaki increased production at their American plants since they were not affected by the tariffs, in turn providing additional work for American workers.

So why was one tariff a success and the other an abysmal failure? The difference is scale. The Harley Davidson tariff was limited to Japanese manufacturers who used their protected high prices at home to subsidize dumping into the America market, which ultimately drove down motorcycle prices so low that Harley Davidson was unable to keep up. The tariff was limited to five years, and designed with a specific purpose: equalize the playing field. It was not done to protect American workers (they were few in number); it was not done to keep a lazy and insolvent company afloat forever; it was done to allow the free market to work. Now, every time a “hog” pulls alongside of you, you can thank Ronald Reagan.

Protectionism ( the imposition of trade barriers) has its purpose. With today’s economy one should expect to see and hear labor unions clamoring for more and more “protection”. It’s a plea that is hard to resist. After all, we could all be in the same boat some day, and certainly would appreciate someone bailing out our leaky vessel…. How can one “not” protect American workers?

The answer to that question is this: that we, the rank and file Americans, have to realize that protectionism is a form of war. As we recently found out, when a nation goes to war, it had better be sure beforehand that it will end up on the winning side. For once a war is started, the costs are always higher then expected. And if the enemy has a method (not in your calculations) of outmaneuvering you,… you never get the chance to say… “oh…never mind… let’s call this off and pretend like it never happened…” For once you hurt someone… they will do their darnedest to hurt you back.

The Smoot Hawley Act hurt a lot of people indiscriminately. The Harley Davidson tariff did so with precision. It’s the difference between accomplishing the same goal with either an all out war, or with a deniable, dark-ops special operation. One must take into account, and not be surprised, by the retaliatory measures which be taken against us.

As an aside, it is worth noting that an interesting observation came from the removal of the Smoot Hawley Tariff as WWII came into closure. The world emphatically sought assurances that no Smoot Hawley Act would ever be passed again. This bitter hate led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s. However it is interesting to note that special provisions were made for national security. Due to globalization in the 20’s and 30’s, Britain and France had ceded their watch making to Germany and Switzerland. Later they discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after WW II. (Lewis E. Lloyd, Tariffs: The Case For Protection, 1955, p. 137-139). The US is in somewhat the same danger today.

When dealing with protectionism, it is important to first sift through all the facts to see who is benefiting from whom. When George Bush protected the American Steel Industry in 2003, business went to China costing our nation 200,000 American manufacturing jobs…. Yet when one goes shopping for jeans, and sees articles from the Philippines, Malaysia, and made in America all at the same price, it puts a hole in the argument that free trade lowers prices for all Americans. Obviously instead, it increases profits for those who move their business to cheap labor areas off shore, then selling it back to us at the rate we are used to paying… Again that is why one must be leery of free trade pronouncements being made by large multinational corporations. They may benefit someone else, and not America.

Protectionism helps the American worker as Ross Perot adequately explained. The downside is that protectionism hurts the American consumer as Al Gore showed Ross Perot in their 1993 debate over NAFTA on the Larry King show. Al presented Ross with a large picture of Smoot and Hawley shaking hands in a congratulatory ceremony. As with anything tainted with protectionism, we need to weigh the benefits against the risks. Sometimes the risk may be acceptable. But it is unconscionable for us to look at protectionism in a vacuum…. as one affecting just American workers. The proper yardstick to measure protectionism’s effectiveness would be to measure its impact upon the total amount of money circulating throughout our system. Will protectionism grow the amount of money… or diminish it. Each case by case analysis needs to take that single measurement into consideration, otherwise we will be making a great mistake, sort of like Smoot and Hawley did during Hoover’s administration.

Bottom line of this entire post:

Raising tariffs, like war, is a very unpredictable method of furthering a nation’s wealth. Therefore other methods to increase our manufacturing base should be tried first.

Recognizing the severe nature of our economic situation, any policy change if enacted should be given expiration dates. A handout is helpful; continuous welfare is not.

To return American manufacturing jobs back to Americans, the entire process of acquiring raw materials to delivering the finished product, needs to be cheaper here in America, than it would be with foreign workers halfway around the globe. The best avenue for providing that benefit while getting the biggest bang for the buck, is to temporarily change our depreciation laws so that capital purchases can be written off entirely over one year. As opposed to the much talked about stimulus package amounting to no more than a national welfare check; this little change would have a lasting economic effect with less long term cost than a corporate tax cut. The second short term policy would be to use a budget reducing gasoline tax, to artificially raise fuel rates, making it expensive for foreign manufactures to ship here. Doing so would reward those businesses that built near their markets.

Both stimulate our economy without directly affecting retaliatory measures by our trading partners. Those two, one politically acceptable and one not, should be our first choice of action.

Longer term solutions involve 1) educating most of our youth to be technically savvy, 2) moving forward with a Carbon Tax benefiting technologically advanced societies over cheap working developing nations, and 3) developing cheap energy sources (2.3 cents per kilowatt/hour) for American manufacturing, would all keep American jobs in America…

What we do not want to do… is believe that we are an island and impose trade restrictions that isolate and collapse us further, instead of growing our way out of our current crises. We do want to lower all other costs so manufactures will want to set up shop here, on these shores, despite our higher wage levels……

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