In his State of the Union Address last week, President Obama announced a renewed commitment to manufacturing in the United States. While the commitment to rebuilding the country's manufacturing base is welcome -- manufacturing has historically been a source of good-paying jobs for workers without college degrees -- he unfortunately left the most important item on the list off the agenda.
President Obama failed to commit himself to restoring the competitiveness of dollar as part of his agenda for bringing back manufacturing jobs. The value of the dollar really has to be front and central in any effort to restore U.S. competitiveness since it is by far the most important factor determining the relative cost of U.S. goods compared with goods produced elsewhere.
If the dollar is 20 percent above its proper value then it is equivalent to putting a 20 percent tariff on all of our exports. If the price of U.S. made goods are 20 percent higher for people living in other countries because of an over-valued dollar, we are not going to be able to export very much.
The opposite is true with imports. The over-valued dollar is equivalent to giving a 20 percent subsidy to people who import goods from other countries. This places U.S.-made products at an enormous disadvantage competing with imports. This explains the flood of imports coming into the country over the last 15 years.
President Obama's plans to improve education and training and provide support for research and long-term planning are all great, but if we don't address the fundamental problem of an over-valued dollar, then his agenda will have little impact on manufacturing in the United States. This is sort of like preparing the soil and carefully watering your garden but forgetting to plant the seeds.
The idea of the dollar falling in response to a trade deficit is actually fairly basic economics. In a system of floating exchange rates, countries with large trade deficits, like the United States, are supposed to see their currency fall, which brings trade back into balance. The lower-valued dollar has little effect on the price of most goods and services people in the United States consume. It just raises the price of imports, which is necessary if we are not going to keep borrowing money to pay for the fact that we consume more imports than we export.
The trade deficit is not leading to a fall in the dollar now because the central banks in many countries (most importantly China) are buying up large amounts of dollars precisely to keep the dollar from declining and eliminating their trade surpluses and our trade deficit. President Obama must persuade these countries to change their practice or take steps to force the dollar down. If he doesn't, then he is largely wasting our time with his "built to last" agenda.
Balanced trade would have a huge impact on U.S. labor markets. It would lead to more than 5 million new jobs in manufacturing. If we had balanced trade, as opposed to a $580 billion trade deficit (4 percent of GDP), we could get back to full employment without needing either the stimulus from large budget deficits or the boost from the demand generated by a housing bubble.
Imagine the 4.0 percent unemployment of the late 90s coming back. This would make a real difference in the lives of tens of millions of workers.
As a matter of accounting, the gap in demand created by a trade deficit can only be filled by either negative public saving (a budget deficit) or negative private saving, as we experienced with the housing-bubble-driven consumption boom. There is literally no way around this story.
Unfortunately it is not clear that President Obama is prepared to push for a lower-valued dollar. Robert Rubin, the Treasury Secretary under President Clinton whose views still capture the thinking of most centrist Democrats, was the main promulgator of the high dollar policy that caused our trade deficit to explode in the first place.
There is a real class dimension to the high dollar since it means that Wall Street's money will go further when it invests overseas. It also helps to keep down inflation, Wall Street's nemesis. In other words the value of the dollar is another one of those 99 percent versus the 1 percent issues.
In short, if we actually want to see results in the form of more manufacturing jobs, rather than just a good speech, we will have to press President Obama to challenge the 1 percent. A more competitive dollar must be at center of a serious manufacturing policy. Everything else on President Obama's Built to Last agenda is just window dressing.
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Cheap oil helps our manufacturing be competitive. Expensive food helps balance our trade deficit. If we pay $6 a gal for gas and sell food for a lot less our economy is not going to strengthen.
Countries won't buy much more of our food if it gets cheaper. We will import some less oil if the dollar is weak but we will lose a lot more economic activity than we gain in exports.
A weak dollar sounds good on the surface but the devil is in the details.
The people who need what we have and make, the under-developed countries, can't afford our goods. The developed cuntries who can afford our goods, prefer their own with the exception of "High Status" goods. This notion that goods should compete on a level playing field is a peculiar American delusion.
If Obama wants to increase exports he should do what the Chinese are doing. Offer long term credit on good terms to developing nations to develop infrastructure in their countries. These credits, kind of like international food stamps, could be redeemed only for products made in America. Probably the best way would be an export bank chartered by the government.
Every developing nation in the world that is experiencing double digit economic growth has found a way to employ that segment of the workforce in large numbers. Those people now produce for the economy rather than being a drain on the fiscal health of the nation.
America has forgotten how important it is to employ as many people as you can in any capacity and at all rungs of the economic ladder to insure the fiscal health and national security of the nation.
We have moved away from patriotism and national interest and moved toward profits and self interest. This is not in the best interest of the nation as it only serves a very small number of corporations that seek global expansion as the means to increased profits.
This economic model has devastating effects on developed nations because of the drain upon those nations resources and the ever increasing burden of providing a social safety net for dispalced workers.
"Many hands make work light..."
http://www.thenation.com/article/163673/what-would-keynes-do
1.) Ban all union activity
2.) Abolish all labor laws
3.) Promote industry built apartment complexes in close proximity to the manufacturing facility
Sound like China? Well if you want to compete with China, your costs have to be competitive. That's why all these manufacturing jobs will never come back to the US.
which allow unions to invest their hundreds of billions in pension funds in companies but don't allow them any say in the companies operation if any money is contributed to the pension fund by the employer.
http://www.law.upenn.edu/journals/jbl/articles/volume4/issue1/Fogdall4U.Pa.J.Lab.&Emp.L.215(2001).pdf
Germany has an 80% unionization rate with union representation on the board of directors in most big companies and is doing the best in Europe and better than the US.
deflation is right around the corner.
Saying that devaluing the dollar is the answer is equivalent to telling citizens it's in their interest for everyone to take a massive pay cut.
Corporations benefit from a weak dollar, but US citizens who haven't seen an income increase since the 70s are hurt by it.
Obama isn't going to change any of these things.
Its our dollar(at least the Fed's dollar) and as long as there are people that want work and low inflation there are not enough dollars in circulation so demand is sufficient for businesses to create more jobs.
The trade deficit has to be paid either by individuals borrowing or the government borrowing, so far the Fed printing money with the government borrowing is the only feasible course because the private sector doesn't have the ability to borrow as much as is necessary.
Keynes said #1 never, ever, ever run a big trade deficit or you will get the economy we have. He would be appalled at the US sending large parts of its manufacturing to China and elsewhere overseas, firing its US workers and importing the products made almost duty free. This caused the stimulus to be diluted because a large portion of it went to buy products made overseas for companies like Walmart's causing their manufacturing to hire more workers instead of ours reducing our taxes and making our deficits soar.
Acknowledging that the State requires financing for military protection and social services, and acknowledging that this it what taxes are for, why don't we simply figure out how much that all costs and reverse engineer our way to knowing how much labor each American citizen needs to contribute?
Could we not then allow the computers and machines to lessen our human burden? Could we not share the remaining work load and, instead of working 40 or 50 hours, and instead of 1 person doing the work of 2 or 3, why not just spread it out and have everyone work 25 hours per week? Wouldn't it be interesting to see what else life has to offer other than scrambling for dollars and fretting over finances?
Again, this is an honest question that may expose my own ignorance, but I tremain curious nonetheless. Any thoughtful reply would be appreciated. Also, there was a lengthy delay in this being posted, so I rewrote it after I walked the dog. My appologies if it gets posted twice.
If there is one segment of the population that is unemployed, and another segment of the population that has suffered consolidation and down-sizing so that one person is now doing the work of 2 or 3 people, why can we not simply divide the work hours evenly among all available workers?
It is a given that the State apparatus needs funding for military protection and other social services, but these expenses couls be determined beforehand and then we could, as a nation, produce to that level.
Machines and computers actually do the work of many people, why don't we learn to enjoy that fact and work less? Isn't there more to life than wealth building and fretting over finances? Imagine working 25 hours per week instead of 40 or 5., What sort of people would we be; more relaxed, less aggressive, healthier, happier, more cooperative? These are just guesses, but I am curious to know what the extrapolated affect of working less would be.