People talk a great deal about free trade. But for better or for worse the real world that we live in is more a mercantilist world than it is a free markets and free trade world. And in this mercantilist world there is a fundamental divergence between the goal of our corporations, which is to maximize profit, and the goal of rebuilding manufacturing here in the United States.
The modern Chinese government wisely exploits the fact that our great American companies take as their main mission in life to make as much money as possible for their shareholders. Companies can maximize profits by taking their technology and know how to China where they receive subsidies, in the form of tax breaks, shared investment, and undervalued currency. These are the factors that in high-tech manufacturing are far more important than lower wages. So our companies manufacture overseas and import the goods they once made in America back into the United States. Our companies do not regard it as part of their mission to take care of the American economy.
In this real world a determined and effective government, like that of China, can make that shift of our production to their country happen on a large scale. That is what has been happening and it continues to happen. And none of this is effectively countered by our standard discussions of the need for better education, more basic research, etc. The inducements offered to our companies are working and our domestic manufacturing is disappearing.
What can we do to change that result? We do not have a government experienced in giving out these subsidies or well organized to support chosen companies as national champions. That is not our tradition; rather In the Unites States our traditional government actions have been tax incentives and tariffs.
Tax incentives: We are used to the idea of R&D tax credits for corporations; so why not corporate tax credits for companies that have high value added in the United States? Make the corporate income tax lower, but make it lower in proportion to the productive activity that these companies actually have in the United States, not somewhere else. Use the corporate income tax rate as an incentive to produce here rather than somewhere else.
Tariffs: With our present grossly unbalanced trade we are importing the manufactured goods we once made here and exporting far less value than we import. We are living beyond our means, consuming more value than we create while our manufacturing is withering away in the process. This is not necessary; we can and should balance trade, and U.S. tariffs have a long history of contributing to that goal in the past.
Almost ten years ago Warren Buffet proposed in Fortune magazine a very good and straightforward way to balance trade he called import certificates. Basically if you export you get certificates for the value of goods you export and these you can sell on an open market. And no-one can import into the U.S. without buying certificates whose face value equals that of the planned import. This automatically balances trade.
So even in a mercantilist world, and even within the limited framework of what we have traditionally done, we could act to incent production here and to balance trade. And there are many other incentives to produce and many other tariff-like actions beyond those just mentioned that could produce those results. Why is it that these actions are not even a significant part of the discussions about how we could end the destruction of our industries and how we could revive manufacturing?
We are not taking the actions we could to revive and strengthen manufacturing because there is no one "we". We, meaning most of the country, would benefit from taking such actions, but there is another "we" that would lose from such a change; the global corporations. But the political power in Washington of the two "we"s is measured more by money and influence than by the number of people who would benefit, and the edge in money and influence is overwhelmingly with the global corporations.
Given the real world we live in, and the current motivation of our great global corporations, it is time to apply to our own situation the immortal words of Pogo: "we have met the enemy and he is us". To solve our manufacturing problem we will first have to face up to our political one.
Your article and the responses it's evoked show why the political parties need to update their ideologies and the interconnectedness of their assumptions. It is interesting that neither party has been willing, as a whole, to tackle the question of protection, which, as readers' comments indicate, can be connected to a whole range of issues, including commodity scarcity, economic and national security, US-China relations, globalism, and the fate of consumer society.
As a historian I'm very interested in the role of the tariff, which actually did a lot for our economy during the 19th century. We would never have developed as a manufacturing power without it.
I'm curious whether readers know of any prominent intellectuals or political groups/figures working on these issues, with the goal of creating a more protected national economy.
The primacy of shareholders that has developed over the last three decades has made global corporations less accountable to non-shareholder stakeholders and when they are called upon to be transparent and accountable for their lobbying, their PACs activities and Citizen United sanctioned political ads; unfortunately they resort to playing the blame card.
Too few jobs are a result of multiple root-causes, and unless the root-causes are addressed, solutions will be unsustainable. Dr. Gomory’s excellent article attempts to address two of the most significant root-causes and proposes mitigating solutions; like a tax system more focused on domestic growth and Buffet’s balanced trade model.
to control the issue of their money,
first by inflation and then by deflation,
the banks and corporations that will
grow up around them (around the banks),
will deprive the people of their property
until their children will wake up homeless
on the continent their fathers conquered." Jefferson tried to warn us. This isn't taught in schools today. Shocked?
But I think to identify the global trade order as one overrun with mercantilist states is highly exaggerated with the exception of China, as more and more trade barriers and non-tariff barriers are falling as a result of proliferating free trade agreements. An American form of mercantilism is hardly a panacea for our manufacturing dilemma and Obama has instead focused on more appropriate remedies, including bolstering exports, tax and health care reform, negotiating trade deals, and attracting more foreign manufacturing investment to the U.S.
When that happens our mfg costs will be competitive, but we will have no mfg skills or infrastructure.
What do u call that? Third world country. Try visiting one. That is what u will see.
Mercantilism only makes a country worse of and China is doing well despite its protectionist nuttiness, not because of it. And theory and research shows that even unilateral free-trade economies do better than resorting to protectionist measures which benefit some inefficient industries at the expense of the greater economy and consumer. We will better off taking as much undervalued goods from China as possible. It is almost as if they are providing us free aid. Take it.
Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.’--Frederic Bastiat, 1850.
Kai
You ask, ‘So, given that employees and their families are the consumers, you would agree that average wages should keep pace with corporate profits as they did from 1950 to 1980.’
As consumers, I would like them to be able to avail themselves to the lower market determined prices that comes from free trade.
As producers, I would like see labor be able to avail themselves to the increased opportunity and whatever market wage their labor is worth as determined by free-market forces.
As savers, I would like to see them be able to avail themselves to a market determined interest rate.
As borrowers, I would like to see them be able to avail themselves to a market determined interest rate.
As an investor, I would like to see them be avail themselves to the increased opportunity of investing overseas or in companies that do trade overseas and the market determined return that comes with it.
However, it is the role of consumer in any transaction that the government should consider carefully…whether you are a consumer of products (as a shopper), money (as a borrower), labor (as an employer), opportunity (as an investor), etc…
Kai
You state, ‘The "consumer" can not consume if she/he does not have the means/money to consume with.’
True. In which case consumption, the economy, and real wages should reduce to a sustainable level, whereby either domestic consumption picks back up or foreign consumption does as we become more competitive. Who says that producers here have to sell to consumers here?
You state, ‘In order to have the means/money one must have a job to earn it with.’
Or you must be able allowed to create your own value via less regulations, taxes, and restrictions that are stopping you from creating your own value….I can think of 20 jobs right now that can be easily done with little or no capital down but are prohibited by licensing and regulation laws that stop people from becoming their own boss. Thanks for making the case that the government is prohibiting people from either creating their own value or employers from hiring people to create value at a wage they can afford. This is lose (employer—no workers and business expansion)-lose (worker—no job or new business and consumption power )-lose (government---less job creation, more welfare payments, less tax revenue) for America.
Carry On, Lads.
It's not money corrupting politics, it's politicians corrupting commerce to get they hands on the money. I think it was Will Rogers who said, the only way to get the money out of politics, is to get politicians out of the money.
True enough, and helps explain the breakdown of rule of law. More regulation = more corruption = less enforcement of regulation. The regulators stay busy making life hell for the little guys, while the big players buy influence.
Then he suggests:
1. Tariffs
2. A market to ration imports
3. Higher corporate taxes on production outside the US than in the US
Tariffs benefit producers at the expense of consumers. A market rationing imports, just limits what citizens can buy from overseas firms. And taxes are already higher on production outside the US, since firms must first pay that nation's tax (though they get to deduct these taxes from their income) before paying US income tax. You can bet that corporations providing local services will be very interested in this, making their industry more profitable than other multi-national companies.
Unfortunately, Gomory, acknowledging our mercantilist economy, suggests nothing to make it freer. He should suggest removing government restrictions for new companies and regulations that favor big business. And what about lowering corporate taxes so we're competitive with other countries?
He says businesses are moving to China for "subsidies, in the form of tax breaks, shared investment, and undervalued currency" These are means by which China takes from its citizens to benefit businesses there. Why shouldn't we take advantage of China's willingness to force its citizens to subsidize businesses; thus, subsidizing owners of firms who open a shop in China, allowing them to sell their goods to us at a lower price? When China wises up and eliminates these subsidies, then we can move the business back to the US.
You reply talking about measures of the state of the economy, and averages.
You bring up Romney, I guess because you assume I support him. I don't, as both he and Obama are for more government and less freedom. I don't see any substantial difference other than Romney is more likely to start war with Iran, and wold probably be better on the regulatory front than Obama. On spending they are about the same: look at Romney's record of increasing spending by 32% and debt by 52% as MA governor - http://www.usgovernmentspending.com/state_spending_2002MAbn http://www.usgovernmentspending.com/state_spending_2007MAbn
I believe those voting in 2012 for Romney are making the same mistake voters made in 2008. In 2008 voters chose Hope and Change. In 2012 a vote for Romney is Hoping he will Change into a fiscal conservative.