Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Economic Stagnation: Have We Run Out of New Products? No, But We Are Outsourcing Their Production
The stagnation of the U.S. economy in spite of federal deficits of $1.5 trillion dollars in both 2009 and 2010 has added to the belief that Keynesian deficit spending is ineffective. We subscribe to that thesis. The President’s $800 billion dollar economic stimulus plan, 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing economy. None of the investments in wind and solar energy would have passed cost-benefit analysis and they provided very little sustainable employment. The housing sector has not recovered from the burst of the housing bubble which stranded millions of construction workers who are still mostly unemployed. In the manufacturing sector, investments in new plant in the U.S. barely cover the depreciation allowances let alone stimulate net new investment.
The failure of the Recovery Act of 2009 to increase employment while spending over $782 billion and running budget deficits of $1.5 billion per year had a number of possible causes: 1) the continued malaise in the housing sector hung over by hundreds of billions of dollars of mortgages in default, 2) the fact that the stimulus package ear-marked spending for every cause backed by Obama supporters, none of which included incentives to unsubsidized private investment, 3) the continuing trade deficits, which increased to $53 billion in June, 2011, represent a continuous drag on the GDP of over $600 billion a year, and keep costing us millions of manufacturing jobs, 4) government policies actually impede the development of fossil fuel exploration, drilling, and production by the Obama administration in its subservience to its anti-carbon emission obsession, 5) the anti-business policies of the Democratic Congress including its actions to regulate banks and other firms in the financial sector and EPA’s inflicting foolish environmental burdens on new and existing manufacturing businesses,
All of the foregoing contribute to the unwillingness of businesses to invest in new or expanded production facilities in the U.S. New products like the I-Pad and mobile telephones were invented here but are produced overseas, with most of the product exported free of duty to the U.S The only exceptions are the investments of foreign automobile makers in the U.S.,and investments in the highly subsidized so-called renewable energy plantations. As to the latter, it is worth noting in the news today (8-15-11) the announcement of the bankruptcy of Evergreen Solar which listed $485 million of debts, much of it owed to state and federal agencies which subsidized the building of its solar panel factories in Massachusetts and Michigan. Last year the company began producing solar panels in China. That entity is expected to survive the bankruptcy with different ownership.
It is possible that we are witnessing a reduction in investment opportunities. We may be at the end of a long creative period and inventing to few new products to fuel the recovery. The nineteenth and twentieth centuries had long business cycles fueled by the building of railroads coast to coast, accompanied by the growth of the steel industry, coal mining, oil, and electricity. Likewise, the growth of the automobile industry and interstate highways, the domestic appliances industry, radio and television, movies, the computer industry, the growth of the cell phone, etc. fueled the economic growth of the U.S. for decades. We still consume these products but most are produced abroad.
Have we really run out of great investment opportunities? No, but American corporations find it more profitable to produce their products abroad. I-pad was invented by Apple Corporation but it decided to produce it in China. As we reported in an earlier article, in the July 5, 2010 issue of Business Week, Andy Grove, a founder of Intel and its former CEO, wrote:
The great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years. …Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers. … Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.
And we give them favored treatment when they export the products they produce abroad to us. We need to give companies an incentive to produce goods here. We have proposed the single-country- scaled-tariff that is imposed on imports from countries with which we have been running large chronic trade deficits. The tariff rises as our trade deficit increases and falls when it diminishes. It would not affect countries with which we are experiencing relatively balanced trade. We ought to impose these scaled tariffs before we decide that we have run out of investment opportunities.
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