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How America Lost Its Industrial Edge
Insight on the News - Issue: 06/24/03 ^ | 11/9/03 | cp124

Posted on 11/09/2003 9:01:59 AM PST by cp124

How America Lost Its Industrial Edge -- comments by Eamonn Fingleton

How America Lost Its Industrial Edge By Paula R. Kaufman

Economic commentator Eamonn Fingleton speaks bluntly about what he sees as the frittering away of the United States' manufacturing base and what he regards as the consequent stagnation of the American standard of living. For those who believe in the superiority of the current U.S. postindustrial strategy, a reading of the OECD Economic Yearbook makes for a distinctly chastening study. As Fingleton puts it: "The United States trails no fewer than eight other nations, all of which devote a larger share of their labor force to manufacturing."

Fingleton, who distinguishes between high-end and low-end jobs, insists that the former, advanced manufacturing, must be reconstituted if the United States wants to remain a superpower. And what are these eroded industries? Semiconductor materials, ceramic packaging for semiconductors, charge-coupled devices (CCD), industrial robotics, numerically controlled machine tools, laser diodes and carbon fibers, to name only a few.

Where did the manufacturing of these items go? In most cases, Japan now dominates the more advanced areas of these industries, says Fingleton, who lives in Tokyo. Moreover, he argues, by dint of superior know-how and large capital investments Japan now enjoys a global lock on key manufacturing processes.

Fingleton recalls an America where men and women went to work and made the nation great, the old-fashioned way, by producing products people wanted and needed. And he juxtaposes the loss of advanced manufacturing jobs in this country with what he regards as the overvalued dollar, America's compulsion to borrow huge sums of money to fund its deficits and an illusionary U.S. prosperity based on unsustainable debt. For now Japan and China, both running huge trade surpluses, pay the United States' bills, he says. Where does this leave the American worker? He puts the answer simply: Out of work!

It is not true that Japan is in dire economic straits, Fingleton maintains. In a recent article in the London journal Prospect entitled "Japan's Fake Funk," he writes: "The Western consensus is that Japan is a basket case: It is not. That is a misreading by the West."

Meanwhile, he says, ill-conceived U.S. policies have failed to protect home-based American industries, leading to the transference of the most advanced technologies known to mankind. Fingleton says flatly that Japan has built up its industrial base at the expense of the United States, and that China now is chomping at the bit to do the same.

Insight: You speak of the transference of hard industries. What do you mean by that?

Eamonn Fingleton: I mean those engaged in advanced manufacturing. Specifically, industries that are both highly capital intensive and highly know-how intensive. They typically are many orders of magnitude more capital-intensive and know-how intensive than the most advanced of "New Economy" services, such as computer software developed in the last three decades.

Although Japan is known in the West for its leadership in certain consumer products such as cars and television sets, its area of greatest leadership is in much more advanced industries that largely are invisible to the consumer. Specifically, Japan leads almost right across the board in the sort of advanced materials, high-tech components and production machinery that are driving the electronic revolution. Some products may be assembled in the United States, but their key manufacture - the manufacture of the advanced components and materials - is done in Japan.

Q: Do U.S. manufacturers hide from the American people how dependent they are on foreign suppliers?

A: The impression given is that outsourcing is done within the U.S. and that available components come from many sources. But it is clear that most advanced components and materials now are outsourced from Japan. Corporate America is very guarded about its dependence on foreign suppliers, and this applies in spades to outsourcing by American defense contractors.

Q: So the United States has lost its edge in advanced manufacturing?

A: It is absolutely gone. The U.S. started losing its edge about 30 to 40 years ago. By the early eighties, America was already in serious trouble.

The sad truth is that advanced manufacturing accounts for only a very small part of the total U.S. economy and much of it merely is customizing equipment for the needs of the American market. Final assembly of manufactured products often is carried out in the United States and, to the extent that it is the sort of manufacturing that requires close proximity to customers, it likely will stay in the United States.

Meanwhile, high-tech manufacturing here largely has disappeared, particularly mass-production manufacturing. American companies can make almost anything if price is no object, and thus they can produce in small batches, for instance, for defense purposes. But they no longer master the mass-production techniques that are necessary to be cost-efficient in serving world markets.

Q: How vulnerable are Americans to job dislocation and unemployment because of what's happened to advanced manufacturing in this country?

A: I believe most of the job loss already has taken place. The blue-collar worker we all knew some 30 to 40 years ago was the backbone of the American economy. He or she was the best-paid worker in the world. But more and more Americans of average ability now are employed in "Mac-jobs" within the service industries. Typically they are not as well paid as in manufacturing.

The manufacturing jobs are gone, and the U.S. standard of living has been impacted badly by this. When I first came to the United States in the 1970s, I was stunned at how wealthy Americans then seemed. Since then, Western Europe largely has closed the wealth gap with the United States, so that living standards even in a country like Ireland that seemed poor a few decades ago are not far behind American levels.

Q: You describe significant job loss to Japan at the high end of the industrial food chain. Are low-end jobs endangered, too?

A: At the higher end of the food chain, Japan already has taken its bite: The jobs are gone. There now is a serious threat emanating from China, which is vying for the lower end of American manufacturing. Beijing is moving very fast and threatening what remains of the job base in the United States.

Q: What lies ahead for the American worker given this grim scenario?

A: Blue-collar workers have been hit hard and the erosion of their jobs will continue. But America is of course now overwhelmingly a service-based economy, and jobs in services largely are insulated from international competition. America as a whole is therefore feeling relatively little pain, even in currency markets.

East Asian economies are supporting the U.S. dollar as well as funding the U.S. trade deficit. As a result the dollar has not shown the effects of the hollowing out of American manufacturing, but we are about to see the free market play itself out in the currency markets.

Q: Why are East Asian nations supporting the dollar?

A: It is obvious to many in the U.S. financial sector that Japan, China and, to a lesser extent, Taiwan are supporting the dollar in an organized effort to benefit their own industrial policies. These nations want to promote their manufactured exports, and the lower their exchange rates are vis-à-vis the dollar the more profitable it is for their manufacturers to export.

The dollar now is vastly overvalued vis-à-vis the East Asian currencies. The best way to look at this is to ask yourself a question: How low would the dollar have to fall to enable the United States now to balance its trade deficit? To answer that, you have to look at both the state of American export industries and the extent to which the United States now is dependent on imports for goods that it no longer can make - at least cannot make in mass-production volumes.

The numbers are shocking. In the late 1980s the U.S. dollar traded above Y140 [yen]. Today, the dollar trades at Y117. So we have seen some depreciation even since the Japanese bubble collapsed in 1990. But, for the United States to begin to win back export markets, we probably would have to see the dollar fall to Y60 or lower. A 50 percent devaluation against the Chinese currency also is necessary.

Q: Why did this "hollowing out" of the U.S. manufacturing base take place?

A: It began in the 1960s and became really serious from the mid-1970s onward. One key factor early on had been a U.S. government policy of transferring technology to Japan. There was an American tendency to underestimate the Japanese competitors. This was particularly apparent in the electronics industry, where American companies that won contracts to supply semiconductors to IBM, for instance, would be required by IBM to license a "second source" - a company that could continue to supply if the primary contractor were hit by an act of God.

American companies like Motorola and Intel invariably chose to license Japanese companies to do such second sourcing, on the theory that the Japanese were incapable of eating America's lunch.

Also, there existed a very powerful Japanese plan to extract technology from this country. By the early 1970s, Japan was the second-largest economy in the world, a market that could not be ignored. Firms such as IBM and others were eager to sell their products in Japan. But the Japanese insisted on a quid pro quo. If an American company wanted to sell in Japan, it would have to manufacture there. Then, when the company moved to the next stage of the technology, it often closed down its American factory and served the entire world market from its Japanese operation. Sometimes technology transferred to the Japanese subsidiary leaked to the company's major Japanese competitors.

It all adds up, and now America imports much of its manufactured goods, with the current account deficit at 4.7 percent of GDP [gross domestic product] and almost all of it related to manufacturing. By comparison, the worst trade deficit in the early 1970s when [Richard] Nixon took the U.S. off the gold standard was just 0.5 percent of GDP.

Q: And as a result Americans lost jobs?

A: Many jobs indeed. But there was also the myth known as the "New Economy," which for 20 years had been growing in fashion.

I was working then at Forbes magazine in New York and I recall how struck I was by the large number of sophisticated people I met who exclaimed that "the future is in services! Manufacturing is a commodity business! We need to get out of it!"

Indeed, America did get out of it. Having allowed its manufacturing base to disappear, the U.S. now is in possession of almost an entirely service-based economy - beating all standards of economic history. The manufacturing sector exports, on average, 11 times more, based on per unit of output, than do service industries. Herein lies the problem: The United States no longer produces the goods to pay for its imports. You have to fund the gap.

For 30 years the United States has run these trade deficits. In the early days, they were relatively small and explained away as a temporary phenomenon. They long since have ceased to be considered temporary even by the most trenchant advocates of laissez-faire.

They have major negative consequences for the United States, particularly in undermining America's ability to project economic power abroad.

Don't get me wrong: I am not saying imports are necessarily a bad thing. But when the United States must go to foreign central banks with its hand extended to fund huge trade deficits for decades on end, something is desperately wrong.

Q: How dependent is the United States on foreign capital?

A: Highly dependent. Two countries now are serious capital exporters: Japan and China. There is one huge capital importer: the United States.

The U.S. Treasury is more and more beholden to the Japanese Ministry of Finance, which is a power-driven organization. One doesn't want to be an alarmist, but there is the matter of sovereignty here. It is inappropriate that the world's superpower is dependent on government agencies in other nations to get it through the day.

Q: You argue that the information economy is not the key to future prosperity. Why isn't it?

A: You are referring to the subtitle of my book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity. The point I was making is that the prospects for the information economy, meaning the all-digital service economy that the American press was then talking about, were vastly overblown. Many of the services being created were basically worthless, a point that has been resoundingly vindicated by subsequent events.

I should make clear, however, that my argument carried no Luddite content. I pointed out that the Internet and many other manifestations of the information economy that were so hyped at the time were indeed great advances for the world in general. But the idea that America could somehow establish a hammerlock on such services and thus graduate to some ineffably higher level of prosperity by providing them to the world was the purest nonsense.

In reality, many of those services are highly labor-intensive and, to the extent that international trade can be conducted in them, they should be located in places such as India, Russia, Latvia and so on, where labor is much cheaper than it is in the United States.

Meanwhile, the United States would be well-advised to follow the lead of the Japanese, the Germans and the Swiss by maintaining and enhancing its position in advanced-manufacturing industries.

Paula R. Kaufman is a free-lance writer for Insight magazine.


TOPICS: Business/Economy
KEYWORDS: bushbashing; catholiclist; dncoperative; economybashing; freetrade; manufacturing; realitysucks; violinmusic
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To: GatekeeperBookman
I'm optimistic - more tax cuts will be pushed by Bush probably every year he is in office. Hopefully he is able to win again. What we need though is a flat tax system, that would really cause a true renaissance here in the U.S.
61 posted on 11/09/2003 6:04:33 PM PST by Norse
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To: Norse
And by the way-the ChiComs have ownership of many factories OUTSIDE of China. Their Army has the ownership, that is. You know, Army like shoot 'em up bang-bang. I think they go by the handle 'PLA'. They make lots of the money from Wal Mart.

Wonder if they paid in cash for their name to be carved over the entrance to the main room at the Bush Library at A&M in Texas?? 'Peoples Republic of China'-sounds kinda nice don't it? Maybe they just loaned shares of one of their commercial enterprises, in lieu of cash?
62 posted on 11/09/2003 6:09:16 PM PST by GatekeeperBookman ("Oh waiter! Please,I'll have the Tancredo '04. Jorge Arbusto tasted just like a dirty Fox")
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To: GatekeeperBookman
Well, if I were going to invest in metals - (which is a good idea in my opinion..not everything..but just to diversify in case of a disaster) I would just buy gold. This stuff is solid, not physically of course, but it won't change in value on you, and if the world economy hits depression and war, this stuff will still hold its value. Don't worry about lead, etc. Go for the gold...like Rocky...
63 posted on 11/09/2003 6:09:24 PM PST by Norse
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To: Norse
I've seen all this - the causes of the problem are not free markets but instead regulation and taxation at home coupled with a currency that experiences swings in value.

We have a winner. Big government is the problem, not free trade.

64 posted on 11/09/2003 6:09:52 PM PST by VRWC For Truth
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To: cp124
Can I supersize your government you Socialist traitor?
65 posted on 11/09/2003 6:11:41 PM PST by VRWC For Truth
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To: Norse
You know what we need is a no tax system for some little time. I have an article from Paul Craig R.... ( can't say his name here on FR I think ), about how the Medieval serfs payed less than we do.

I am sure Bush will push tax cuts-that's the last defining difference between the Demoncats & Repulidumbs-the tax rate. That's all there is. And pretty soon we can just make direct cash payments to our neighborhood illegals-at the local church or grocary or hospital or whereever they may be. The gov will find great economies in direct payments-dirrect transfers of money. The mexicans send a BILLION a week South-they need the money.
66 posted on 11/09/2003 6:13:57 PM PST by GatekeeperBookman ("Oh waiter! Please,I'll have the Tancredo '04. Jorge Arbusto tasted just like a dirty Fox")
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To: Norse
Gold makes very poor cases & won't stand the temperatures of burning gun-powder. Brass is far superior. Even silver too soft-except for projectiles.
67 posted on 11/09/2003 6:15:30 PM PST by GatekeeperBookman ("Oh waiter! Please,I'll have the Tancredo '04. Jorge Arbusto tasted just like a dirty Fox")
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To: clamper1797
Demoncats & Republidumbs are in that business-wholesale. I would love to see figures from china with love for the pols on both sides. Wonder what really waits in Swiss banks & offshore in cheaper facilities-for Slick, Jimma,et al & maybe some nice respectable Republidimbs???
68 posted on 11/09/2003 6:18:16 PM PST by GatekeeperBookman ("Oh waiter! Please,I'll have the Tancredo '04. Jorge Arbusto tasted just like a dirty Fox")
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To: GatekeeperBookman
Sure it might melt but gold is practically indestructable.
69 posted on 11/09/2003 6:18:23 PM PST by Norse
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To: GatekeeperBookman
>You know what we need is a no tax system for some little >time.

I'm more in favor of incremental change - we don't need any shocks - also incremental is a far more realistic way to achieve our goals - must easier to make it happen.
70 posted on 11/09/2003 6:20:03 PM PST by Norse
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To: VRWC For Truth
Its all about power-money is power & for us 'citizens' it is freedom. Remember when it was illegal for us to OWN gold?? Now they want to criminalize personal firearms. I think I see a pattern.
71 posted on 11/09/2003 6:20:29 PM PST by GatekeeperBookman ("Oh waiter! Please,I'll have the Tancredo '04. Jorge Arbusto tasted just like a dirty Fox")
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To: clamper1797
BUT IMO any company who created their business on American shores whose citizens provided the opportunity to create that business and provided the safety of their military to protect that company then moves their business off-shore to make an easy buck and in the process screws the same American worker who made their existance possible ... are TRAITORS to me.

I agree with Norse on the proper reaction to being labeled a "traitor" because I see the opportunities and inevitable impertative of American companies and workers competing expertly and profitably in the Global Market of goods and services.

I'm not a traitor if I recognize NO obligation to provide you a well paying job. You earn your way in this life. You need to butch up your attitude and bolster your arsenal of productive skills and expertise.

Some of you folks should just come to peace with your world view, and go join the jaunty go-getters of AFSCME - whether asleep on the clock or enjoying open ended paid disability leaves, the fast paced lethargy of civil service is WAITING FOR YOU!

Put Lennon's "Imagine" on, and think of your new world. We obviously owe you big time. If we all knew you were an American, we'd have put you on the payroll at once.

72 posted on 11/09/2003 6:22:10 PM PST by ArneFufkin
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To: VRWC For Truth
Jobless in the USA
Paul Craig Roberts
Thursday, Aug. 7, 2003

Throughout history, peoples have been overcome by trends and forces that they were unable to recognize. Could the United States be losing its economy to forces economists mistake for benevolent free trade?

Traditionally, free trade has required a country's workforce to compete indirectly against the workforces of other countries in the markets for traded goods and services. Fears in the post-WW II era that U.S. wages and living standards would be undermined by imports made with cheap foreign labor proved to be wrong. U.S. labor was better educated and worked with more and better capital and technology, which made American labor much more productive. Higher productivity protected U.S. wages and employment from cheap foreign labor.

The collapse of world socialism and the rise of globalism have made U.S. capital, technology and business know-how highly mobile. Today, it is as easy – and far less expensive – for a U.S. firm to produce abroad for U.S. markets. Instead of locating its capital and technology in Ohio, California or South Carolina, the company locates its facility in China, for example.

By locating in China, the firm substitutes a workforce that is paid less than a dollar an hour for U.S. labor that costs $26 an hour. By locating in China, the firm also avoids expensive regulations, torts, employment taxes and discrimination lawsuits.

The mobility of capital and technology means that American labor now faces direct competition in global labor markets. This is a new development.

A Chinese person working with U.S. capital and technology is just as productive as an American. The Chinese worker can be hired for much less, because living standards and the cost of living are far lower in China.

The huge labor surplus in countries such as China and India means that wages are not likely to rise very rapidly in those countries. U.S. firms that substitute Chinese and Indian labor for U.S. employees are building in lower labor costs for years to come.

Eventually, as China and India become fully employed first world economies, wages will be bid up and labor will be paid according to its productivity. By then the U.S. might be a third world country.

Existing mortgages, cost of living and accustomed living standards prevent U.S. wages from falling to levels that would be competitive with China's. Americans have to seek work in their next best alternative when they lose their well-paying manufacturing and high-tech knowledge and service jobs to foreigners. By definition, these are less productive jobs paying less.

When jobs move out, skills move with them. At the rate at which the United States is losing software and computer engineering jobs, for example, how much longer will U.S. engineering schools be offering this major?

When manufacturing jobs are lost, so are jobs in trucking, warehousing, banking and insurance. There is a chain effect that reduces the overall productivity of the United States as a location of economic activity.

The loss of high productivity jobs takes away the ladders of upward mobility and wipes out human capital. A displaced U.S. software engineer cannot move to China or India to seek employment in his profession.

Retraining is not an answer, because almost the entire range of knowledge jobs can be outsourced. The Internet permits U.S. employers to hire people in India, China and the Philippines as stock analysts, accountants, researchers, designers, engineers, radiologists – any occupation that doesn't require a hands-on, face-to-face, local presence.

Economists assume that the substitution of foreign labor for U.S. labor is the benevolent workings of free trade. But what is being traded when U.S. employers move jobs out of the country? Many of our imports are products made for American markets by U.S. firms.

Economists mistake the free movement of factors of production for free trade. Raised on the theory of comparative advantage, economists know that free trade is mutually beneficial. They dismiss without thought any concerns that seem to call free trade into question. The case for free trade has been unassailable for so long that economists have overlooked that today's circumstances do not comply with the assumptions of the theory.

The gains from trade flow from each country focusing on what it can do best and trading for other goods. The idea that there are comparative advantages in production is based on countries having different endowments of immobile factors of production. When the theory was developed, agricultural output was an important component of Gross Domestic Product, and a country's advantages resided in its climate and geography.

David Ricardo discovered the principle of comparative advantage in the early 19th century. Ricardo recognized that the principle did not hold if all factors of production are internationally mobile. Mobile factors of production would migrate to countries that had the greatest absolute advantages. Those countries would gain, and all others would lose.

Climate and geography cannot migrate, but capital and technology can. Today, absolute advantage resides in an abundant supply of cheap and willing labor. Now that Asia is safe for capitalism, capital and technology flow to countries where labor costs are lowest.

The global mobility of factors of production is a new development. Until recent years, it was not safe for capital and technology to migrate outside North America, Western Europe and Japan. No first-world country had an absolute advantage in labor cost.

The collapse of world socialism changed circumstances overnight. U.S. labor now faces direct competition in global labor markets. The excess supply of labor in these markets will drive down wages, salaries and employment in the United States. As the dollar is likely to lose value under pressure from our growing trade deficit, the decline in wages will not be compensated by a decline in prices, and U.S. living standards will fall.

It is irresponsible for economists to dismiss these concerns by citing empirical evidence from historical correlations. New developments are not reflected in historical data.

Economists dismiss as "anecdotal evidence" the news reports of millions of high-paying U.S. white-collar jobs being moved overseas and filled by foreigners. American high school and college students are far more realistic than economists, as they search for careers that cannot be shipped out or given to foreigners on work visas.

U.S. labor no longer has the advantage of education, training, technology and capital over its foreign competition. Existing wage levels, however, assume that Americans still have these advantages. The extraordinary wage differences between the United States and Asia mean that jobs will flow out of America into Asia. Tax cuts and low interest rates cannot compensate for the huge wage differences.

U.S. corporations have made a strategic decision to move jobs abroad. What corporations will employ the displaced U.S. employees?

Dr. Roberts' latest book, "The Tyranny of Good Intentions," has been published by Prima Publishers.

Copyright 2003 Creators Syndicate, Inc.
73 posted on 11/09/2003 6:24:21 PM PST by cp124 (The Great Wall Mart)
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To: ArneFufkin
Another shameless free traitor
74 posted on 11/09/2003 6:27:16 PM PST by clamper1797 (Conservative by nature ... Republican in Spirit ... Patriot by Heart ... and Anti Liberal BY GOD)
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To: Willie Green
Advanced manufacturing certainly merits its glitzy, high-tech strategic status. But it exists at the pinnacle of the manufacturing infrastructure, and is reliant on a solid base of more traditional industries and interconnected suppliers

Absolutely, and that infrastructure of jobs upon which people can develop and grow their skills is being built by us at breakneck speed in China.

It's not really a puzzle. All we really need to do is ensure that our schools produce high quality individuals to enter at the ground floor. They will contribute to the system and make it possible to build.

Now, if only we could figure out how to teach them to read, it would be a start.

75 posted on 11/09/2003 6:29:54 PM PST by Held_to_Ransom
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To: cp124
This whole article is bull shit. Not once did the author mention UNIONS. Unions have killed the American manufacturing base - from the steel industry through high tech.

I graduated from high school in 1949. In my city, we had a depression. Finally, the Pittsburgh Plate Glass Company came in and built a $34 million plant to manufacture precision glass products. People who had been unemployed for years finally had a job. And within a year or two, they went on strike for more money, and destroyed the company.

Do they have my sympathy? Hell no. Let them starve.
76 posted on 11/09/2003 6:31:29 PM PST by jackbill
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To: jackbill
High tech has NEVER seen a union
77 posted on 11/09/2003 6:37:34 PM PST by clamper1797 (Conservative by nature ... Republican in Spirit ... Patriot by Heart ... and Anti Liberal BY GOD)
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To: cp124
Economic commentator Eamonn Fingleton speaks bluntly about what he sees as the frittering away of the United States' manufacturing base and what he regards as the consequent stagnation of the American standard of living.

Bump.

78 posted on 11/09/2003 6:40:19 PM PST by A. Pole
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To: clamper1797
From the wellspring of Arne-riffic bold, daring and spunky outside-the-box nonsense, consider this proposal:

Log off Free Republic. Find some job people will pay you actual cash-money to do. Find some talent or skill that people will pay you what you think you are worth to perform the job.

Having failed that, return to Free Republic and call people traitors and demonstrate that headshrinking cannibals straight from the jungle of New Guinea are more attractive employee candidates than you.

79 posted on 11/09/2003 6:46:28 PM PST by ArneFufkin
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To: cp124
What is happening is at least three things at once.

First, research is falling behind. The US may still have the lead, but others are catching up. The huge lead the US had at the end of WW II is gone.

Second, upgrading and modernizing is mostly up to the industry itself. This is a huge disadvantage compared to industries of other countries that had to rebuild after WW II and countries that are now building modern plants.

Third, wages are high, prices are high. and some of this is due to the factory workers themselves through their unions. Ayn was right about this.

80 posted on 11/09/2003 6:47:47 PM PST by RightWhale (Close your tag lines)
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