Replies

(The following is a repost of No. 509):

I've explained the benefits in several posts, but I suppose you don't feel my arguments are "serious" because they don't agree with yours.

According to your novel theories, massive amounts of U.S. capital should be flowing to low-wage countries, especially China and India. Your theories utterly fail to explain why most capital leaving the United States, including manufacturing investment, flows to other high-wage countries, such as Canada and Europe. According to a study by Deloitte and Touche Consulting, 94 percent of outward U.S. foreign direct manufacturing investment in 2001 flowed to other rich countries. Yes, 94%. If low wages drive investment, how do you explain the fact that, during the past decade, the United States has been a net recipient of an annual average of $20 billion in foreign manufacturing investment?

As many American companies can attest, investing profitably in China and India remains a challenge—because of their underdeveloped infrastructure and legal systems, undereducated workforces, remaining trade barriers, and limited consumer markets. American companies invest less than $2 billion a year in China, and far less in India. That compares to the nearly $200 billion invested each year in our own domestic manufacturing capacity, and $100 billion a year invested by American companies in the rest of the world (and most of that in other rich countries). At the end of 2001, American companies owned more than 10 TIMES as much direct investment in the tiny, high-wage Netherlands ($132 billion) than they did in China ($10.5 billion) and India ($1.7 billion) combined. Obviously, wages are not the only, or even the main, driver of foreign investment.

Your flawed theories also fail to explain America's continued export success in world markets. Americans remain the world's leading exporters of manufactured goods. The United States today accounts for a steady 12 percent of global exports, the same share as two decades ago, and three times China's share. Chinese exports to the United States have indeed grown rapidly in recent years, but at $125 billion last year, they represent just above 1 percent of America's gross domestic product of almost $10.4 trillion. There is nothing alarming about the fact that Americans spend 1 percent of our income on products made by the one-fifth of mankind that lives in Mainland China.

Like many before you, and including Pat Buchanan, you confuse the passing pain of a recession with a shift in fundamentals. Yes, the recession of 2001 and the slow recovery have been especially hard on the manufacturing and high-tech sectors, but neither is in danger of disappearing. Manufacturing output in the United States remains 40 percent higher than it was a decade ago, and double what it was in the 1970s. We can produce more with fewer workers because of soaring productivity. In information technology services, the United States remains the world's top provider. Under what contorted economic theory does rising worker productivity—up an amazing 4.8 percent in the Untied States last year and still rising—turn a rich country into a poor country?

Obviously, competition from China hurts some U.S. sectors and companies and will even drive some of them out of business. That is an expected result of competition. Trade with China allows our economy to shift production to those products and services where we enjoy an even greater advantage, raising our overall productivity. Erecting new barriers to trade and investment with China would restrict the liberty of Americans and would weaken our economy by reducing competition and raising prices. It would benefit the few at the expense of the many.

American workers retain huge advantages when competing in the global economy. When we shake off the current slowdown, as we have every other postwar recession, American workers will be more productive than ever.

Manufacturing output in the United States remains 40 percent higher than it was a decade ago, and double what it was in the 1970s

False. These are numbers you posit wihtout sources or basis for credence. Deloitte & Touche brought us ENRON. Need I say more.

I do know that the basic primary industrial declines are structural (i.e., PERMANENT) not cyclical which is what the Free Traders always try to assert. And it has not been 'productivity' increases, but outsourcing which accounts for the structural destruction of our industrial infrastructure. Aircraft production is down to a puny fraction of what it was in the 80's. Car production is also way down when you look at actual value-added by the so-called 'U.S. assemblers' of cars from the foreign car companies. Steel production is way down. Computer production is way down. Tool Manufacturing is almost extinct. The U.S. industrial base is running on fumes.

And this little gem of yours deserves a rejoinder:

At the end of 2001, American companies owned more than 10 TIMES as much direct investment in the tiny, high-wage Netherlands ($132 billion) than they did in China ($10.5 billion) and India ($1.7 billion) combined.

No sources. No credence. And the actual PRODUCTION CAPACITY of China's U.S.-owned 'assets' DWARFS the Netherlands. And let's look at your '$10.5 billion number. First, you should be aware that the foreign companies can only own 50% of Chinese enterprises. They have to partner. But guess who actually supplies ALL the capital, hmmmm?? So double your number right there. GM is outsourcing $10 billion in parts production to China. Gee, you think they are doing that on less than state-of-the art machines? Motorola is investing by 2006 $10 billion in the latest state-of-the art semiconductor fabrications facilities...and their R&D labs that go with them... 'saving $50 billion if invested in the U.S.' Right there, that should tell your numbers are drastically understated for their real value.

It's Just like China's Army budget. Don't be fooled. The low wages skew every calculation. It is in reality a sizable entity, getting more modern all the time. Boeing is outsourcing its tail-section fabrications operations to China. Pretty soon that will be the end of Boeing. It is already forced into outsourcing 95% of its next plane design.

These are not massive amounts of U.S. capital exiting? You live in a paper castle if you persist in that fable.

The following excerpted article bears repeating here:

"So what is limiting the market for American-produced goods? The answer, of course, is imports. Despite the slowdown in the U.S. economy during the 2000-2002 period, American consumers still increased their annual purchase of foreign-made autos and auto parts by $6.9 billion and of imported consumer goods by $21.5 billion. In all, Americans imported almost $1 trillion worth of manufactured goods last year. Though there was a slight drop in total manufactured imports during this period, the cause was concentrated in certain sectors, such capital goods where imports dropped by $66.5 billion. But capital goods are used in American production, so this decline is consistent with a cut in U.S. manufacturing. Indeed, the main cause of the slow recovery is the decline in business investment spending in the United States, as major firms look to invest in factories overseas.

"The result is a loss of jobs that is structural, not cyclical. Two economists at the Federal Reserve Bank of New York, Erica L. Groshen and Simon Potter, have recently published a paper that answers in the affirmative the question they pose in its title "Has Structural Change Contributed to a Jobless Recovery?" They found that 79 percent of employees who have lost their jobs worked in industries affected more by structural shifts than by cyclical shifts, meaning that their jobs are not going to come back by the natural working of the business cycle. "Job losses that stem from structural changes are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job," write Groshen and Potter. They add, "In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment."

Oddly, though 90 percent of the jobs lost over the last three years have been in manufacturing, Groshen and Potter never mention this sector. Instead, they note that several of the fastest growing industries in the 1990s, communications, business services, and security trading have suffered as their bubbles have burst (e.g. "structural downturns because of unsustainable overexpansion"). These, of course, were among the much hailed "new economy" jobs which were supposed to replace manufacturing. Groshen and Potter do mention "reorganization of production, and local or international outsourcing" as causes of structural job losses. Local outsourcing would, however, only shift jobs within the economy. It is international outsourcing, along with the "reorganization of production" into global supply chains, which has cost the United States manufacturing jobs and manufacturing capacity.

Groshen and Porter do not make policy suggestions, but the implications are obvious. Macroeconomic policies like tax cuts, deficit spending, and low interest rates will not revive the manufacturing sector because they do not address the structural challenge of imports and outsourcing. The structure of American production for the American market has to be purposely rebuilt. The foundation of a new American economy that preserves manufacturing as the most important sector is a new trade policy that restricts imports.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

In sum, your 'cyclical' explanation for the jobless 'recovery' is debunked. And so is the general notion that cyclical recovery can make things right again. It won't bring back Motorola, Intel, or Boeing. We need to take drastic measures to preserve the industrial heart of our national defense base.