We will not rebuild our manufacturing base until the Wall Street banks which control access to capital make long term investments in hard productive assets (bricks, mortar, and machines) instead of continuing to engage in speculation (short term trades of paper).
One hundred years ago JP Morgan and other Wall Street financiers invested in trains, factories, ships and other long term capital equipment that allowed the US to build the largest and most productive industrial base on the planet. Today’s Wall Street titans create worthless paper instruments and make billions using them to speculate with the common people’s pension money. They’ve converted equities (stocks) from long term investments underlying fixed assets into short term speculative paper traded based on short term earnings and rumors. Corporate CEO’s and executives, rewarded by the short term thinking market traders for short term manipulation of earnings have shed productive assets (factories, R&D, people) to boost short term earnings and stock prices. As a result the productive manufacturing infrastructure has fled America gutting towns and destroying the middle class.
At the same time corporations are led by MBA finance types instead of product and sales people. This results in corporations focusing on internal manipulations (cost cutting, people cutting, and internal politics) instead of customers and innovation. The decline of GM dates from the beginning of the 1960’s when the financial managers wrested executive leadership from the product and manufacturing types. Large corporations today pay huge salaries to the financial and legal managers while starving the innovative and customer centric functions (marketing, sales, product development). The creation and destruction of Saturn at GM is indicative of the difficulty of any truly new business idea being developed, funded, and nurtured within a large corporation today. The mentality of the executive suite and Wall Street is too short term to sustain multi-year investments. Jobs are retained and bonuses are rewarded for the most recent quarter’s results, not the multi billion dollar revenue stream a new business will generate in five years.
Faced with a choice of investing $100 million in R&D that won’t pay off for several years, or taking that same $100 million and buying back stock today to inflate the PE multiple, the CEO will choose the short term financial move. The analysts of the Wall Street investment banks that profit from the buyback transaction will pump the stock by writing glowing reports of the brilliance of management for buying back the stock. Rewarded for this short term move, the CEO looks for more cash to buy back more stock. The hundreds of millions of dollars invested in factories over decades by his predecessors is a great source of cash. Those same Wall Street bankers will be more than happy to help the CEO shut down and sell off those factories in America and through their offshore offices help him develop relationships with Asian contract manufacturers who can make the products for him. Plus, they will help move capital from the US to Asia to help fund the construction of new factories, an investment in hard assets they would never have underwritten in the US.
The loss of the manufacturing base and redirection of long term investing in capital assets to short term paper speculation has a number of long term implications which are just beginning to be felt. Small business, the engine of creativity and employment in the US is now starved for capital, particularly if the business needs capital to build manufacturing operations. Twenty years of deindustrialization by big corporations has made banks extremely reluctant to provide long term financing for any kind of assembly or manufacturing operation. It is ironic that until very recently banks viewed financing a 100% mortgage on an unaffordable home to a poor credit risk was viewed as a less risky “investment” than loaning the same amount of money to a small US manufacturer to buy a machine tool that has a productive life of 20-30 years.
The lack of financing is problematic for small business but the evaporation of the US manufacturing base over the last 20 years is even more problematic. Twenty years ago an American entrepreneur with an idea for a new product could source parts for that product from a multitude of US manufacturers both big and small. Those US resources would respect his intellectual property and often provide engineering and technical support to help him work through design and manufacturing startup issues. Today, those suppliers no longer exist and neither does the technical knowledge they owned. The entrepreneur must go overseas to develop and produce his products where he will work with suppliers who will often steal his intellectual property.
Looking at the history of US innovation over the past 150 years, many of the breakthrough inventions and products came from creative entrepreneurs tinkering. Edison, Hewlitt and Packard, Jobs and Wozniak are just some of the tens of thousands of Americans who took ideas from concept to reality in garages and on kitchen tables. The easy access to parts and raw materials for trial and error experimentation plus the availability of capital and manufacturing assets close by once the products were ready for production, allowed them to produce their products and bring them to the largest consumer and industrial marketplace on the planet to realize their dreams.
Those of us who have worked in manufacturing businesses know that many ideas for new products or innovative processes come from the factory floor. In addition, easy access to factories allows new product ideas from other parts of the company to be tried and tested without visibility to competitors. Outsourcing of production eliminates this access to machines and production capabilities which is a critical input to R&D.
Great power and middle class lifestyle result from strong manufacturing infrastructures. A strong middle class is essential to the preservation of a democratic republic. Twenty years of neglect of our industrial base in favor of financial speculation is now resulting in declining standards of living and erosion of the middle class. If we don’t get serious now about rebuilding our manufacturing base in another 20 years we will be a third world debtor nation who must sell off its natural resources to the new prosperous industrial countries so our citizens can buy the cheap imported manufactured necessities for a subsistence life.
Rebuilding a strong manufacturing base in this country will require significant policy changes which neither political party will support today. For example:
1) Eliminate federal and state taxes on profits made from manufacturing in the United States. This will dramatically increase the return on investment in manufacturing assets, spurring the building of new factories and creation of middle class jobs. No doubt the tax revenue will be recaptured from the personal income tax collected on the new jobs created.
2) Tort reform including “loser pays all legal costs”, limitations on class action awards, and limitations on damages.
3) Return to tariff and quota levels of the 1980’s, at the height of American industrial prosperity.
4) Make imports pay directly for all infrastructure and service costs currently born by the government to support and manage imports. A duty can be placed on each container landed in US ports to cover a prorated cost to the taxpayer of the Coast Guard, Customs Service, Immigration Service, Border Patrol, Army Corps of Engineers, and other government agencies involved on oversight or support of imported products. A percentage of total government expenditures associated with highway construction and maintenance should also be levied on imports given the transportation of these imports across the country require use of the public transportation system.
5) Redirect some of the billions in federal money currently supporting soft education to technical schools and training to enhance the skills of workers going into the new factories.
6) National “right to work” law ending closed shops. Make unions collect dues directly from workers, not through payroll deductions. No card checkoff law.
7) Exit all multilateral trade agreements and treaties, including WTO, where American sovereignty is given to international organizations. All future trade agreements should be bilateral and reciprocal. No more trade agreements where the US gives open access to our market while our “partners” retain tariffs and non-tariff barriers.
8) Immediately implement reciprocal non-tariff barriers with all importers. For example a nation’s customs agency manually inspects 100% of containers imported from the US and US Customs sample inspects only 5% of containers, US Customs should immediately begin inspecting 100% of the containers from that country. The cost of hiring additional customs to handle the higher volume will paid for by the levy on every container described in paragraph #4.
9) Balance the federal budget and begin paying off the debt by dramatically downsizing the federal government and shifting activities (such as education) to the states who can then decide how much to spend on these activities. Focus federal government on those activities specifically outlined in the Constitution as being under its administration (defense, coinage, foreign treaties, interstate commerce).
10) Simplify corporate tax structure and the individual income tax. Go to straight percentage rates without deductions. The only exception being earnings on profits derived from US manufacturing should not be taxed.
11) Apply a VAT to imported products.
12) Streamline approval process for developing land and constructing buildings for manufacturing.
13) Massive investment by government in repairing and upgrading the national transportation system - highways, bridges.
14) Develop domestic energy resources including petroleum and nuclear to achieve energy independence.
15) Beef up operations, sales, and marketing training in business schools.
The survival of our democratic institutions and the middle class depend on a national focus to rebuild our industrial base. Over the next 10 to 15 years much of the manufacturing knowledge and skills will be lost as the baby boomers who started their career in manufacturing retire. We need to put this knowledge to work, rebuilding our factories and teaching the next generation how to produce things instead of shuffle paper.
Excellent post. Bravo.
Item (8) is also a national security issue.