January 26, 2010    Volume 17, No. 2

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The Economic State Of The Union 2010: What Replaces The Debt-Driven Economy?


By Charles McMillion
cwm@mbginfosvcs.com

The last two difficult years could be a mild warning for the future as the internal, cost-cutting logic of lifeboat ethics and the economic race to the bottom accelerate hardship while governance disintegrates further and the concentration of private wealth and power soars.

Over the past decade of concentrating wealth and power, the United States lost 1.5 million private-sector jobs; incomes, private investment and industrial production all fell; and "average" real net worth per capita plunged by about 10 percent.

While Wall Street partied with record bonuses and taxpayer bailouts, for almost everyone else it was a lost decade unprecedented since the 1930s.

More ominous still is the fact that to achieve even these awful results households and the federal government each were forced to more than double all previous debt in history, adding almost $14 trillion in new debt.

That is, since 1999 households and the federal government, through new mortgages, credit-card debt, school and medical debt, tax cuts and war spending borrowed three dollars (net) for every one dollar of expanded Gross Domestic Product. Since 1980, debt has grown more than twice as much as GDP. The United States borrowed its entire past generation of sluggish growth...twice.

It was, indeed, an economic miracle that debt could soar so high for so long.

While the "bubble" jobs and asset values now are gone, the debts and their unprecedented leverage remain and are worsening rapidly. The ratio of household and federal debt to GDP peaked at 139 percent just after WW-II and fell thereafter to 79 percent in 1981. Since then, as attacks on governance intensified, debt rocketed to 131 percent of GDP in 1999, 171 percent in September 2008 and over 185 percent today.

For the past generation of accelerating globalization the financial sector's lock on policymakers has reversed previous surpluses and forced the United States to import and borrow massively (paying them hefty fees) rather than to produce and earn. Over this time, the full U.S. current account trade deficits totaled -$7.8 trillion. That is, the United States produced -$7.8 trillion less than it spent since 1981, borrowing and selling off assets to China and other foreign interests to pay for it.

Constant false media "reporting" notwithstanding, only trade deficits -- NOT federal budget deficits, no matter how large -- require offsetting foreign borrowing. (China, too, has government deficits.)

Worsening sharply each decade, U.S. trade losses totaled -$5.8 trillion over just the past 10 years -- far more than total GDP growth. The U.S. manufacturing sector lost almost one-in-three of its jobs, the worst decade in history, as manufacturers' production declined over the decade for the first time since the 1930s. Every manufacturing industry slashed jobs, with durable manufacturing losing 34.4 percent of its jobs.

Over the past decade, the auto industry suffered -$2.1 trillion of imports and -$1.2 trillion of net imports and production shortfalls. Of course, even this understates the effects of imports as the industry made substantial wage and benefit concessions, received aid and tax concessions from state and federal programs and cut corners on health, safety, environmental and other regulatory costs trying to compete with imports. That was even before bankruptcy filings and the massive taxpayer bailouts. The once mighty U.S. industry lost over 50 percent of its jobs in the decade.

The Obama administration's recent "Manufacturing Framework" does not have a single mention of the word "import," and "trade deficit" is mentioned only vaguely with no actual figures either of its size or composition.

China is now the world's leading auto producer. With the help of all the major global automakers pouring their best expertise, including R&D, into minority joint-ventures with China's state-owned giants, China is setting the standards for next-generation alternative energy vehicles. Now majority owned by American taxpayers, General Motors is still closing productive capacity in the United States -- giving-up U.S. exports -- as it opens new plants and R&D centers in China to help the exports of its majority Chinese partners.

Every industry is different but all face the same mindless U.S. "free" global trade policies and all are on the same path to China and elsewhere. Textile/apparel manufacturers lost 63 percent of their jobs over the past decade. U.S.-based producers of computer equipment lost 49 percent of their jobs; telecom equipment makers lost 46 percent; semiconductor producers lost 43 percent of their jobs.

China now has the world's largest and most profitable banks, insurance companies, telecom and Internet providers. It has lured all the world's leading financial and tech firms to produce in China, usually with Chinese partners that are quickly becoming serious competitors. Google is only the latest prominent firm to find it cannot compete alone against both a western-nourished Chinese rival and Chinese authorities determined to build "independent" innovation and capacity.

For the first time on record, the United States became a global net importer of Advanced Technology Products in 2002 and these high-tech deficits have offset all net earnings on "intellectual property" royalties and fees -- including franchise fees for Starbucks, McDonalds, etc. -- for the past seven years. That is, since 2003 the U.S. global balance on technology goods AND services trade has been virtually zero, offsetting no part of U.S. losses for autos and other manufactured goods, oil and gas or anything else.

China alone has a technology goods and services surplus with the United States of about $70 billion per year and it is worsening rapidly. The $2.4-trillion war chest of foreign currencies created by China's trade surpluses and other activities already generates six times as much for China's politically powerful U.S. investments -- currently mostly low-yielding U.S. Treasury bonds -- as all earnings of U.S.-incorporated companies and investors in China.

The broad, once incomparable and dynamic U.S. supply chain of manufactured goods and services has been hollowed out and continues to shift quickly to China and elsewhere. It is this vital supply chain decline, rather than concerns about any single product or group of products -- for which substitutes may or may not be readily available -- that is the most urgent challenge to U.S. economic and military security.

While the United States lost 1.5-million private-sector jobs over the past decade, the healthcare and education bureaucracies added 4.5 million jobs, and bars and restaurants added another 1.4 million. That is, but for these generally low-paying, low productivity industries that remain almost entirely protected from imports or offshore outsourcing, the U.S. lost almost 7.5 million jobs over the decade. The only higher-wage industry that added jobs was professional and technical services, which added 1.2 million jobs, mostly related to the unsustainable burst of federal deficit spending on foreign wars and homeland security.

The facts are clear: for 30 years U.S. jobs that are lost to imports do not move automatically to higher wage, more productive employment. In fact they generally don't get re-employed at all except through massive new borrowing by households and government. Even with unprecedented borrowing most re-employment moves down sharply to far less productive, lower wage employment that do not face imports and cannot export. Most U.S. economic destruction is not "creative" but simply and mindlessly destructive. Poorly regulated global commerce now undermines productivity and requires soaring debt to maintain much less to improve U.S. living standards.

After a lost decade and a generation built on soaring debt, large majorities of citizens are again -- or still -- demanding fundamental change beyond the failed race-to-the-bottom scam of tax cuts and deregulation. Dozens of competing small groups are again drafting economic strategies to rebuild U.S. productive capacity, stop soaring debt and sustain our remarkable living standard. None, however, comes remotely close to addressing the monumental scale of the crisis and none has the political muscle to stand up to the hirelings in the professions and in politics.

President Obama recently claimed that the wealthy and powerful Wall Street and China crowd "just doesn't get it." But as China adds almost $40 billion each month to its massive reserves and taxpayer bailed-out Goldman Sachs alone hands out $16.2 billion in "constrained" annual bonuses -- with the political power money entails -- why change?

Perhaps it is the President who really doesn't "get it." Or perhaps, like virtually every Wall Street-connected multimillionaire member of his senior staff, every Congressional Republican and most Democrats, he does "get it" but will not -- or most troubling, cannot -- change the disastrous U.S. policy direction.

-- Charles W. McMillion, president and chief economist for MBG Information Services, is a former Contributing Editor of the Harvard Business Review. He helped create the bipartisan U.S. Congressional Competitiveness Caucus a generation ago.


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