January 19, 2011    Volume 18, No. 1

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Economic State Of The Union: The Future Will Likely Be Worse


By Charles McMillion
cwm@mbginfosvcs.com

The United States continues to live far beyond its means while losing its once uniquely dynamic productive expertise and its financial independence. The standard business news narrative is that the United States is now 18 months into recovering from the worst downturn in 70 years. Private sector jobs grew in each of the past 12 months. Industrial production, real wages, after-tax incomes and personal spending are all rising with monthly savings up from post-1933 lows three years ago. Prices are stable. Global corporate profits and Wall Street bonuses are again at record levels, helping reflate equity markets to 28-month highs.

But in the first U.S. economic lost decade since the 1930s, there are still 3.2 million fewer private sector jobs than there were 10-years ago, including one-third fewer manufacturing jobs. There is less private investment and less real per-capita net worth. Income inequality is at the highest level since the 1930s, and the median real annual income of men with a college degree is less than it was for men with four years of college in 1966. No surprise, consumer spending this decade is the weakest on records back to WWII.

The official rate of unemployment is 9.4 percent, even with an unprecedented 1.2 million fewer people counted in the labor force than were counted two years ago. Long-term unemployment is off the charts. Even excluding record levels of involuntarily part-time employment, the true unemployment rate is nearly 14 percent.

This record would be far worse but for an explosion of new private and public debt. Household debts almost doubled from $7.2 trillion in 2000 to $14 trillion in 2010. At the same time, government debt more than doubled from $5.7 trillion to $14.0 trillion.

This combined private and public increase of over $15 trillion in debt for the decade compares with an increase of just $4.8 trillion in nominal Gross Domestic Product. That is, over the past decade the United States borrowed $3 for every $1 of growth in output. Since 1980, the United States has borrowed over $2 for each $1 of GDP growth.

As a percent of GDP, household and government debt peaked at an unprecedented 138 percent at the end of World War II but fell steadily to 76 percent in 1975 before skyrocketing after 1981. Since then, debt soared to 170 percent of GDP in 2008. At the start of 2011, debt is at 187 percent of GDP and is still rising rapidly.

Personal savings rates have rebounded over the past three years but only through transfers from government to households. Since December 2007, total real worker compensation and earnings are down, but after-tax real incomes are up -- only because personal tax payments fell by 26 percent and government insurance such as Social Security, Medicare and other payments to individuals rose by 27.5 percent. The result has been skyrocketing federal deficits.

This is why, for the first time since 1934, starting in the second quarter of 2008, the United States has suffered net national dis-savings and dis-investment: The government now is borrowing more than all net businesses and households' new savings and investing combined.

Since 2000, U.S. demand for goods and services has exceeded production by $6.2 trillion. This is far more than all GDP growth. Foreign-made imports and foreign borrowing made up the difference. It is wildly wrong to assume that U.S. demand drives U.S. production and jobs. However, Wall Street traders and importers make so much money from global arbitrage that, for all the hype about "globalization," they have made serious discussion of global commerce the new "third rail" of economic policy -- touch it and you die of a thousand smears.

The clear, simple fact is that production, jobs, income and tax revenues lost to trade deficits have devastated the U.S. economy to the point where it may already be too late to fully recover. U.S. jobs and businesses lost to net 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 does not face imports and cannot export. Most of the economic destruction from trade is not "creative," but simply and mindlessly destructive -- although it is often wildly profitable for Wall Street traders, importers and countless "think" tanks, media and politicians they employ.

NAFTA with Mexico was sold as a surefire way indefinitely to extend U.S. trade surpluses with Mexico -- superior U.S. productivity would certainly more than offset Mexico's lower production costs. Seventeen years later this has proven to be a near $1-trillion mistake in judgment by Wall Street-sponsored politicians and "experts" who nonetheless continue to dominate media coverage of trade issues.

By far, the most crippling U.S. economic policy mistakes have come with China with scores of "breakthrough" agreements since 1989 all promising (by the same Wall Street and importer sources) to unlock vast new U.S. net exports. Yet, just since 2000, the U.S. manufacturing trade deficit -- and their production, jobs, incomes and tax revenues -- with China now exceeds $2 trillion, including virtually every advanced industry except semiconductors and aircraft, which China is now targeting.

China's strategy of luring the best global commercial and financial firms to produce in China in joint ventures with Chinese state-owned firms has led to the remarkably rapid and massive transfer of technology and expertise -- and at bargain rates for the Chinese. Despite a relentless disinformation campaign regarding Apple products using compromised "think" tanks and major media, the fact is that this transfer has devastated the vital technological advantages long enjoyed by producers within the United States.

The historic U.S. global surplus in Advanced Technology Products was lost in 2001 with deficits mounting almost every year since. Indeed, over the last decade U.S. global deficits in manufactured ATP have offset all the net global "Intellectual Property" income for royalties and fees for all "U.S." firms, from Apple, Intel and Microsoft to Goldman Sachs, McDonald's and Viacom. In 2010 and in most recent years, the United States suffered a net deficit in global commerce for technology goods and services. That is, earnings from technology -- including from intellectual property -- no longer pay for any portion of the soaring U.S. trade bill for autos, computers, cell phones, apparel or oil.

"U.S." companies report a total of only $2.5 billion in annual net Intellectual Property earnings in China while the U.S. government reports net annual payments of over $46 billion to China just to service past trade-related U.S. borrowing. With the data unclear, it may not be necessary to quibble about exactly what percentage of China's now nearly $100-billion annual ATP surplus with the United States reflects value added in China (and, for U.S. exports, what percentage was added in the U.S.) rather than third countries. What does matter enormously is that the only means the U.S. has to offset vastly lower production costs in China and elsewhere -- global U.S. technology superiority -- has been lost.

The major U.S. export to China over the past eight years is soybeans.

Even with massive net import bills for oil and iron ore during the decade, China's total current account surpluses totaled over $2 trillion for the decade. It amassed over $2.5 trillion in global manufacturing surpluses led by $850 billion in global net exports of machinery, computers and parts. Along with its global earnings on interest and investments, China's war chest of foreign currency, now rising at over $90 million each hour, totals an astonishing $2.85 trillion.

From global oil, gas and iron ore reserves to key patents and expertise -- including political and public relations expertise -- it seems there is now little that China's aggressive governing authorities cannot build or buy. Meanwhile, Americans debate more cuts to taxes, education and infrastructure, along with less health care and retirement security.

The economic state of the union is worrisome, but seems likely soon to be far worse.

-- Dr. Charles McMillion is president and chief economist of Washington, D.C.- based MBG Information Services. He helped create and was the first Policy Director of the bipartisan and bicameral Congressional Competitiveness Caucus in the 1980s and is a former Contributing Editor of the Harvard Business Review, e-mail: cwm@mbginfosvcs.com.


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