Monday, September 27, 2010

50 years too late

Please read this post in conjunction with my basic position paper "What is this blog all about?".

We have had a 50-year experiment, beginning in 1960, of allowing our manufacturing jobs to be sent to China and other overseas locations.   Sending our manufacturing jobs overseas was initially a trickle but gradually increased to flood proportions.

Various claims were made that our economy and in fact the United States of America could survive the loss of manufacturing jobs.  One claim was that we don't need manufacturing because we can offer the more-modern knowledge-based services and financial services. 

We now have the results of the experiment.  The absolutely clear conclusion from the experiment is that our economy cannot survive and has not survived the loss of millions of manufacturing jobs.  The above claims that we don't need manufacturing have been proven to be completely incorrect. 

Furthermore, if one hundred ordinary working men and women had been consulted in the early 1960s, when the jobs started to go overseas, they would have predicted the above result.  It was not necessary to go through the 50 year experiment, seriously damage our manufacturing base, and create hardship and despair for many tens of millions of our people.  Anyone with a grain of common sense would have advised that it is insane to voluntarily send our jobs overseas.

However, looking very superficially at the United States of America during the 1960s, the 1970s, the 1980s, the 1990s, even into the first part of the new century, everything looked OK.  But the stock market and financial crash of Fall 2008 revealed the true fragility of our economy.  Too many manufacturing jobs had been sent away, resulting in too much damage to our economy.  The crash was the proverbial straw that breaks the camel's back, a back that was already almost broken. 

The Fall 2008 crash was basically only about banks, insurance companies, and investment houses making very stupid and risky investments, all the while claiming to be able to advise their customers on investment strategies.  If our economy had been robust before the crash, the long term effects would have been small.  But since our economy was not robust before the crash, recovery is difficult, with experts saying it will take 5 to 10 years for employment to recover.

I want to further emphasize that the crash of Fall 2008 did not create the present unemployment problem.  The present  unemployment problem is fundamentally the result of 50 years of criminally negligent management of our country by successive Democratic and Republican administrations, and by generations of politicians in the House and the Senate.  The single most insane and criminally negligent action was to send, or allow to be sent, millions of manufacturing jobs to China and other overseas locations.   As I say numerous times in this blog, you can't have a viable economy without the value-added effect of manufacturing employment.
Let's look at some actual figures on job losses.  According to "Manufacturing & Distribution USA", 4th edition, volume 3, page xi, Figure 2, there was a loss of 4.41 million manufacturing jobs between 1982 and 2004.  Further, this publication states that "80.2% of these jobs were lost between 1999 and 2004".

So the really major job loss began in the Clinton administration and continued into the Bush administration.  Toward the end of the Clinton administration, there was a strong appearance of close relations with China.  Both President Clinton and Vice-President Gore, especially Vice-President Gore, appeared to have frequent contact with Chinese officials.

Consider the following table, which presents some relevant data:

Year     Column 2        Column 3

1982    7.7%               Small positive balance
2004    4.6%               Negative balance of $170 billion

Column 2.  Percent of American population employed in manufacturing.  Column 3.  Balance of trade with China

Conclusions from the table:

There was a decline of 40% in participation of Americans in manufacturing employment, over the period 1982-2004. 

Apologists may claim that there was a great increase in productivity over the same time period, and thus we could do with 40% fewer Americans working in manufacturing.  If this claim were correct, why would we have needed to import from China, in 2004, manufactured goods valued at $170 billion more than we exported?  And an approximately equal amount from other foreign countries?

It is simple common sense that even with increased efficiency and productivity of our remaining manufacturing sector, we would need many more manufacturing workers here at home to avoid having to import manufactured goods.  The magnitude of our negative balance of trade in manufactured goods is a direct measure of how many manufacturing jobs were transferred to overseas locations.

Saturday, September 25, 2010

Playing games with yuan

Please read this post in conjunction with my basic position paper "What is this blog all about?".

On September 25, 2010, there was discussion in the news of possible actions within the U.S. government to put further pressure on China to allow the yuan to move up. 

The news report stated that some members of the Senate and of the House are in favor of applying tariffs to some goods coming from China.  According to the September 27, 2010, issue of the financial newsletter published by Michael Shedlock, a think tank has said that if the yuan moves up (no numerical value of a possible increase was given), "that would add 500,000 manufacturing  jobs in the United States".

It is certainly gratifying to hear that a connection is being made between China and manufacturing employment in the United States.  But specific action in the House and Senate is slow in coming.  Hundreds of major U.S. corporations are doing all their manufacturing in China.  These corporations are probably happy with the way things are now.  Is it possible that these corporations are putting pressure on the President and on House and Senate members to leave things alone, don't rock the boat, don't put great pressure on China to allow the yuan to rise?

There was mention in the news report that in China manufacturing firms are lightly taxed.  This is another unfair aspect of the U.S.-China economic relationship.  The suggestion is put forward that corporate tax in the United States should be reduced.

But obviously the tax on corporations should be reduced only for those corporations that are manufacturing in the United States.  This key point was not mentioned.  A corporation doing half its manufacturing in the U.S. would get half the tax cut.

Mr. Shedlock in the same issue of his newsletter states that Wal-Mart is one of the companies "lobbying against" action against Chinese imports.

I comment that this position taken by Wal-Mart is insane.  Wal-Mart is not a manufacturer.  Wal-Mart would not be affected by an increase in the cost of imported goods.  All stores competing with Wal-Mart would face these same increases.  What Wal-Mart should really be concerned about is high unemployment in the United States.  People who are unemployed are not good prospects to buy in Wal-Mart stores, regardless of price.  People who live in China do not shop in Wal-Mart stores located in the United States.  Wal-Mart should welcome any action that puts Americans to work, so they have money to spend in Wal-Mart stores.

If Wal-Mart wants to get ahead of the pack, instead of taking negative action as in trying to influence Congress, it should take positive action and and encourage domestic manufacturers to offer goods.  Wal-Mart would advertise its action, taken to encourage domestic manufacturing and increased employment in America.  American-made goods would be clearly so marked.  Each item would be placed in the store next to its Chinese counterpart, so that customers would have a choice.

Friday, September 17, 2010

How do we get the jobs back from China?

Please read this post in conjunction with my basic position paper "What is this blog all about?".

Getting the jobs back from China, and from other overseas locations with whom we have negative trade balances in manufactured goods, won't be easy. 

We will have to do some original thinking and ruffle some feathers.

In addition to resistance from China and other overseas countries, there is the mysterious, unelected, world trade bureaucracy.  But the greatest barrier is the vested interest of U.S. corporations in keeping manufacturing arrangements as they are now.   The ban on mentioning and discussing the simple phrase "Get the jobs back from China" in all probability comes from these corporations.  

There are also many people such as economists, trade "experts", and politicians who say that globalization is here to stay and nothing can be done about it.

But we have to do something about it.  The American economy will not survive unless we get a substantial portion of the lost manufacturing  jobs back to our shores.  The present situation where the stores are filled exclusively with goods from China and other overseas locations is insane and untenable.  Most of the money spent in these stores immediately hemorrhages out of our country.

We have here a situation where we don't have to beg and plead with the government to do something.  Americans have the capability of solving the problem themselves, simply by ceasing to buy goods made in China and other overseas locations.  Even if only 25% of our citizens joined this action, it would be a tremendous shock for the stores and for China and the other overseas suppliers.  The stores would quickly increase purchases from existing American suppliers, and would look for additional American supply sources.  There would be an immediate positive impact on the employment situation.

Ants demonstrate the ability to spontaneously work together to one goal.  But human beings are not ants.  So we need some type of  leadership to achieve an action as described above.

Leadership is not going to come from President Obama.  It would be too radical for President Obama to set himself against the powerful behind-the-scenes forces that moved the jobs to China and other overseas locations in the first place.

I am interested in receiving suggestions as to where the leadership will come from.  Anti-poverty groups would help.  Community organizations would help.  The simple message to all Americans would be that the only way to get employment going again in the United States is to greatly reduce purchasing of imported manufactured goods, and buy American-made goods instead. 

Individuals would write letters to local stores, telling them that stores filled 100% with Chinese goods are no longer acceptable.  Stores would be asked to stock American-made goods, to give work to Americans so Americans can buy.  A store receiving even a few hundred letters along these lines would pay attention!

State and city governments may be more prepared to help, in comparison with the Federal government.  A simple measure would be to accept state and city sales tax on purchases of American-made goods as refundable credits toward state and city income and property taxes.  Store receipts would show the amounts spent on American-made goods and on foreign goods, and the taxes on each amount.  The further benefit would be that the issue of American-made goods versus imported goods would be front and center for everyone on a daily basis.

As employment increased, tax revenues to states and cities would increase, more than compensating for the tax credits. 

The campaign would be self-amplifying.  Small increases in store purchases from American factories would lead to small increases in employment.  Employed people would buy and stores would place additional orders with American factories.  Entrepreneurs would step forward to set up manufacturing of consumer goods.  More employment, more customers in stores, more orders to American factories. 

A mood of hope would gradually develop, replacing the desperate prospect of 5 to 10 years for employment to recover, so calmly predicted and accepted by securely employed, well-paid "experts".

Government purchasing

Please read this post in conjunction with my basic position paper "What is this blog all about?".

All levels of government, from the smallest village council, to the biggest Federal departments, must ensure that all goods purchased are made in America. 

This means everything, from aircraft carriers to cars and trucks to paper clips. 

If our governments at all levels do not have confidence in American products, American competitiveness, and American workers, who will?

Purchasing officials often appear to work in a sealed bubble environment, cut off from all outside knowledge and context.  What do purchasing officials do at night?  Do they go home?  Do they watch the TV news?  Do they see reports of high unemployment?  Do they put two and two together in their brains and conclude that it might be a good idea to purchase from American sources, and give work to Americans?

If a given item costs 10% more when purchased from American manufacturers rather than Chinese manufacturers, buy American!  The slight extra cost will be more than made up by increased tax revenue to governments from American manufacturers and American workers. 

If there are no American manufacturers able to offer an item, offer very low interest loans to entrepreneurs who are prepared to re-open existing factories or create new factories. 

The biggest scandal is Department of Defense purchasing from overseas sources, such as Country XYZ.  The first issue is that our defense technology becomes available to Country XYZ.  On the basis of this issue alone, there should be no overseas purchasing.  Secondly, what happens if we get into a war with Country XYZ, and we have no other source of the item or items provided by that country?  Obviously, on the basis of military, strategic and technological considerations, we must purchase all defense equipment from American factories. 

The other issue is cost.  What percentage of our military budged is saved by overseas purchasing?  1%?  2%?  The saving is inconsequential.  What is consequential is the loss of U.S. jobs.  Again, if the government would mandate purchasing from American factories exclusively, there would be a tremendous overall saving for the government because of increased tax revenue from American factories and American workers.

Thursday, September 16, 2010

Statements from President Obama and others

Please read this post in conjunction with my basic position paper "What is this blog all about?".

During the presidential election campaign in 2008, on TV I saw and heard then-Senator Obama say "we have to get the jobs back from China".  I did not see every speech made by Senator Obama.  However in the speeches I did see, I did not hear him make the same statement again.  I suspect that his handlers and advisers ganged up on him and told him he cannot make this type of statement.

Nevertheless, the "man-in-the-street", the ordinary working man or woman, knows that we must get the jobs back from China. 

In late August 2010, President Obama made a speech about the economy.  He said that, with his advisers, he has been looking at many possible ways of increasing employment.  He said that he will offer incentives to business to "create new jobs here in America". 

This statement is very good in one respect and I hope the President will follow through.  The President is also trying to get China to let its currency float, rather than artificially keeping the currency down.  China has promised to do something.  A report issued by the G20 group at the same time states that "vigorous implementation (of loosening of the yuan) is now necessary".  "Unfortunately so far only limited progress has been made." 

So we have acknowledgement at the highest levels that job-killing imports from China have to be brought under control.  But what happens if China continues to refuse to loosen control of the yuan?

President Obama's statement that we want to "create new jobs here in America" is very disappointing in another respect because it implies that we are writing off the millions of jobs already sent to China and other overseas locations.  In other words, no attempt will be made to get these jobs back. 

While "creating new jobs here in America" sounds very good, it will be a slow process because it implies new technological areas with extended times for product and market development.  People who are unemployed cannot wait five or ten years for these new jobs to materialize.  "Getting the jobs back from China" relates to reinstating production in America of thousands of known products for which is there an immediate market. 

Further, if there is no government policy to control import of manufactured goods from countries that don't buy from us, then new jobs created in America, in new areas such as solar technology, could easily be lost also.

President Obama has an advisory panel of 300 members, and recently convened a Blue Ribbon panel on the economy.  It reminds me of the Mr. McGoo cartoons of 40 or 50 years ago:  Looking keenly in every direction but not seeing anything.  All these advisers and Blue Ribbon people don't identify the one thing that will solve the problem and that is "get, or take, the jobs back from China" and other countries that don't buy manufactured goods from us. 

In late August 2010, Governor Schwarzenegger stated that "California simply cannot solve its budgetary problem without addressing government employee compensation and benefits".  Undoubtedly this statement is valid, correct, and true.  But note the complete absence of any reference in the Governor's statement to measures to increase employment in California, thereby increasing California tax revenue,

Governor Schwarzenegger is typical of most of our officials and legislators at all levels of government in appearing to view the reduced employment situation in business and industry as something etched in stone which cannot be changed or even discussed.

Media discussions of the job situation

Please read this post in conjunction with my basic position paper "What is this blog all about?".

We often see editorials, columns, and general articles dealing with the economic situation.  The material presented is often lengthy, with intricate reasoning.  The amazing thing about these offerings is that they never mention the systematic transfer of millions of jobs out of the country over the last 50 years. 

The "job creation" record of President Bush or President Obama, or other presidents, is often referred to, without any mention of the concurrent continuing movement of jobs to China and other overseas locations.  How can anyone talk about "job creation" when the jobs are continuing to hemorrhage?  The transfer of manufacturing jobs to overseas locations is not something that happened 30 years ago.  The transfer of jobs, or selection of China or other overseas location as the source for additional products, is continuing to this day. 

Take a look at the historical record of the balance of trade in manufactured goods with China:

(Numerical values are in billions of dollars.  Source:  Congressional Research Service, "China - U.S. Trade Issues", Report no. RL33536.  July 29, 2010.  Table 1, page 2.) 

1980    2.7
1985    0
1990    -10.4
1995    -33.8
2000    -83.8
2005    -201.6
2006    -232.5
2007    -256.3
2008    -266.3
2009    -226.8
2010 Projection  -249.2

The negative balance in manufactured goods marched steadily upward.  There was a downward turn in 2009, due to the financial crash, but the trend is projected upward again.

An example of the type of article that discusses the economy but never mentions the transfer of millions of manufacturing jobs overseas is an item coming from The New Republic, dated September 10, 2010.  The article is entitled "There is only one way out of the recession".  The article does not mention unemployment, let alone mention the fact that tens of millions of jobs have been sent overseas.  The article says that companies aren't hiring because American households are working down their debt, rather than going to stores to buy.  There is no mention of the millions of American households that have no income, and therefore are out of luck on both counts.  They can't reduce debt AND they can't go to stores.

There is no mention of the fact that stores carry mostly goods imported from China and other low-wage regions, so most of the money spent in stores hemorrhages right out of our country. So even if people were buying in stores, it would not help the economy.

What is the "only way out" suggested in this article?  Wealthy people would buy bonds in a "national infrastructure bank" and would receive interest.  The money would be used to rebuild infrastructure and create new infrastructure, and in this way "boost economic activity and employment in the short term..."

So The New Republic's proposal boils down to a further stimulus program.  While the employment would be great for those who do the work, this type of activity alone does not provide for long-term viability of the economy. 

The very basic assertion and position statement put forward by this blog is that manufacturing employment is needed for a viable economy.  The manufacturing employment must produce real goods that individuals or organizations will actually buy and use.  This type of economic activity, in addition to the benefit of numbers of people having employment, provides a continuing value-added effect that is vital to the economy.  This effect cannot be provided in any other way.

Sunday, September 12, 2010

Quality of Chinese goods

Please read this post in conjunction with my basic position paper "What is this blog all about?".

The American market is large enough to support domestic manufacturing of TV sets, home computers, microwave cooking equipment, and similar items, using modern manufacturing facilities.

But even if manufacture in China of the above items can be justified on the basis of economies of scale, there is no justification whatsoever for importation from China of canned foods, cosmetics, or medical products, or ingredients of these products. Over and over it has been shown that there is no quality control in China for these types of products.  So we don't want to import from China any goods that are applied to the human body, either externally or internally.  Furthermore, there is no possibility of significant savings for the consumer, by importing these goods rather than manufacturing them domestically. 

An insane cult seems to have grown up according to which purchasing officials in government and industry automatically think of China first, before thinking of domestic sources.  Even when sourcing in China is completely pointless, as in the case of food, cosmetics, and medical items, they still think of China first.

Some years ago I was travelling and I needed a pair of scissors.  I made my purchase at a large chain drug store.  As soon as I opened the package, the scissors fell apart.  At a later time I was able to speak with the Vice President for purchasing.  His response:  "No domestic source could offer us the same price and quality".  He seemed to miss the point completely.  The quality was zero.  His statement was probably the automatic response to any question as to why he is purchasing in China. 

Government agencies such as Food and Drug Administration and Consumer Product Safety Commission are very passive when there are problems with goods imported from China.  The common sense approach would be to simply ban the import of problem goods.   Instead, government agencies try to get the Chinese authorities to investigate and correct the problems.   The government agencies go to the Chinese authorities as weak supplicants, as if America is helpless and has no other source of these items.

Consider the issue of lead in paint used in toy manufacture in China.  The Chinese government and the factories in China making the toys are unable to follow the simple requirement:  Don't use paint that contains lead!  Instead of begging the Chinese to stop using paint that contains lead, we should ban the import of toys from the factories involved, and manufacture the toys in the United States.  The most ridiculous aspect of this situation is this:  Where do they get paint that contains lead?  Do the Chinese have great storehouses filled with cans of paint manufactured years ago?  No one currently manufactures paint that contains lead.  (Except maybe the Chinese.)

There has been a huge disaster with a medical product, heparin. Heparin is an anti-coagulant used in treating patients in hospitals.  According to a report issued by Congressional Research Service, "China - U.S. Trade Issues", July 20, 2010, there were 246 deaths of patients in 2007 and first half of 2008, attributed to tainted heparin.  Also many illnesses. The problem was caused by "an active pharmaceutical ingredient" imported from China.  The report states further that there "appeared to be a deliberate scheme to adulterate the ingredient". 

The ingredient is obtained from pigs.  The report states that due to the large number of pigs required, the ingredient is sourced in China. 

I see this case as an excellent example of the cult referred to above, namely the automatic mindset that China should be considered first, when sourcing and purchasing.   America has been known almost from the day of its founding as a nation with very high levels of initiative, ingenuity, and resourcefulness.  Surely America with a very large pork industry and strength in science and technology can solve the problem of production of heparin and provide it from domestic sources at reasonable cost.  Certainly there are cases of defective American products.  But it is very rare that there is "a deliberate scheme to adulterate".  By manufacturing in America you have some control over quality and safety issues, which you do not have in products made in China.

Chinese authorities never investigated the problem with the heparin ingredient, despite repeated requests from FDA.  Who in his right mind continues to buy from a supplier who provides a defective product and refuses to investigate and correct the problem?

In another insane purchasing decision, drywall was sourced in China and used in construction of new housing in the United States.  Tens of thousands of homes may be involved.  In relation to the total cost of a house, including land and construction cost, how much can you save by getting the drywall from China rather than from U.S. domestic manufacturers?  0.5%?  0.3%?

The drywall from China proved defective in several ways.  The drywall emits sulfur-containing gases, which are probably a health hazard for occupants of the house.  In addition, the gases are corrosive and may damage heating and air-conditioning equipment to the point where the equipment has to be replaced.

Further, the drywall proved to be of poor quality and very brittle, creating difficulties during construction.  A number of houses have been gutted and new drywall from domestic sources installed.  How does the cost of this process compare with the alleged cost savings associated with drywall from China?

I visited a wholesale plumbing supply store recently.  This is a store patronized by professionals such as plumbing contractors.  I was told that everything in the store is made in China.

If there is a failure in a pipe fitting or flexible hose installed in a house, the resulting flooding can lead to a repair cost of $50,000 to $100,000, plus tremendous inconvenience for the occupants, and loss of family records and heirlooms.   If I were a senior official in an insurance company, I would set a requirement that new construction, and replacement of components in existing buildings, must utilize American-made products, in order to obtain or continue insurance.  The reason is, obviously, that there is some hope of proper quality control in domestic manufacturing. 

Flexible hoses are of greatest concern.  We have no knowledge of the properties of rubber and related materials used in flexible hoses made in China.  We have no knowledge of the composition or extent of quality control in manufacturing.  If the price difference between a washing machine hose made in America and a hose made in China is $5, it is well worth the extra cost to reduce the chance of a very expensive home disaster due to a failed hose.

There was never a ground-swell of requests from consumers for lower prices on critical components, such as saving $3 or $5 on a washing machine hose.  The interest in lower prices has been artificially created by manufacturers to justify the loss of millions of jobs.

Saturday, September 11, 2010

Rational government

Please read this post in conjunction with my basic position paper "What is this blog all about?".

We will never have rational government in Washington unless we put in limits to terms of office.  During the hard work of creating a new government, the founding fathers considered limits to terms of office.  However, this issue did not get included in the final version of the documents.  The founding fathers made a huge mistake in not incorporating limits to terms of office.

We have limits to terms of office for the office of the President.  It is very good that we have this.principle that applies equally and fairly to every president.

For example, consider President Reagan.   Approaching the end of his second term, without a term limit there would have been discussion of a  third term, and serious concern as to whether his health was adequate to continue.  It would have been very embarrassing to get into public arguments related to his health.  With a term limit in place, the issue did not come up.  President Reagan retired gracefully because of the constitutional amendment limiting the President to two terms, not because of any question related to his health or age.

Without term limits, members of the Senate and House of Representatives stay in office for 30, 40, or even 50 years.  The one goal of each member is to stay in office.  All of his or her actions are considered in terms of getting re-elected, not in terms of what is best for the country.

I propose a term limit in Washington of 12 years, with the time divided in any way between the Senate and the House.  In this arrangement, there would be a very clear signal that people are in the Senate and House for a relatively brief period and their focus is principles and what is best for the people of the United States.  It would be a clear signal that people are in Washington for a brief period of service to the country, not for a life-time gravy train.  

With term limits in place, it would be a lot more difficult for special interests to gain control of enough members to have an effect on decisions.  No sooner does a special interest get a senator in its pocket than the senator's twelve years are up and he returns to his home state!

Many more people would have a chance to serve in the House and/or the Senate, a tremendous boost toward true democracy.  Because of the term limit of 12 years, it would not be worthwhile for anyone to spend millions to try to get elected.  People with modest means could get elected, a further big boost for democracy. 

When I mention limits to terms of office, often people say to me "But what about the GOOD politician?"  My answer is let the good politician return home and do more good things at home, rather than staying in office in Washington until he becomes drunk with power and self-importance, turns crooked, and ultimately returns home in disgrace!

I believe that with limits to terms of office in place, many members of House and Senate, free to think and follow their consciences, would have objected to closing factories and sending the jobs to China.  They would not have accepted the fallacious explanations and  justifications for sending manufacturing jobs to China and other overseas locations that don't buy balancing amounts of manufactured goods from us.

Everyone with common sense is very concerned about keeping our manufacturing jobs.  Many states and cities have advertising campaigns aimed at enticing new business firms.  It is ridiculous that while states and cities are operating these programs, the Federal government makes no attempt to stop transfer of millions of jobs to overseas locations.

To illustrate how universal is the understanding (except in the Federal government) that we must create and retain manufacturing employment, we can refer to a fictional story written by a famous novelist.

The setting is England in the 1930s, with the depression crushing everything.  A businessman is travelling.  As he goes through one particular town, he becomes seriously ill.  He is taken to the local hospital.  He receives excellent care.  One of the nurses takes a special interest.  He recovers to normal health.  He resolves to help this town that saved his life.  There is a desperate need for employment.  Through business contacts and wheeling and dealing, he wins shipbuilding contracts for the town.   However he is accused of some illegal actions in the process.  Whether he is innocent or guilty is not clear but he is sentenced to three years in jail.  The nurse stands by him.  When he gets out of jail, she is waiting for him and they live happily ever after!

The economy is hemorrhaging

Please read this post in conjunction with my basic position paper "What is this blog all about?".

Everyone knows that there is a serious unemployment problem in the United States, as well as a serious government debt problem. 

Under successive Democratic and Republican presidents, over a period of 50 years we have chosen to send millions of manufacturing jobs to China and other overseas locations.  As a result of losing the value-added effect and the decent wages in manufacturing, tax revenue declined substantially.  Also, we now have to import most of our manufactured goods, especially consumer goods.  Money is hemorrhaging out of our country to pay the interest on money borrowed from foreign countries and foreign investors, and to cover the negative balance of trade in manufactured goods. 

There is obviously a  huge difference between money spent by governments and private industry within the United States, and money going overseas.

For example, if residents of the United States buy U.S. government savings bonds, the government has to pay out interest to these people.  But the money is being given to U.S. residents and in most cases they will spend the money inside the U.S.  The opposite case is where foreigners buy U.S. government bonds.  In this situation, the interest is sent out of the country and is never seen again. 

The United States is suffering from at least five categories of money going out of the country.  I call this situation "hemorrhaging".  There is no word that more accurately describes the situation.

Here are the categories:

Negative balance of trade in manufactured goods - total for all foreign countries including China.  For 2009. 
$439 billion per year
(What about U.S. Defense Department purchases of manufactured goods from overseas sources, whether brought in to the U.S. or used directly at overseas locations?  Are these purchases included in the $439 billion amount?)

Negative balance of trade in manufactured goods with China (included in above figure)
$227 billion per year

Debt service on U.S. Federal government securities held by foreign countries (foreign debt).  China alone holds over $1 trillion of U.S. government securities, including an estimated 20% purchased through agents to disguise the size of China's holdings.  Foreign government holdings of U.S. government securities are closely related to the negative balance of trade in manufactured goods.  Estimate $100 billion.
(It probably would be better to look at all interest and dividends going out to all foreign governments and foreign investors, and all interest and dividends coming in to governments and individuals in the U.S., and get a net figure.)

Negative balance of trade with OPEC, as a way of estimating cost of imported oil
$166 billion in 2008 and $62 billion in 2009

Purchase of illegal drugs, with the money going to criminal empires in Mexico, South America, Afghanistan, and elsewhere.  Estimate $30 billion.

Spy operations.  Total $80 billion per year.  What portion is spent overseas?  Estimate $40 billion. 

Total military budget of $970 billion per year.  Estimate that 20% of this amount goes out of the country for local purchase of  fuel and other consumable items, to support U.S. soldiers in Iraq and Afghanistan, and in over 100 other countries and territories around the world.    Estimate $200 billion in round numbers.  

Foreign aid and military aid where cash is given to foreign governments.  Estimate $75 billion. 

Add up the figures and we get a nearly $1 trillion per year. 

The total U.S. government budget is about $2700 billion or $2.7 trillion.  So expenditures which could be reduced by rational government action, but which are now hemorrhaging at full throttle, amount to roughly one-third of the government budget.   (Not to say that the government is paying for all the above items, but just for comparison to show the magnitude of these money outflows.)

Even with a $14.6 trillion economy, there is a definite negative effect of nearly $1 trillion going out of the country every year.  It can't go on like this forever without causing major damage, which has already happened.  Look around America and the damage can be seen in terms of abandoned people, abandoned factories, and abandoned areas of cities.

PLEASE NOTE:  I welcome additions, corrections, deletions, related to the above list of cash outflows.  

Friday, September 10, 2010

Further comments on employment

Please read this post in conjunction with my basic post "What is this blog all about?".

I say that the only way to solve our debt/unemployment problem is to get our manufacturing jobs back from China and other overseas locations.  Maybe a better word is "take".  We have to take the jobs back from China and other overseas locations. 

Government officials are scratching their heads and looking everywhere for ways to solve the debt/unemployment problem.  They are looking everywhere except in the correct direction which is to face up to our self-created problem, and work to re-establish/increase domestic manufacturing of consumer, commercial, and industrial goods. 

The especially insane aspect of the situation is that there were tax incentives and tax benefits in place to assist corporations to build new manufacturing facilities overseas, and therefore to transfer jobs overseas.  Some of these incentives and benefits may have been removed.  However, others are still in place.  In his financial newsletter of September 21, 2010, Mr. Michael Shedlock states:

"We need to fix the corporate income tax structure that gives incentives to businesses to move jobs overseas.  Because of tax deferments, businesses pay less tax overseas than in the U.S.  To promote hiring in the U.S., we need to reverse that set-up."

So here is further proof that we are committing national economic suicide.  Why would the U.S. Federal government offer assistance to companies to encourage them to move jobs overseas?  It is a completely insane situation.

Some commentators hold the view that unionized manufacturing workers in the 1970s and 1980s were receiving excessively high wages and benefits, and that this situation forced manufacturers to shift employment overseas.  This view may be correct or it may be incorrect.  That is water under the bridge.  The situation in 2010 is that there is tremendous unemployment in the United States, probably at least double the official government figure of 10%.  I am sure that unemployed people would be happy to accept manufacturing jobs, at reasonable wages.

Other commentators emphasize very high wages and very generous pension benefits for unionized government workers as a major contributor to the current financial stress faced by states and cities. I agree that all levels of government have to reduce waste and excess in their expenditures. However the INCOME side of the equation is also important. Over the last 50 years, all levels of government have progressively lost trillions of dollars of tax revenue because jobs were sent overseas.

Consider the word "trade"

Please read this post in conjunction with my basic position paper "What is this blog all about?". 

Everyone knows that there is a severe debt and unemployment problem in the United States at this time. 

I make the very simple statement that the cause of the problem is the transfer of millions of manufacturing jobs to China and other overseas locations.  I further say that there is one and only one way of solving the problem, and that is to get the jobs back from China, and from other overseas locations. 

The financial, economic, and employment situation of the United States is so bad that no one in government is brave enough to face up to it.  No one is prepared to admit that the present situation is our own fault, in that we allowed our manufacturing jobs to be sent out of the country. 

There have been and are many apologists for sending the jobs out of the country.  Frequently their incorrect and nonsensical reasoning is based on incorrect use of information in classical economic texts such as "Wealth of Nations".   Specifically, this book is often used, incorrectly, to justify the phenomenon of unlimited and uncontrolled international free trade, otherwise known as globalization.

The book was published in 1776 by an English scholar and philosopher, Adam Smith.  The book deals with a wide variety of economic and social issues, including manufacturing and trade.  The lengthy title of the book includes the phrase "Wealth of Nations", the latter phrase being used as a short-hand way of referring to the book.  The most-quoted theory in the book is that when thousands of business owners act in their own best interest, the result is an optimum outcome for society as a whole. 

The book envisions manufacturers in each country, country "A" as an example.  Country A strives to produce better goods at lower prices, so that domestic customers and ultimately foreign customers, in country "B" as an example, will want to buy.  If a country A item is more attractive in country B than the domestic equivalent, then the country A manufacturer may come to specialize in that item and provide it domestically and in several foreign countries.  In this way, according to Adam Smith, all consumers will benefit.

In the 234 years since the book was published, the world has changed.   Now we have the situation of "trade" between United States and China.  Obviously the author did not envision "trade" between two nations, one having four times the population and 50 times lower wages in comparison with the other.  "Trade" in the present context is grossly and pathologically different in comparison with trade as discussed 234 years ago.  Adam Smith clearly envisioned each country becoming the specialist supplier of a few items, not today's pathological situation of one country, China, becoming the specialist supplier of thousands of items to the whole world.

The word "trade" does not apply in any way, shape, or form to the economic relationship between the United States and China.  Trade means give and take.  You have something and you give it to another party, and in return that party gives you something of approximately equal value.  In view of the huge and growing negative balance of "trade" in manufactured goods between the U.S. and China, it is not trade.  It is a one-way street of exploitation and economic destruction of the U.S., with money flowing to China in such quantities that they don't know what to do with it (see below). 

The author of "Wealth of Nations" also never envisioned one country voluntarily closing a very substantial fraction of its factories, and setting up new factories in another country to manufacture the goods.  I am sure Adam Smith would have agreed that this process is insane.  It is not "trade" in any sense of the word.

In breaking free of our enslavement to China, we don't have to be afraid of China.  The United States and China are locked in a "MAD" scenario (mutually assured destruction), similar to the nuclear weapons stand-off of the Cold War.  China made a big mistake in allowing itself to get into this situation.  The result is that China's options are actually quite limited, in the event that America undertakes some actions China does not like.  The example of "actions" that I have in mind is of course a major increase in domestic manufacturing of consumer, commercial, and industrial goods.

China has used a large amount of the money it receives to buy U.S. treasury securities.  According to a key theory taught in Economics 101, if a country imports too much, as the United States is doing, its currency goes down in value, in comparison with the currency of another country that is actively manufacturing and exporting.  True to this theory, the U.S. dollar has been going down. 

China is concerned that the value of its U.S. dollar-denominated investments is going down.  But China can't sell its U.S. investments because they are so large.  Even relatively small sales would cause the U.S. dollar to go down even more, further threatening the value of the Chinese investments.  And if the U.S. dollar goes down more, Americans will not be able to buy the same volumes of imported goods.  So there is another negative effect on China, resulting from any attempt to unload its U.S. investments.  Finally, if China starts unloading its investments, other foreign holders may also unload, further driving down the U.S. dollar.

In 2009, China's holding of U.S. Federal government securities was approximately $1,400 billion, or in other words $1.4 trillion. 

It is clear that China is trapped in a "MAD" situation, and could not retaliate economically if America were to begin a program of barring or taxing imports, and increasing domestic manufacturing.  However, could or would China retaliate militarily?  No country poses a threat to China.  But China, already a very major military power, is actively increasing the size of its armed forces.  It is a mystery why they are doing this.  Maybe they are having difficulty spending all the money that is coming in, so they are using some of the money to increase the size of the armed forces.  China is also supplying weapons to a number of other countries, some of which are a threat to the United States.  So, via China, our money is being used to increase the threat against us.  Another reason why we have to reduce our buying from China.

Sunday, September 5, 2010

What is this blog all about?

America shot itself in the foot in a very big way by sending millions of manufacturing jobs to China and other overseas locations.   How did we get into this insane situation?

Manufacturing activity provides a strong value-added effect to the economy in which it occurs.  In addition, manufacturing employment generates additional supporting employment.  Nevertheless, around 1960, our manufacturing jobs started going overseas, first a trickle and later a flood.  We are now completing a 50-year experiment, 1960 to 2010, to see if our economy can survive with a substantially reduced level of manufacturing.

I believe that the results of the experiment are very clear.  We have a major unemployment problem and related problems of government debt.  The results of the experiment were clear long before the crash of Fall 2008.  Increasing numbers of people were not able to find employment paying a living wage.  These people would not be buying houses, cars, and major appliances in their lifetimes.  So the economy was already starting to contract.

The crash has only made it clearer that our economy cannot survive in a scenario where virtually all our consumer goods, and thousands of items for commercial and industrial applications, are made in China and other overseas locations.

Right from the beginning of the experiment, the ordinary working man or woman understood that it is insane to let our manufacturing jobs go overseas.  Unfortunately our "leaders" did not have this understanding.

At the beginning of the experiment, our nation was prosperous.  There were plenty of jobs.  Factories were busy.  American-made products were in use around the world.  We were a major exporting nation.  Government and personal debt levels were moderate. 

Today we are a large net importing nation.  Our economy is hemorrhaging at the rate of three-quarters of a trillion dollars per year.  This money goes out to cover our negative balance of trade in manufactured goods, interest payments to foreign holders of U.S. Federal government securities, and other items.  We are paying a gigantic price in order to save a few dollars when we buy a toaster made in China rather than a toaster made in U.S.A. 

Every job sent overseas, and especially every manufacturing job sent overseas, is a reduction, a deflation, and a contraction of our economy.  I have been writing about this situation for some years, and I have said, very accurately, that we are committing national economic suicide.  

In this huge movement of manufacturing employment out of the country, our great business "leaders" forgot one thing.  If Americans don't have employment, how are they going to buy the products that used to be manufactured in the United States but are now manufactured in China and other overseas locations?  This phenomenon is starkly real today.  Businessmen, government officials, and economists are moaning about low levels of store sales.    

Our great government "leaders" also forgot one thing.  If factories in the United States are closed, and workers are laid off, where is the tax revenue going to come from?  Factories in China, and workers in China, don't pay taxes to the IRS!

We have economic and trade arrangements with China and other countries.  We have complex arrangements under the auspices of the World Trade Organization.  Are we going to be politically correct and adhere to all these arrangements while our economy goes down and down until it has been totally destroyed?  The only way to solve our debt and employment problem is to get our manufacturing jobs back from China and from other countries with whom we have negative balances of trade in manufactured goods.