Monday, May 30, 2011

The costs of manufacturing OUTSIDE America are too high!

Some people say to me that Americans choose lowest-cost items and therefore will not buy USA-made goods.

I believe this statement may have been correct ten years ago but is not correct now.   Difficult to prove this statement either way because in most cases the consumer is not offered a choice.  He or she goes into a store and sees only Made in China.  I say to Wal-Mart and other chain stores:  Put USA items and China items side by side, with clear labelling, and see what choices the consumer makes.

There are thousands of manufacturers of consumer items operating in the United States.  These manufacturers could quickly increase production, if the chain stores showed interest. At very little additional effort, consumers could be offered a choice.

I have not made a detailed study in stores.  In half a dozen instances that I came across by chance where identical Chinese and American items were available, the prices were the same!  So why are we importing these Chinese items? 

Anyone who says that consumers go by price only should carry out a survey.  Talk to 1000 consumers fairly selected according to level of financial assets, employed or unemployed, and other relevant factors.  Ask the consumer if he or she will pay 10% more for the same item Made in USA.  Ask if he or she will pay 20% more.  I predict that a survey of this type will find that people are prepared to pay more for American-made goods.

I recently saw an article by Ms Michele Nash-Hoff*.  She presents some poll results, similar to the above suggestion.  The overall impression of the article is that the typical American consumer is way ahead of politicians, commentators, and analysts, in understanding the importance of getting our jobs back from overseas, in understanding the importance of buying American, and in willingness to pay more to buy American.  Maybe many Americans also understand the huge hidden costs incurred when we "save" a few dollars buying a Chinese item. Full discussion further on in this post.

* "Poll shows creating manufacturing jobs is key to recovery".  Huffington Post.  September 7, 2011.

One man said to me that talking about buying American is Nationalistic.  I don't think that is a terribly bad word but I also don't think this is what is happening.  Most Americans understand that buying foreign-made goods has nearly wrecked the economy, and has created a huge army of 25 million unemployed.  Americans want to buy American-made to help ensure the security of their own employment, and to help relatives, neighbors, and friends retain their jobs or find jobs.

The sending of jobs overseas started 50 years ago.  Over the years it occurred to me: "Are we sending these jobs overseas to help the poor people of those countries?"  I could not understand why we were sending our jobs away.  In November 2011 a man said to me that my mention of buying American is selfish and we should think of poor people overseas.  I have to say that I do not agree with this idea.  Charity begins at home!

Take China as one example. If any Chinese person living in China is worried about the poor people of China, let him or her set up to manufacture in China, hiring Chinese people for the purpose, and selling the products to the Chinese people.  That is the way to lift up the poor people of China.  Not by sending the goods to USA and wrecking the economy of the USA!

Going  now to more general topics, obviously some of our manufacturing is done inside our borders and some of our manufacturing is done for us by foreign countries. 

We export some manufactured goods to foreign countries.  But we IMPORT much greater amounts of goods.

In official U.S. government publications, from Congressional Research Service and from Bureau of the Census, Foreign Trade Division, the above situation is concisely described as follows:

         "Value of manufactured goods exported 
                            MINUS value of manufactured goods imported"

The result of this little bit of arithmetic is NEGATIVE if imports are larger than exports.  

At present our Negative balance of trade in manufactured goods is over 500 billion dollars per year. 

So our net cost of having a great deal of our manufacturing done for us by foreign countries is over 500 billion dollars per year, real money hemorrhaging out of our country and impoverishing our country.

Some economists have said that a negative balance of trade is not real money and we don't have to worry about it. 

I say it IS real money, hemorrhaging out of our country, never to be seen again, and the proof is two-fold:

+  America is impoverished.  Our people can't find jobs, portions of some of our cities are being shut down, and our governments at all levels are fighting impossible deficits.

+  China, the major example of foreign countries doing our manufacturing for us, is responsible for about half of our negative balance of trade.  China is rolling in money.  China doesn't know what to do with all the money.  China has built millions of new apartments that are empty, and has built new towns that are ghost towns.  China is greatly enlarging an already very large military establishment, despite the fact that there is absolutely no enemy and no threat in sight.  China is investing in technology and manufacturing so that it will become self-sufficient in all manufactured goods including airliners, and will supply all manufactured goods required on the Chinese domestic market and also on the world market.   

Parenthetically, a great deal of the technology will be stolen from western countries but that is a topic for another post!

There are well over ONE THOUSAND professors in economics departments in U.S. universities.  I invite economics professors and economists with any other affiliation to come forward and let me know if anything said in this post is incorrect or incomplete.  I will listen and if warranted I will adjust my views and statements.

Let's summarize.  I say that manufacturing outside USA is far too expensive and far too costly for the following reasons:

1.  We are paying our life's blood, over 500 billion dollars per year, to have our manufacturing done for us by foreign countries, while our own workers stand in line at unemployment offices.

2.  We have to make increased unemployment and welfare payments. 

3.  Our governments are facing huge deficits because of the loss of tax revenue.  Very simply, workers in foreign countries don't pay U.S. taxes.  Over half of Americans have such low levels of income that they don't owe any tax. 

4.  People who want to work and can't find work are subject to increased health and social problems, leading to increased costs.  People in illegal activities can't be told "get an honest job".  There are no jobs.  The result is hundreds of billions in extra costs for police, courts, and jails. 

Add up items 1 through 4 and you will see how expensive it is to manufacture overseas. 

Some people say that job loss in manufacturing is due to increased efficiency of the U.S. manufacturing sector.  It is true that the U.S. manufacturing sector has become more and more efficient.  But the fact is that today the U.S. manufacturing sector is not able to make all the goods we need.  In addition, we have to import goods to a net value of over 500 billion dollars per year. 

We have to bring the manufacturing jobs back from overseas.  The whole process over the last 50 years of sending manufacturing jobs overseas has been a giant mistake.  Our business and government leaders have to admit the mistake.  Bring the jobs back from overseas and our costs will go DOWN by literally trillions of dollars.

One further point.  I am not against trade.  Trade is good when there is approximate equality between imports and exports. 

However, when there is a negative balance of trade of over 500 billion dollars per year, that is not "trade".  It is a devastating, pathological, insane situation that has to be reversed.

As an example of devastating and pathological, note that our imports from China are four times larger than our exports to China. 


Saturday, May 28, 2011

Let's Clarify!

In the last few days "Blkrocket" on twitter has made some comments about my views and statements.

 Let me clarify.

My interest is solely America's negative balance of trade with all foreign countries in manufactured goods, currently running at over 500 billion dollars per year.  My interest is the devastating effect of this huge negative balance of trade on the American economy, on the American people, and on the nation as a whole.

In addition, the U.S. government is making foreign purchases of goods and services, and there is the debt service on U.S. Treasury securities held by China, Japan, and other countries.

Adding up all the above items, I estimate that the total hemorrhage of money out of the country is one trillion dollars per year.  America is bleeding.  If we do not reduce the bleeding, the economy will never recover.

The negative balance of trade in manufactured goods is the largest single item and therefore is the logical place to start in reducing the bleeding.

The negative balance of trade in manufactured goods of over 500 billion dollars per year tells us directly the net amount we are paying foreign countries to do our manufacturing for us.  It is against all common sense that we are sending out of our country 500 billion dollars per year while many millions of our own workers are unemployed or under-employed.

To cut this net foreign expenditure of 500 billion dollars per year, we have to get manufacturing jobs back from China and other foreign countries.  The benefits of getting jobs back are:

+  Put Americans back to work, give them dignity, give them the ability to support their families

+  More Americans will have income and therefore more Americans will pay tax.  The government will see an increase in tax revenue and deficits will go down.

Very simply, the ONLY way available to us to solve our present economic problem is to get the manufacturing jobs back from overseas.

There are encouraging signs that economic forces are getting some of the jobs back for us.  Also, Senator Debbie Stabenow of Michigan, and Congressman Frank Wolf of Virginia, and other members of Senate and House, are working on new legislation to encourage and support existing manufacturing, and manufacturing returning from overseas.

Now here are some of Blkrocket's comments:

+  "I do not think consumers think about the hidden cost of food, diamonds or oil or iPhones."

+  "Joe6Pac is indifferent about hidden costs of weak labor, business operation practices, and environmental laws of China."

+  "The consumer is less concerned about global work conditions and inequality than product cost and value.  It's self interest."

My response is that I have never mentioned or commented on "weak labor", business practices, environmental laws, global work conditions, or inequality.  My concern is solely increasing the size of our manufacturing sector by getting the jobs back from overseas, resulting in increased employment in America, increased well-being, and increased tax revenue to reduce deficits.

I believe many consumers are already well aware of the devastating effect of our huge imports of manufactured goods from China and other foreign countries.  We can help solve the problem at the grassroots level by educating all consumers concerning the importance of purchasing American-made goods when a choice is available, and the importance of letting stores know that we want them to carry American-made goods.

I have mentioned hidden costs.  Here is what I mean by hidden costs.  Consider Mr. and Mrs. X who have two children in their twenties. The children cannot find jobs at reasonable pay levels because the economy has contracted so much due to sending millions of manufacturing jobs overseas. When Mr. and Mrs.X go to the store to buy a kitchen utensil, they are offered a Chinese-made item at a cost lower than might be paid for an American-made item.  They save a few dollars in the purchase.  The HIDDEN cost to Mr. and Mrs. X is that they have to provide financial support to their adult children.

Another hidden cost is increased unemployment and welfare payments, because so many people are unemployed.  These increased costs have to be borne by those people who still have employment and therefore are still paying taxes.

Some consumers are aware of the hidden costs of foreign-made goods.  I agree that many other consumers are not aware of the issue.  However, if the consumer needs a kitchen item, and finds ONLY Chinese-made items at the store, he or she is forced to buy the Chinese item.  Again, we should operate at the grassroots level to inform all consumers of the hidden costs of saving a few dollars by buying a Chinese item, and the need to inform store chains that they must carry American-made goods.

It is often said that stores cannot stock American-made items because all the American factories have shut down.  It is a chicken and egg situation.  However I believe that many consumer items are manufactured in America at low levels.  If the store chains would seek out these manufacturers, they could quickly ramp up production.  Also, if it becomes known that store chains are looking for American-made items, entrepreneurs would start new facilities to meet that need.

Further, a store chain that makes the effort to carry American-made goods, and advertises that fact, could well see an increase in sales and profits more than covering any extra costs.

Please note that in all of my comments above, a reference to goods coming from China is a shorthand way of saying "goods coming from China or from other countries that don't buy from us in approximately equal amounts".  Our imports from China are four times our exports to China. This is not a situation of "approximately equal amounts".  

Blkrocket also provided an article entitled "Why U.S. Companies Love China", Business Week On-line, September 13, 2005, by Dexter Roberts.  There are a few problems with this article, in addition to being somewhat out of date.

The article mixes together references to American companies operating in China and selling to the Chinese people, and American companies operating in China and sending the goods to America.  These two situations are totally different, obviously.  There is nothing wrong with an American company manufacturing in China and selling the products to the people of China.  However, again, note that the article is six years old.  I suspect that in the next few years production for the Chinese market will be taken over by Chinese companies.  American companies will see near or complete disappearance of their business activity.

At the end of the article, referring to the prospects for U.S. companies operating in China, Roberts states: "It will be many years before China develops the intellectual property rights protection, transparent policy making, and level playing field that will make it anywhere as predictable as the West or Japan."

My comment:  Protection of intellectual property rights in China is not going to happen.  Quite the opposite.  American companies would be well advised to avoid any contact with China.

At the same time, American companies are finding slow sales in America.  Why?  Because American companies have transferred millions of manufacturing jobs out of America.  Relatively few people still have reasonably stable and reasonably-paid jobs.  No wonder people are not buying.

The best course of action for American companies is to move their manufacturing back to America, helped by the lower U.S. dollar, efforts of Senate and House members as referred to above, and reasonable wage requests of American workers.  Message to American companies:  Give work to Americans and Americans will buy from you!

America has every justification to tear up trade agreements with China and other countries that don't buy from us.  Put on a tariff to protect manufacturing jobs returning from overseas, and start to re-build the American economy!

Friday, May 13, 2011

A fantasy view of our economic relationship with China

Note added November 2011.  I had wrongly interpreted some data.  As a result I over-estimated manufacturing employment loss during President Clinton's time in office.  I see now that manufacturing employment, including production, administrative, and sales personnel, was stable or in upswing 1993 to 1996.  However from 1996 to 2000 inclusive, manufacturing employment decreased by approximately 850,000.

Toward the end of the Clinton Administration, the Vice-President met very frequently with Chinese officials, and possibly the President met with them also.

R. B. Reich was Secretary of Labor 1993 to 1997.  At the present time, Mr. Reich has taken a position of defending China and making claims that products from China have only a modest effect on the U.S. economy.

Mrs. Clinton, of course now Secretary of State, has also taken a position of defending China.  Please see the following for a detailed analysis.

In May 2011, I came across a speech made by Secretary of State Clinton on January 14, 2011.

This speech was the "Inaugural Richard C. Holbrooke Lecture on a Broad Vision of U.S.-China Relations in the 21st Century".

Let me say right away that America has two deadly serious problems that no one is addressing and no one is talking about.  Both problems involve China, one partly and one wholly.  If America does not face up to these problems soon, we will be in such bad shape that the Holbrooke Lecture Series will not get very far into the 21st century!

The two problems are:

+  America is sending out one trillion dollars per year to foreign countries and foreign companies.  Any foreign expenditure is much more damaging to the economy than even a wasteful domestic expenditure.   One trillion dollars is wealth we cannot afford to lose.  This is real physical money going out of the country, never to be seen again.  It amounts to over three thousand dollars for each man, woman and child in America.  We are massively impoverished by this huge hemorrhage of money.

+  China has announced a new economic policy with the objective of being completely self-sufficient in all manufactured goods by 2050, and being self-sufficient in industrial components by 2020.   So even the present moderate purchases by China of manufactured goods from America and other western countries will take a major step down by 2020 (readily achievable)  and a further final step down by 2050 (may not actually get down to zero but definitely a further step down).  Part of the 2020 goal is to have reverse-engineered all components now purchased from America, so that China will be making the items for domestic use and for sale on the world market.  American manufacturers involved may suffer major or even complete loss of their business activity.

(I previously said that this new economic policy was announced in early 2011.  I have now learned that this new economic policy was announced in 2006.  More details in a forthcoming post.)

Some people put all blame for all problems on President Obama.  But President Obama has only been in office a little over two years.  What about the eight-year term of President Bush?  What about the eight-year term of President Clinton?  Responsibility for the two problems mentioned above lies with all Presidents and all members of the Senate and House over the last 50 years.  These problems have been a long time developing.

But now let's return to the topic of Secretary Clinton's speech of January 14, 2011.  I say, and I  hope to prove in the analysis that follows, that Secretary Clinton's speech demonstrates a fantasy view of China, arrived at by using rose-colored glasses, blinders, and head-in-the-sand.

I hope President Obama does not share the views of Secretary Clinton.  But of course any President sets the tone for statements and speeches made by Cabinet members.

Some of the more outrageous statements made by Secretary Clinton on January 14, 2011, are presented below, in each case followed by the Ed Farkas rebuttal!  As you look at the statements made by Secretary Clinton, remember that the China she is so enthusiastic about announced over four years ago a new economic policy that is going to be extremely damaging to the U.S. economy.

Secretary C.  "Trade between our two countries used to be measured in the hundreds of millions of dollars.  Today, it surpasses $400 billion annually."

Rebuttal.  Secretary C glories in the number $400 billion but forgets her math!  Normally, one checks whether a number is negative or positive, before drawing a conclusion.  I don't know exactly what is contained in Secretary C's $400 billion figure (see further discussion below) but our NEGATIVE balance of trade with China in manufactured goods is $273 billion annually.  This figure is included in the figure one trillion dollars mentioned above.  Again, the $273 billion figure is real physical money, hemorrhaging out of our economy and our country.  No American can take comfort in this yearly loss of our wealth. 

Secretary C.  "China's transformation, made possible primarily by the hard work of its people...,was also the American power that has long secured stability in the region."

Rebuttal.  China's transformation was made possible through receiving our manufacturing technology on a platter, which otherwise would have taken many decades to develop, and by manufacturing jobs pouring in by the million, without the slightest effort by China.  I estimate that China's current POSITIVE balance of trade with the world in manufactured goods is 1.25 trillion dollars annually.  With this kind of money flowing in, sure a country can be transformed!  And, equally, that kind of money flowing out will wreck a country. 

Consider also that a manufacturing job is a wealth creator, as mentioned innumerable times in this blog.  Every manufacturing job transferred from America to China is a wealth creator America has lost and China has gained.  No wonder most Americans are feeling impoverished today. 

Secretary C is talking nonsense when she claims that China was able to develop because of American military protection.  The fact is that China did  not and does not need our help to maintain "stability in the region".  Something else China is doing with our money is increase and modernize its already very large military establishment.  Why is China increasing its military so aggressively when there is no threat from any direction?   Possibly we should see this situation as a strong threat against ourselves.  Or, maybe the reason is simply that they can't think of any other way to use the huge stream of money coming their way. They certainly don't want to use it to help the ordinary Chinese citizen. 

Secretary C.  "(China) helps drive global prosperity.  The United States has welcomed this growth (in China's economy), and we have benefited from it."

Rebuttal.   Secretary Clinton, you have hit bottom here.   China is not driving global prosperity.  China is driving its own prosperity while severely damaging the economies of western countries.  In the latter respect, China is not completely to blame.  The blame lies with governments of western countries in that these governments don't have the courage and the intellectual honesty to put tariffs on goods coming in from China.  Tariffs are strongly indicated when the economic relationship is highly distorted.  I am purposely not using the word "trade".  It is not trade when the relationship is so distorted.

America imports four times more manufactured goods from China than it exports to China.  That's a distorted economic relationship!

Secretary Clinton, who in America has "welcomed this growth"?   Who in America thinks "we have benefited from it"?

Who is "we"? 

I cannot imagine any ordinary working man or woman of America saying "I welcome the growth of China's economy" or "I have benefited from it".

The ordinary working men and women of America have not welcomed "this growth" because they had to sacrifice their jobs on the altar of the economy of China to provide the growth.
I suspect that the only people who have "welcomed this growth" and "have benefited from it" are yourself and former President Clinton, who with his Vice-President had very close and continuous contact with Chinese officials, especially toward the end of his term.

Our insane process of handing over to China our manufacturing jobs and our manufacturing technology has led to the completely predictable result that China is wealthy and powerful and America is impoverished.  America has a huge budget deficit because we have lost tax revenue by sending jobs to China and other foreign countries.  In case you haven't noticed, workers in China and other foreign countries do not pay U.S. taxes!   Everyone who sent jobs overseas, or passively allowed the sending of jobs overseas, forgot this little point!

Secretary C.  "But despite its progress...China still faces great challenges.  China's GDP is only a third the size of America's...and our trade with the European Union is greater than our trade with China."

Rebuttal.  What the heck is Secretary C trying to say here?  Does she have no concept of negative numbers?  If the temperature is Minus 30 degrees, do we feel warmer if it "increases" to Minus 40 degrees?

As stated above, our NEGATIVE balance of trade with China in manufactured goods is over $270 billion per year.   Does Secretary C want this hemorrhage to get even larger?   As presented above, China has announced a policy of reducing its purchases from other countries.  Therefore, if our trade with China gets larger, it is going to get larger by our imports getting larger and our exports getting smaller.  Therefore our NEGATIVE balance of trade will get larger, meaning even more money permanently lost from our country. 

Just as a matter of interest, let's look at Secretary C's claim that our trade with European Union (EU) is greater than our trade with China.   Here are the figures for 2010, from Bureau of the Census, Foreign Trade Division.

Our exports to EU           $240 billion
Our imports from EU       $319 billion
Balance           Negative balance of trade (rounded)  $79 billion

Our exports to China       $91 billion
Our imports from China  $364 billion
Balance           Negative balance of trade (rounded) $273 billion

Maybe because of her evident inability to understand negative numbers, Secretary Clinton evaluates trade by ADDING exports and imports as magnitudes only, omitting direction of travel!  In this sense our trade with EU is larger. 

However, in terms of health of our economy, professionals in the Bureau of Census, Foreign Trade Division, and in the Congressional Research Service, look at EXPORTS MINUS IMPORTS.   If the result is a larger negative number, then the effect on the economy is more devastating.   In this sense our economic relationship with China is almost 3.5 times more devastating than our economic relationship with EU.   

Secretary C.  "...some here at home see China's growth as a threat that will decline.  We reject those views."

Rebuttal.  Secretary Clinton, how can you look around America and not see that "American decline" has already happened to a very significant degree?   All levels of government are experiencing severe budget deficits.  Fourteen million people who want to work cannot find work. 

Then, Secretary Clinton, what will happen when China reaches its frankly and openly announced 2020 and 2050 goals?   There will be nothing left of our manufacturing sector.  It is as simple as that.

Again I ask who is "We" in your statement "We reject those views"?  I challenge you to carry out a professionally-administered poll with the question "Do you believe that China's growth has led to American decline and there will be further decline?"  I believe that over 90% of respondents would answer a resounding "yes".  If that result were to be obtained, would you say that hundreds of millions of Americans are wrong and you are right?

Secretary C.  "A thriving America is good for China, and a thriving China is good for America."

Rebuttal.  Secretary Clinton, you are batting .500 here!  You are correct in saying that "a thriving America is good for China".   There are very clever people in the Chinese government who would agree with your statement.  But evidently they have been overruled by people who want to destroy the American economy completely.  In simple terms, China has announced a plan to kill the goose that lays the golden egg. 

Your statement "a thriving China is good for America" is completely incorrect.  The evidence that your statement is incorrect is all around you, easily to be seen, if you step out of your office into the streets of America and talk with the ordinary working men and women of America.

Monday, May 9, 2011

Look at detailed facts, not worn-out over-used phrases

In my previous blog post, I advocated immediate application of a 25% tariff on manufactured goods from China and from other countries with which we have a substantial negative balance of trade.

I received from Mr. X. a negative response to my post.  The gentleman says "a tariff would destroy USA manufacturing.  Import taxes will cause global depression."

The idea that tariffs have caused or will cause global depression has been invoked on innumerable occasions for nearly a hundred years.  It is one of  many phrases that through constant repetition have come to be believed and applied without analysis of the individual case.

My primary interest is not "global".  The United States of America has a huge budget deficit problem and a huge unemployment problem.  My interest is to solve these closely inter-related problems.  I believe that the only way to solve these problems is to return to America the millions of manufacturing jobs that were transferred to foreign countries over the last 50 years.

Mr. X. says that if we apply tariffs we will destroy USA manufacturing and cause a global depression.

But right now there are no tariffs, and America is already in a very bad situation, with a large part of its manufacturing sector gone.  Proof of how much of our manufacturing sector has been lost is the fact that we are sending out to foreign countries on a net basis more than 500 billion dollars per year.  This money pays those countries to do our manufacturing for us.  Our country is bleeding, hemorrhaging, 500 billion dollars per year.  This amount is real physical money going out of our country every year, never to be seen again.  This is wealth we cannot afford to lose.

 In addition, China has announced an aggressive policy consisting of two objectives:

+  By 2020, China will take over manufacture of items that are included in our current moderate exports to China.  China will then manufacture the items for its domestic needs and also for the world market.  American manufacturers will see their business activity evaporate and probably in many cases will shut down.

+  By 2050, China will be completely self-sufficient in all manufactured goods including complex items such as airliners, railroad systems, and communication systems.

I am being very careful not to exaggerate here.  I think it is fair to say that China has set up the objective of complete destruction of the American manufacturing sector, and thereby complete destruction of the American economy.  So if we continue as advocated by Mr. X. with a policy of no tariffs, America will certainly be in a depression.  Maybe there won't be a global depression, but America will be in a depression and America is my concern.

China has refused repeated requests to allow its currency to float freely to realistic market levels.  The U.S. negative balance of trade with China is about half of the above total, i.e., 250 billion dollars per year.  China is openly planning the destruction of the American economy, using our money to help it meet this goal.  The negative balance of trade of 250 billion dollars per year is large enough that a neutral observer would describe the situation as "exploitation" rather than "trade" or "free trade".  How many pathological aspects do there have to be in the relationship between America and China before America is free to withdraw from trade agreements and begin to act in its own interest?

My proposal of an immediate 25% tariff on imported goods from China and other countries that don't buy from us is a reasonable and mild action in view of the issues summarized above.  The tariff would rise to 50% in 2012 and 100% in 2013.  American manufacturers in their own interest should stop shipping to China, as the goods shipped are being used to support reverse-engineering efforts.

The best thing that could happen to America is that purchases from China, and sales to China, would cease.  Never has any country entered into such a dangerous and self-destructive economic relationship as we have with China.