Why Our Economy Isn’t Going Down the Tubes May07

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Why Our Economy Isn’t Going Down the Tubes

This week I received one of those alarmist chain letters decrying the collapse of the American economy and using for argument “19 shocking statistics” like:

  • #1 The United States has lost approximately 42,400 factories since 2001. About 75 percent of those factories employed over 500 people when they were still in operation.
  • #2 Dell Inc., one of America’s largest manufacturers of computers, has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.
  • #4 In 2008, 1.2 billion cell phones were sold worldwide. So how many of them were manufactured inside the United States ? Zero.
  • #10 Ford Motor Company recently announced the closure of a factory that produces the Ford Ranger in St. Paul , Minnesota . Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford’s new “global” manufacturing strategy.
  • #16 Printed circuit boards are used in tens of thousands of different products. Asia now produces 84 percent of them worldwide.

I’m sure you get the idea, so I’ll spare you the rest of the letter and the dramatic call to pass this on to everyone you know.

In reality, what we today call the industrial economy could have also been labeled the “post-agricultural” economy. Before America became a great industrial power, we were a great agricultural power. In fact, you could have decried (and many did) that the hollowing out of our agricultural sector (big cotton and tobacco, for example) would lead to the collapse of America as a regional power and the eventual inability of us to even feed ourselves.

It is perfectly clear that the agricultural road we were on, while a very successful course in its day, bypassed all of the technical and manufacturing achievements of which the author is so deservedly proud. In order to make those gains, we needed to leave the past behind. And here we are again, just a hundred or so years later, at a similar crossroads.

It is absolutely true that we live in a post-industrial economy. This simply means that the source of wealth and power has shifted away from manufacturing and over to other parts of the value chain. The fact that people in the past have succeeded by manufacturing things doesn’t mean that’s how they will succeed in the future. There is no more reason to fear a post-industrial economy than there was to fear a post-agricultural economy.

Value, for many decades, was added in the growing of things; turning raw land and labor into things you could eat and wear. When we got very good at agriculture, we drove all of the value out of it. Value was then added in the manufacture of things. Today, value is added in the design of things, in intellectual property and in marketing. The most valuable assets in the world today are not factories, they are brands like Intel, CocaCola and Google.

The reason why printed circuit boards and integrated circuits are not manufactured in this country is that 1) there is no money in that part of the process, and 2) manufacturing those items generates a lot of dangerous wastes that we don’t want in our neighborhoods. But where are those industrial products invented, designed, and marketed? In the United States.

The fact that Ford figured out how to run their business more profitably by manufacturing in Malaysia rather than Minnesota is not an indication that they, or we, are failing. Ford is not in business to provide a particular type of job to a particular type of person. Ford is in business to provide a profitable return to its shareholders (Americans).

Google is a perfect example of what the future of this country looks like. Google is one of the most successful companies in the world. They provide lots of high-paying jobs, yet they produce nothing (which also means that they don’t pollute our air or water or use up any of our valuable natural resources.)

So no, we do not have to worry about closing a bunch of filthy, toxic, dangerous manufacturing plants producing 20th century goods using 19th century technologies. But change is often uncomfortable for people. If all you know is how to sew the soles onto shoes, you are going to be displaced by the closing of a shoe factory. But there will be plenty of jobs for your kids designing shoes and blogging about them.

By the way, Dell is closing thier US factory and moving to China because the Chinese will be the next wave of computer buyers. The money from those sales will be coming back to Dell shareholders.

But while a post-industrial economy is completely sustainable, spending more than you make is not. But these are completely separate issues, joined only in this author’s essay. We are running a trade deficit and a massive government deficit. That’s a bad thing, but it isn’t related to our economic system; it’s related to our desire to live beyond our means. Japan has created a similar problem for itself, and they are very much a manufacturing economy.

The deficit is a hidden tax on future earnings, since our debt will eventually need to be repaid plus the interest owed on it. It’s a future tax that we are handing down to the next generation in the form of reduced government services, higher taxes and inflation.

But that’s a story for another time.