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We Are In The Post-Industrial Economy

Mon, 04/21/2014 - 1:25pm
Mike Collins, Author

In doing the research for this article I found that there are as many articles saying that American Manufacturing is not in decline as saying it is. I wondered if this is simply a matter of economic perspectives or if there is a real basis for this dichotomy of views. The following graph reveals the answer.

The graph shows that from 1947 to 2010 manufacturing output has been growing at a very good rate. Even though it dropped during the recession it has jumped back up to $1.993 trillion by the end of 2012. So from the point of view of economists, owners and managers of the Fortune 500 companies, manufacturing is growing. For them profitability has been good, stock prices are up and they are producing almost as many goods and services with 5 million fewer workers. Life is good!

The graph also shows that the total employment in manufacturing grew up until 1979, but has been declining steadily since this peak and declining precipitously since year 2000. Since 1979 manufacturing has lost 8 million jobs. Since each manufacturing job produces 1 to 2 other jobs, the economy has actually lost another 16 million jobs. So if you define manufacturing from the perspective of the employee or jobs it is still declining

Can the large corporations help reverse this trend?

Yes, they can but they won’t. Since the beginning of globalization the big companies see themselves in a worldwide struggle against foreign competitors for markets. By using automation, technology, outsourcing, the decline of unions, and a two tier wage system the big corporations have lowered labor costs significantly since 1980.

What are the large corporation answers to the manufacturing dilemma?

When asked what should be done to grow manufacturing and make it more competitive, Jay Timmons President of the National Association of Manufactures said:

  • Reduce the corporate tax rate
  • Reduce government regulation
  • Push through trade laws like the TCP

Now if the government agreed to do all of the things Mr. Timmons wants, do you think it would increase the number of manufacturing jobs? A good example of what they will do is the 2004 repatriation tax break under President Bush. Just like today, the big multi-national companies had enormous sums of money in offshore banks. They did not want to bring it into the country and pay 35 percent tax and they argued that a one time tax holiday would encourage them to create jobs, make R & D investments and stimulate the economy. The bill had language that specifically said that the money could not be used for stock buy backs or executive compensation.

At the time the country was already running big deficits but Congress approved a one time tax holiday at a 5.25 percent tax rate. 843 large corporations took advantage of this holiday and brought around $346 billion home from overseas. The National Bureau of Economic Research said that very little of the money was used to increase employment or R&D. The lion’s share of the money went into stock buy-backs to increase share prices, executive compensation, and to the share holders despite the fact that the bill said it was illegal (the NBER study concluded.)[1]. The same group is lobbying Congress again to give them a special tax holiday

Today Mr. Timmons says “the bottom line is that it is 20 percent more expensive to manufacture in the United States then anywhere else in the world.”[2] So I guess labor costs are still not low enough, and the relentless effort of NAM’s members to reduce labor costs will continue.

Investment in the U.S.

Since labor and middle class income is shrinking, there has not been enough spending to trigger growth in our consumption oriented economy. So the only other macro economic answer is to offset this weakness with increases in capital spending on buildings, equipment, R & D, and new products. But this isn’t happening.

Robert Samuelson of the Washington Post says, “Corporate America is husbanding its profits. It invests mainly in the safest projects. From 2007 (the previous business cycle peak) to 2012, domestic corporate profits climbed 35 percent while investment in plants and equipment rose only 2.6 percent. American companies had accumulated a huge cash hoard of $1.8 trillion at the end of 2012.[3]

The big companies will argue that they won’t make these capital investments because consumption is not high enough. Yet, the middle class can’t buy more because of falling incomes. So the economy continues to limp along with low growth.

President Obama created the Council on Jobs and Competitiveness in 2011 with the goal of creating 1 million manufacturing jobs. He appointed General Electrics Chief Executive, Jeff Immelt as the council’s chairman. This was a big surprise to me because General Electric had been one of the biggest exporters of jobs – they reduced their total manufacturing jobs in the U.S. from 125,000 to 50,000 people from year 2000 to 2010.

Both Reuter’s news service and Scott Paul of the Alliance for American Manufacturing said, “The companies touting themselves as champions of the factory worker (General Electric) or being touted by the President (master Lock) are dubious poster children for an American Manufacturing renaissance. GE has brought back a little work from overseas, and they have hired back a small percentage of the workers they laid off over the past decade at their American factories. But GE has also recently closed more then 20 factories, shifted avionics and radiology businesses to China, and pushed for public policies that will allow them to continue that course.”[4]

General Electric’s Chief Executive Jeff Immelt announced that G.E. was bringing back their line of water heaters made in China and creating 230 jobs in Louisville KY. But, what he didn’t say was that the union had to agree to a new wage of $13.50 and hour, which is $8 less then the original $21.50 wage.

Another recent example is the announcement by Hoover to bring its Eden Pure product line back from Mexico to its old North Canton Ohio plant. But employees would not make the $20 per hour wage that they used to make at the plant. The new employees would be paid $7.50 per hour.

We should not delude ourselves to think that any of the large corporations will create jobs for any other reason then cost reduction, and that wage concessions will be part of the outcome. The problem isn’t more jobs it is decent wages.

What is the reality?

The reality is that today’s big corporations are really only focused on three things — cost reduction, profitability and increasing returns to their investors. They are not moral, patriotic, loyal, or immoral, and we cannot and should not depend on them to devote anything more then lip service to the plight of the middle class or the decline of american manufacturing. Despite the multi-national companies wonderful publicity campaigns that are designed to make them appear to be loyal to the country, concerned about the environment and supportive of employees; they are giant money making machines that get 60 percent of their revenues from foreign markets.

Even with all of this talk about a Manufacturing Renaissance and re-shoring of jobs the fact is that manufacturing employment is still down more then 4 million workers, we are still offshoring jobs, imports from China are setting new records, the trade deficit is getting worse, the number of factories are still down, the percentage of GDP is still low (it is 12 percent of GDP and it was 14 percent), and R & D expenditures are being off-shored. We are not even close to President Obama’s goal of doubling exports by year 2016 or his goal of creating 1 million manufacturing jobs. All of these things taken together make up the critical mass that it takes to support innovation in our economy.

In 2003 the National Association of Manufacturers sponsored a research paper entitled “Securing America’s Future’ and authored by Joel Popkin. The paper said, “U.S. manufacturing is the heart of a significant process that generates economic growth and has produced the highest living standards in history. But today this complex process faces serious domestic and international challenges which, if not overcome, will lead to reduced economic growth and ultimately a decline in living standards for future generations of Americans. America’s manufacturing innovation process requires a critical mass to generate wealth and higher standards of living. If the U.S. manufacturing base continues to diminish at its present rate that process may deteriorate beyond repair and with it the seedbed of our industrial strength and competitive edge. Once that mass has diminished below its critical value, the process by which prosperity has been generated may never be recovered. If that is permitted to occur, the growth rate of the U.S. economy may drop to half its historical average. “[5]

It has been 10 years since NAM issued this report and Joel Popkin’s projection was accurate. Critical mass is more then just job growth. It includes the skilled people, R&D investments in the U.S., basic research funded by the Federal government, a solution to the trade deficit, and a system that is dedicated to fuel innovation. In my opinion we are losing the critical mass of manufacturing and are now transitioning to a Post Industrial Economy

Waiting for the large corporations to reverse the decline of manufacturing has been a fool’s errand. They are a big part of the problem and offer few solutions.

Part three will describe solutions that might allow American Manufacturing to rebound.

President Obama created the Council on Jobs and Competitiveness in 2011 with the goal of creating 1 million manufacturing jobs. He appointed General Electric’s Chief Executive Jeff Immelt as the council’s chairman which was a big surprise because G.E. had been one of the chief exporters of jobs — they reduced their total manufacturing jobs from 125,000 in year 2000 to 50,000 in 2010

The only product lines I could find that GE brought back from Asia were their line of water heaters that were made in China. The water heaters are now being made in their Louisville KY appliance complex and did create jobs. But, the union had to agree to w new wage of $13.50 and hour, which is $8 less then the $21.50 wage. We should not delude ourselves to think that any of the large corporations will create jobs for any other reason then cost, and that wage concessions will be part of the outcome.


 

[1] Wealthy Corporations with Trillion Dollars Stashed Offshore Lobby for a Holiday from U.S. Taxes, John Farrell and Aaron Mehta, Center for Public Integrity, October 24, 2011.

[2] NAM Prexy Says Washington Needs to Act to Spur Manufacturing Renaissance, Industry Week, Steve Mnter, and Jan 28, 2014.

[3] What’s stunting a slow recovery, Robert Samuelson, Washington Post Writers Group, Sept 9, 2013

[4] Is GE creating US jobs or out sourcing them? Alliance for American Manufacturing, Scott Paul, 2/16/2012

[5] Securing America’s Future: The Case for a Strong Manufacturing Base, Joel Popkin, Prepared for NAM, Washington, D.C... June 2003

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