Thursday, December 10, 2015

The Decline of US Manufacturing and The Rise of Income Inequality

Author:  Stuart M. Rosenberg
Senior. Inventory Manager | Supply Chain Best Practice Author

The Decline of US Manufacturing and The Rise of Income Inequality

Please do not misunderstand my intent here.  I am not a naysayer or a pessimist but we have had our heads in the sand way too long and this is the result of that denial.

On January 28, 2015, the U.S. Census Bureau reported that some 20% or 16 million of U.S. children receive food stamps. This is roughly a doubling since 2007 when 9 million children, or one in eight, received this form of assistance. Further reports indicate that the overall number of U.S. food stamp recipients has reached close to 50 million (matter of public record)

We need to ask the following question: Is this just another income redistribution instrument in the Federal toolbox or does this really reflect a more alarming feature of the overall U.S. economic picture?

In order to get a better handle on this issue, this will be the first of a short series of articles sorting out this issue from the end of World War II to the present. We will need to look into what really goes on in our domestic economy.

1947 – 1953: The Post War Years

Hence, the wheels of U.S. manufacturing were churning ahead with full speed, and the sector’s share of U.S. GDP rose from around 25.5% in 1948 to 27.6% in 1953.  

In Figure 5, the initial post-war years are shown. Here manufacturing’s share of U.S. GDP was rising, and the income equality improving in leaps and bounds. The U.S. had come out of the war with a very efficient and diverse manufacturing sector. The U.S. was the source of industrial export to a war-torn Europe, and its might and prestige was without bounds.

In a June 5, 1947, speech to the graduating class at Harvard University, Secretary of State George C. Marshall issued a call for a comprehensive program to rebuild Europe. This program, later known as the Marshall Plan (officially the European Recovery Program, or ERP), was an American initiative to help rebuild the mostly ruined European economies after World War II. Most of the help was in the form of machinery and infrastructural implements.

Figure 5 - Source: US DOL/BLS & US DOC/BEA

1954 to 1967: The Eisenhower-Kennedy-Johnson Years

Better times were awaiting the U.S. population, as the middle class and the manufacturing sector expanded, although only in total terms. In comparative conditions, the effect of the Marshall Plan had begun to take hold, and German manufacturing was on the rise, particularly TVs, a newcomer on the European scene, and automobiles gradually took over the European markets.

But the socio-economic scene in the U.S. was one of optimism and belief in the future. Carl Perkins and Elvis Presley were, for the most part, only worried about their “Blue Suede Shoes.”

The Cold War was now in full bloom, and the Iron Curtin had fallen along the central European borders. Worrying signs of unrest in the world at-large would soon move the public attention from personal apparel to war. An armistice had been reached in 1953 on the Korean conflict. Almost 40,000 Americans died in action in Korea, and more than 100,000 were wounded. Consequently, the U.S. population was in no mood for another major war.

1968 to 1975: The Vietnam, Mid-East and the Oil Shock Years

Unfortunately, another and more devastating war and more international unrest were on the horizon. When the French left Vietnam after the First Indochina War (1946-54), the U.S. stepped in to assist the non-communist cold war proxy fight. This engagement lasted from 1955 to 1975, although American military advisors had been there since 1950. At the end, the total cost in human life had reached to around 58,000.

During the same period, the world oil supply was endangered by the Middle East conflict. As a reaction to the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) decided in 1973 to instigate an oil embargo on the western nations that sided with Israel. The embargo ended in 1974. The result of this embargo was that global crude oil prices rose significantly (from $3/bbl. prior to the embargo to around $12/bbl. after).

The impact of the global economies was immediate and severe, as the economic structures adjusted to the fourfold hike in energy costs. Structural change takes time and implies both permanent and interim unemployment for large segment of the impacted economies.

Although well-endowed with hydrocarbons, the oil embargo caught the U.S., to a large extent, off guard. Not only did the gas lines at the gas stations become long and tedious, but the various oil consuming industries were suffering. Fortunately, a valuable lesson was, however, learned through this experience: utilize national resources and build up reserves.

1976 to 2014: The Relentless Outsourcing Years

As the economic tumults subsided during the late 1970’s and 1980’s, new international trade agreements, both through GATT and bilateral trade agreements were finalized. Additionally, the U.S. managed to get free trade agreements with 20 countries.

Currently the U.S. is in negotiations on regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement and the Transatlantic Trade and Investment Partnership (T-TIP) with the European Union. The objective here is the shaping of high-standard, broad-based regional pacts.

On top of this, the U.S. has bilateral investment treaty (BIT) program that helps: to protect private investment, to develop market-oriented policies in partner countries, and to promote U.S. exports. The BIT program's basic aims are to protect investment abroad in countries where investor rights are not already protected through existing agreements (such as modern treaties of friendship, commerce, and navigation, or free trade agreements); to encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory way; and to support the development of international law standards consistent with these objectives.

Now, one should think these would be powerful tools to enhance the ability of U.S. manufacturing to penetrate most of the world markets for exports. Unfortunately the U.S. manufacturing industries have continued downward and, by 2014, these industries’ share of contribution to the U.S. GDP stood at around 12%, down from around 21% when manufacturing outsourcing started in earnest.

The income and wealth distribution index (the GINI coefficient) has by 2014 reached Third World levels, and there is no improvement insight.

Simultaneously, however, the U.S. participated in the various UNCTAD trade rounds and the more hemispherical NAFTA negotiations. Some political actors heard sucking sounds, but came with no suggestions on how to moderate or restructure the outsourcing phenomenon. There is, however, a strong suspicion that our free trade agreements provided political cover for U.S. companies, particularly the larger corporations, to move production to countries with adequate human skill sets, an economic environment that has lower taxes; and a free trade agreement with the U.S.

Hence, with corporate offices in the U.S. and the production facilities flying a “flag of convenience,” the quarterly reports and bonuses for the leadership started to improve.

Improved bottom lines should, of course, always be the goal of well managed businesses, but the flight of labor-intensive industries has a vicious downward spiral attached to it. and, unless new needs and wants are created or discovered in the economy, the purchasing power of the remaining population will over time deteriorate.

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