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