Mike Collins in the News
A Debt Culture Run Amok
It is time to focus on what it takes to grow a stable economy
By Michael Collins, President, MPC Management
Product Design & Development - May 29, 2009
The U.S. economy, once the envy of all countries in the world, is now a huge debt culture that may sink into oblivion. For the last 20 years we have been a nation of drug addicts and the drug has been credit.
In 1950 manufacturing was 30 percent of GDP and finance was 10 percent. By 2005 finance was 20 percent and manufacturing 12 percent; and finance made four times the profit of the manufacturing sector. Instead of making money from making products, the trend became making money from money.
The nation abandoned manufacturing and put its faith in finance. Between 1987 and 2007 the credit market debt roughly quadrupled from $11 trillion to $48 trillion. This growth was fostered by de-regulation, increased marketing, political lobbying and propaganda.
Achieving this increase in debt and profits required deliberate policies. Beginning in 1994, we allowed China to undervalue its currency. Coupled with the export subsidies and a policy that ignored the trade deficit, it helped low cost imports flood the country, which consumers could buy with their credit cards.
The idea behind low cost imports was that they would fuel our consumption economy and bring strong GDP growth. The assumption was that the average consumer would be better off because they could buy more low-cost, imported goods with their wages. The biggest loser during this time was the manufacturing sector of the economy. These policies not only led to huge indebtedness and an ongoing financial crisis, but they also led to a policy of de-industrialization.
The countries who export to us gain by having huge economic surpluses. By strengthening their industries and undermining U.S. industries, they have enhanced their power in the world. They sacrifice some domestic consumption in the short term but gain tremendously in long term growth. In contrast, the United States gains domestic consumption in the short term and suffers deindustrialization.
The second problem has become visible to the middle class. In the last five years there has been a stagnation of median family incomes at a time when health costs and personal debt are skyrocketing.
We had full employment in 2006, at the same time millions of manufacturing workers were displaced by trade deficits. Most people found new jobs but they were service jobs at lower wages. This means wage stagnation and a growing inequality of incomes.
When you look at this over the long haul from 1978 to 2005, the average wage of all workers in private industry only rose 1.3 percent over inflation. Consumers did gain from buying cheaper imports, but these gains did not offset declining wages and incurred debt.
The supply side economists in the last administration said there was nothing wrong with going into debt, and they sold the long held Reagan era belief that tax cuts would lead to growth and reward the middle class through the trickle down theory. They were also free market proponents and did a good job of deregulating many industries and keeping the government out of the business of business.
Perhaps this could have been a good argument if the nation and its workers would have gained something in return. But, instead, these policies resulted in stagnant wages, deindustrialization, a crumbling infrastructure, a rise in income inequality and the lowest consumer saving rate since the great depression.
I can’t offer solutions to the many problems of failing banks, foreclosed mortgages and the enormity of the debt, but I can say we need to get back to fiscal responsibility, savings, and balancing budgets. Most importantly we need a policy that counters the policy of deindustrialization. Creating a strong and growing manufacturing base is key.
Solving the manufacturing crisis comes at the same time we must find solutions to the financial crisis. This means saving the banking system and preventing a worldwide depression; regulating the system so greedy financiers can’t do it again, emphasize savings; and getting the nation off the drug of debt.
We need to create wealth through manufacturing, mining and agriculture rather then making money from money. A strong manufacturing base is the foundation of the economy, not the financial sector. Sometimes I feel that I am repeating myself in trying to make a case for manufacturing, but here are just some of the reasons to consider:
Secondary jobs – Manufacturing stimulates employment in other sectors at a greater pace than other industries. On the average, 8 jobs in the manufacturing sector creates 6 jobs in other sectors of the economy.
R and D –Many experts feel that the U.S. is simply not doing enough in R & D and we are falling into an “innovation gap”. If the U.S. is going to have a chance for continued economic growth based on innovation and new products, it will be extremely important to increase R & D. Manufacturers perform about 60 percent of all R & D in the U.S.
Reducing the Trade Deficit- Manufacturing contributes more than 62 percent of American export earnings. If we are to have a chance at balancing the trade deficit, the manufacturing sector must grow. The U.S cannot rely on service exports to take up the gap.
Manufacturing supports state economies – In terms of tax receipts manufacturers are huge contributors to the state revenue budgets. The bureau of Economic Analysis shows that during the last 10 years, manufacturing corporations have paid 30-34 percent of all corporate tax payments for state and local taxes, social security and payroll taxes, excise taxes, import and tariff duties, environmental taxes and license taxes. In light of the current crisis in state budgets, states cannot afford to lose any more manufacturing.
High skilled jobs- We need training programs that create high skilled workers in all industries. Jobs like machinists, mold-makers, tool and die makers and fabricators are the backbone of manufacturing.
Manufacturing supports other sectors – 80 percent of all goods hauled by trucks and 80 percent of all goods hauled by railroads are manufactured goods. The utility, energy and communications industries as well as all of the OEMs that supply them equipment are connected to manufacturing
We have had our 20-year experiment with cutting taxes, deregulation, promoting deficits, sub prime loans, hedge funds and credit cards. It has resulted in an economy that is in danger, loss of manufacturing and declining living standards for almost all workers. I hope that the financial crisis has woken the nation from its debt stupor. Perhaps now we can get back to focus on what it takes to grow a stable economy. It is time to get back to savings, balanced budgets and making stuff.