American Manufacturing Can No Longer Compete
Today there are fewer manufacturing employees than in 1955, and over the past 20 years 6.4 million manufacturing jobs have been lost. These figures are a grim reminder that America can no longer manufacture competitively.
How did this happen? Two causes stand out: low international wage rates in countries like China and Mexico that America will not and cannot compete with, and America’s abandonment of capital and knowledge intensive industries.
American workers can not and should not have to compete with third world wage rates. Some Chinese manufacturers are paid 33 cents an hour according to a 2005 AFLCIO report. This cents-an-hour pay in many countries around the world has caused American companies and entire industries to move abroad. It also led Princeton economist Alan Blinder to estimate 42-56 million jobs could potentially be sent overseas.
Japan has successfully navigated the problem of China’s low wage rates. China is one of Japan’s biggest trading partners and yet Japan maintains a trade surplus with them. The labor in Japan is leveraged; one person operates equipment that can do the work of 100 ordinary laborers. America used to manufacture this way but now produces little by comparison and increasingly depends on imports at a net cost of $1.5 million per minute ($765 billion per year) to maintain our standards of living.
Auto and other manufacturing industries were once proud centers of American productivity, but have since seen their superiority usurped by technology based economies like that of Japan. The Japanese realized the gains of encouraging industrial growth and with hardly any natural resources turned their economy into an economic superpower that last year alone generated an $88 billion trade surplus with America and a $170 billion current account surplus with the rest of the world, the second largest next to China.
Meanwhile, the U.S. has resigned itself to live on increasing debts. Since 1987 home mortgages have gone from $1.8 trillion to $8.2 trillion, consumer debt from $2.7 trillion to $11 trillion and household debt has quadrupled. Add to that a national debt approaching $9 trillion and you do not have to be an economist to realize the economy may not be as rosy as America’s GDP rating system would deceptively lead you to believe.
The U.S. is increasing debt, decreasing savings and selling off our principal assets, our wealth producing companies abroad. This is not a sustainable or responsible long-term economic policy.
America can, and must, do better. How do we get out of this debt-ridden rut? The solution is to copy Japan’s model. Taiwan, Korea and many other Asian countries have adopted the Japanese East Asian economic model and are extremely successful.
What if the economy had always operated as it does today with companies being sold abroad diverting wealth, jobs and production to other countries.
Imagine the consequences in WWII if Chrysler had been under its recent 9 year-long German ownership. Chrysler produced the main combat vehicle for troops on the ground the Sherman M-4 tank. German ownership would likely have forced production of tanks for the Axis rather than America. That one acquisition would have deprived America of one of its best on the ground assets and could have greatly changed the course of the war.
The World War II scenario is of course a hypothetical, but it illustrates the potential risk of continuing to sell our best companies from vital industries abroad. Investing in industry before WWII turned America into the most productive labor force and strongest country in the world. It’s time to make that investment again.
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If Pat Buchanan’s research[1] is correct, Europe (and presumably Japan) have lower corporate tax rates. Quote: “We impose corporate taxes that average 40 percent, state and federal. Europe imposes corporate taxes averaging 24 percent. Advantage Europe.
Europe imposes an average Value Added Tax of 19 percent on all they produce.
But they rebate that VAT tax on exports to the United States and stick a 19 percent VAT equivalent on all imports from America. Without calling it a tariff and a subsidy, it is a tariff and a subsidy.”
Europe pushes a lot of its taxation into VATs keeping corporate taxes low. Per Alexander Hamilton and other founding fathers, Americans weren’t supposed to have *any* corporate taxes on domestic firms, tariffs on the purchase of foreign products was supposed to fund government. It’s just when we got rid of the latter, we needed to put in the former to pay for government. You can see how free trade is really reverse protectionism, making domestic products more expensive in order to keep foreign ones artificially cheap.
[1] http://www.wnd.com/news/article.asp?ARTICLE_ID=57302
On paper Japanese corporate tax rates go up to 40.69%, US rates up to 47% (includes up to 35% federal and up to 12% State) and Germany on average now has about 29.8% but was almost 39.70% a few years ago. For individual tax rates Japan can be up to 50% (National and Local), the US up to 45.55% (up to 35% federal and up to 10.55% State) and Germany up to 45%. For payroll tax Japan has 12.375% (Social Security), US has 15.3% and Germany has 41%. For sales and VAT taxes, Japan has 5% consumption tax (works similar to VAT), US has 0-10.25% Sales tax and Germany has a VAT tax 7-19%. For world tax rates see: http://en.wikipedia.org/wiki/Tax_rates_around_the_world
On paper US corporate income taxes are 2nd highest in developed world but it’s important to note that the effective rate actually paid is around 15%-25% after deductions and credits have been taken into account. When looking at companies that use tax havens and actively outsource, these companies in the US pay even less where some pay 0% in tax and some get money back which means they pay negative taxes.
When it comes to the VAT tax, it in the end works like sales tax because companies in the intermediate stages before the final sale to the consumer at the retail level get rebated for the VAT they pay. So a company that imports US vehicles to Europe will get rebated the VAT tax they paid on it when the vehicle is sold which thus passes the tax to the final consumer. So it actually works like a sales tax. For the VAT tax please read:
The VAT subsidy that Does not Exist
http://www.lewrockwell.com/boukhonine/boukhonine12.html
So regardless of the tax rate paid, if a country has an industrial policy which means they use the printing press to endlessly back their manufacturers; the end result could be a trade surplus even with high tax rates. Of course the lower the tax rate the better it is in helping to stimulate investment.