THE BEAR'S
LAIR US
must strip costs By Martin
Hutchinson
As Federal Reserve chairman Ben
Bernanke unveils yet another attempt to print
enough money to restart the moribund US economy,
its true number-one need becomes increasingly
clear. It's not lower tax, and only indirectly
lower government spending and a better education
system.
In an era when global competition
from middle-income and low-income countries has
intensified beyond all historical experience, the
top priority for policymakers and Americans in all
walks of life must be to get excess costs out of
the US economy.
Internationally traded US
businesses have been doing this for decades
(partly through outsourcing production to
cheaper-wage locations), thereby inflating US
corporate profits close to record levels in terms
of gross domestic product. However only a
minority of the economy
consists of internationally traded businesses and
the remainder of it is barnacle- and weed-ridden
beyond belief.
In terms of cost, the US
economy was never especially competitive in many
sectors; it survived because of its vast size.
Heavy industry became dominated by US
manufacturers only after the 1862 Morrill tariff
blocked British, German and other foreign imports.
Behind the high tariff wall, the US built
dominance in most industries in which economies of
scale were important. Britain tried to compete
from 1846 to 1932 on the basis of free trade, but
with a relatively small domestic market its
efforts were futile and British industry declined
in global importance.
After World War I,
and to an even greater extent after World War II,
US industry also benefited from its competitors'
devastation. Starting with Henry Ford's US$5 day
in 1914, continuing with the high wages paid in
the internationally uncompetitive 1920s, but still
more with the New Deal and the passage of the
Wagner Act in 1935, this lack of competitive
pressure resolved itself into increasingly lavish
labor contracts. In the prosperity of the 1950s
and the 1960s, relatively unskilled blue-collar
workers lucky enough to join the right union were
rewarded in a way they probably can never be
again.
Since about 1970, this has all
fallen apart. In the 1970s and 1980s, European
countries were once more competitive. They too had
excessive union contracts, but nothing like the
US. It is however notable that the US automobile
manufacturers were unable to compete with the
Europeans even in the US market.
Of
course, even had the union contracts been
re-negotiable efficiently, there was also the
problem of the absurd and extremely expensive CAFE
(corporate average fuel economy) regulations,
which benefited foreign manufacturers at the
expense of domestic ones. Contrary to Michael
Moore's fantasies, General Motors was not
especially badly run from 1970-2009; it simply
suffered from an impossible cost structure and a
government regulator that thought extra costs
could be piled on the automobile companies without
adverse economic effects.
Since the middle
1990s, two additional factors have made US
industry's position a lot more difficult. One is
technological: the invention of the Internet and
modern cellphone technology have made it possible
to construct global supply chains using
cheap-labor manufacture of goods and services. The
other is financial; from 1995, the Fed pumped
excessive amounts of money into the global
economy, eliminating the capital cost advantage
that had previously protected US manufacturers
from competitors in cheap-labor economies.
Thus the US has become increasingly
globally uncompetitive, resulting now in an
unemployment rate that, when you adjust for
reduced "labor participation", is now around 12%
and a median wage level that has declined 9% since
2000 and will undoubtedly decrease further in the
years to come.
Without structural change,
the United States' position will not significantly
improve. Its rate of decay may however diminish.
The invention of fracking has provided the US with
abundant supplies of cheap natural gas that give
it a comparative advantage in energy-dependent
sectors that it has not possessed since 1960 or
so.
Provided the regulators do not manage
to close the industry down (and they are doubtless
gnashing their teeth at the additional visibility
and salience it has gained during the 2012
election year), it should enable energy-intensive
manufacturing and chemical processing to spring up
in areas like rural Pennsylvania in which gas is
exceptionally cheap and moderately priced labor
readily available. That won't revive the US
economy alone, but it should slow its decline.
It is thus now necessary for us to carry
out the same cost-reduction for the rest of the
economy that God has provided for the energy
sector. Michigan has begun this work effectively,
by signing right-to-work legislation, by which
workers in unionized plants cannot be forced to
join the union, becoming the 24th state to do so.
Right-to-work was a huge issue in the
Britain of the 1970s, where union-closed shops
imposed restrictive practices on a whole host of
industries, making the economy as a whole
uncompetitive and with wages rapidly eroded by
inflation. Only when 1980s trades union
legislation outlawed the closed shop did British
strike levels decline and its economy become
internationally competitive and stable.
The United States never had Britain's
union problem to the same extent, although
automobiles, steel and some other sectors imposed
"closed shop" union systems, suffering accordingly
after 1970. Even Michigan, one of the country's
most unionized states in 1970, has seen union
membership decline to only 17% of the workforce,
much of it in the public sector. Nevertheless,
right-to-work states had previously been primarily
in the South, so a major traditional center of
union activity signing up was significant.
Studies from left and right have shown
that "right-to-work" reduces wages by about 6-7%
(albeit only by 4% in real terms, since locally
produced goods are generally cheaper in such
states) and reduces the unemployment rate by about
1%, possibly increasing workforce participation
marginally. (You'd expect from economic theory
that if employment was increased, wages would
correspondingly be reduced, and vice versa.)
Thus Michigan appears to have made itself
significantly more competitive in the new global
economy, and should reduce its above-average
unemployment and increase its below-average
workforce participation by doing so.
Michigan is the second state in 2012 to
adopt right-to-work legislation; Indiana did so in
February. Further progress will be slow, although
states such as Missouri and Kentucky, with
Republican governors and legislatures, seem ripe
for the change. Nevertheless, in the long run even
the bastions of the northeast, such as
Pennsylvania and New York, seem likely to join the
trend, reducing their unemployment by doing so,
with only a few eccentric bastions like California
and Vermont holding out.
This column
discussed the hopelessly overpriced US higher
education system last week (see Twilight
of the four-year college, Asia Times Online,
December 14, 2012). Here progress is again being
made; Texas Governor Rick Perry and Florida
Governor Rick Scott have announced that their
state college systems will offer full college
degrees for only US$10,000 over the four years,
slashing overheads and using distance-learning
methods in order to do so.
While the
quality of such degrees may be fairly low, they
represent exactly the initiative needed to turn
the US four-year college system from an expensive
dinosaur into a value-added contributor to the
country's skill base.
The US legal and
medical systems are also areas where costs need to
be ripped out. Restrictive industry practices
demand law and medical school degrees on top of
four-year college degrees for practitioners.
Except for the top specialists, this is excessive;
the education should be carried out in one
post-high school operation, with a modest
mandatory period of post-graduate training and a
state Bar or medical board examination before
lawyers and doctors are allowed to practice. In
addition, the tort system needs to be sorted out,
with trial-lawyer advertising severely restricted
to limit ambulance-chasing.
Lest it be
supposed that I would spare my own previous
profession, there's no question that finance
nowadays adds more cost than value. The explosion
in financial sector rent-seeking from about 1980,
which more than doubled financial services' share
of GDP, is already reversing. However, a
transaction tax, limiting the volume of "high
speed" trading and making standard derivatives
contracts available to all on public exchanges are
steps to implement to shrink the sector back to
its 1970s size. In addition, deposit insurance
should be cut back to a maximum of $50,000, making
large depositors perform at least rudimentary
analysis of the banks where they put their money.
Finally, regulation itself must be
severely pruned. The excessive cost of
infrastructure, in which a railroad from Boston to
Washington is estimated to cost $150 billion and
take 30 years to build, is very largely due to the
jungle of environmental, safety and other
regulations which now bedevil any large project.
As this column has outlined,
infrastructure projects now cost about 10 times
what they did in 1900-50, in real terms, and at
least double their cost in even the highly
regulated European Union. The US economy cannot
survive with this additional burden, which imposes
heavy costs and additional delays on even the
simplest activity. I have suggested that without
the 1970s increase in regulation, GDP would today
be 45% higher than it is; that gap between actual
and potential output will only widen in the second
Obama term.
Cutting out costs as outlined
above will be enormously unpopular initially; it
strikes at vested interests in every sector of
American life. Nevertheless, if we are to compete
successfully with Asian economies that are now as
well capitalized as ourselves, with well-trained
labor and far more efficient business climates, it
is essential. More than tax, direct government
spending or education, it should form the
centerpiece of the next successful presidential
administration.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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