From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.
What are some of the things government can do to assist in shaking loose the dormant and inactive corporate spirit of America? The loss of vigor has been demonstrated in one facet by describing “The Swedish Disease,” the phenomenon where once-active and competitive companies are parking a combined nearly $2 trillion on the sidelines in safe yet unproductive funds. (See blog entries of October 8 and October 18, 2012.)
First, if corporations and other investors ever attain a renewed vitality and begin to withdraw parts of the staggering sums they have parked in safe US government securities, then the government is going to have to take major steps to cut the deficit. Otherwise, the government won’t be in a position to pay all the demands for redemption of bonds which will be made against the treasury. In addition, if Chinese goods are not as easily imported into the United States, the Chinese government may also need to redeem some of its US government securities in order to make a greater investment in its own economy.
The US government needs to take immediate steps to reduce the importation of goods and services from countries with low pay scales. This needs to be done even if it means that other countries will retaliate by reducing imports of American-made goods. The bald fact is that American-made goods cost more in developing countries than most of those in the population can afford to pay. And the prosperous and influential in those same countries will really not want to give up their American-made luxuries, so they may be less inclined to retaliate than is imagined. In any event, exports from the US will be more than counterbalanced by the increased demand for the same goods inside the US when the manufacturing and construction industries are revitalized and more people are hired and higher wages are paid to American consumers.
There are also many foreign companies which operate productive enterprises inside the US. Still, these companies often use executives from their home country, and also import many of the components of their products and only assemble them inside the US. These companies should be given some credits for the number of US citizens employed in their in-country facilities, and be treated the same as any other importer with regard to their home country executives and the portion of their product which is brought in from outside the US.
Just as an example, BMW has an assembly plant in South Carolina. About forty BMW suppliers are now located in South Carolina within a few hours’ drive of the Spartanburg County plant, creating more than 10,000 jobs and dramatically multiplying the economic impact of the plant to the region. This local supply network should be given great credit when considering what portion of the total value of each BMW is imported and what portion is not.
I examined the back of one of my Dell laptops. It says simply “Made in Malaysia.” I’m sure many of the parts were made in other low-wage countries. But quite simply, this Dell laptop is an imported product, which does not have much effect on the US economy except for its sale markup and corporate profit.
Rather than using tariffs or import quotas, which are more likely to engender retaliation, the federal government could impose a tax inside the country at the wholesale level in order to make the foreign-made goods more expensive. A ten or fifteen per cent across the board federal tax on all imported goods as they are delivered to wholesalers would be good for the country. This tax should also be placed on foreign oil yet not on domestic oil, and on foreign automobiles, trucks and equipment yet not on domestic automobiles, trucks and equipment.
Many other countries already use this entry tax on foreign goods as a means of protecting domestic enterprise. For example, the Philippines imposes an across the board ten per cent Value Added Tax on goods before the goods can be released from import warehouses. They also impose an ad valorem tax of up to fifty per cent on selected items. See for confirmation the description at http://www.aseansec.org/14298.htm.
Economists typically take the view that tariffs and other taxes on imports tend to benefit domestic producers and the government at the expense of consumers, and that the net effects of such taxes on the importing country are negative. I say that such taxes can become a positive when a rise in domestic production and wages results from the reduction or elimination of the cost difference between domestic and imported goods. This type of result is very much needed right now in the United States, to prevent our domestic economy from being hollowed out by imported goods, and to restore the vigor and vitality of discouraged corporate officials and employees, and the unemployed of our country. Parking half of corporate assets in unproductive funds is surely a sign of loss of faith by corporate leaders in the potential of our country to grow and prosper, and is also a sign of a corporate culture dominated by pessimism and ennui.
Such specialized taxes on foreign-made or produced goods and services would, in the situation as we have it today, act as a revenue-positive stimulus to the United States economy. I say revenue-positive because it would result in the collection of some taxes, yet would not require the expenditure of any tax funds on the part of the government. At the same time, there would be a definite creation of greater internal demand for US made goods and services. This demand could only be satisfied by increasing production inside the US. The stimulus would affect positively almost all the goods and services made in the US, and would at the same time provide increased opportunities for financial institutions to put together and fund large loan packages which would be backed by much greater stability.
When US lenders make loans in the current economic environment, the ability to repay the loans is subject to considerable instability, at least in part due to the fact that at any time the borrower can be destabilized by the introduction of new imported goods or services. If the loan is made to a foreign company, there is an inherent instability in the international markets which can lead to defaults. Lenders need to be able to make loans which are not subject to the whims of market changes that are beyond the reasonable control of the borrower.
We need to review our international trade agreements and tighten them up where we can. It is highly likely that such pacts as NAFTA have been more beneficial to the other participating countries than to the US. Our government needs to always and ever make sure that all foreign trade is weighed against how it will affect the strength of US companies.
We need to stop stigmatizing the domestic exploration of oil and gas. Oil and gas are messy. Up to now we’ve preferred that the mess be made in the deserts of the Middle East than in our own backyard. We are now becoming extremely economically depleted in part by our desire not to have the mess of resource extraction in our own country. In some ways it can be said that our rampant environmentalism is a type of NIMBY: Not In My Backyard. Keep the mess out of the US. Let some other country pollute their groundwater and deal with oil spills, and pay them great sums to keep on doing so. It’s only our own environment we will worry about. Those foreigners don’t count. When was the last time you saw our militant environmental groups demonstrating against fracking or oil pollution in Iran or Nigeria? Not our problem!
The government needs to review all parts of the tax code to make sure that all tax incentives are aimed at encouraging US companies to produce their goods and services inside the country, and penalizing those who import their goods or parts.
There will still be a need for some parts of goods to be produced in other countries. It will be difficult to find American workers who will be interested in spending all day wiring and soldering tiny parts on assembly lines. Many will actually do so, though, if they are unemployed and want to find ways to support their families. The key is that the pay has to be sufficient to motivate Americans to do fine and tiny work.
The bottom line is that the United States economy has been hollowed out by our reliance on low-priced imports. The low-priced imports are necessary mostly because even our citizens with jobs don’t make enough to pay more for American-made goods.
There will be pain in a lot of low-wage nations if the US withdraws from importing such a large portion of its goods and services. Some of this pain will simply have to be borne by these nations. It’s a question of whether the US should shoulder their pain by having its manufacturing base hollowed out, or whether they should deal with their own pain.
The United States should not have to bear the pain of the world to our own detriment. We cannot remain in our current position as the savior of the world. It’s like on the airplanes: put on your own oxygen mask before you help your child or the weak. We first of all have an obligation to make our own country strong, for the long haul over the next fifty or a hundred years. Our first economic obligation is to our own corporations, entrepreneurs, and employed citizens, and the need to maintain prosperity within our own borders.
Right now we are losing our strength by catering to the low-wage cultures of other nations. We as a nation will grow weaker year by year until we own up to the fact that our own people are discouraged and unmotivated, and lack the will to stand up to the siren song of cheap imports.
Henry Ford’s solution is also the solution for many of these foreign countries. Their own citizens can only afford to buy more of the goods manufactured in their own countries if wages are raised to provide a sufficient domestic market to offset their loss of exports. It’s really up to those countries to look after their own prosperity. We can’t continue to do it for them.
The largest foreign holder of U.S. debt is China, which owns more about $1.2 trillion in bills, notes and bonds, according to the US Treasury. In total, China owns about 8 percent of publicly held U.S. debt. According to the World Bank, the total Gross Domestic Product of China is about $7.2 trillion in normalized US dollars. So it would appear that China is on the edge of doing the same hunkering down that US corporations have been doing: parking their excess cash in safe investments rather than taking the responsibility for using this cash wisely to stimulate their own economy. And no one should ever doubt that the value of China’s $1.2 trillion normalized US dollars has a purchasing power inside China of at least ten times the normalized US dollar amount. And don’t forget that much of China is state-owned, which means that the state itself acts in some ways exactly in the same manner as US corporations act.
If China wants to replace lower exports with higher domestic consumption, they can pull away some of that parked excess cash reserve and use it to pay Chinese workers high enough wages so that these workers can afford to buy the products which are manufactured in China. I’m not willing to let China off the hook by perpetuating the belief that there is no way for China to be able to pay more for labor costs within their own country.
And the same goes for the private businesses and state-owned enterprises in other countries. All these businesses and state enterprises actually have the capacity to pay their workers more, and by doing so sell more of their products in their own countries. It’s not up the United States to subsidize their profits or state returns by enabling them to pay almost starvation wages to the people of their own countries.
The certainty of low wages in other countries is a myth. It’s time the United States stops buying into this myth, and begins to get on with the business of strengthening our own economy before we actually become a mildly impoverished country, sharing the fate of the rest of the world which doesn’t have the will to work for the benefit of its own citizens.
The below quoted words of Thomas Jefferson show that, back in 1816, he understood the necessity for a strong domestic manufacturing base in order for the United States to have “the comforts of life.” If you are a citizen of the United States, please read this quote for the way it applies to what I have written above about pulling our country back from an import economy and returning vitality to domestic manufacturing inside the United States. Domestic manufacturing even today is as necessary to our independence and to our comfort as it was in the time of Thomas Jefferson.
If you are a citizen of another country, please read this quote for the way it applies to the necessity of each nation having its own internal manufacturing base if the nation is ever to have “the comforts of life.” If you live in a developing country, be very aware that in 1816 the United States was a wild and untamed developing country. In 1816 there was no certainty that the United States would ever be more than a backwoods outpost to be exploited by the other more civilized nations of the time.
“We have experienced what we did not then believe, that there exists both profligacy and power enough to exclude us from the field of interchange with other nations: that to be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturist…. Shall we make our own comforts, or go without them at the will of a foreign nation? He, therefore, who is now against domestic manufacture must be for reducing us either to dependence on that foreign nation, or to be clothed in skins and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that that manufactures are now as necessary to our independence as to our comfort.” (Letter to Benjamin Austin, January 9, 1816, ME 14:389)
For part two of this two-part series, click here: https://mcgeepost.com/2012/12/12/dangers-of-our-import-economy-part-two/
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