Arguments continue on the effectiveness for job creation of the fiscal incentive package. There is no doubt, however, that it would be much more effective if the US was manufacturing a higher percentage of the goods consumed by Americans.
The job intensive part of the program is lost to the country when the stimulus leads to the purchase of goods manufactured outside of the United States.
To illustrate this effect, suppose first that the incentive package entices the citizen to spend on a product manufactured in the United States. The retailer takes the money to pay operating and fixed costs, pay the wholesaler to restock the item, and make a small profit. The wholesaler accumulates its regional orders for the item and places a factory order. So far only some sales and administrative labor has gone into the economy. It is when the order is received by the manufacturer that the benefit of serious job creation starts. The factory places the replacement order into its production schedule and commits to the plant labor to produce the required number of items. The multiplier effect starts as the manufacturer places orders to its suppliers for the required raw materials and sub assemblies. The economic engine starts up and begins to create some real US labor value add.
In the case where the item is not manufactured domestically the wholesaler or importer places the order to a foreign manufacturer and any further value added goes to another country. Not surprisingly, there are not many jobs created in the United States. The trade deficit grows and the chance for the American worker to add value is missed.
There are some “expert” economists who say that a trade deficit is good and doesn’t significantly affect manufacturing employment. (Some were advisors to Bush!!) To counter this the Enterprise Policy Institute (EPI) in 2004 published a detailed analysis of the contribution of the trade deficit to unemployment in manufacturing. It concluded that in contradiction to those “experts”, the trade deficit was an important contributor toward jobs lost in manufacturing, accounting for 59% of the loss since 1998. The other contributor to unemployment was the productivity increase of the American worker.
EPI examined the percent of US production in relation to the total demand for production goods in the US. It is very telling. In 1991 94.7% of the total product demand for the USA was made domestically. It dropped to 76.5% by 2003. 1991 was a time of almost full employment. They stated that if we could return to our previous position of around 90%, millions of jobs would be created. Another interesting fact is that the US had a trade surplus until 1971.
There are some who say that our service business will make up for our loss in manufacturing. In 2008 we had a service surplus of $144 billion. Our negative manufacturing trade was $840 billion. That is a long way to go and very unlikely.
President Obama has set a target to double the US exports. It will be impossible to do this without the increased value add of manufacturing. If it were done, however, it would result in millions of American jobs and return us to economic strength we once knew before the damaging actions of the past. It will take drastic action to reverse the decades of bad decisions. It must be done.
Our current approach just isn’t working for the American people. China, Germany, Japan and every country with a strong export record is implementing a strategic plan to support their critical manufacturing sectors. These plans address innovation, trade, tax, and educational issues. They are eating both our lunch and dinner in manufacturing while we turn our focus on finance. Where is our integrated plan? It is necessary if we are to compete in a capitalist global economy!!!
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