Underneath the income and deficit unbalances ravaging America, structural unbalance erodes our economy…and our prospects for recovery.
In “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” noted economics author Kevin Phillips points out that finance now dominates the U.S. economy at 21% of GDP while manufacturing has fallen to 12%.
“There is no historic example of a great power that has let itself financialize, where manufacturing has been subordinated, that has come back from it,” he said.
This economic shift from manufacturing to high finance matches shifts by U.S. corporations to prioritize profit, exemplified by their eagerness to “outsource” and “offshore” production.
In comparison, Germany made it a priority to protect domestic mass production expertise, technology, and manufacturing capacity. Today, Germany remains a world leader in capital goods, making machine tools that drive factories worldwide. New economic powerhouse China pursues the same course. Both maintain huge trade surpluses. The U.S. last had a trade surplus in 1975.
America forgot, says former Intel CEO Andy Grove, the critical importance of U.S. based high-value-added manufacturing. He described the phenomenal job growth in Silicon Valley three and four decades ago when entrepreneurs transformed innovative ideas into mass production engines “employing thousands of workers.”
“The great Silicon Valley innovation machine hasn’t been creating many jobs of late,” he told Bloomberg Businessweek, “unless you’re counting Asia, where American tech companies have been adding jobs like mad for years.”
He said the 166,000 computer manufacturing jobs in America today are less than we had in 1975, while China’s have grown to 1.5 million.
The decline of America’s production economy was masked for years by the rise of a debt-driven, consumption economy. Rising government debt financed jobs in government, health care, and finance. Rising consumer debt financed jobs in retailing, construction, and finance. Contraction of government and consumer spending from the Great Recession has exposed severe structural unbalance. Without debt, there is little job growth.
“Restoring elements of manufacturing competitiveness is hard,” says Nobel Prize-winning economist Michael Spence. “Once skilled labor, training programs, and technical institutions in specific industries are gone, it is difficult to get them back.”
China, India and other developing countries now have the capacity to compete with advanced economies in high-value-added production, “a permanent, irreversible change,” he said. “Structural economic changes in emerging countries will only have more impact on the rest of the world in the future.”
Grove said these countries clearly understand “job creation must be the No. 1 objective of state economic policy.”
Our national interest is not to create jobs in Asia. Nor should it be the profitability of corporations. Not just our recovery but our future hinge on fixing the structural unbalance in our economy.