A few years ago, I began to get excited about the return of manufacturing to the U.S. and now it’s happening. Mind you, I don’t expect it to regain the prominent position in our economy that it had prior to the 1970’s. In those days, the U.S. manufacturing industries led the world. Prior to 1973, we were a net exporter to the rest of the world in manufactured goods, oil, grains and investment capital. We were a net attractor of the world’s intellectual talent. Some of these trends took longer to reverse, but manufacturing changed early on.
Today, our economy is nearly 70% service based. We’ve lost preeminence in almost every manufacturing sector, and our twin deficits have become legendary. But we will have an opportunity to better balance our economy with more manufacturing again, which will create new careers capable of earning higher dollars than we pay today. We will also buy more of what we make within the country, reducing our trade deficits. Our manufactured goods will be more competitive in both performance and price, further increasing our chances of exporting more and hopefully reaching a better trade balance.
We have a few “negative” factors to thank for the return of manufacturing. One of those has been the cost of oil and its refined products, making transportation of materials and goods across water and land more expensive. Another is the dramatically rising standard of living in regions of the world that historically represented undeveloped, “third world” economies. Wage rates in these rapidly evolving economies are accelerating far faster than the “developed” industrialized countries. It will take time to reach wage parity, but combined with fuel costs and other expenses associated with long-distance supply chains, the offshore manufacturing model is decreasingly competitive with onshore. The weak dollar, as compared to the Euro, the Australian and Canadian dollars, is the third “negative” causing manufacturing’s rebirth. This devaluation is based on our monetary policy of “easing”, i.e., creating more cash in the flow from the headwaters of the federal printing presses.
We can debate as to when inflation will rise as a result, but not whether. When foreign and domestic buyers of Treasurys take their investment funds elsewhere, the Fed has to raise interest rates to keep borrowers interested. Until there’s a better monetary bet, money managers around the world, both sovereign and private, will still look to the dollar and U.S. debt as a safest haven among the choices available. That is, until our global balance sheet has digested (written off or written down) all the nonperforming asset-based securities we stuffed onto it up until 2008. When that happens, inflation will accelerate.
Whenever a government takes steps such as these, it is always a dangerous course. The more that we try to operate the economy like a machine which can be controlled through deft twists of the dials, the more we introduce system imbalance and unintended consequences. Look at the escalating impact on food prices that government-subsidized corn-based ethanol production has had. And converting corn to ethanol isn’t even a net positive energy production model with the subsidies included. If we let it, capitalism cures its own ills, if you look at the system as a whole. The regulatory framework should be considered a necessary protection to ensure that the large majority of players of Jack Stack’s “Great Game of Business” follow the rules prohibiting fraud. Beyond that role, government intervention into the free markets tends to over-correct. Maybe if our government leaders took a longer-term perspective, they might not push the tiller too quickly or too far in the opposite direction when we seem to be off course. I had a sailing instructor once who called me “Captain Snake Wake”, because I used big corrections for minor deviations from our chosen heading. It took me a long time to change my tiller “push” to a tiller “nudge”. I think we can all agree that the Fed’s rapid, steep sequence of interest rate reductions would qualify for a pretty heavy “push”. They may have had no choice. But then, the Fed only has a few main options in its bag of tricks: raise rates, lower them, loan bucks or co-sign for loans. What is that old saw about the guy with a hammer seeing nails everywhere? I’m hoping someone “up there” in Washington D.C. understands economics better than Congress and the executive branch seem to, given historical gaffs. Maybe some of them woke up in 2008.
But the trend is that the U.S. will manufacture more of its own needed products, keeping more of our wealth inside the country. We will export more goods and services, bringing wealth back into the country after so many decades of sending it overseas. We will acquire the strengths and abilities of succeeding in tougher markets, continuing our productivity gains that began in every industry that has been deposed by foreign competition. We will learn how to do more with less, waste less, invest more wisely, manage more astutely. This is a natural outcome of hard times.
I love capitalism. Natural re-balancing occurs if we let the free (but properly transparent) markets do their thing. The resurgence of manufacturing will change many social and economic factors in the U.S., and for the better in my opinion. Intangible assets are very important, but the creation of physical products is essential for a healthy nation. It’s a lot like the ancient Zen saying forming this column’s title. If we spend a good portion of our collective energies making useful things that help the true quality of life, we are closer to a sustainable mix of work in our country. Our core standard of living will fundamentally improve. Hand me that axe and bucket!