What America makes will make America
As a boy living in Wilmington, Delaware, I often took the train to events in Philadelphia. As we passed through Chester, Pa., I often noticed a huge sign looming over the train station that said: "What Chester Makes Makes Chester." In those days ( late 1940s early 1950s) Chester was a thriving production center that ...
As a boy living in Wilmington, Delaware, I often took the train to events in Philadelphia. As we passed through Chester, Pa., I often noticed a huge sign looming over the train station that said: "What Chester Makes Makes Chester."
In those days ( late 1940s early 1950s) Chester was a thriving production center that made everything from ships, and locomotives, to pianos. Today, the sign no longer stands over the station, which is only fitting in view of the fact that Chester no longer makes anything. It’s no longer thriving either. In fact, it’s one of the poorest towns in the country with soaring unemployment and drug addiction.
I thought of Chester yesterday as I read the New York Times front page story about how the economic stimulus being provided by the Federal Reserve’s quantitative easing (buying of gobs of U.S. Treasuries in an effort to reduce interest rates and thereby spur investment, consumption, and jobs) is proving disappointing to economists who are now estimating that the pace of recovery from the financial crisis has actually slowed since November when the Fed initiated the program. The story quoted a number of economists to the effect that this kind of stimulus doesn’t work very well in creating jobs.
Why not, I wondered. Could it be that, like Chester, America just doesn’t produce much anymore so that no matter how low the interest rates are there’s just not enough productive activity in which to make investments that would create jobs?
This line of thinking reminded me of the dinner discussion of eminent economists that I had attended last week at a prominent Washington think tank. I had been asked to make a few opening remarks on the issue of "how to make globalization work for America." I had noted that in today’s global economy all the incentives are such as gradually but inexorably to move the production of tradable goods and the provision of tradable services out of the United States. The key such incentives are: 1) U.S. corporate tax rates far above those in most other economies, 2) a chronically over-valued dollar that results from the policies of many exporting economies that keep their currencies undervalued as a kind of export subsidy, 3) aggressive investment incentives such as capital grants, free land, free infrastructure, utilities cost abatement, no taxes for ten to fifteen years, and 4) conditioning of market access on establishment of production facilities in the subject market.
My remarks gave rise to a robust discussion in which several participants argued that U.S. manufacturing is maintaining its share of global production and criticized me for being too pessimistic about its future.
In truth, I had not been particularly focusing on manufacturing. The incentives that tend to draw manufacturing out of the United States also operate to draw the provision of tradable services out as well. The off-shoring of financial back office operations, software programming, and even such advanced medical procedures as the reading of brain scans is well known and well advanced. It so happens that U.S. based manufacturing production has been losing share of the global export market (Ernest Preeg, MAPI) over the past decade, but dynamics are similar whether we are talking services, manufacturing, design, or R&D. They are all moving abroad.
That’s why the Fed is having difficulty creating jobs with its quantitative easing program. The lower interest rates it is fostering are not nearly enough to offset the incentives for off-shoring being offered by the likes of China, Singapore, France, and Israel.
Professional economists, especially macro-economists, don’t like to face up to this reality for two reasons. First, to do so would be to acknowledge that the win-win, free trade globalization theory which they have long embraced is seriously flawed. Second, facing up would require getting into the real nitty gritty of economic development and job creation. It would mean descending from the macro-economic Olympus to the actual fields of production and of service provision to determine in which America can compete and what policies are necessary to enable these industries to compete.
In other words, it would require an economic strategy for making the things (broadly defined to include services, R&D, etc.) that will make America.