America: Why the High Unemployment?

by John Brian Shannon

In 1970, of the 89,244 new cars and trucks sold in the U.S.A., 84.9% of them were built in North America, while only 15.1% of them were manufactured in other countries and shipped to this continent for purchase and registration.

In 2012, of the 14.4 million new cars and trucks sold in the U.S.A., 44.5% of them were built in North America, while imports accounted for 55.6% of registrations. Read here.

By any measure, this is an ongoing paradigm shift — which directly relates to American unemployment statistics since 1970.

A total of 15.4 million car and light truck sales are expected in the U.S. for calendar year 2013 — the best year since 2007. By 2014, U.S. sales are expected to reach 16 million, with imports continuing to increase their market share in the U.S.

Since the first Model T Ford rolled off the Dearborn, MI assembly line, millions of  workers have been employed by American automakers – including some workers who worked for the same company their entire career. Fathers who worked at Ford, GM or Chrysler from their childhood until retirement, found their sons and daughters good-paying jobs with their old employers. Unemployment in the 1945 – 1975 era was generally quite low — and that, in the midst of an economically damaging Cold War which negatively affected many parts of society including the unemployment rate, not incidentally.

Generally during the post-war boom, everybody worked, everybody earned a paycheque, and almost everybody contributed to the economy. About late 1973 or early 1974 this began to profoundly change in the United States and in the Western nations generally.

Not to blame the American auto manufacturers for the Arab Oil Embargo, as the Big Three had been assured of low petroleum prices by foreign governments and several domestic administrations — hence the big, V-8 powered cars of the era and their consequently-low MPG figures were popular with both manufacturers and consumers.

But American consumers are a fickle lot. Once the gas price shot upwards in the aftermath of the Arab Oil embargo, Datsun (now Nissan), Toyota and Honda nameplates began selling as fast as the ships could deliver them from Japan.

If only the foreign vehicles were of inferior quality! But they’re not. If only they used more fuel than their U.S. equivalents. But they don’t. The corporate fuel economy average for foreign and domestic makes still favours imported vehicles. Not by the wide margin it once did — and not that GM and Ford haven’t scored impressive MPG victories in some categories, because they have.

But, to put it bluntly, many employed Americans prefer their foreign-built cars. (“And those millions of now-chronically-unemployed Americans will just have to get by.”)

It’s not just cars and trucks either. Historically, most home electronics sold in the U.S.A. including televisions, smartphones and computers were also ‘Made in the U.S.A.’  — but not these days.

Most of the clothing, plastics and extruded metals purchased in the U.S. are now manufactured in Asian and Southeast Asian nations, where countries like Indonesia rely heavily on textile exports to us and other Western nations.

Much of the American conversation these days revolves around the old austerity vs. stimulus debate which reporters and op/ed journalists are required by their respective organizations to cover.

Meanwhile the 80-ton elephant in the room is the trillions of manufacturing dollars which have transferred from the West to Asia since 1970 — and the manufacturing jobs that have gone with them.

That’s Not the Goal I’m Working For

by John Brian Shannon

It was fascinating to read the Project Syndicate article by Former US Secretary of Defense Harold Brown on America’s trouble with China discussing some of the history and modern-day challenges to Sino-American relations.

Although I have the greatest respect for former Secretary of Defense Harold Brown, I respectfully disagree with his proposed solution to the present challenges. Starting a new Cold War to secure America’s future is a step backward — not a step forward.

Rather, as both Western and Chinese interests converge at so many levels in the modern paradigm, it is in our best interests to work on solutions together.

Instead of the “Win – Lose” thinking of the past, it is incumbent upon us to find ways to “Win – Win” as so much is at stake.

We survived the last Cold War, but that is no guarantee we would survive another one. It’s simply too big a risk to take — especially when there are better options available. And, there are.

The former Secretary of Defense states that; “China’s export-led economic model has reached its limits…” and I believe this is a most profound point.

IF China has reached it’s export-led model as he asserts, it has only done so because there are presently a lack of purchasers to purchase Chinese goods.

For years, China has manufactured products to sell around the world and as long as there has been plenty of disposable income in the West, there has been plenty of sales.

As the Western economies fell backwards — so did Chinese exports.

Funny how that works.

In case policy-makers haven’t yet reached the same conclusions as I, let me say the situation I describe above is easily verifiable and directly correlates with the economic events of the early 21st century.

Whether political leaders in the U.S. or China like it or not, the relationship has been, is, and must continue to be, a symbiotic one.

China NEEDS a healthy, stable and frankly, a wealthy Western world to sell it’s wares to — and the West needs a source of low priced goods to assist growth to continue at lower cost than otherwise would be the case.

The U.S. needs a large export market for its billions of tons of coal and millions of barrels of petroleum that it must sell every year to support those industries here.

By 2017 the U.S. will surpass Saudi Arabia as the world’s #1 oil exporter — according to the IEA — but in actuality, this may occur in 2015.

http://arabiangazette.com/us-top-oil-producer-2017/

Not only that, so many products are manufactured by American corporations in China at lower cost than they could be here — therefore personal happiness is enhanced on a massive scale by products Western consumers can afford. Thanks China!

And without a healthy China (and Japan) who will continue to buy all those T-Bills to float the American economy? Along with all of the other China-driven (and increasing yearly) investment and purchasing of American goods and services.

For the next few decades, the only politics that make over-arching sense will be the politics of economics. For now, more than ever, the politics of self-interest will be the politics of economics and the politics of economics will be the politics of self-interest.

The stronger the Chinese economy, the better the effect on Western economies and Western governments. The stronger the American and other Western economies, the better for Chinese exports.

Any other model will be a lesser model and will bring it’s own problems with it.

As for the long-range bomber advocated for by former Secretary Harold Brown. I too, want a strong, secure and freedom-loving North America — but let us hope the days of Mutually Assured Destruction (MAD) are over.

Instead of sabre-rattling and an ever-present nuclear threat, let us hope that our thinking as a species has moved on.

A Pentagon report laid it out in stark terms a couple of decades back, “it is not a case of if, but of when” a nuclear exchange will take place under the MAD paradigm.

If we can’t co-exist, if we can’t form and retain viable and symbiotic relationships with other nations — every one of us will be dead, eventually. And then, none of it will matter.

That’s not the goal I’m working for.

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Read more at: http://www.project-syndicate.org/commentary/from-competition-to-confrontation-for-the-us-and-china-by-harold-brown#yD3qLMzsctZhgiyR.99

JOHN BRIAN SHANNON

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Excerpts from the Center for American Progress Fact Sheet/Regional Energy, National Solutions

by John Brian Shannon

“Developing just 54 gigawatts of offshore wind in Atlantic waters would generate $200 billion in economic activity and create 43,000 permanent, well-paid technical jobs, in addition to displacing the annual output of 52 coal-fired power plants.” — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

I have selected excerpts from this report, which you can read below. I suggest you read or download the entire report in PDF form, click here:

Excerpts from the Southeast: Energy efficiency and smart grid

The Southeast, a region historically dependent on fossil fuels, has become a leader in the emerging field of smart-grid technology—which is at the center of the impending wholesale modernization of our electric infrastructure. An enhanced commitment to regional smart-grid innovation, manufacturing, and deployment, coupled with a robust plan to address the region’s traditional energy efficiency shortfall, point to an economic and environmental boon. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

• The Southeast boasts more firms across the high-tech smart-grid value chain than any other region. Continuing to lead this transition offers the opportunity to create jobs across a range of skill-levels and fields; to diversify existing companies and to build new ones; to improve quality of life by connecting home, utility, renewable, and vehicle technology; and to reap the environmental and cost-saving benefits of using our resources more efficiently. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

• At the same time, addressing the region’s serious shortfall in implementing conventional energy efficiency policies provides a tremendous and complementary economic and environmental opportunity. A study by Georgia Tech and Duke University showed the potential to cut energy use across the region by 16 percent in 2030. This would result in annual consumer savings of $71 billion and lead to the creation of 520,000 jobs by 2030. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

Excerpts from the Midwest: Advanced Vehicles

The auto industry revival that is taking place in the Midwest is proof that states and the nation prosper when we make energy choices that take the American people, our economy, and our outdoor heritage forward together. Having recovered from near bankruptcy less than three years ago, the auto industry is now profitable, sales are rebounding, and fuel-economy projections have exceeded expectations. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

In addition to revitalizing American manufacturing, the deep oil savings from vehicles being built now under strong new fuel-economy standards will mean net savings to consumers of more than $54 billion a year in 2030 and will add 570,000 jobs to the economy. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

Excerpts from Mountain West: Wind and solar development and distribution

The Mountain West is experiencing firsthand the economic and environmental benefits of transitioning to low-carbon energy sources. Continuing this shift will be critical—the West is already experiencing serious damage from climate change and would face an even grimmer future if the nation turns its back on clean renewable energy in favor of a continued reliance on dirty fuels. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

• The West boasts nearly unlimited renewable energy resources—particularly wind, solar, and geothermal—that promise a brighter economic future than is possible with fossil fuels. The National Renewable Energy Laboratory identified 11,788 megawatts of nonhydro renewable energy projects either under construction or in advanced development in the region. Using the Electric Power Research Institute’s estimates of jobs per megawatt, these projects represent 71,872 jobs. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

Excerpt from the Pacific Coast: Solar power innovation and installation

The Pacific Coast and the adjoining western states are referred to as the “sun belt” for a reason. Capitalizing on that abundant solar resource is paying huge dividends for the region—providing jobs, spurring new industries, and spawning new innovative technologies. Abundant resources and aggressive renewable energy standards, including incentives for both utility-scale and small-scale rooftop solar, position the region to build on its current status as a national leader in solar energy installation and generation. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

• The solar industry in California has experienced significant growth over the past 15 years. Since 1995 the number of solar businesses grew by 171 percent, and total employment jumped by 166 percent. As a point of comparison, the total number of California businesses has grown by 70 percent, and employment has increased by 12 percent. — Center for American Progress – Fact Sheet/Regional Energy, National Solutions

To read or download the entire report in PDF form, click here.

Looking Through the Wrong End of the Telescope Won’t Fix the Economy

by John Brian Shannon

Quick, think fast! Why is there a huge liquidity trap in America?

If you can answer that question, then you’re not ‘looking through the wrong end of the telescope’ blaming the symptoms, instead of the root causes of the present American economic problem. Which, some other people (not you and me) are probably doing right now.

Let’s call some of those people 2012 Republican politicians.

The present excess-liquidity situation has come about as a result of some economic policies of the United States, which gained traction during President Reagan’s first term in office. It was a different world then and the 40th President acted swiftly and responsibly to restart the U.S. economy. I quote the New York Times reportage of President Reagan’s inauguration speech.

He said “progress may be slow,” but his “first priorities” would be to “get government back within its means, and to lighten out punitive tax burden,” a reference to his campaign pledge to balance the Federal budget and cut personal taxes to 30 percent in three years. – The New York Times, quoting President Ronald Reagan’s inaugural speech of January 20, 1981.

Personal and corporate tax rates have dramatically fallen since then and the plan to cut the tax rates and add unprecedented billions of dollars of stimulus spending to the economy (much of it went to U.S. defense contractors) worked to grow the American economy and the economies of other Western nations, such as the UK, Canada and Spain. Yes, it was that much stimulus.

Cold War allies such as Canada, received generous NASA and U.S. defense-related contracts from the administration, which in turn helped to boost the economies of Western alliesthereby helping the U.S. economy.

How’s that?

During Ronald Reagan’s terms in office, most cars and trucks registered in Canada were manufactured by U.S. corporations and the same held true for so-called ‘white goods’ (refrigerators, stoves, dishwashers, etc.) and large volumes of many other products — especially construction industry products and materials. Not to mention Canada’s purchase of 110 F-18’s in 1981.

When your allies have money, they place orders with U.S. corporations. When your allies don’t have enough money to purchase American goods and services, sales fall off dramatically.

Of course, there was much more to it than that. America was deep in the economic doldrums in 1980/81 and the American psyche was still reeling from the Vietnam War, a recession and a loss of American prestige following the dual shocks of the Arab Oil Embargo and the American hostages in Iran.

President Reagan stepped up and hit a ‘home-run’ every day for the U.S.A and got America to believe in itself again. The President authorized the Chrysler bailout, other bailouts and some exceptional mergers so that companies would not be forced to shut their doors and take all those middle-class jobs with them.

Economically speaking, by adding significant hundreds of billions of stimulus dollars to the U.S. economy (perhaps as much as 1 trillion dollars, depending on who is doing the counting) and lowering personal and corporate tax rates, the Reagan administration employed a two-pronged approach to foster growth in the American economy. And it worked.

Fast-forward to 2012. Trying to employ those same policies now when we have reached a state of diminishing returns on them (as there isn’t much left to cut without shutting down America) can only be called tinkering with the economy. Back in the 1980’s huge cuts in tax rates were possible and allowed a decade-long spending spree by American citizens and corporations.

Now that personal and corporate taxes are so low and have been for some time, there is no longer room for huge tax cuts of 10% or more. All the juice has been squeezed out of that lemon.

The policies which allowed huge growth in the 1980’s (mega-stimulus and tax cuts) were financed by running massive deficits which were never paid off — as President Reagan had responsibly promised would eventually happen.

When governments run obscene deficits designed to stimulate the economy during times of economic crisis it is an utterly logical thing to do. When successive governments don’t return to balanced budgets and don’t paydown the accumulated government debt during the ‘good times’ as John Maynard Keynes suggested, governments ability to assist in subsequent recessions are constrained (for a telling article on that, read here) – but this time around the constraint is the liquidity trap.

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Now we have people writing to members of Congress, to the media and to each other, asking for fixes to the symptoms of the economic problem, instead of the cause. It gets worse, we now have candidates for high office blaming the symptoms instead of the cause.

Why are we in a liquidity trap? The answer my friend, is right below.

A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth.

A liquidity trap is caused when people [or corporations] hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels. – Wikipedia

How can injections of cash into the private banking system by a central bank lower the interest rates when the interest rates are effectively zero?

What we are left with; The banks are full to the top with deposited money from individuals and corporations. There is low demand for goods and services. There is little demand for money to loan. There is little incentive for banks to loan money as there is presently such a small ‘spread’ between prime rate and mortgage rates. There is little room for personal and corporate tax rate cuts — as the largest cuts have already taken place over the past 30 years.

What all of this means is the government has little in the way of actual controls over the economy. When both major levers (monetary and fiscal) don’t work, all that is left is minor tinkering.

When two of the most important economic levers are temporarily out of order, we just can’t stand around blaming the symptoms or wishing for a better day. It is now the time to bring in other levers to spur the economy like a reasonable (export) tariff of say, 5-8% on all raw resource exports, such as petroleum (the U.S. is a net exporter of petroleum) coal, minerals and metals.

This would begin to add cash to the federal coffers from day one and every penny should be used to stimulate actual jobs.

The U.S. could hire 100,000 additional police as President Clinton once did – many of whom are still paying taxes and contributing to their local economies, by the way.

Also, more teachers, or teachers with higher credentials could be educating a better future workforce.

‘Shovel-ready’ national infrastructure programs could create jobs for out-of-work and under-employed labourers.

Want to create demand in the economy? Give a few million Americans jobs! Watch how much tax revenue is generated. Watch the sales of everything from work-appropriate clothing, to cars, gasoline, home appliances and so much more, skyrocket in less than a year and continue to contribute to the economy.

People don’t want food stamps if they have a good-paying job. People don’t want welfare if they have a decent job. And people don’t want to burden social agencies when they can afford to live independently.

Looking through the right end of the telescope, there’s nothing but solutions in all directions. A moderate tariff on raw resource exports is a good place to start.

John Brian Shannon

ABOUT JOHN BRIAN SHANNON

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

“It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.”

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: @JBSCanada

 

Why Resource-based Economies Need Tariffs

by John Brian Shannon

Joseph E. Stiglitz, Nobel laureate in economics and Professor at Columbia University has noted the problems inherent to resource-based economies in his recent and excellent article; “From Resource Curse to Blessing” which I urge you to read. Early into his piece, he says;

“On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect.” — Stiglitz

The usual solution to the inevitable slowing of a resource-based economy is to facilitate ever more extraction — in the hopes that more resource dollars will stimulate growth and compensate for the lack of progress in other sectors.

Time and time again this fails to work and to make matters worse, other sectors of the economy grow weaker in almost direct correlation with mounting resource exports. Manufacturing often takes the greatest hit.

Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments. — Stiglitz

The government line on this is usually; “We should concentrate on what we do best.” Which is fine except that in so doing, the rest of the economy slowly slips toward the day when the government must then announce; ‘The majority of the resources are gone, we now must rebuild our economy from scratch.” This is when economists are finally consulted and listened to — but are then expected to solve the entire problem by the weekend, with nothing more than a magic wand and an algebraic/transcendental incantation.

Resource-based economies should commit to robust and long-term economic development throughout the economy well before such cantrip is required.

Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries’ comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world’s most efficient rice grower, but it would still be poor. — Stiglitz

The problem of course, is how to fund the necessary investment in the non-resource economy. And what level of funding do non-resource sectors enjoy at the present? Less than you might imagine.

Of all solutions, the simplest usually work best. Which is why a nominal export tax is a necessary ingredient to any resource-based economy to assist the national economy maintain a quantitative balance.

After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development, and redistribution. — Stiglitz

There is little need for domestic resource taxes in nations where the majority of resources are exported. Such ‘recycling’ of citizen’s money adds little ‘new money’ to the economy and irritates voters, while the most efficient economic performance enhancement available comes from export tariffs and FDI.

Both export tariffs and FDI revenue streams represent new money entering the system which means unlike domestic taxation, citizens are not paying for other citizens employment programs — foreign interests will be paying that bill.

When resource-based economies implement a 5% to 8% export tariff on every exported tonne of coal/metals/minerals, or barrel of oil, their economies will fire on all cylinders — and with little complaint from the rapidly growing and resource-hungry nations.

John Brian Shannon