Will the Collapse of the Western Manufacturing Base Create a Worldwide Depression?

by John Brian Shannon

The Eastern economies have traditionally been the manufacturers and purchasers of downmarket goods in their own region, while Western economies have traditionally been the manufacturers and purchasers of upmarket goods in their particular region.

Over the past 40 years Asia has taken much of the West’s upmarket manufacturing base, so much so, that the West has lost fully 50% of the manufacturing jobs it once enjoyed previous to 1980. That is the single most important reason why there is significant unemployment, under-employment and worryingly, under-reported unemployment (people who no longer look for work) stats in the Western economies.

Which obviously leaves a big hole in the economy of the West, translating into lower Western economic performance and recessions in North America, Europe, Japan, Australia and New Zealand since the 1970’s.

The fact that many Western corporations are making huge amounts of money at this (outsourcing their manufacturing to Asia – resulting in better corporate profits due to the much lower labour rates there) is now a complete side-issue.

It has now come down to this; The once broad base of Western consumers with generous amounts of disposable income is changing to an ever-broadening base of Western consumers without much disposable income.

If things continue, soon it will impact the Eastern economies — as there won’t be enough people in the West with enough disposable income to afford much of those upmarket goods and services! Translating into reduced economic performance there.

For now, China and India are the only significant economies in the entire world which maintain a healthy growth rate. They have been the economic engines of the world since 1998. Here in the West, we have suffered two recessions since then — and that, with China and India firing on all cylinders and their admirable growth rates of at least 8% per year and sometimes much higher than that.

The U.S. growth rate was an anemic 2% last year and is expected to come in at 1.5% to 1.6% next year. The U.S has not seen any growth rate over 4% since the 1980’s. Europe and Canada have posted similar percentages over that same time-frame.

If demand for Eastern-produced goods slackens any further in the West, the Eastern economies will see recession too. At that point, with the West still mired in the fog of recession — the entire world economy will tailspin resulting in a worldwide depression. This is the fear of many economists — including economists in Asia.

Which is why I favour keeping some significant amount of manufacturing here in the West, as manufacturing produces (relatively speaking) a lot of jobs — while removing resources from the ground and shipping them to Asia produces relatively few jobs.

Oil refineries here cost 12 – 13 billion dollars, while in China they cost 1 billion dollars. No new refineries are planned for the West for obvious reasons. As much as I’d like to say otherwise, there is precious little chance of adding value to our petroleum exports when new refineries are so expensive here.

Which is why we need to find ways to add value to our other resources.There are many North American resources that are being exported away and some would say, squandered away. We need much more focus on a value-added economy. We need to add value to our diminishing resources before they leave our Western economy.

One way, is to manufacture products out of our resources — and then sell them abroad, to enhance our balance of payments, which would contribute to enhancing our GDP, thereby lowering our overall debt-to-GDP ratio. Those ratios are killing us right now in the West.

Another good way to improve our Western economic picture is to tariff all resource exports and use that money to fund infrastructure projects, which would contribute much to the economy, but only temporarily. After all those projects reach completion in about ten years, workers (consumers with disposable income) will again be unemployed or under-employed, just as they are now. What then?

Some economists have suggested a Goods and Services Tax for the U.S. economy and to use those windfall tax funds for national infrastructure programs, as was done in Canada so successfully from 1990 – 2004. I am one of those people. However, with the latest projected U.S. growth rates set to be 1.5% to 1.6% for next year, that means there is a lot of fragility in the economy and some economists say a large, useful Goods and Services Tax might stall the recovery process. A smaller tax would be much less useful, but the taxation rate could be increased as the economy builds positive momentum. Even with those limitations, it is still a good option for the U.S.

It keeps coming back to the fact that we need to add more value to our economy, especially to our export economy on a long-term sustainable basis. We need to create MORE jobs from the resources we extract and from our agriculture and forestry industries — or eventually there won’t be enough demand for Asian-produced products and when those Asian sales sag due to lack of demand in the West, it will hit the fan everywhere.

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John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com
Check out his economics blog at:
https://jbsnews.wordpress.com
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JOBS: The Key to Capitalism’s Success

by John Brian Shannon

As we all know, several political/economic models are in use in the early 21st century. A little refresher for you first, if your high-school political science classes didn’t especially thrill you.

The capitalist system employed by the Western nations and some other nations, is often referred to as the Free Enterprise system, the Free Market system, Wealth Accumulation, Capital Accumulation or the Open Economic model – depending on the context of a conversation. Politics can vary within capitalist systems – which are often a variant of democracy (civil rights enshrined in a constitution, the right to vote, rights to property and person and freedom of expression) form part of this model. Socialist parties represent the “left wing” and conservative “right-wing” parties are represented along with independent candidates as elected by the registered voters.

In the capitalist system, greed is the primary agent of economic change. If you want to eat, you work for money to buy your food. If you would rather drive to work than walk, you work for money to buy a car and insurance. An individual “works” to earn “profit” to purchase goods or services. The underlying premise being, that if an individual has a decent education and works “smart” and “hard” you will accumulate wealth over time. Western corporations and governments operate in a similar fashion.

So, why isn’t it working?

“It IS working!” wealthy Western individuals emphatically state.

“It IS working!” Western corporations emphatically state.

“It IS working!” Western governments emphatically state.

And in those cases, it most emphatically IS working!

But the rest of us are not. Working, that is. You know… jobs, working, making a living, paying the bills, making the rent… and all the rest of it.

You will recall my words from a previous paragraph; “An individual “works” to earn “profit” to purchase goods or services. The underlying premise being, that if an individual has a decent education and works “smart” and “hard” you will accumulate wealth over time.”

All good there. Except what happens in the capitalist system when there aren’t enough jobs?

The short answer is; A failed economic system. Ever more wealth becomes concentrated in a ever smaller percentage of the general population. You guessed it — 1% of the Western population will always agree that the Open Economic system works well for them.

For Western nations it is death by a thousand cuts and only in the interests of economic survival will our present system evolve into something very unlike the present model and it may take as long as 50 years to do so.

Let me back up a bit.

I promised you a political science refresher and here is the other half of it. The Communist system, sometimes called the Statist model, the Centralized Economic model, or the Closed Economic model, does not employ greed as the primary driver of human activity. Profit, either at the individual or corporate level is unknown and all economic activity is considered the property of the state. The only things that really matter to a communist is the national GDP and the sovereignty of the country. Of course, civil rights and personal freedoms are enshrined in the constitutions of communist countries – although at the end of the day personal rights can be and often are subjugated in the best interests of the state.

For one example of this, in the former USSR alcoholism rates were astonishingly high. But this was never reported in the Soviet media as it was thought that publicizing this knowledge would emotionally depress workers across the nation – and thereby suppress economic output. Therefore and officially, in the former USSR there was no alcoholism – and hence, the government-owned hospitals failed to devise a treatment for a disease which only occurred in the decadent West! If a citizen of the former USSR arrived at a hospital or doctor’s office for treatment of his alcoholism, he was told that he suffered from “an imaginary disease” and was counseled to stop “trying to get attention” by emulating Western behaviors. And no doubt put on some sort of watch list for good measure.

Eventually the former USSR collapsed mainly due to internal forces. However, some communist nations remain and are thriving. China has surpassed India, France, the UK, Germany, Japan and every other country except for the United States in GDP and accumulated wealth – and has done so by employing the statist economic model. According to most economics Professors, China will surpass the United States GDP by 2040. That’s 28 years from now in case you are a Chinese economist counting the days.

The main reason for the dramatic growth-driven economic performance in China is that many Western corporations have chosen to do business in China rather than the West – due to lower land and construction costs, lower labour rates, the lower costs associated with a relaxed or non-existent regulatory environment (depending on the industry and region of the country) and other cost-lowering factors associated with operating a business in China.

Beginning about 1999, U.S. corporations especially, have embraced the opportunity to lower their costs by closing their North American factories and building brand-new factories in China – sometimes with significant communist Chinese government assistance! Other western corporations too, have been closing our factories by the thousands in America and Europe and relocating their manufacturing operations to China – and on account of this economic activity, the Western economies combined are at present, 150 million jobs short of full employment. This trend of creating jobs in communist China whilst simultaneously creating higher unemployment in the Western democracies will continue as long as Western voters don’t complain too much.

By 2030, the Western democracies will be much-weakened in comparison to a still-booming China and the other Asian nations. At that time, Asia will be supplying almost all the manufactured goods for the Western economies which will by then, have lost 300 million jobs to Asia.

Also by 2030, perhaps as many as 700 million Westerners will be retired persons receiving some form of Social Security – while millions of younger people won’t be old enough to join the workforce. It will be a time when less than half of the West’s population will be employed and able to support the Western economies. From the Western point of view, this trend gets worse until 2060 when economic performance is expected to plateau in Asia.

A paradigm-shift has been taking place right under our Western noses for three decades now and we have just now begun to notice. China will soon be the dominant world power – and we handed it to them in exchange for higher profits for Western corporations.

It’s said; “He who has the gold makes the rules” – and it is shaping up to be a very different world indeed.

Follow John Brian Shannon on Twitter: https://twitter.com/#!/JBSCanada