Article: How Can We Resolve America's Economic Problems?

By Leon Gurevich

In the aftermath of the September 11 terrorist attacks, a significant amount of resources have been deployed to improve the security of United States. The security of our country depends upon our military and economic strength.

Unlike the consequences of unexpected attacks, there are other potentially devastating factors that could affect us in the near future that we may be able to control. The manufacturing industry has been a cornerstone of the U.S. economy for over two centuries. Our ability to produce goods for everyday life, build complex infrastructure, and grow a surplus of food are essential parts of today's economy.

Many economists have commented on the existing trend to reduce employment in manufacturing while comparing it to the reduction of employment in farming. This confident and accommodating assessment may not yield the same conclusions if made with a deeper analysis and understanding of the possible outcomes.

Unlike the advances in the agricultural industry which have led to great efficiency in production of food with fewer workers, the recent advances in manufacturing have been greatly influenced by one additional factor: the migration of industrial plants to foreign countries.

For reasons of security and independence, we have made a conscious decision to grow our critical food in the U.S. instead of moving the food production to other countries that may be offering much lower labor costs. As a result, great advances in farming automation technologies and automation of food processing have been made.

However, decisions to employ better technologies to reduce the amount of manual labor in manufacturing did not follow the same pattern. Investors realized that technologies for manufacturing required longer periods of time and larger capital. They also understood that this investment could be easily avoided by moving our factories to lower labor cost countries. Relocation of manufacturing plants for many companies has become one of the best short-term and most expedient alternatives to improve the bottom line.

The accelerated growth of the U.S. economy during the two decades of outsourcing helped create a sense of prosperity. The prices of commodities and everyday home items have gone down since products started to be made in lower labor cost countries. The immediate increase in the buying power of families led to increased demand in the real estate. As many families moved into more expensive houses, the prices for real estate grew at an unsustainable rate.

Meanwhile, financial institutions, encouraged by growing demand for financing, came up with the better mousetrap for the average consumer - let them obtain mortgages with minimal or no down payment. They relied on the assumption that the value of homes and incomes will continue to increase for a long time. Unfortunately, the buying power of households declined. The demand for overpriced housing plummeted, and with that, the housing and oversized loan and financial markets collapsed.

The collapse of the financial markets in the U.S. during the last weeks of September 2008 is the result of the "uncontrolled race" of many large corporations striving to achieve larger and quicker profits. In the meantime, the institutions of government have allowed these corporations to operate without strong oversight.

The outsourcing of manufacturing, coupled with increased investments by the world's largest companies in China and India have caused an increase in the flow of money to these countries. The U.S. budget and trade deficits grew as fast as the prosperity of the countries to which we outsourced. That prosperity has lifted consumption as never before known in the history of the planet and in turn lead to fastest increases to the cost of materials, oil, natural gas and other resources.

Today's ominous trend presents us with totally different scenarios for the future of our nation and for our relationship with the rest of the world. We need to remember that the ultimate physical control of the plants that we helped to build will be reserved for the governments of those countries where the industries will be residing. This scenario creates a multitude of possibilities for disruption and/or price control.

If products are manufactured outside the U.S., the infrastructure and services associated with manufacturing, payroll, material producing, delivery resources will be lost for the U.S. It drastically reduces federal and state tax revenues and will require treasury to borrow more money from other countries. Another factor related to the loss of manufacturing activity is the potential loss of technological know-how to less than friendly nations who do not share our values. Losing our technological competitive advantage to countries that may pose a risk to our economy and security may further heighten those dangers.

These consequences already led to the destruction of the existing manufacturing base, reduction in employment in high-paying manufacturing industries, reduction in payroll taxes, reduction in property values, and beginning a possibly deep and long recession. This will soon lead to the reduction of employment in government, finance, retail and other services, since fewer of these services are needed to maintain manufacturing and a declined economy.

One can imagine a future world for the U.S. where we will find that almost all of the things that we use daily are made out of the country. We will pay other manufacturing countries for their goods. In exchange we will offer them our services but at prices they may not be able to afford. Thus we will find ourselves quickly losing our incomes and then the ability to buy goods and services, ultimately moving in the direction of a decline in our standard of living.

The current recession will not stop until the buying power of our population can be increased again. The government needs to introduce policies that will require companies to move manufacturing back to the U.S. and invest in new technologies such as robotics and automation similar to our investments in farming.

In order to reverse these trends, the U.S. government will need to develop financial strategies that encourage spending on the development of better equipment that can reduce the cost of manufacturing. Only automated manufacturing can compete with low cost of manual labor since it makes the cost of labor to be a very small portion of the total cost. The resources required to develop new technologies for manufacturing will keep the population employed in better jobs, it will protect the future of the country and its youngest generation. The U.S. tax code needs to be changed to accelerate depreciation for manufacturing equipment similar to computer depreciation due to the obsolescence of technology. It may be desirable to have the depreciation for automated equipment be written off over a two years period. Additional strategies include tax credits for spending on advanced manufacturing technologies such as robotics.

The U.S. needs to start applying taxes on imported goods or services, or the so-called "Value Added Tax" as a temporary measure. These taxes will even the playing field for unfair competition from China and encourage domestic corporations to move factories back home. Domestic corporations selecting to move their plants overseas should also pay their fair share of income taxes due to the loss of tax revenue after the U.S. plant closing. We also need to renegotiate the terms of the WTA and NAFTA to include Value Added Tax instruments that will be proportionate to the opportunity of selling their products in our country. The examples of history tell us that without creation of the tangible and intangible values civilization will perish.