Time for the U.S. Economy to Reindustrialize

The Wall Street Journal’s “Tinkering Makes Comeback Amid Crisis” stirred my thoughts on the limits of America’s dependence on a knowledge-based economy. The article focused on engineering students at prestige universities wanting to actually create physical things. Students are migrating from the virtual world of software science to hobby-ing with computer controlled milling machines in their dorm rooms, school workshops and membership machine shop clubs.

The Journal’s “Obama to Warn Asia Against Relying on U.S. Consumers” reports that the President is reiterating his call for the US to get back to making things for itself and the rest of the world. In “Larry Summers and Jeff Immelt Preparing for Post-Consumer Economy” and "US Needs to Convert from a Consumer to an Industrial Economy", I highlighted that companies such as Eaton (ETN), Ingersoll-Rand (IR), Parker Hannifin (PH) and Rockwell Automation (ROK) could be the beneficiaries. Now it appears that both the President and these companies are developing a young following.

While the President will be emphasizing balance during his Asian trip, the underlying message to the world is that the US consumer is finished, spent out, and will never return. The President doesn’t want foreigners to lend us any more of our own money to buy any more of their trinkets. The inherent conflict between the Administration and the Federal Reserve is the sustainability of our economy based on recycled dollars. Obama would rather recycle the Pound, Euro, Yuan and Yen in our favor. Bernanke still believes that the US consumer will save the world.

The previous conventional wisdom was that it is too expensive to make anything in the US, so we must concentrate on the high value-adding knowledge-based economy to be competitive. That proved a failure as each time the Fed pumped up the “economy”, i.e. money supply, it only created asset bubbles – not more industrial capacity or real innovation. True innovation and the real knowledge-based industries evolve in fits and starts; therefore they will never be enough to drive an economy as large as the US.

Now it’s time to take a step out of fantasyland. The US needs a “core” economy that supports all skill levels, personal spending that matches personal income, and an energy policy that matches consumption with its percentage of the world population and its accesses to resources.

Whether the Fed likes it or not, the central bank can no longer play US consumers like a violin. We are already diverting too large a portion of our consumption to energy. So that leaves the availability of work for all skill levels as the central focus.

It is time to end all the rhetoric about the need for better education and fair trade for the US to compete in the world. Both are overused excuses in the same manner as pharmaceutical companies say they must gouge consumers to support research. While the quality of our education varies substantially, the high-end is still extremely competitive. Education and skills are not stubbing our economy. And trade will become fairer as our consumers adjust spending to match their incomes.

So what will force the economy to reindustrialize? I believe it will come when many of the knowledge-based commerce businesses such as banking, finance and accounting become utilities. Yes, the Bank of America (BAC) Electric Co., the Citigroup (C) Electric Co., the JP Morgan (JPM) Electric Co., the Wells Fargo (WFC) Electric Co., and even the Faux Goldman Sachs (GS) Virtual “We are not a retail bank” Electric Co. As services lose their ability to value-add, industrials will pick up the slack and jobs will fill in at all skill levels.

I am not advocating the doom of the knowledge-based technology sector, just a substantial decline in the knowledge-based services sector because of the realization that most services have never been value adding. And non-value adding services could never have been the foundation of a sustainable economy.

I am betting that President Obama’s vision of the US and world economies will be right by default.

Disclosures: Author is long BAC, C and WFC.

Comments

[Tom Armistead]

You are too polite in labeling GS, BAC, JPM et al as participants in a knowledge-based economy. Too much of their operations are in the fantasy land of financialsim, and too little in the prosaic world of utilitarian financial products, loans that support industry and the creation of productive assets.

Eamonn Fingleton's "In Praise of Hard Industries, Why Manufacturing, not the Information Economy, is the Key to Future Prosperity," written in 1999, makes an extremely good case for the need for the US to retain (or rebuild) its manufacturing and industrial base.

It also includes, in its 3rd chapter, an incisive and prescient critique of financialism. If there is one lesson coming out of the meltdown of our financial system, and any hope for constructive change, it is in the area of rebuilding a strong manufacturing capacity in the US, providng real jobs that create value.

2009 Nov 15 07:51 AM

[Tom B. Guest]

Economies work best when they are sustainable and local. Too much has been made of the idea that it is good to ship product thousands of miles to customers. Such, shipments are logically more expensive because of shipping costs - and include parasitic middlemen markups. Only, excess goods need to find markets outside of their local production areas -- or, unique goods desired by externals.

2009 Nov 15 08:10 AM

[Davin]

Unfortunately, none of this will work. How can we rebuild a strong manufacturing capacity that can compete in the world market while employing human beings? Human beings require vast quantities of food, health care, shelter, and education to be able to function in any job. That translates to high compensation packages (including wages, insurance options, education reimbursement, et al) which simply costs companies too much at the manufacturing to cost of labor price point.

Manufacturing can only be competitive if performed by machines. Sure, some humans are required to supervise, but that requires more education than simply turning screws on an assembly line.

Capitalism failed. The banks screwed us over. We gave an inch, they took a mile. It's time to realize that the economy was doomed the minute we allowed interest into the equation. How can I pay back more money than existed in the first place?

The US and indeed the world need to realize we are nearing a transitional change in consciousness that will enable us to being the move away from money. Let's stop trying to fix what we already know is conceptually flawed at a fundamental level, and focus on reinventing ourselves, our society, and our future.

2009 Nov 15 08:15 AM

[Michael Clark]

We can have both: a knowledge-based economy AND a manufacturing/industri... economy. I don't know who came up with the great idea that exporting well-paying manufacturing jobs to Mexico and Asia and expanding service jobs in America was the ticket -- well, yes, I guess American business came up with this idea.

The's the 'bottom line' philosophy at work. We need more than the 'bottom line' philosophy. Enhancing shareholder value is NOT the only viable creed for business. Japan has a 'employee for life' philosophy. There are different ways of doing things, depending upon how highly you put ethics and doing the right thing for the society. If you view the public as lambs to be slaughtered -- the 'bottom line' philosophy -- then social catastrophe is guaranteed. In America we like to fight, we like to have adversaries: the working man (unions) is the enemy of business (although thinly disguised); and the consumer is a fool ripe for fleecing.

Business in America needs to grow a soul. We need to realize we are all in this together. If Goldman Sachs wants to treat Americans like peasants, then the peasants just might treat Goldman Sachs like the French peasants treated Marie Antoinette.

2009 Nov 15 08:19 AM

[logicalthought]

On Nov 15 08:19 AM Michael Clark wrote:

>>We need more than the 'bottom line' philosophy. Enhancing shareholder value is NOT the only viable creed for business. Japan has a 'employee for life' philosophy.<<

And Japan has economically stagnated (or worse) for the last 20 or so years. No system is perfect, but "bottom line/enhancing shareholder value" capitalism (accompanied by reasonable safety and environmental regulation and, for the financials, leverage regulation) is the "continually reinvigorating" best of them.

2009 Nov 15 08:35 AM

[Pat C]

Great article and comments. Please keep it up and spread the word.

2009 Nov 15 08:45 AM

[Andrew Butter]

80% of China's exports are manufactured in SEZ (free zones), by companies that are mainly owned or partnered with "foreign" (non Chinese) companies.

The basic inputs from China into that equation are (land + infrastructure + transportation capacity to bring products to market), plus cheap labor.

The studies I've done of SEZ (mainly Jebel Ali in Dubai which is more logistics (with relatively higher labor costs)), is that what adds real economic value is the trickle down, not the margin made on the labor.

I suspect that if USA had a more coherent policy on importing labor to do jobs that (a) US workers don't want to do (b) so therefore they get done outside USA; there would be a significant spin off.

2009 Nov 15 08:46 AM

[richjoy403]

I'll be brief...what a bunch of whiners spewing their crock of BS!
They'd like for us to turn back the clock to...what 1860?...1960?

And BTW, Japan's "employee for life" philosophy worked only for a few of the very largest manufacturers, and only for a while, as their export economy was growing and they had a labor shortage; but you should look again.

The better approach would be to accept the advantages of what you have and work to improve upon its disadvantages.

2009 Nov 15 08:58 AM

[a. palmer jr.]

I think that in order to be competitive Americans are going to have to give up the notion that they have to earn huge sums of money for work that others do for less than minimum wage in other countries.
I think that executives should do likewise. In order for that to become possible some items, such as healthcare, insurance, food, utilities, transportation and other "essentials" are going to have to bite the bullet and become a little more affordable. Government will have to do it's part also by keeping spending, and thus taxes, lower for it's citizens. I'm probably in the minority thinking that President Nixon had a good idea when he was in office, of price and wage freezes for certain amounts of time. I realize it wasn't exactly free enterprise, but it was good at the time, in my opinion, but only if everyone in the country participated.

2009 Nov 15 09:05 AM

[Dan in mpls]

Has anyone here ever tried to start a small business???? The government will be your partner from start to finish. They (the government bureaucrat, will tell you how big a building you need, how many bathrooms you need, how many inches the toilet must be from the sink, how large a sprinkler system to install. They will assist you in designing your packaging, requiring labels of all sorts. They will dictate who you hire and how much you pay them. They will enlighten you as to how many hours your employees will work. They will decide who get pregnancy leave and day care. The list of help your business partner will offer is endless. Finally, once you are done with your startup phase and when you are successful, they will take a growing portion of your profits to support the legions of poor people in America who cannot work as they don't begin to have the skills necessary to hold an entry level job.

It will take 20 percent unemployment, which will happen yet, before our business partner, the government, decides to butt out and let someone start a business on their own at a cost that will make American products competitive on the world market.

America does not have the wealth it once had. I hear daily how we have borrowed our way to an affluent life style. Yet I have never once heard any practical suggestions as to how we back of the government intrusions that have been suffocating new businesses. The government has not laid off a single worker in this opening salvo of what will be a Great Recession. Government employees are waltzing through this thing unphased and strengthened. Their every missed dance step is on the neck of some schmuck who has an idea and a dream.

2009 Nov 15 09:13 AM

[Tom Armistead]

I am so sorry for all the hardhips you have endured. Respecting the rights of others just gets in the way of all kinds of wonderful entrepreneurial opportunities.


On Nov 15 09:13 AM Dan in mpls wrote:

> Has anyone here ever tried to start a small business???? The government
> will be your partner from start to finish. They (the government bureaucrat,
> will tell you how big a building you need, how many bathrooms you
> need, how many inches the toilet must be from the sink, how large
> a sprinkler system to install. They will assist you in designing
> your packaging, requiring labels of all sorts. They will dictate
> who you hire and how much you pay them. They will enlighten you as
> to how many hours your employees will work. They will decide who
> get pregnancy leave and day care. The list of help your business
> partner will offer is endless. Finally, once you are done with your
> startup phase and when you are successful, they will take a growing
> portion of your profits to support the legions of poor people in
> America who cannot work as they don't begin to have the skills necessary
> to hold an entry level job.
>
> It will take 20 percent unemployment, which will happen yet, before
> our business partner, the government, decides to butt out and let
> someone start a business on their own at a cost that will make American
> products competitive on the world market.
>
> America does not have the wealth it once had. I hear daily how we
> have borrowed our way to an affluent life style. Yet I have never
> once heard any practical suggestions as to how we back of the government
> intrusions that have been suffocating new businesses. The government
> has not laid off a single worker in this opening salvo of what will
> be a Great Recession. Government employees are waltzing through this
> thing unphased and strengthened. Their every missed dance step is
> on the neck of some schmuck who has an idea and a dream.

2009 Nov 15 09:16 AM

[john s. gordon]

if we are going to insist on fighting wars all over the world we will need an industrial base to support the troops sailors airmen etc./
the u.s industrial base has been in trouble since 1981.
the author is right, bankstering does not add value.
> jack

2009 Nov 15 09:55 AM

[Shaftsinker]

This libertarian rhetoric gets old so fast. I know it sounds horrible to you but human beings have rights. Your employees have the right to have access to bathrooms and not be overworked, your employees who have children have the right to not be fired in order for your country to retain a reasonable birth rater, your customers have the right to standardized nutritional information and health warnings, and the larger your business gets the less taxes your government will proportionally take.

Maybe you long for a world of children wearing diapers working in factories and cigarette companies advertising their health benefits, but we tried it once and decided it wasn't all that great.


On Nov 15 09:13 AM Dan in mpls wrote:

> Has anyone here ever tried to start a small business???? The government
> will be your partner from start to finish. They (the government bureaucrat,
> will tell you how big a building you need, how many bathrooms you
> need, how many inches the toilet must be from the sink, how large
> a sprinkler system to install. They will assist you in designing
> your packaging, requiring labels of all sorts. They will dictate
> who you hire and how much you pay them. They will enlighten you as
> to how many hours your employees will work. They will decide who
> get pregnancy leave and day care. The list of help your business
> partner will offer is endless. Finally, once you are done with your
> startup phase and when you are successful, they will take a growing
> portion of your profits to support the legions of poor people in
> America who cannot work as they don't begin to have the skills necessary
> to hold an entry level job.
>
> It will take 20 percent unemployment, which will happen yet, before
> our business partner, the government, decides to butt out and let
> someone start a business on their own at a cost that will make American
> products competitive on the world market.
>
> America does not have the wealth it once had. I hear daily how we
> have borrowed our way to an affluent life style. Yet I have never
> once heard any practical suggestions as to how we back of the government
> intrusions that have been suffocating new businesses. The government
> has not laid off a single worker in this opening salvo of what will
> be a Great Recession. Government employees are waltzing through this
> thing unphased and strengthened. Their every missed dance step is
> on the neck of some schmuck who has an idea and a dream.

2009 Nov 15 10:01 AM

[Shaftsinker]

Anyways as for the article I have a question...

"It is time to end all the rhetoric about the need for better education and fair trade for the US to compete in the world"

Are you saying the US should end it's fair/free trade policies? What are you exactly proposing?

2009 Nov 15 10:18 AM

[Mrudula Shah]

I am pretty sure that this is the idea companies such as GE is gearing itself up for, apparently through state-of -the-art and 21st century industries like health-care (through ultra-modern diognostic equipment manufacturing, research facilities for 21st century drugs and treatments, etc.) and green-energy (wind, solar and geothermal power) and smart-grids. We can't beat the Chinese in the 20th century industries like toys, clothings, TV sets, and such other consumer goods manufacturing. But, to be leading the world in the 21st century industries, we need to have excellent high-tech education, smarter kids and advanced research capabilities. I believe, like Mr. Goldman, that the Obama government is shooting for such a dream come true.


On Nov 15 10:32 AM Mrudula Shah wrote:

> A very good, appropriate and timely thought expressed by Mr. Armstrong,
> which with a bit more sophistication can be good enough to be published
> in magazines like Forbes and The Economist. This is what we need
> to do. Exactly how will be the next step to think and implement.

2009 Nov 15 10:47 AM

[Gary A]

Well if the dollar is devalued enough we can have factories move here. Is that the plan? Problem is that assets are rising too fast if that happens, and it will still be too expensive to do business with 6 dollar gas. Maybe rail will be the only transport and maybe that is why Buffett decided to buy his big railroad.

If the plan is 6 dollar gas and a work force willing to work for minimum wage in a factory, the politicians who allow it will all be gone and continually voted out.

2009 Nov 15 10:51 AM

[davidbdc]

All of the "G20" countries have a buy....France, China, UK, etc policy when it comes to federal expenditures........ex... 1. Thats right, the USA is the only industrialized country that doesn't support its industrial base with a Buy USA policy for Federal expenditures. We need a coherant industrial policy for us to have a strong economy going forward. Once your manufacturing footprint is gone, it isn't going to suddenly reappear.

We need to draw "talent" away from financial engineering....which doesn't produce anything but paperwork into "real" industries. Too much of our best engineering talent ends up on Wall Street.....they make a bundle for themselves but nothing for those around them.

2009 Nov 15 10:59 AM

[rick12345]

Unfortunately an economy needs inflation before it can expand and any rise in the cost of living/production has to be matched with wages growth, otherwise the countries net wealth will contract. Freezing or even lowering wages will do nothing apart from increasing the gap between rich and poor.

2009 Nov 15 11:00 AM

[manya05]

Re-industrializing America is a nice idea, but I am not sure is not more of our fantasyland approach of denying reality. How many times in the past have countries done it successfully? lost entire industries, wait a generation and then re-industrialize? I can only think of Japan and Germany post WWII, but we sure helped them do that...who will help us?

A few kids tinkering in their MIT dorm rooms with robots is nice, but believe me it takes MUCH more than that to re-industrialize an economy such as the US, Plenty of real hard education (not just tinkering), and oceans and oceans of capital. I do not see either one of those happening.

2009 Nov 15 11:06 AM

[Duude]

Unfortunately, I have to agree with the notion of America re-industrializing is more pipe-dream. Its an especially ironic view for Obama since his cap and tax plans run counter to any re-industrialization. Much less expensive for both labor and energy to set up shop in an emerging nation. But I do understand why he may say such things, while organized labor owns his administration and manufacturing had been their most-prized hold for decades, but this still remains a pipe-dream. Organized labor has doomed manufacturing in this country. Any American re-industrialization will surely set up shop overseas if they want to remain in business. The only weapon the administration has to protect union jobs is protectionism in the private sector. The administration has also thrown around ideas of creating a new green industry, certainly paved with union labor. This can only work if government plans to oblige the left with protectionism. Frankly, stupid politics and greedy unions have brought us to this place. My best advice for them is to instruct their children to not follow in their footsteps but to get an education.

2009 Nov 15 11:26 AM