'It's The Economy, Stupid!'

by: Michael Chandler

You know, it's been 20 years since we first heard that battle cry --- the focused slogan of Bill Clinton and James Carville in their successful 1992 bid to unseat the incumbent George H. W. Bush. After that election, there followed one of the greatest periods of economic expansion America has seen, a period labeled by some as the "Technological Revolution."

Every sector of the economy had huge productivity advances. If you recall, back then we used 86% capacity utilization in manufacturing as a benchmark, a point at which the economy was thought to be in danger of overheating, and the Federal Reserve would be expected to raise rates to cool it down. For the last 15 years, that benchmark has hovered between 69% and 78%, a development attributed to the newfound efficiencies of the Technological Revolution.

Another indicator we followed back then was the NAIRU (Non-Accelerating Inflation rate of unemployment). The magic number for unemployment was 6% --- the point where inflation would hold steady. Dropping below that number would warn of inflation to come. We don't hear much about this metric anymore, though, perhaps because it would be significantly lower, due to those same newfound efficiencies in the workplace.

We should not overstate the effects of these efficiencies, however. According to government figures, GDP has grown 17% in the past decade, but manufacturing as a percentage of GDP has fallen from 19 to about 11% (according to the US Dept. of Commerce). By way of comparison, back in the Great Depression (1929-1933), America lost 30.9% of its manufacturing jobs . . . but during the 2000-2010 decade, we lost 33.1% of all manufacturing employment. That is a third of all manufacturing jobs! In North Carolina we lost 43% of our manufacturing jobs over that same period. Of all the states North Carolina was second in manufacturing job losses.

According to The Information Technology & Innovation Foundation (March 2012), "If from 2000 to 2010 manufacturing output had grown at the same rate as that of the rest of the business sector, the United States would have 3.8 million more manufacturing jobs today."

Yet, in the last 20 years we have led the world in technology and innovation. In that same period, computers and electronic devices have been the highest growth sectors in the manufacturing sector. And energy has also been one of the few bright spots, believe it or not.

How could this happen? Well, all those evil corporations moved offshore --- or at least, that's the only answer you hear coming out of Washington these days. But in reality, manufacturing jobs were lost due to policy failures by the US Government. We lost those jobs to other countries, pure and simple. The fixed cost of producing here in the US was not competitive with costs elsewhere in the world. Productivity was not the problem --- we still lead the world in productivity. The problem was taxation. And trade policy. And education. And downright non-competitiveness.

A great example is the car industry. Toyota (NYSE:TM) kicked Detroit down the road to ruin. You know why? Because it cost Toyota 10 to 15 dollars less per hour to produce its product --- and that product was superior to its Detroit rival. That is pure capitalism, folks. And yes, it's just that simple --- it is not about sweatshops at Toyota plants.

Meanwhile, China is dumping their goods on us every day. For illustration purposes, consider this economic fact of life: if the value of the dollar falls relative to Chinese currency, widgets from China become more expensive for us to buy --- because we use more of our dollars to make each purchase. Our widgets, on the other hand, become less expensive and therefore more attractive to Chinese buyers. All of you know that our dollar has been falling in value for some time. At some point, this drop in the dollar should increase our export business and help revive our manufacturing sector.

But that's not happening, because the Chinese artificially peg their currency to the Yankee Dollar. In other words, the Chinese are intentionally refusing to allow the free market to value their currency. This refusal amounts to manipulating the currency system, and as long as we allow practices like this to go on with impunity . . . we deserve what we get.

When it comes to education, you can pick almost any Southeast Asian country, and their skill sets beat Americans hands down. A great deal of this is probably caused by differences in culture and family values, but that's a whole other article. For the moment, let's just put it bluntly --- America is lacking in both talent and attitude, and somehow this must change. I believe we have many talented educators who are essentially handcuffed in doing their jobs, particularly in public education. We must give those educators the tools they need and not allow them to become expensive babysitters.

Moreover, the corporate tax policies at the Federal and State level are among the highest in the world. Some may claim that all of the tax credits bring it back down to a competitive rate. Unfortunately, those credits don't apply to every corporation. Small corporations are getting hit particularly hard. According to the global accounting firm KMPG, the US has the highest corporate tax rate in the world at 40%. And don't forget that our State tax rates for corporations, as a nationwide average, add another 11%.

As a whole, that's a toxic cocktail of financial disincentives. Why would you want to keep your multibillion dollar corporation here in the United States, with its broken education system and its non-competitive workforce?

Where is common sense when it comes to US tax policy? The current administration has proposed penalties for companies that move offshore. As these companies sell back to the US and are paid in dollars, the Obama Administration wants to tax all dollars that are repatriated back to the US. This is tantamount to a penalty for them to come back. As a result Cisco (NASDAQ:CSCO) takes its money and builds another plant in Asia or elsewhere in the world. Just brilliant Mr. President.

I am sick and tired of corporations being slammed by our Government for making good common sense decisions. Politicians need to team up with corporate America and get our people back to work and rebuild the manufacturing dynamo we used to be. If we believe in free enterprise, capitalism, and basic economic freedoms for all our citizens, it's time we showed it.

Our CEO's have to make tough decisions, and if they fail to do so they are replaced. It's time we sent to Washington people with a spine. If they fail to do the work of the people, they too should be replaced. If you want to build an environment where long term investment means something again we must rebuild the faith in the system we once had. The only answer is to get out and vote on Nov. 6th, and make it count. Let's hold our Government accountable by changing this anti business attitude and bring our manufacturing base back home where it belongs.

We can still see the truth in the old mantra, "it's the economy, stupid." But nowadays, given the current administration's severely limited financial acumen, we might do better to rephrase it as, "Hey, Stupid! It's the ECONOMY!"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.