I Hate When That Happens

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American manufacturing, once the principal source of American economic power, has become a pale shadow of the world-dominant competitor it was only 30 years ago. Although the productivity of American workers still vastly exceeds the worker productivity of all major manufacturing economies, America has become a laggard in the global marketplace. For decades many have bemoaned the descent of America's industrial power. Now they say that the decline has been the result of economic misfortune: globalization, technological advance, foreign competition, unions, and so forth.

The actual misfortune is that US economic policy has been formulated by feckless politicians in Washington DC. It's as if the nebbish Willie (from the “Willie and Frankie” sketches of Saturday Night Live fame) had been behind it all. Because Willie had no grasp of causality, his life was fraught with excruciating experiences, experiences of his own making. In one skit, he came up with a scheme to test mouse traps, only to discover that "the thing came down right on my tongue!" It was an accident, even though "after 40, 50 times, I . . . I . . . I couldn't even feel the cheese." With each painful incident (which included encounters with a meat thermometer, a ball-peen hammer, and a self-threading film projector), the baffled Willie sullenly whined, "I hate when that happens."

Since the turn of this century, 5.7 million American manufacturing jobs have been lost, and the US trade deficit has soared. According to a Council on Foreign Relations study, "between 2000 and 2012, the cumulative total of U.S. spending on imports of goods and services exceeded U.S. export earnings by $7.1 trillion dollars." For manufacturing workers and, for that matter, most Americans, there has been no recovery from the recession of 2008. Two of the Willies that deserve special thanks for this misfortune are former President Bill Clinton — for his role in causing the recession — and current President Barack Obama — for his role in causing the non-recovery.

Although the productivity of American workers still vastly exceeds the worker productivity of all major manufacturing economies, America has become a laggard in the global marketplace.

It's a safe bet that in none of the 542 speeches given since he left office (for which he has reaped $104.9 million) did Mr. Clinton mention how his policies caused the housing bubble and the financial crisis. These policies (deregulation of credit-default swaps, spurious use of the Community Reinvestment Act, and shenanigans with Fannie Mae, Freddie Mac, HUD, and other organizations, to name a few) were discussed here (“Sticking It To Wall Street”), and the following week, at Reason (“Clinton’s Legacy: The Financial and Housing Meltdown”). They set the stage for the recession that occurred seven years later, no doubt to Clinton's astonishment.

The Clinton legacy also included the unfortunate accidents that followed the North American Free Trade Agreement (NAFTA), passed in 1993, and permanent normal trade relations (PNTR) for China, granted in 2000. Clinton expected NAFTA to increase US exports and therefore jobs (one million in five years, he promised). Instead, according to a recent Public Citizen report, "millions have suffered job loss, wage stagnation, and economic instability from NAFTA." The export of manufactured products from the US dwindled and the trade deficit with Mexico and Canada shot from $27 billion in 1993 to $177.2 billion today. And the economic chaos that engulfed Mexico prompted "a new wave of migration from Mexico."

Granted, Public Citizen is an anti-NAFTA advocacy group, but its claims are substantiated bytrustworthy sources — namely the US International Trade Commission (for the NAFTA trade deficit data, p. 7 of the report) and the Economic Policy Institute (for the job loss and wage decrease data, p. 8). Ironically, the immigration spike was caused by one of the few US export benefits from NAFTA. With NAFTA, Mexico eliminated its corn subsidy, but the US did not. Asa result, “seventy-five thousand Iowa farmers grew twice as much corn as three million Mexican farmers at half the cost." As subsidized U.S. corn flooded into Mexico, displaced Mexican farmers flooded into the US, greatly contributing to the surge of illegalimmigrants, from 4.8 million in 1993 to 11.7 million by 2012 (p. 22).

For manufacturing workers and, for that matter, most Americans, there has been no recovery from the recession of 2008.

NAFTA has paid off well for US corn farmers. American workers who, in the wake of the immigrant influx, lost their jobs or saw their wages shrink, have come up a little short. As have American taxpayers, who foot the bill for the subsidies awarded to corn industry cronies. This should not be confused with the bill from their cousins, the ethanol industry cronies, for subsidizing the ethanol scam — the ongoingenvironment-friendly fuel program, whose accidents include increasedair pollution, water contamination, soil erosion, andgreenhouse gas emissions, as well as increased prices for gasoline, automobiles, farmland, and food.

Clinton had loftier expectations in his efforts to help China gain World Trade Organization (WTO) membership. But instead of wielding American economic power to establish a level playing field for US industry, Clinton followed the wishes of Wall Street power, which did not extend to protecting US manufacturers from the mercantilist antics of brutal, authoritarian states such as China. As Robert Kuttner explained in “Playing Ourselves for Fools”:

In 1999, when China was negotiating its entry into the WTO, it was a lot weaker economically and financially, and the stench of the Tiananmen massacre still lingered, the U.S. had far more diplomatic leverage than the rather pitiful show of humility befitting a debtor nation displayed on President Barack Obama's recent maiden trip to Beijing. But as the memoirs of both Robert Rubin and Joseph Stiglitz confirm, that leverage was used mainly to gain access for U.S. banks and insurance companies to Chinese markets, not to require China to modify its system of predatory industrial mercantilism.

Clinton promised that China's admission to the WTO would provide the US with a vital trading partner who would change its ways and "play by the rules"; trade with China would "increase U.S. jobs and reduce our trade deficit." All the experts agreed. Then presidential candidate and fellow Willie, George W. Bush, agreed. "It is primarily U.S. exporters who will benefit," echoed the Cato Institute. It would be “a win-win result for both countries,” said Clinton, that could only "grow substantially with the new access to the Chinese market."

Alas, the tremendous US-China trade that ensued has, to date, resulted in the loss of 3.2 million American jobs, a US trade deficit with China of almost $500 billion (that grew from $100 billion in 2001), and, according to the New York Times (“Come On, China, Buy Our Stuff!”), American exporters are still waiting for the payoff. The main reason: currency manipulation by China's Central Bank makes American products more expensive to Chinese consumers. Furthermore, our trade deficit, which enables such manipulation, allows China to use its surplus of US dollars to purchase US Treasury bonds, which, in turn, enables the US government to plunge itself more deeply into debt (now at more than $18 trillion), with US taxpayers paying interest for the privilege.

Instead of wielding American economic power to establish a level playing field for US industry, President Clinton followed the wishes of Wall Street power.

American consumers have benefited, but foreign competitiveness has suffered. As a percentage of GDP, US manufacturing has shrunk from 14% in 2000 to about 11% today. According to a recent Economic Policy Institute study, of the 3.2 million jobs shed by our trade with China, 2.4 million were manufacturing jobs. Moreover, trade with low-wage countries such as China "has driven down wages for workers in U.S. manufacturing and reduced the wages and bargaining power of similar, non-college-educated workers [a pool of 100 million workers] throughout the economy."

Under Clinton's version of free trade, the outsourcing of American production, jobs, and technical expertise has flourished. To participate in such trade, observed Kuttner, many US manufacturing companies engage in

deals to shift their research, technology, and production offshore, sometimes in exchange for explicit subsidies for land, factories, research and development, and the implicit subsidy of low-wage and powerless workers and weak environmental or safety requirements. At other times, the terms of the deal are more stick than carrot: If you want to sell here, the companies are told, you must manufacture here. Or even worse, you can manufacture here but only for re-export to your own domestic market and not for local sale.

Describing Clinton’s legacy, the Huffington Post called him the "Outsourcer-in Chief," saying that

Manufacturers never emerged from the 2001 recession, which coincided with China's entry into the World Trade Organization. Between 2001 and 2009 the U.S. lost 42,400 factories and manufacturing employment dropped to 11.7 million, a loss of 32 percent of all manufacturing jobs.

But things are booming in China, which, thanks to US investment in the expansion and modernization of its manufacturing sector, has now surpassed the US as the world's leading exporter, and in our federal government, which now employs twice as many people as the entire American manufacturing industry — an industry to which Clinton could say, "The thing [WTO deal] came down right on my tongue!"

If Bill Clinton was the Outsourcer-in-Chief, then Barack Obama is the Regulator-in-Chief. With annual federal regulatory compliance costs now at an astounding $1.9 trillion, no one has done more to increase the cost, and decrease the desirability, of doing business in America than Mr. Obama. His regulatory obsession has exceeded that of George Bush, who, in eight years, increased regulatory costs by $318 billion. Obama has increased it by $708 billion, in only six years.

Unhindered by a timid Congress that has consigned its legislative powers to regulators, there's no telling how high Obama can drive regulatory costs during his final two years. But American manufacturing is doubly harassed by existing regulatory overreach, paying a staggering $20,000 per employee in annual compliance costs, compared with $10,000 for the average US firm. The cost is $35,000 per employee for small manufacturers (<50 employees), who, if they can't feel the cheese, can smell the pungent odor of our federal government.

The stagnation that began creeping into the economy under Bush is in full stride under Obama, with GDP growth averaging little more than 2% since he took office. Unconventional oil and gas production (i.e., fracking of oil and gas deposits, mostly on non-federal land) has been the only bright spot. Without fracking, even this tepid GDP growth would have been impossible. With fracking, says the Cato Institute, oil and gas prices have plummeted, increasing disposable income by $1,500 per household, 2.5 million jobs have been created, and a tax windfall of $100 billion has been garnered by government.

No one has done more to increase the cost, and decrease the desirability, of doing business in America than President Obama.

After almost seven years of stagnation, the US economy — with its shrinking middle class and its growing cohort of 55 million jobless working age adults, all desperate for a meaningful recovery from the recession of 2008 — has enthusiastically welcomed the fracking revolution. Mr. Obama's greeting has been less ardent. After almost seven years of tightening drilling regulations, his response has been to tighten fracking regulations, followed by more plans to tighten fracking regulations.

Existing regulations "are more than 30 years old, and they simply have not kept pace with the technical complexities of today’s hydraulic fracturing operations,” explained Interior Secretary Sally Jewell. Nor has the 40-year-old crude oil export ban, which is no longer needed, now that the US is flush with oil and gas. Free trade in US energy would help reduce our trade deficit, our national debt, and our dependence on foreign energy. Surging US oil production has been responsible for plummeting global oil prices, thereby improving our national security with respect to countries and terrorist organizations whose bellicosity depends exclusively on oil revenues. Additional production, therefore, would further enhance US security and would likely reduce the frequency with which thugs such as Vladimir Putin and Ayatollah Ali Khamenei embarrass our president.

Crudely Put,” an article that explains the folly of this archaic ban, alludes to Putin's crushing energy grip on Europe and the reason for America’s reluctance to export more energy. Last February, Vaclav Bartuska, the Czech Republic’s energy envoy, pleaded with "American policymakers to liberalise energy exports . . . to safeguard allies under pressure from Russia," and asked, "if freeing crude exports makes America richer, its allies stronger, its foes weaker and the world safer, what stands in the way?" Willie Obama's colossal green mousetrap, of course.

This from the man who promised shovel-ready jobs, then green jobs, and now brags about the low-income jobs created under his stifling reign.

Perhaps American manufacturers will have better luck with Mr. Obama's new free trade brainchild, the Trans-Pacific Partnership, which gives him "fast-track" authority to negotiate trade deals with Pacific Rim countries. Covering the legislation's East Room signing ceremony, Politico's Sarah Wheaton noted its bipartisan support, usually a good sign. But the more telling sign, Wheaton indicated, may have been discerned by the pianist in the Grand Foyer, who played "understated renditions of the theme to ‘Charlie and the Chocolate Factory’ and ‘Puff the Magic Dragon,’ songs depicting fantasy worlds undone by cynicism and lost innocence."

Reminiscent of Clinton's trade deal confidence, Mr. Obama stated that he was "absolutely convinced that these pieces of legislation are ultimately good for American workers." This from the man who promised shovel-ready jobs, then green jobs, and now brags about the low-income jobs created under his stifling reign — while middle-income manufacturing jobs languish.

Last November, Mr. Clinton conjectured, "NAFTA is still controversial but people will thank me for it in 20 years." He might as well have bit his lower lip and said, "after 40, 50 years, we  . . . we . . . we will feel the cheese." It will take much longer for American manufacturing to thank him for hustling China into the WTO. And who knows how long it will "ultimately" take for manufacturing workers to thank Obama for the trade deals that he hopes to negotiate — deals with trading partners who cannot be controlled by the $2 trillion regulatory mousetrap that punishes American manufacturers. It is a mousetrap with a spring force that Obama has increased by $708 billion. And, as the thing comes right down on his tongue, he orders costly new climate change regulations — to be paid for by US manufacturers, and ignored by their foreign competitors.

Federal trade and regulatory policy, not foreign competition and unions, is responsible for the decline of American manufacturing. Free trade, whose banner is routinely hoisted to adorn trade negotiations, exists only in the delusional minds of our hapless political leaders. Indeed, that American manufacturers must conform to inordinately higher standards (of trade, finance, health, safety, environment, etc.) than their foreign competitors is considered an achievement by the causality-challenged Obama. Green ideology, not economics or trade, is his forte. Officious regulation, not sound industrial policy, is his goal. As to the unfortunate accidents — chronic economic stagnation, declining household income, growing income inequality, immense pubic debt, enormous trade deficits, shrinking geopolitical power, and waning foreign competitiveness — that have befallen his presidency, he hates when that happens.




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Comments

Greg Robbins

Odd that a libertarian publication would bemoan free trade. Our manufacturing output is higer than it's ever been. Employment in manufacturing has fallen, but the purpose of industry is not to employ people, it's to supply needed goods to individuals. As Patrick Hanley says:

"Having rejected the case for restricting imports, [Adam] Smith moved on to reject the case for promoting exports. He scoffed at government efforts to increase exports through artificial methods such as bounties and subsidies, remarking that 'trade which cannot be carried on but by means of a bounty' is 'necessarily a losing trade.' He explained that a country could not force other countries to buy its goods, but it could pay them (through subsidies) to buy them. But without the subsidy, merchants would devote their resources to other activities, and therefore the effect of the subsidy would be to 'force the trade of a country into a channel much less advantageous that that in which it would naturally run of its own accord.'"

As to our trade deficit? Read this:

http://triblive.com//x/pittsburghtrib/opinion/columnists/boudreaux/s_635889.html#axzz3rZwAJ4vr

Scott Robinson

Dear Greg,

I read your interesting article on trade deficit. It is an interesting point that the trade deficit exists because foreign competitors are investing their time and money in producing goods for sale in America because "we the people" will buy them.
You could say that this means we're good because the fact that we buy imports means we're wealthy and can afford it. This is true, but it is also true that the foreigners investing in producing these imports is a wise investment. Why is it a wise investment? It is wise because the investors make a profit off of the time and money they lost in manufacturing. In accounting terms, it means that they (foreign importers) end up in the black. Where does that mean that we (domestic purchasers) end up? Unless we made more money from something else than we spent in purchase, we're in the red. If you're unaware, black equals win/profit, red equals loss/deficit. Fools can purchase things also. Ability to purchase, especially in our case based on loans doesn't make us smart. Valuable to one side of the trade does not equal valuable to both sides of the trade.

Best Wishes,
Scott

Steve Murphy

Excellent comments. I agree with them all, except the one about bemoaning free trade.

Free trade (the unfettered flow of goods and services across borders) is a beautiful thing. I'm all for it, and obviously I'm against subsidies, tariffs, and other forms of protectionism. But the trade deals that Bill Clinton and other so-called free traders have hammered out are not free trade.

For one thing, free trade must occur in both directions. While cheap Chinese products freely flow into the US (as they should, if Chinese manufacturers can produce them more efficiently than American manufacturers), the only American products that flow into China are the ones that Chinese consumers can still afford, after the Chinese central bank has increased their cost by 25%. And the competitiveness of American products, wherever they are sold, is drastically hurt by excessive domestic regulation. Moreover, such regulations limit free trade (e.g., the oil export ban and fracking restrictions).

In any case, the essay had no criticism of free trade. Its focus was on the clumsy policies of political leaders such as Clinton and Obama that have routinely delivered the opposite of what they promised. I probably should have made it clearer that what Clinton and Obama call free trade is anything but.

Thanks for your interest,
Steve Murphy

Tucci

"Odd that a libertarian publication would bemoan free trade."

Hm. So what part of "regulatory burden" are you not getting yet?

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"With annual federal regulatory compliance costs now at an astounding $1.9 trillion, no one has done more to increase the cost, and decrease the desirability, of doing business in America than Mr. Obama. His regulatory obsession has exceeded that of George Bush, who, in eight years, increased regulatory costs by $318 billion. Obama has increased it by $708 billion, in only six years."

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