For years, American manufacturing has suffered at the hands of economists from leading business schools who have downplayed its importance in the economy. This needs to change. The head of a Silicon Valley technology firm, Henry Nothhaft, argues that domestic manufacturing is essential not only because of the jobs and security it provides to workers, but also because it is crucial to innovation.
"R&D decoupled from manufacturing eventually results in the loss of incremental innovation, which occurs on the factory floor," Nothhaft has written. Because of corporate America's obsession with downsizing and short-term profits, he says, "we have gutted our ability to build the most advanced high-tech products of tomorrow." Factory jobs produce a ripple effect, creating many times more jobs. Similarly, Nothhaft says, "for every manufacturing job lost, ripple effects of job destruction and income erosion spread like a plague throughout the economy."
Boosters of America's evolving economy point to companies like Google and Apple as classic examples of American ingenuity and entrepreneurship. But not every company can be or should be an Apple, says Ralph Gomory, the onetime head of research at IBM. "To prosper, a country needs to make a range of good products and services, and then keep after them year after year, constantly learning, and improving their capabilities to stay with or ahead of the competition," Gomory told a congressional committee in 2008. "Many products and services of this sort are dismissed as 'old hat' or even as 'commodities,' but many things we consume are of this type."
As for the types of jobs replacing factory work, the future doesn't look promising. Unlike manufactured goods, the U.S. exports more in services than it imports. A plus, right? Hardly. One of our leading service exports is in the category of travel; the services we provide to foreign tourists who visit the United States. Any job created is good, of course, but many in this category - bellmen, desk clerks, maids, garage attendants, and other workers in the hospitality industry - cannot replace well-paid manufacturing jobs. In the meantime, high-value service jobs from abroad will put more and more wage pressure on those occupations at home.
To change this we first must acknowledge that the trade policies we have followed for half a century have failed. Under them, dozens of U.S. industries have been gutted by imports, and new industries that could offset some of the job losses in our older industries haven't been given the support they need to export their products to foreign markets.
The most obvious solution to the decline in manufacturing is to enforce existing trade laws by taking action against governments that unfairly subsidize their own industries and undermine the jobs of U.S. workers. In some cases the solution would require imposing tariffs - perhaps even high tariffs. The very mention of tariffs infuriates free traders. But unless we are willing to enforce the law, other countries will continue to ignore U.S. pleas to open their markets.
Q. Your book describes how other countries protect and encourage the launch of their industries. Why doesn't the United States do the same thing? Isn't that a protectionist policy, which some economists oppose?
A. Most economists who extol the benefits of unrestricted free trade are living in an ivory tower and refuse to face what is happening in the real world. Free trade is a wonderful theory, and if every nation practiced it in the same way we would have far fewer problems. But other nations, China, Japan, and even some in Western Europe, have not truly embraced free trade. As a result, many goods and services that the United States would like to export to other countries and create jobs at home are blocked from entering those economies.
Every year, the U.S. trade representative compiles a report on the ways foreign governments block imports of U.S. products, the "National Trade Estimate Report on Foreign Trade Barriers." The 2011 version runs 329 pages and describes in detail how other nations discriminate against U.S. services and products.
Here's a snapshot:
The European Union: After many years of negotiations, the E.U. maintains "significant barriers" to U.S. products "despite repeated efforts to resolve them."
Japan: "The U.S. government has expressed concern with the overall lack of access to Japan's automotive market, as well as with specific aspects of Japan's regulatory system that limit the ability of U.S. automobile and related companies to expand in Japan."
China: "Many U.S. industries complain that they face significant nontariff barriers to trade. . . . These include regulations that set high thresholds for entry into service sectors . . . and the use of questionable . . . measures to control import volumes."
What's most troubling about the 2011 report is that it contains nothing new; every year the report reads essentially the same as the year before. The types of barriers change, but the obstacles remain, with the same result: Many of our products cannot be sold in other countries.
Q. Critics say free trade is best for the country in the long run. Your book debunks that. If it's that conclusive, why do the free-trade voices have so much sway in Congress?
A. Political influence - pure and simple. Multinational corporations want the freedom to export jobs and then bring goods made by cheap labor in their overseas factories back into the United States free of tariffs and taxes. Some industries, such as retailers, want the cheapest goods they can buy. Together, those two - and their allies in many foreign governments that are robust exporters to the United States - join hands to push for the adoption of free-trade agreements and lobby against any measures that would halt the unrestricted flow of imports into the United States. Smaller U.S. companies that employ American workers in the States always lose those battles.
For free trade to work, a nation's imports and exports should be in relative balance. That's the principle followed by all of our major trading partners. But imports into the United States have been out of balance ever since the 1970s, as each year imports overwhelm exports and drive up the trade deficit - now the world's highest - all the while killing jobs. The United States has run up nearly $10 trillion in trade deficits since the mid-'70s, killing millions of good-paying jobs in the process.
Q. You advocate limiting subsidized imports and insisting that foreign nations lower their barriers to our goods. Doesn't that put the United States on a collision course with other growing economies, especially China, which holds billions of dollars of U.S. debt? Is the United States really able to negotiate with China on trade?
A. We can't control China. But we can control our own economy by regulating what we permit to enter the country. Yet we have consistently refused to exercise that right. Yes, the Chinese hold a lot of our debt, but we are crucial to China's economy, too. Whenever tough measures are suggested to enforce trade laws already on the books, the economic elite in the United States warn of repercussions from China as though the United States is powerless to control its own destiny. That's just not true.
Q. Your book blames a lopsided tax system that favors the rich while draining the middle class. How could Congress institute a simpler and fairer tax code?
A. Of all the economic challenges facing the middle class, the tax system should be the simplest to correct: What needs to be done is to reinstitute a series of tax rates that would apply largely to upper-income taxpayers. This would eliminate the inequity that has taxpayers who earn $379,000 paying federal taxes at the same rate as someone who earns $50 million a year.
Anyone who suggests raising the rates on people at the top is accused of inciting class warfare. But this is nonsense. We are merely calling for a rollback to policies similar to those that long existed in the United States and helped bolster a growing middle class. Increasing the number of tax rates would restore fairness. Ever since the income tax was first levied, some critics have denounced any system that contained more than two or three rates as being too complex. What they really mean is that when there are more rates, the very wealthy have to pay more. A tax code with 10 rates is every bit as simple as a code with two rates.
Here's a truly shocking statistic: If you were one of the richest Americans in 1955, you paid on average about 51.2 percent of your income in federal taxes. If you were one of the richest Americans in 2007, your tax rate had plummeted to an average of 16.6 percent. During that time, Congress has systematically cut tax rates for the rich, allowed certain income to be excluded, and enabled the wealthy to funnel vast amounts of money out of the Treasury through loopholes.
The justification for cutting the tax bills of the wealthy was to stimulate the economy and create jobs. Instead, it's given us a wealth gap greater than at any time since the late 1920s, when a similar chasm between the rich and everyone else foreshadowed the Great Depression.
To restore a semblance of balance, the very rich should pay more. It wouldn't affect their lifestyle. It would make our society as a whole more prosperous, which ultimately would benefit even the very rich. It also would dramatically reduce the deficit, which has soared in no small part because $700 billion in tax cuts extended to the rich in the last 10 years.
Simplification of the tax code has been a Trojan horse of the rich for years, luring people into thinking that fewer rates would mean a more equitable tax system, even though it means the opposite. U.S. Rep. Paul Ryan, the House budget chairman, and the presumptive Republican vice-presidential nominee, submitted a proposed budget earlier this year that he claimed would "simplify" the tax code by reducing the number of tax brackets and lowering the top rate on the wealthy. The tax code is complex, but the rates aren't the cause. In fact, much of the code's complexity stems from provisions inserted to benefit the wealthy.
Q. If Congress were serious about making the tax code simpler and fairer, what might it do?
A. For starters it could create an individual tax return that could be filed on a single sheet of paper. It would include all your income and the sources of that income - wages, interest, dividends, rental income, and what's now referred to as capital gains and royalties. In short, every dollar of gross income from whatever source derived.
The sum of all that income then would be multiplied by your tax rate. No deductions for any purpose. No tax credits. No personal exemptions. There would be multiple rates, possibly as many as a dozen, running up to a top rate of 70 percent, which would be applied to all income over, say, $10 million. Multiple rates would make certain that people in totally different economic circumstances would not be grouped in the same tax bracket, as is now the case.
Q. Your book blames both parties for the country's jobs deficit. It sounds hopeless. Is it?
A. It's not hopeless, but in the near term it's hopeless with this Congress and a tea party that masquerades as a friend of the middle class when in fact it really represents the interests of the super-rich. The hardening of positions in Washington is preventing the nation from even thinking about tackling our most difficult problems. This isn't the way it used to be.
Few people realize that the largest peacetime public works program in the nation's history - the interstate highway system - was proposed and implemented under a Republican president, Dwight Eisenhower, with broad bipartisan support. It is hard to imagine the two parties, as now constituted in Congress, agreeing to any such ambitious program these days. Deficit hawks would scream that such a venture would just add red ink to the budget. But right now, investing in infrastructure, technology, or some other promising field, would be a plus for job creation. Only when we start taking positive steps to help the middle class, and only when we recreate a political zone where politicians of both parties work together again, will we be able to get this country moving again.
Q. Do you expect the issues raised in your book to become part of the presidential campaign?
A. The issues are already running through the campaign because they are the story of America in 2012. Both candidates are talking about the middle class, but neither is very specific on what he would do. Both are talking about taxes, though in much different ways. Mitt Romney's proposals on taxes would be deadly for the middle class, lead to even more income inequality, and do nothing to create additional jobs. Both have talked about China but neither has faced the obvious need to fashion a more realistic policy on trade with all our trading partners.