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Los Angeles, California, United States
The blog 'Breaking Bread' is for a civil general discussion, like you might have at the dinner table with guests. The posts 'Economics Without the B.S.' are intended for a general audience that wouldn't have to know the difference between a Phillips Curve, a Laffer Curve, or a Cole Hamels Curve. Vic Volpe was formally educated at Penn State and the University of Scranton, with major studies in History, Economics and Finance, and Business; and, is self-educated since by way of books and on-line university courses. His practical education came from fifty years of work experience in the blue-collar trades as well as a white-collar professional career -- a white-collar professional career in production and R&D. In his professional career and as a long-haul trucker, he has traveled throughout the lower forty-eight. From his professional career alone he has visited many manufacturing plants in the United States, Europe and China. He has lived in major metropolitan areas and very small towns in various parts of the United States. He served three years with the U.S. Army as an enlisted man, much of that time in Germany.

Wednesday, January 2, 2013

Manufacturing: Elements Of The Transformed Economy

Economics Without The B.S.**:

[**  Double entendre intended.]

Manufacturing: Part III - The case for emphasizing manufacturing in our economy…continued
Elements Of The Transformed Economy

To propel growth by way of increasing the manufacturing sector we need a growth strategy that will provide investment in infrastructure, an energy policy to promote efficiency and renewable energy sources, full employment incentives to lessen the burden of the increasing costs of our social safety net and meet the employment needs of a rejuvenated economy, and finally tax reform which promotes equity financing over debt financing and promotes fairness and equity in our society.
Infrastructure investment is to be financed by government and private investments.  Initially the government financing will add to our national debt; but, putting controls on overall spending and raising productivity to annual increases of four percent growth rates may allow us to achieve a balanced federal budget within ten years, considering that Federal Government revenues would approximate twenty percent of GDP – it has averaged around eighteen percent of GDP since WWII.  After ten years we should be back to having budget surpluses if we can have political leadership that exercises self-discipline, something that has been in short supply since 2000, our last submitted balance budget, in this case for FY2001.  Infrastructure investment is needed in manufacturing (all types), research and development, the energy network, utilities, transportation (roads, interior waterways, and harbors, as well as rail and air), and education at all levels, similar to the Sputnik response of the late 1950’s and 1960’s.  These are not decisions that need to be made by a Central Planning Committee.  Let the free enterprise system work, the same way it was unleashed in the 1980’s.
Take modernizing the national energy grid as an example.  We need to upgrade our national energy grid if we are going to take advantage of the newer technologies for wind, solar, and ocean waves.  These newer energy sources are produced in more isolated areas of the country and need to be distributed to population centers far away from the original source of energy.  Since it is costly to store electrical energy, we need a more modernized distribution system.  The cost for upgrading our energy grid was estimated at over $600 billion by Jim Rogers, the CEO of Duke Energy out of North Carolina.  The $600 billion figure is a multi-year investment to be made by government and the private sector.  In 2009, the Obama Administration allocated $60 billion for energy infrastructure investment as part of the stimulus bill.
There is plenty written on the fact that income for working people has not kept up with the productivity gains of the American economy and that this is due to a loss of bargaining power in the workplace.  I will not add anything to that except to say that I think all income of the average employees (and I include engineers in that category), the managers, the executives, and the investors should be tied to the productivity and financial health of the enterprise, its profitability, gains or losses.  Workers should not be judged by one productivity index and management and investors by another.  Judge all by the same and compensate appropriately.  Judge productivity by profitability and earnings, or the lack thereof, and not by some inefficacious barometer.  To make my point I often like to draw from literature, Melville’s Moby Dick.
When the young Ishmael and the more experienced ‘savage’ Queequeg went out to find a whaling ship for employment, they come upon the Pequod with two Quakers as the representatives of the ownership of the whaling enterprise.  Ishmael inquires about sailing on the vessel and the reply from the Quakers is, “Dost know nothing at all about whaling, I dare say.”  To which Ishmael replies, “Nothing, Sir; but, I have no doubt I shall soon learn.  I want to see what whaling is.”  Ishmael is hoping he can sign on for a 275th part of the ship’s proceeds.  The Quakers are trying to bargain his share down.  They haggle over whether a 777th part would be too much for Ishmael.  One Quaker is willing to be more generous and give him a 700th share.  The other says that they should not shirk their responsibility to the community that has a stake in the bounty of the voyage and that the community has widows and orphans dependent upon the profitability of the voyage.  They all haggle some more and finally present the book for Ishmael to sign on declaring, “Mend that pen.  Down ye go here for the 300th part.”  Ishmael signs.  He knows this sum, while not much, will still have his provisions provided for while on-board for the voyage and that he will have a modest sum in savings when it is over.  When Queequeg shows up, the Quakers will not have a “cannibal” on-board the ship.  “Son of darkness, art thou a Christian?  Having been baptized?”  Queequeg jumps upon the bulwarks with a harpoon, points to a small tar drop some considerable distance away and says, “Spse him one whale eye.”  Takes aim with his harpoon.  Heaves it across the ship’s deck, and strikes a bull’s eye.  “Quick” says the Quaker and he shoves the book in front of Queequeg, “Sign here or make your mark for the 19th part of the net proceeds.”  Has anything changed since Melville?  When do we learn?
We need tax reform to restore fairness in our society.  I have worked for almost fifty years and over that time I have listened to experts from the Right, Left, and Center discuss equity in the tax code – graduated rates versus flat rates, various incentives, deductions, and credits.
I no longer know what equity is!  But I think I can recognize inequality.  And when upper income individuals can get lower tax rates (15%) on income derived from investments when lower income people are paying 25% to 28% on “ordinary” income earned trying to make an enterprise successful and productive, or when investors can shelter income in businesses derived from executive positions that classifies ordinary income from salaries and “fees” as “carried interest” taxed at a 15% capital gains rate, I think I can infer that something is not right.
When I was a small kid growing up in a blue-collar neighborhood of Philadelphia we played baseball on a dirt lot without adult supervision, before any of us had TV’s to watch how the game was actually played.  We made our own rules as we went along during the day and would check back later in the day with our dads to see if we had it right.  Not everybody had a glove because we could not afford one.  We shared.  We did not have enough boys to make up two teams so we had to bribe the girls to play with us.  Since there were smaller kids maybe two and three years younger than others and girls (This is before women’s lib, now.), the two teams had uneven skill levels and were manned unevenly – five on one side, eight on the other.  If one team was made up of weak players, the stronger team might give them four strikes for an out and four outs in an inning.  Anything to keep the game going for the rest of the day.  One time a kid from a nearby neighborhood asked us if we wanted to play them at the neighborhood playground.  When we showed up, the other team had an adult for a coach.  He was hitting ground balls to the infield.  Everybody had a glove.  And everybody had a uniform.  We couldn’t even afford hats for everybody.  They may have looked like the 1955 Phillies, but that was a big improvement over us.  Do I have to tell you who won?  You can learn rather young that the world is not fair.
I have my own ideas about tax reform.  They are not that important, but I will give them to you so you know where I am coming from.  I would propose one flat rate tax on ALL income – individuals, businesses, and corporations, and even non-profits, religious organizations (churches), and universities – on gross income (minus “real” expenses – depreciation of equipment does not count (I’ve never seen anybody write a check to ‘Depreciation’.), no deductions for anything (not charities – which have existed back in the 19th Century before we had income taxes – not home mortgage interest).  Everybody pays.  Even poor people.  Everybody has a stake in their country.  Maybe we can include a National Sales Tax or a Value Added Tax of just couple of percentage points (2, 3, or 4%).  What is important is to get the Federal revenues equal to 17% of GDP – 17% would not be pernicious.  That was the goal under Reagan.  Right now we need to freeze the Federal budget, not cut it, and get revenues up to 20% or more of GDP until we can get the budget in balance and back to producing surpluses.  With annual growth rates of 4% for GDP we can achieve this goal within ten years.  All people in an enterprise contribute to the productivity of that enterprise.  They should be compensated accordingly.  Like the Pequod, everybody has a fair share, not necessarily an equal share, that is tied to the productivity of the enterprise and taxed appropriately.
The only other thing I would mention for tax reform would be to favor equity financing of ventures rather than debt financing.  It seems like we are doing the reverse.  We need to favor manufacturing interests over financial interests.  I think that is why the financial sector has grown so disproportionate to the rest of the economy the last couple of decades.  I do not think that globalization alone would account for this.  A tax policy that favors debt financing incentivizes speculation and that is why we have some of the problems we do in the misallocation of our national resources.
Restoring our manufacturing sector in our economy to where it has a greater presence has national security ramifications also.  Like President Eisenhower warned us, we do have a defense-industrial complex.  And it functions best when the defense industry is right here in our backyards rather than having our military depend on foreign sources for defense readiness.  There is another factor in this argument that is very important.  Our military depends on a knowledgeable citizen base for the military to function at a high level, not just people who wear the uniform but also the civilian workforce both from government and industry.  Technology is a driver for the military, not just for costs but also for capability.  We have this edge and we need to keep it.  An educated populous is necessary for military readiness and education in technology is a necessity.  In addition, the military is a big spender in R&D for technology, education, and very basic research (in health, medicine, etc.).  A depleted manufacturing sector is a detriment to national security.
Today we have “experts” and knowledgeable people who will tell you the importance of human relationships, gaining somebody’s trust, confidence for a business to succeed.  While these traits are desirable, I’ll bet these “experts” never worked in a manufacturing environment, never had to make a tangible product that needed to be shipped out the door, or never had to work in a creative environment for a specific product.  When you work in a manufacturing environment it not just who you know, it’s what you know.  Your knowledge has to be based on the sciences, math, engineering, technical know-how.  This is true throughout the workplace, white-collar and blue-collar.  Emphasizing manufacturing will get us refocused on education in the sciences, math, engineering, and technology.  People educated as such will place value on scientific inquiry rather than belief systems.  These values do not get the proper emphasis in a consumer economy which is more attuned to a sales pitch, engendering warmth and relationships.  Will it take another “Sputnik” to wake us up.
And mentioning Sputnik reminds me, in our $3.8 TRILLION budget, what does NASA get…$18 billion.  Not to mention that the financial industry got bailed out in one year with several trillion dollars.  NASA hasn’t spent that in its existence in over forty years.  Do I have to listen to some cynic say, “We spent billions of dollars on space and what did we get?  Tang!”    Just what has NASA done with that $18 billion in any year? – a space station, the Mars Rover, or how about research that furthered cures for breast cancer, MRI’s and CAT scans, dialysis, artificial limbs, virtual reality.  And in forty years they have barely been able to get beyond the earth boundaries of space because of the paltry funding and lack of leadership in our society.  In the 1960’s NASA was visionary and that is why people went into the sciences, math, engineering, and technical fields.  Their discoveries affected our daily lives.  We have lost our vision.  And NASA is only one discipline that I could mention.  How about ocean exploration, at its depths, or medicine and biology?  There is so much more that we could do.  We are listening to the wrong people for leadership.  We need the inspiration that we had in the 50’s and 60’s.  When we pick up a newspaper the first page should be filled like it was in the 60’s, with rockets going into space.  The Wall Street Crowd should be relegated to the back of the paper with the Business Section and Society News.  We need to stop listening to accountants and find leaders that will turn our visionaries loose.

Summation
A nation’s wealth should come from productivity increases, not from asset inflation (stocks, bonds, real estate).  People who are creative, people who make things, have good self esteem, self fulfillment, self improvement, self involvement, and make contributions to the greater society.  What we do, is what we are.  Manufacturing addresses these values like no other sector and impacts the other sectors that are providing a service based on the manufactured product.  We need to do more manufacturing.  Need I say more?
We need to change.  But change does not come easily.  While we need leadership, we also need to look within ourselves.  Sometimes great movements start from humble beginnings.  Rosa Parks, a seamstress, refuses to give up her seat on a segregated bus in the 1950’s and today we consider her the spark that ignited the civil rights freedom movement.  If I may be allowed one other literary reference, let me pick the opera Tosca by Puccini.  When Tosca is confronted with the tyrannical, dictatorial police commissioner of Rome, Scarpia, who is not only trying to seduce her but is deceitful in his pursuit, and she finally erupts.  The small, feminine Tosca plunges a sharp object into Scarpia, mortally wounding him.  As the tyrant of Rome lies dying, at the hand of a woman no less, she taunts him, “E avanti a lui tremava tutta Roma!”  Loosely translated: “And to think all Rome trembled under his rule!”  It’s all in the doing.

1 comment:

  1. That was an interesting historical summation of the issue (I actually followed your remarks from "On Point").

    ReplyDelete