Chinese, Trump Trade Concessions Are Not Enough To Revive Manufacturing, Job Market.
China has offered the Trump Administration trade concessions in order to avert a trade war. China has agreed to lift a 2003 import ban on American beef, which helps China feed a massive pollution with a growing taste for beef, and allow foreign investors to own a majority stake in Chinese businesses, which helps break Chinese nepotism, yet is also needed to stabilize China’s financial markets. These alleged concessions would significantly benefit the agricultural sector and the financial services sector of the US economy. Unfortunately, the agricultural sector does not provide massive numbers of Middle Class jobs while the financial services sector offers high paying, yet relatively, few jobs. As the trade deficit with countries like China has helped decimate the manufacturing sector, which has traditionally provided a massive number of jobs, these concessions do little to solve America’s beef with China.
Because the manufacturing sector demands innovative thinking, large sums of capital, and lots of labor, all of which have long been abundant in the US, it was the perfect vehicle for distributing America’s wealth to the masses. This is also why the manufacturing sector must be the focus of policy shifts. First, the American People are not against the Chinese People. China just happens to be the largest nation on Earth with the largest population and the second largest economy. The size of China alone forces the US, as well as most other nations, to tread carefully when it comes to trade. Even if Chinese policies provided equal access to Chinese markets, the vast disparities between the Chinese economy and most others place domestic businesses and workforce(s) at a disadvantage. Under added scrutiny, the aggressive and predatory policies of the oligarchical “Communist” government make China the biggest target for Americans worried about the state of the US economy.
n theory, a trade war is devastating to an economy, because it creates barriers to trade, thus starving the economy of added economic activity from trade. Not only do increases in tariffs raise import and export prices, they undermine the sustainability of global production by raising the cost of outsourcing too quickly. Sharp increases also create a lack of uncertainty, which inhibits consumer spending and capital investment, thus helping to stall and destabilize the economy. Because growing anti-free trade sentiments are pushing America, and the world, toward a global trade war, there is a pressing need to seriously address trade issues, which many hoped the Trump Administration would do. Instead of feeding opposition to trade and provoking a dramatic embrace of trade wars, which the American People do not seem to fear, the best course is to turn to diplomacy. It is necessary to confront the misalignment of the population’s interests and public policy beyond superficial concessions.
The economic interests of trade partners shift very rapidly with the changing nature of the economy, especially in an era defined by democratic uprisings and a pull back from rapid globalization to community-centered thinking. Because a stable global economy depends on healthy national economies, national economies must be built on industries that serve the local needs of a people with locally plentiful resources that are as local as possible with excess production being used to participate in the global economy. As such, trade agreements must be recalibrated regularly to reflect shifting economic interests. This is particularly important when recognizing the geopolitical processes like the resovereignization that is threatening the EU and driving the aggressive nationalist behavior of Russia and China. In terms of economic policies, this means addressing the economic interests of a nation’s majority and building a diplomatic infrastructure to periodically address shifts in trade relations.
Focusing on the manufacturing sector, trade reform alone will not be enough to secure the manufacturing sector of United States or the manufacturing sectors of other economies. Looking at the effects of innovation over the last century, advancements in technology and the commoditization of technology have created then destroyed a great number of jobs/financial opportunities. The new jobs created from technological advances exist to maintain and expand the new technology. Unfortunately, these technician jobs must be fewer in number, because the technology must produce more with less labor and other costs. The technicianization process that the manufacturing sector has been undertaking since its inception will soon reach maturity. At this point, the industry will be comprised mainly of machinery doing the work with a small number of technicians maintaining/operating the equipment and a smaller number of better paid engineers designing what the machines will do.
Considering 3D printing, along with innovations in machine vision, i.e. quicker, easier means of inputting data, and the general trend toward more intuitive interfaces as seen in consumer products like tablets, traditional methods used in parts manufacturing, such as injection molding, will soon be outmoded while those doings the work will require fewer skills, thus they will receive a lower pay. The technology will eventually replace the need for almost all manufacturing methods once researchers develop new methods to print in different mediums, including those that will be stronger and more durable than steal, for small and large products. In essence, the advancement of 3D printing, as well as most others modern industrial innovations, has simply found a means of doing what was already being done faster and cheaper by further cutting the human component out of the equation, instead of creating new ways of distributing wealth via improving the quality of life for consumers/workers.
Because greater productivity demands greater consumption, there will be a contraction in the number of manufacturing businesses and operations, in addition to a massive loss of outmoded jobs, and/or the new high tech manufacturing sector will have to find new customers. The highly dynamic nature of 3D printing, i.e. the technology can be used to make an ever-expanding range of products, means the former is almost a certainty. The latter, however, will depend upon the ability of consumers to spend large sums of money, which means a critical mass of well-paying jobs will have to be created in other economic sectors, and expanding economic trade. Advances in science and technology will eventually lead to a future where humans will be able to cheaply engineer and customize products at the molecular level on a massive scale. What is done with these products will help determine the industries of the future.
Given that most people do not have the capacity to understand the science involved in this type of research, e.g. quantum mechanics and quantum electrodynamics, it is unclear how such innovations will translate into jobs for the majority of individuals throughout the world. Given that the West, especially the United States, has embraced a purist capitalist thinking, small and large manufacturing businesses will have to invest large sums of private capital to upgrade their equipment in order to compete in the global market. Looking at the most populous nation of the world where demand for products is likely to grow the fastest, China is a Communist country, thus the government is likely to subsidize upgrades while it is already building a modern infrastructure for the high tech future; whereas, the US is behind in infrastructure spending. As such, the Chinese manufacturing sector has a good chance of increasing its productivity beyond that of the US and providing products to fulfill world demand.
The US economy, therefore, requires an economic revolution that cannot be outsourced and does not depend upon increased consumption alone. Unfortunately, this is not likely to happen as any added economic activity due to advances in technology will be sourced globally under the current trade paradigm. Elementary market forces dictate increased supply translates into decreased prices. Consequently, more workers seeking more work translates into decreased wages. Increased productivity, ongoing increases in population, women entering the work force on a massive scale, increased need for more hours from workers due to income constraints, increased need for multiple incomes due to stagnant wages in the face of economic growth and increased living expenses, increased competition from a globalized job market, and massive job losses due to economic shifts are factors that have and continue to push wages down. This degenerative cycle needs to be broken. Unfortunately, it has only been allowed to undermine the mechanisms by which individuals can overcome disparity.
Businesses, industries, and economies depend on three kinds of capital: financial, intellectual, and labor. The investment of financial capital provides businesses with the money they need to open their doors, maintain their operations, and expand as their customer bases grow. This is why investors and banks are so important. It is also why the investment of financial capital is rewarded with either a share of a business or interest payments. The need for the investment of intellectual and labor capital is not, however, always appreciated or properly rewarded. To restructure the economy to benefit average Americans, intellectual and labor capital need to be cultivated. Over the past few decades, the financial sector of the economy has been a persistent bright spot, in part, because policymakers crafted policies to cultivate financial capital. One such policy has been a reduced capital gains tax, which offers a window into ways labor and intellectual capital can also be cultivated..
For average American investors, a lower rate for capital gains tax serves as a long-term incentive to invest their money in order to ensure their financial future. It helps them build wealth for retirement while fueling the continued economic growth of the country. Because stock markets afford individuals a convenient vehicle for investment, versus directly risking their savings in a local business venture, most people invest in the national and global economies through a 401K retirement plan, an IRA, mutual funds, bonds, CDs, and other financial instruments. This means that money is funneled into investments that have more stringent reporting requirements, with the greatest benefits and risks going to those who invest in segments expected to grow the fastest. The benefit to the economy is a readily available, broad base source of capital that can be used to expand economic activities on Wall Street and on Main Street.
Unfortunately, the financial sector does not employ a great deal of labor compared to the greatly diminished manufacturing sector; a vibrant financial sector does not directly create many jobs. Consequently, steering too much money into the financial sector may hurt the economy as a whole. After all, it diverts money away from the economic activities that directly benefit most Americans. Growing economic disparity, stagnating and shrinking wages, and lackluster job creation as the capital gains tax has been cut hints at the validity of this argument. People need well-paying jobs to sustain strong consumer spending, i.e. the lifeblood of the economy, and build their investment portfolios, i.e. get access the benefits of economic growth and supply the economy with capital, i.e. while enjoying a comfortable lifestyle. When people lose their ability to both afford a comfortable lifestyle and invest for their futures, the economy is in trouble.
From the 1970′s until about 2008, average income Americans were able to compensate for diminishing wages and lost financial opportunities by working longer hours, living on multiple incomes, decreasing family size, forgoing certain luxuries, relying on state support, and, in the case of the growing poor classes, forgoing necessities, thus ultimately hurting themselves in the future. Today’s economy is built on increasing returns to those who can afford to be investors. For wealthier Americans, a lower tax rate for unearned income is not an incentive to invest. It essentially affords them a windfall for money they would have invested anyway. This translates into a situation where an excess of capital is driven toward investments with the highest payouts, thus creating economic bubbles. In turn, Wall Street firms and affluent individuals have been increasingly able to use extremes in the markets to siphon capital out of the economy, especially with their use of exotic financial instruments.
Consequently, U.S. policymakers should cap the benefits of the lower capital gains tax rate, so it can act primarily as an incentive for middle-income households. Paying down the National Debt is one option for spending the increased revenue resulting from limiting capital gains, while shifting the tax savings associated with reducing the capital gains tax discount is another. Cutting overall tax rates would be nice, but governments might consider subsidizing another type of capital that would drive growth where it is most needed, i.e. intellectual capital. Innovations and the spread of new technology can create good paying jobs by sparking novel industries. Coupled with improved patent laws, offering a tax discount on par with current capital gains tax deductions for royalty payments on novel technologies and other innovations would make them far more valuable. By making patents and other intellectual property more valuable, financial capital would be steered toward innovation, thus ultimately cultivating new industries and jobs.
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