Leo W. Gerard
David M. Rubenstein
The United Steelworkers and the Carlyle Group don’t agree on everything, but on this we are in lock-step: the key to success of the stimulus is maximizing the economic activity generated by each tax dollar spent. The more money spent in the manufacturing sector, the greater the economic benefit. Manufacturing multiplies the spending because it has a ripple effect through the economy. That’s why it’s so important to concentrate the expenditures on products with significant domestic value added, which will more quickly generate more jobs and economic benefits.
Manufacturing is the bedrock of our nation’s gross domestic product, producing approximately $1.40 of additional economic activity for every $1 of direct spending in the sector – more than all other U.S. industries. Here’s how this “multiplier effect” works: Every dollar spent on a manufactured product pays wages and benefits to company employees, buys raw materials and purchases supporting products and services such as forklifts and shipping. The suppliers of the raw materials and supporting products, in turn, pay wages to their employees and purchase raw materials, supplies and services – and so on. And all along the way employees use some of their wages to buy products and services for themselves. Of the incremental spending generated by the multiplier, roughly 60 percent is spent in other sectors, meaning everyone from retailers to teachers to healthcare workers benefits from manufacturing activities.
Manufacturing has also been the engine of U.S. economic productivity. Since 1990, output per hours worked in the manufacturing sector has increased 94 percent, versus 49 percent for the economy as a whole. Greater productivity translates directly into higher pay. In 2006, wages and benefits for the average manufacturing position were 41 percent higher than the rest of the workforce.
But this critical part of our economy is now suffering terribly. While a serious recession is gripping most of the world, for U.S. manufacturing it’s the 1930s all over again. In 2008 alone, manufacturing jobs were cut by more than 540,000, an amount nearly equal to the population of our nation’s capital.
In the steel industry, for example, nearly 55 percent of capacity is currently idled, a level last seen in the Great Depression. Cumulative steel production for the first seven weeks of 2009 was down 52 percent compared to the same period last year.
The manufacturing collapse hurts our economy in two ways. First, layoffs create a vicious cycle of lower consumer spending, which leads to reduced manufacturing activity, which leads to still more lay-offs. Second, the multiplier effect cuts both ways. Just as a growing manufacturing sector lifts all boats, problems in the sector disproportionately ripple across the rest of the economy.
So, by ensuring spending flows to the manufacturing sector, the stimulus package can have a deep and lasting impact. And what’s more, results will come quickly. Job creation by supporting industries up and down the supply chain will begin as soon as infrastructure projects are awarded – even if the projects are not started immediately – due to lead time needed to support the new demand. For example, steel manufactures will begin relighting beam and bar capacity long before shovels are put to ground.
But stimulus spending can’t exist in a vacuum; as the President has said, it needs to be accompanied by action to loosen up credit markets and stem the tide of home foreclosures. Without access to credit, many manufacturers won’t be able to fund the inventory needed to address demand created by the stimulus program. This, in turn, will dampen and slow the program’s impact.
Secretary Geithner’s recent announcements include a number of important ideas and initiatives, but additional details need to be fleshed out. For example, a public-private partnership to purchase toxic assets is a positive step that sends a clear signal that we must find a way to attract private capital back to the markets. Before the private sector engages, however, the administration must identify who can sell assets, what type of assets can be sold and how the financing will work. In addition, the expansion of the TALF will provide additional liquidity to constricted markets, but policymakers should consider further broadening the class of asset-backed securities that are eligible for TALF support.
While jumpstarting credit markets is critical, it is equally important to take aggressive action to stabilize housing prices. The President’s recent announcement, which emphasized interest rate reductions through mortgage modifications, is a significant step in the right direction. However, we fear that homeowners will continue to lack incentives to stay in their homes unless the program places a greater emphasis on principal reduction. Interest rate reductions will help some homeowners, but those with significant negative equity may still have strong incentives to walk away from their homes. Stabilizing the housing markets is the most important action the government can take to revive consumer spending.
A well-implemented stimulus plan that focuses spending on manufacturing and industry, incentives for investment of new private capital and additional steps to prevent foreclosures will help to break the credit and investment logjam.
Leo W. Gerard is International President of the United Steelworkers and David M. Rubenstein is Co-founder of The Carlyle Group, a global private equity firm.
By Leo W. Gerard and David M. Rubenstein
Posted March 9, 2009 at 5:00 pm, in From the USW International President
March 12th, 2009 at 11:03 am
When you go to anywhere in the USA to buy anything, look to see where is it made? Nothing is made in the USA anymore. When you buy $1,000.00 tools, parts, etc at Home Depot, they send maybe $500.00 to probably China to purchase these products from the people who worked to manufacture these items. The US only makes a few things that people in other countries want to buy. The US Government no longer redeems US dollars for gold from our gold reserves at Fort Knox (since 1972). The US government does allow the Chinese (and other foreigners) to redeem these freshly printed paper dollars (that they earned by making the imported goods that we consumed) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. All of the other industrial nations that supply us with the products we import (so that we do not have to work to make anything) are allowed to redeem their dollars for US assets. What will be the buying power of the dollar when we have nothing left that the foreigners want for redemption of the dollars they earned by manufacturing the things that we imported and consumed??? This is selling of our children’s legacy to foreign owners, and the US government calls it “Investing in America”. This is sort-of like selling our body parts to keep from working!!!!!
The current US government economic stimulation plan is to print up a bunch of new paper money, T-Bills, Bonds, and other similar paper securities for bank deposit (actually the Federal Reserve) to cover checks issued to US contractors to re-build and expand the US infrastructure (Pork Barrel Projects) in order to reduce unemployment. (also pay cash bonuses to the Wall Street forgers of SEC documents, welfare queens, Las Vegas Corporate Junkets, mortgages for big spenders with bad credit, etc.). This money will probably be spent on imported earth-moving machinery, imported materials (Steel, Equipment, Pipe & Wire), new imported private jet airplanes, illegal alien labor, outsourced engineering, outsourced CAD drafting, etc., and the US workers will still be mostly unemployed?
Any Economic Stimulus Spending also needs to prohibit any imported products (even if we no longer manufacture those products) from being purchased with these funds, and also prohibit all outsourcing of the Labor Required. This is a short term solution that will only economically benefit foreign manufacturers of industrial and consumer goods, salesmen of foreign manufactured equipment, materials, etc., and the other people working in the distribution of imported things for our consumption, but the balance of trade will still be sending US dollars overseas to pay for the things that we import.
Instead of just passing out free money to the incompetent financial wizards at various inept and possibility criminal wall street organizations, maybe the US government should build manufacturing plants to make consumer products like refrigerators, Washing Machines, Clothing, TV’s, and eventually all of the consumer goods that we import with that money. We should impose import taxes high enough on these products so that US made products are competitive in price with imported goods. These plants should periodically and/or constantly be for sale based upon periodic open public competitive bidding, but at a minimum sale price at least equal to as much as the government investment, and with terms of cash only. There should not be any leveraged creative financing by the government. The Management should know about making the products, not creative financing. Maybe anyone with a MBA degree should be disqualified from employment. The money passed out to the financial industries does nothing to create jobs or eliminate the problems with the US economy. Maybe it helps pay for the commissions of the US salesmen of the expensive new French manufactured private Jet Airplanes. The French people making these (Dasault Falcon 20-25) airplanes are probably very thankful for President Obama’s generosity.
We desperately need to create many more scientists and engineers who must become better educated, more intelligent and otherwise much superior to foreign scientists and engineers in order to innovate and produce new products that foreigners do not have, so that they will buy the products from us, so then we can export these products in return for their foreign payment to the USA. We also need to export scientific and engineering services to foreign nations in return for their currency and gold in order to improve our balance of trade. This has to be provided by scientists and engineers who are superior to any foreign scientists and engineers, or the foreigners will not buy the services of US scientists and engineers. We need to stop the H1B import of low paid scientific and engineering talent, in order to create a demand and more financial incentive for our students to major in the technical and scientific subjects that are needed to re-industrialize the USA. We need to return to scientific and technical excellence in our education systems because we can only export technology if our products and technology services to export are superior to those available anywhere else in the world. According to the National Science Foundation and the National Society of Professional Engineers, only about 5% of the current college students in the USA studying for a degree in science, medicine, mathematics or engineering are US citizens. In the Asia the majority of the college students are majoring in science or engineering. We cannot afford to support or educate any more artists, actors, theologians, musicians, philosophers, psychologists, historians, poets, novelists, political scientists, marketing experts, etc.
The option is for US citizens to work cheaper than the foreigners. It is also going to take decades to re-create the US industrial bases that we destroyed over the past few decades. This will first require that our students study science instead of other subjects in our colleges in order to create the technology base and other knowledge necessary for re-industrialization. We must emulate China, India, Pakistan, or die economically. I am worried about the future of my college age children, and all of the other children in the USA.
I believe that there is very little economic future for students majoring in the science or engineering fields. This needs to change for the benefit of the US economy. I believe that most students today want to study business and/or economics to become wealthy Enron and/or Arthur Anderson type master criminals, or emulate some of the other extremely wealthy master criminals of today. Student loans should be available for only those fields such as science, engineering, education, accounting, and medicine that do contribute to our industrial base and help our international trade balance. Student loans should not be available for prospective historians, social engineers, artists, poets, theologians, actors, or any other activities that do not contribute to our industrial base or improve our balance of trade situation.
Civilized nations have always taxed the productive (agricultural and industrial) population to pay for providing National Security, Crime Prevention, Education, Fire Prevention, and other similar items that are necessary to assist and protect the agricultural and industrial production bases. Our Productive Industrial Base could not exist with foreign invasion, rampant crime, protection rackets, corruption, sabotage, etc., so a portion of the money earned by this producing base has always been taken by taxation by all civilizations to pay for federal, state, and local governments to prevent these occurrences. Maybe we can no longer afford to spend our hard earned taxes on National Service, social entitlements, welfare, environmental clean-up, pork barrel projects, free education, free medicine, subsidized housing, humanities, art, writing poems, make-work schemes, entertainment, digging holes then re-filling the same hole, etc. until we re-establish our economic base.
March 17th, 2009 at 7:51 pm
Is anyone else besides me interested in the economic future of the USA?
Some economic experts think that we can become a “post-indusrtrial” society of “knowledge workers” consisting of software developers, data analysts, technicians, editors, scientists, lab technicians, teachers, doctors, nurses, architects, engineers, inventors, lawyers, etc, and still somehow pay foreigners to manufacture the things that we consume.
How can we get foreigners to pay for the services of these “knowledge workers” so that we can stop the foreign flow of dollars and title to US properties out of this country that we are paying for people in other countries to manufacture the things that we consume. Our “knowledge workers” are not much if any amount better than their “knowledge workers”, and I do not see foreigners hiring our “knowledge workers” instead of their home grorn “knowledge workers”.
Maybe in the future we could produce better “knowledge workers” if we changed our educational system to emphasize technical education instead of the things that most students study today.
It does not matter how we reverse the balance of trade as long as we stop the flow of gold, dollars, t-bills, Governmenmt Bonds, title to US located property, and other US assets from this country to other countries in payment for our foreign trade.
We have de-industrailized this nation and now we import the things that we consume, instead of working to manufacture these things. We paid people in foreign countries to make the things that we consumed with our US dollars that were redeemed for gold reserves until 1972. Our gold reserves were the basis of value of our dollar, and they is almost now gone. The buying power or value of the US dollar is partly about psychology when it is now backed by the “full faith and credit of the US government” rather than gold. This is almost the same as my definition of “Junk Bonds”. The US government does not go to banks to borrow money. The US government just buys a lot of paper and cranks up the presses to create more dollar bills, T-Bills, Government Bonds, etc. and deposits these items into banks (VIA federal reserve) to pay for the checks that they give out to pay for their government payrolls, pork barrel projects, negative balance of trade balances, bailouts, entitlements, operations, social schemes, wars, new infrastructure, wealth re-distribution, mental health, imported consumer goods and etc. Foreign governments and foreign individuals are now allowed to redeem these freshly printed dollars (and other freshly printed US securities that they earned in exchange for their products that they exported to the USA) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. We paid these foreigners with our freshly printed currencies to manufacture or supply the things that we imported and consumed (rather than have US citizens working to make these products ourselves in this country). Some government sources estimate that the title to 25% of our property and businesses are now foreign owned (http://www.economyincrisis.org/content/ownership).
March 18th, 2009 at 7:09 pm
US citizens will take any job available if they are hungry and desperate.
Right now we have many social nets for those who are not employed, so why should the unemployed take a job if they can make more money with unemployment checks, welfare checks, AFDC Checks, SSI checks, etc. foreign governments stop buying our paper currency, and/or buy it at a few pennies on the dollar, the welfare checks, social security checks, government payroll checks, and private paychecks will not buy very much food or anything else that we consume.
Your life savings might only sustain you for a couple of months.
China has questioned the value of our paper currency publicly this past weekend. They said that they are worried about our printing paper for bailouts and etc.
We are committing economic suicide.
March 29th, 2009 at 10:02 am
The article and the posts contain excellent points. The frustration I continually face is that economics is presented as complicated and can only be understood by a select few. Perhaps the population needs to go back to the basics.
All economic wealth is created by only two basic elements: you either grow something, or make something. All other wealth is redistribution of the value created by these two core efforts. If your country is not creating new wealth for each child born, then you face a downward spiral in your standard of living. The continued loss of manufacturing in the US will make it impossible to reverse this trend, no matter how much money is printed and distributed.
I offer this plan up for consideration and ask that all who read it to please point out why it won’t work. I may be too close to the solution or simply not understanding all the pitfalls, but here it is:
Enact a severe tariff on ALL manufactured goods that enter our shores. Not raw materials, only manufactured (value added) goods. Ore and fuel would not… Steel, plastics, cars, consumer goods, etc would be heavily taxed. Those taxes would be put into a superfund that any manufacturer, foreign or domestic, may borrow from – tax and interest free – to build or expand a manufacturing facilty in the US. Any losses of imports a foreign company might face would quickly be made up by building a plant here.
Construction would immediately take off, investment capital would be funded from the tariffs, and the trickle effect in North America could again get on track.
I am sure there a many complicated reasons as to why we can’t do this – trade agreements being the greatest barrier. But these are exceptional times and call for extraordinary actions.
March 30th, 2009 at 5:10 pm
richjweiner – you really said it well.
I believe that Economics really is as simple as you state.
We really need to get back to basics.
We need to mainly correct the Balance of Payments before our dollar becomes of no value.
If our dollar loses or 99% of its buying power we will not be able to purchase the materials required to re-construct our manufacturing industries.
The dollars that Home Depot, WalMart, GM, Ford, Chrysler, Maytag, GE, and all of the other major importers paid to foreigners overseas to make the imported products for our consumption are redeemed by our government for freshly printed US Bonds, US T-bills, and other US government securities can be redeemed for title to real estate, forests, mines, manufacturing industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. The financial services does bring US Currency earned by foreign nations back into the USA by performing brokerage service commossions for foreign institutions and investors when they buy title to assets located within the USA with their freshly printed US currency. The US government is glad to allow exchange of freshly printed US Bonds, US T-bills, and other US government securities for title to US assets. The normal option of other governments is to exchange our US currency for Gold, but the USA stopped redeeming our currency for gold in 1972. The dollar buying power or value is partly about psychology when it is backed by the “full faith and credit of the US government” rather than gold. This is the same as my definition of “Junk Bonds”. If the freshly printed US bonds, T-bills and other US government securities were sold at auction without being allowed exchange for US located assets, the sale price of our securities would at much more discount than the present expectations. When foreigners own title to everything of value in the USA, the value of our currency will approach zero. Non-US citizens now own title to 25% of US located titled assets now. This in addition to foreign owned stock market and commidities market holdings.
We will very soon not be in control of our future after we totally destroy our economy, and no one seems to care. My wife tells me that the government has all kinds of plans that they will implement before they let another great depression happen, so I should not worry.