Having covered America’s trade deficits since the mid-1980s, it drives me wild to hear economists talk about how the root cause is that we don’t save enough money. That’s the argument trotted out today by Paul Krugman in the New York Times, here. The key sentence is: “The reason America runs persistent trade deficits isn’t that we’ve given away too much in trade deals, it’s that we have low savings compared with other countries.”
This is not the root cause of the problem. The root cause is that we import more than we export. That’s what a trade deficit is, and the roots of it are deep.
One basic piece of the equation is that many serious academics and political leaders do not think that manufacturing is important. They believe it is dirty, dark and repetitive, which means they have not been inside a factory lately, or maybe ever. They don’t understand that manufacturing has been transformed by technology and that it remains an important source of innovation and wealth in our country.
CEOs also short-changed the importance of manufacturing when they rushed to offshore much of their production of consumer goods. America still makes and exports many important products such as jet liners, cars, semiconductors, engines, construction and farm equipment, and other capital-intensive goods, but the manufacturing of consumer electronics, shoes, household goods and basically everything you find in Wal-Mart has gone offshore. Either companies have their own manufacturing offshore or they acquire these products made by others.
In some extreme cases, as with Dell and Hewlett-Packard, they outsourced the design of their products to middlemen in Taiwan, who then contracted with others to actually make the goods. But both Dell and HP missed important shifts in the market and have been laid low as a result. “They outsourced their brains,” one top executive at Lenovo told me when I was writing the ThinkPad book. The reason you need to design and manufacture your own products is to be able to adapt quickly to new customer demands and to retain the skills sets to do that.
There are signs that the equation has shifted–labor costs in China exploded while those in the United States remained relatively stable. Electricity costs in China are now greater than in some places in the United States. Some manufacturers are reassessing their supply chains and manufacturing patterns and shifting some manufacturing back home, as Harry Moser of the Reshoring Initiative has documented.
But rot and decay has set in to our educational system. Many high schools long ago stopped offering shop classes. Technical and community colleges have not kept pace with the need for workers with skills that manufacturers actually need. We have 7 million people out of work but employers have millions of job openings they can’t fill. Something has gone very wrong.
If we want to really attack the trade deficits, and not just engage in pointless politics and name-calling, the pathway would involve these elements: re-establish a national consensus that manufacturing is important. CEOs should be persuaded that short-term boosts to profits that they derive by going offshore may be offset by a loss in their ability to control their own technological futures and the heart of their innovation processes. We also should get serious about training and re-training, which we have not yet done. The most recent estimate is that the U.S. government has 47 training programs spread among nine agencies, which is absurd. Unions need to realize that hostility toward managements is one reason so many jobs have gone away, and work better and smarter with management. High school counselors should tell students that it is alright to become a welder or a quality technician. Those can fulfilling careers. Not everyone needs to go to a four-year college or university.
If we want to get serious about our trade deficits, it would be far easier and better to start taking actions we can control at home instead of beating our heads against the brick walls of China and Japan. They are not going to fundamentally alter their economic models because it’s obvious that, on balance, they have been winning. It is up to us to improve our economic model in the face of such competition. That might also include weaning ourselves away from a national model of large-scale consumption of cheap goods, as you can see in the overflowing shopping carts at Wal-Mart. We have the power to attack our trade deficits, if only we would choose to use it.
