September 3, 2010
A Real Economic StimulusBy Jim Gammon & Admiral Ben Moreell
When we hear supposed experts speak of what we need to do to help our ailing economy, they never seem to mention the obvious: increasing exports and reducing imports, and doing so without increasing import duties. Is it just too obvious that if more money goes out than comes in, you're going to be in trouble eventually? Is there some law that simple truth doesn't apply when politics is involved?
The simple solution to fixing both of these problems is to encourage manufacturing. To help fix our trade imbalance and debt load, we must increase exports and reduce imports. How can you do this without increasing manufacturing? There is no other way; it is a very simple truth.
So how do we encourage more domestic manufacturing? First, the basics. To manufacturer and sell a product, two things must happen:
1. You must have a product that is as good as, or better than, the competitor's.
2. You must be price competitive.
America has the quality; we just need to be more competitive. I run a successful small manufacturing company, and we export 30% of our production, so I do know what I am talking about. We are successful in the export game, designing, manufacturing and selling U.S.-made products every day.
The typical knee-jerk politician comes up with a simple solution: increase import duties -- which sounds good, but in truth all it really does is increase taxes the American people must pay. By making imported items more expensive, you simply increase that cost to the American people, and this method usually leads to retaliation from other countries -- they increase import taxes on our products. It has been tried, and it doesn't solve anything.
This is not rocket science. You don't need a Nobel Prize in economics to figure out that the solution is very simple: you must reduce the cost of manufacturing here in the USA. Look at our competition, China. The Chinese did this very, very effectively, but before you think labor costs, think a bit deeper, as there is much more to their advantage over us than labor. Labor is a small component of the problem. It is not all about lower labor costs; it is lower overall costs.
Allow me to illustrate. Let's take a simple job -- making toothpicks. The Chinese government-owned forest is not subject to real estate property taxes; the American one usually is. Chinese logging companies pay little, if any, taxes; American companies pay in full. Any middleman, freight, or handling company in between the forest and the toothpick factory adds to this problem.
This "snowball" effect takes place in the USA -- every time something changes hands, the price increases due to these taxes adding up. The total is much larger than you think. One estimate is that as much as 80% of the price you pay for U.S.-made goods is "snowballed taxes."
In China, there are no profits on the government-owned portions of the economy, so there are no taxes. When a Chinese company is involved, it is paying little, if anything, in taxes. (Cheating is rampant.) So when the lumber arrives at the toothpick factory, the cost is a tiny fraction of the cost to a U.S. toothpick factory. In addition, the Chinese toothpick factory pays much less, if anything, in taxes to the government.
We are more efficient that the Chinese, and we have more advanced equipment in most manufacturing areas, but regardless of how efficient a U.S. toothpick factory may be, the Chinese factory has a great cost advantage over a U.S. factory.
In a large or more complex manufacturing environment, like electronics and metalworking, the differences are even greater than in the toothpick industry. Often, an item made in China can be shipped all the way here and sold at a profit in the U.S. at a price less than the cost of the materials alone to a U.S. manufacturer. Yes, it really is that bad! I'd give a specific example, but a friend would kill me. The Chinese system is simply more efficient where it counts -- taxes.
So how can we beat them at this? We are more agile, and we can respond to markets faster. We know the markets and what the customers want. We are more efficient -- we can produce more product per work hour. We are better engineers; we can design better and meet the needs of a changing market faster. The only problem comes down to our incoming costs, our materials.
The solution is simple: reduce our costs. How do we do that?
1. Reduce fuel, real estate, and income taxes on mines, mining equipment manufacturers, metal mills, and foundries.
2. Reduce fuel, real estate, and income taxes on trucking companies, manufacturing companies, and export companies.
I am not just speaking of exporting companies, but every industry -- what we don't import is just as important as what we export.
Is this unrealistic? I submit that this is a real stimulus. It will help everyone in the country. It is the only logic.
We have given up on manufacturing here in the U.S., supposedly because "we can't compete" with their low labor costs. I say "bull"!
The U.S. was built on manufacturing, and the Chinese didn't take it away -- our government policies gave it to them. It is our own government's stupidity that is the cause for so many manufacturers moving their manufacturing operations to a "friendlier environment."
Logic says that a business that exports should be encouraged, and a business that imports should be discouraged. We have done quite the opposite, and it is time to reverse this stupidity.
So the final question -- indeed the only question -- is politics. Is either party likely to actually act on this simple logic? I submit that both parties need to rethink their policies. The above suggestions are good for both small and large businesses and good for union and non-union labor. There are no downsides to this, and it can be done incrementally to minimize the effect on government revenue.
I guess it all comes down to the media. I address this to those in the media who are against U.S. manufacturing:
Can you accept my points, as stated above, or must you see this as a business vs. society or as a class warfare issue -- refusing to accept that anything that helps American companies is wrong just because it helps American companies? Do you feel manufacturing in the U.S. is wrong, but that it is OK elsewhere? Do you think that a factory in China will be more efficient and responsible in its use of natural resources? Isn't it better to manufacture in the U.S. than to import? Have you ever actually considered this subject objectively?