WAPO's Major Article on the Future of Manufacturing Never Once Mentions the Value of the Dollar

Wow, you just have to sit back in awe at something like this. Imagine the lead sports story the day after the Superbowl. It talks about who had a good day, the big plays, the big mistakes, and it never once mentions the score of the game. That is pretty much what the Post managed to do in a front page business section piece on the future of manufacturing in the United States.

If the Post noted the value of the dollar, which is the prime determinant of the relative cost of good produced in other countries and good produced in the United States, then it could have worked through some simple logic. The United States as a country will continue to consume manufactured goods. It is likely that thirty or forty years in the future we will still have cars, computer-like objects, houses made of manufactured materials, etc.

If we don't manufacture these items here then we will have to import them. If we will import them, we will either have to export something else to pay for these imports or the rest of the world will have to give us manufactured goods for free. Something like the latter is happening now as China and other developing countries are buying up dollar denominated assets to keep up the value of the dollar against their currencies.

Essentially they are paying us to buy their stuff by making their products cheaper than they would otherwise be. This seems to be a useful development strategy at the moment, both because it helps to harness demand for their products and also because it allows them to accumulate massive amounts of dollar reserves which they believe are essential in an incompetently managed international financial system.

However, it is unlikely that situation will exist forever. China and other developing countries can pay their own people to buy their stuff, so it is not essential for them to indefinitely maintain huge export markets in the United States. Also, at some point they will presumably have enough reserves to get them through an inconceivable financial crisis.

This then raises the issue of how we will pay for the goods we import. While the popular line is "services," this is mostly said by people who have not looked at the data. We would need an incredible a five-fold expansion of our surplus in services to even cover our current deficit. It would need to grow by a factor of ten if we lost all manufacturing in the U.S.

Furthermore, many trends in services point in the opposite direction. For example, we already have a large deficit with India in software services. This will certainly grow larger over time, and Indian software engineers will almost certainly drive us out of third countries as well.

We have a surplus on financial services, but this may slip if taxpayers got tired of subsidizing too big to fail Wall Street banks. One growing area of service exports is fees for royalties on patents and copyrights. This may grow if we have the economic and military power to impose more protectionist trade pacts (called "Free Trade Agreements" in Orwellian Washington newspeak), but that seems unlikely as countries like India are frequently insisting on paying free market prices for drugs.

Alternatively, the dollar might just fall so that the U.S. is again competitive in manufactured goods. That is the econ 101 story.

No brainer
written by Patrick Tchou, July 15, 2012 7:30

It's a no brainer that the trade deficit (and thus the real national debt) is a major contributor to the lack of job growth in our economy. In addition, this deficit is causing this country to loose our manufacturing assets and property. Decreasing the federal deficit and income tax structure has nothing to do with our economic prosperity. Don't know why more attention is not paid to our trade deficit. Reducing that would be the biggest job creation program that we can muster.

Deliberately De-Valuing the Dollar
written by Paul, July 15, 2012 8:15

Is completely contrary to G-20 rules and would never be tolerated by our trading partners who could easily take countermeasures. Every time the Fed has done a QE, Germany and China have complained about de-valuing the dollar, even though they are doing nothing to boost their domestic demand.

Our strategy should be to compel China and Germany to increase imports of American goods and services.

Compelling
written by David, July 15, 2012 11:31

China's MPC is around .38. No compelling reason to import. Germany needs to import Spanish/Greek/Italian goods more than American. India? Until the dollar goes lower, there is no compelling.

http://johnqpublican.wordpress.com
written by John Q. Publican, July 16, 2012 4:01

The one rapidly growing area of surplus in services is tourism. Perhaps the future American workforce will be cleaning toilets and making beds for the rest of the world, since we will no longer be set up to manufacture goods.

Alternatively, the dollar might just fall so that the U.S. is again competitive in manufactured goods. That is the econ 101 story.

Superb article; explains very nicely why the UK and the US are rapidly becoming post-industrial economies, whether their respective governments notice or not.

Even if the dollar falls that far, it will have taken America's infrastructure with it. As Dmitri Orlov has pointed out, the USA and the UK are on course for a Stage 3 or 4 socio-economic system collapse. Russia in the 90s had a Stage 4, Sudan right now is in Stage 5 of 5, to give you an idea of the severity levels we're talking about. Life expectancy drops 30 years over the course of 5, the poverty-conscripted military you can no longer afford to employ but who have no productive skills beyond soldiering become private armies employed by organised criminals and state Governors, etc. etc.

America might be able to buy their way out of collapse with pure natural resource exports, very much as Africa survived the 60s and 70s; it's what Russia did, and the US has very significant natural resources to exploit. The UK, on the other hand, is *totally screwed*.

The underlying infrastructure which more than anything else permits industrial and technological development is systematic, comprehensive and *effective* national education programs. Neil DeGrasse Tyson has said everything that needs to be said about how poor US education, particularly in the sciences, has become since the 1980s.

Ultimately, this is about cycles. Everyone gets industrial, fine; why did people assume the world stops there? That the upward curve of development and prosperity was in some way a perpetual-motion machine, rather than a what-goes-up situation? This is the mistake Marx made, and you'd think we'd learned since then. Nothing just keeps going; post-industrial economics need to be seriously addresssed, because for those of us falling off the imperial cliff in the UK and the US, avoiding the collapse is unlikely to be possible. Even if our governments weren't *very stupid*.

And recovering from collapse is not a narrative of triumphantly reclaiming world dominance. It's a narrative where India becomes the US and the US becomes, say, Nigeria. It's not like this is new: Spain under the Bourbons used to be a hegemonic world-conqueror like the US in the 20th century, and look at them now...

~JQP

Oops...
written by John Q. Publican, July 16, 2012 4:06

Huh. Blockquotes apparently don't work, sorry...

...
written by liberal, July 16, 2012 12:22

Every time the Fed has done a QE, Germany and China have complained about de-valuing the dollar...

LOL. I don't know about Germany, but the idea that china has a leg to stand on in the "nations should not intervene in currency markets to increase exports" has to be one of the worse jokes floating around this week.

WAPO's Major Article on the Future of Manufacturing Never Once Mentions the Value of the Dollar

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