Industry Today: The World of Manufacturing

Login/
Site Registration
Printer Friendly Page
 Date:3/26/2009

 

Wake Up Call
The AIG-ing of America
Running with scissors in the last decade has cut into our creation of wealth, piled up fake abundance and belittled the value of manufacturing, Alan Tonelson argues.

Why do we loathe thee, AIG? Let us count the ways. There’s the bonus issue of course. There’s the recent Washington Pot report that the riskiest AIG contracts were unwound last December, well before the bonuses were paid out to employees who ostensibly were the world’s last line of defense against economic Armageddon. There’s the fact that most of the AIG counterparties receiving payouts have been foreign financial institutions. There’s the fact that most of the rest went to big Wall Street companies whose own reckless practices helped spark the global meltdown – and that have already received billions in taxpayer dollars. Adding insult to injury, there’s AIG’s decision – made by other Wall Street welfare queens as well – to sue the Internal Revenue Service for tax credits it charges it was unfairly denied.

It’s no surprise that there’s no shortage of reasons to vilify a company whose enormity and irresponsibility have led Washington to spend $170 billion to keep it afloat long enough to dismantle it gradually, to avoid destroying the world economy – or so the rationale goes. But also undoubtedly explaining the fury directed at AIG, at least by elected officials, is embarrassment over a reality that American leaders and opinion and business elites alike are still struggling to cover up – what might be called the AIG-ing of America.

Specifically, the orgy of financial gimmickry held by AIG and its finance industry peers in recent years was allowed to spread throughout the entire U.S. economy. And the blame ultimately falls on a U.S. policy establishment that has so long neglected the main sector of the economy that actually produces wealth: manufacturing.

Thanks in particular to outsourcing-focused trade policies that began with NAFTA, the thoroughly bipartisan chattering and leadership classes fell head over heels with a post-industrialist fantasy as reflective of economic and business fundamentals as their Washington-centric echo chamber is of workaday America.

Because creating competitive goods and services for Main Street households and businesses has nothing to do with their lives, these elites turned a perfectly natural and indisputable trend – the steady relative decline of manufacturing activity in all advanced industrialized economies – into a national mission and virtue. By the same token, production became something to sneer at, and in fact transcend. Its proponents were witless primitives or hopeless romantics.

This post-industrial worldview left plenty of room for economics and business. After all, monied interests were the hand that created and fed much of the political and chattering class. They funded the universities and think tanks that endowed this outlook with intellectual respectability, and paid politicians to promote its growth at every opportunity. Yet the business activity lauded and promoted was finance, and the more complicated and arcane (not to mention, the more lucrative), the better.

Fittingly, one of post-industrialism’s leading denigrators of manufacturing was none other than former Federal Reserve Chairman Alan Greenspan. “Is it important to have manufacturing?” he asked a Congressional committee rhetorically in 2003. “What is important is that economies create value, and whether value is created by taking raw materials and fabricating them into something consumers want, and whether value is created by various different services which consumers want, presumably should not make any significant difference so far as standards of living are concerned because the income, the capability to purchase goods is there.”

Three years later, after retiring, Greenspan dismissed manufacturing as “something we were terrific at 50 years ago” and “essentially a 19th and 20th century technology.”

Small wonder that this same mentality glorified financial markets as clever enough to distribute risk in sectors like housing so masterfully as to eliminate it for all intents and purposes, and as wise enough to promote the greater good by regulating themselves. And small wonder that manufacturing’s role in the U.S. economy shrank steadily in recent years – below the point needed for America to sustain first world living standards without reckless borrowing.

From 1990 to 2007 alone (the last year for which government data are available), manufacturing’s share of real value-added grew by 9.0 percent, but the share held by finance and insurance increased more than twice as fast – by 20.91 percent. The finance share in 2007 still represented only 58.34 percent of the manufacturing share, but clearly dominated the growth picture.

Inflation-adjusted figures for gross output are not available, but in current dollar terms, manufacturing’s share fell by 26.47 percent during the 1990-2007 period, while finance’s share jumped more than 37 percent. By this measure, finance is only 40 percent as large as manufacturing, but the trend, again, is what counts.

The manufacturing-finance gap is even more dramatic when measured in profitability. In 1990, manufacturing’s accounted for 35.29 percent of corporate profits of U.S.-owned firms, while finance generated on 22.77 percent. Ten years later, finance had passed manufacturing, growing to 28.19 percent of the total while the manufacturing share had fallen to 27.10 percent. By the first quarter of 2006 (the last year for which government data is available), the finance share of U.S. corporate profits had risen to 29.03 percent, while manufacturing’s share had tumbled all the way to 20.16 percent. During the entire post-World War II period, moreover, manufacturing’s decline relative to finance is even more pronounced by all measures.

Yet today, the reverence expressed for finance and the belittling of manufacturing continues – more than 18 months after the first signs appeared of a national financial crackup grounded ultimately in U.S. under-production and over-consumption. Literally trillions in bailouts and subsidies for finance, and crumbs by comparison for industry? Finance is different, insist its champions from Big Banking to Big Government to Big Media. It’s the lifeblood of capitalism. It allocates resources efficiently. (To be fair, this argument is voiced less often as the financial meltdown has accelerated.) It’s like a utility – though one in which neither prices nor profits are tightly regulated. Without finance, we’d be living in caves, or toiling as serfs on a medieval estate.

In other words, the same old either-or arguments keep being served up. Worse, they fail to recognize that, as important as the efficient allocation of resources unquestionably is, first there must be resources to allocate. Without wealth creation, not only is there no finance and no capitalism. There is no commerce or economy of any kind. The very need to make so elementary a point makes painfully clear how far U.S. leaders remain from even acknowledging in public that a production-led recovery is the only way genuinely to overcome the economic crisis, let alone from actually encouraging one.

And so the AIG’ing of America’s economy continues unabated: a Fed plan to buy up hundreds of billions of dollars of U.S. government debt last week. The Treasury’s latest – but surely not last – trillion-dollar banking industry rescue plan this week. The former is the latest bet that flooding debt-choked homeowners and consumers with enough cheap credit will keep them in their homes, fix their balance sheets, and get them shopping once again even though their incomes remain stagnant, their employment remains precarious, and the goods they buy will remain largely and increasingly imported. The latter is a hope that the straw of toxic assets wanted by literally no one can somehow be spun into the gold of real value for which investors will clamor – and by the same companies that were either mendacious enough to concoct and market these tarted up pigs, or dumb enough to buy them, in the first place.

Freed of these bad debts, banks will start lending again. And if the plan fails, Wall Street’s losses will be covered by taxpayers – and supposedly by America’s infinitely indulgent foreign creditors. Recovery will begin because credit markets will resume their normal workings, and Americans will resume their normal borrowing and spending. The hard work of rebuilding the productive economy? From all indications, it will remain an afterthought. And the imperative of deferring consumption and policy-induced growth until needed productive investments bear fruit? “Hoover-ite economic Puritanism,” we have already been told. In other words, get ready for the AIG-ing of America 2.0.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C.. A contributor to the Council’s AmericanEconomicAlert.org website, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). Megan Chidester, a Research Assistant at the Council, assisted in this article’s preparation. The views expressed here are their own.