The Twin Secrets of Economic Growth

America now suffers from lower productivity and a decline in GDP growth.

Factory With Flag

Labor productivity, defined as output per labor hour, is below the average rate. Since 2005, the average annual productivity growth rate is 1.3 percent – well under the average of 2.1 percent going back to 1947. In addition, GDP is comparably anemic. There were several decades where the U.S. enjoyed three to four percent GDP growth, but since 2000 it has been only 1.8 percent.

The primary reason that productivity growth is important is that weak productivity growth results in slow economic growth, and a decline in wages, and living standards. The primary cause of reduced productivity and economic growth is globalization and deindustrialization. And, of course, deindustrialization is all about manufacturing.

The Twin Secrets of Economic Growth

In his report “The Twin Secrets of Economic Growth” economist Jeff Ferry of the Coalition for a Prosperous America, says that the “the evidence suggests that two important indicators provide the best explanation of the secrets of economic growth. Those indicators are the share of a nation’s gross domestic product devoted to manufacturing, and the level of the current account balance as a share of GDP.

Importantly, Ferry provides data that makes clear that, “manufacturing is a key contributor to growth because it is the only sector that can create multi-decade broad-based increases in labor productivity, which is the key to rising wages.” Ferry goes on to say that, “the opposite is true because a nation with a significant current account deficit is always in trouble because it is losing share of either its foreign market, or its domestic market, or both” . It also results in loss of economic growth.

Consequently, America now suffers from low productivity and a decline in GDP growth. The only answer is to refocus on increasing manufacturing’s share of GDP and to reduce the trade deficit.

Collins 1

The Downside of Trade Deficits

One of the best summaries of these problems was described by former U.S. Ambassador Robert Lighthizer, who as the U.S. Trade Representative, was out on the economic front lines of our trade problems for many years. Lighthizer wrote an op-ed piece for the Economist Magazine where he advocated keeping the tariffs as a trade tool and describing the dangers of ever-increasing trade deficits and the danger of a strong dollar.

Lighthizer says, "anyone who has taken economics 101 knows that countries are supposed to eventually get back to a surplus because the dollar value is supposed to go down, making our exports more competitive." But this hasn’t happened for a variety of reasons. Here is a brief summary of some of Lighthizer's primary points.

  • The U.S. is now the largest importer in the world, which has caused us to also be the world’s largest debtor nation.
  • Our ongoing trade deficits have shipped trillions of wealth to foreign countries in return for foreign goods, and our foreign competitors use the money to purchase our assets and debt instruments. Ligfhthizer said “in a real sense America is trading ownership of its productive assets and economic future for short term consumption”.
  • The purchase of securities like stocks, corporate bonds, and Treasury bonds makes for greater demand for dollar assets, thus driving up the strength of the dollar.

Reversing the Trend

Lighthizer’s solution is for the government to tax capital inflows using a Market Access Charge to disincentivize foreigners from buying American assets and lower the value of the dollar. He also suggests raising tariffs selectively. He suggests imposing tariffs on all imports and then selectively raising or lowering the tariffs depending on whether deficit for the product is going up or down.

As the trade deficit is slowly reduced,  the tariffs for the product would be reduced or eliminated.

Collins 2

The German Example

A good example of what a Western nation can do to protect and grow its manufacturing sector and maintain jobs is Germany. Year after year Germany has run trade surpluses. They are a very strong exporter and consume little from abroad. Their manufacturing wages are high and they have strong unions in most industries. Their manufacturing sector share of GDP is 18.8 percent, compared to the U.S. of 10 percent.

Germany is protective of its manufacturing sector and does not have trade deficits. They manage their economy to run trade surpluses every year by using tariffs for specific industries. For instance, The EU (including Germany) charges a 10 percent tariff on imported American cars, while the U.S. imposes a 2.5 percent tariff on imported European cars. Europe exports four times as many cars to the U.S., or 1.14 million cars per year. It is time for the U.S. to introduce reciprocity into it trade.

Our deindustrialization experiment with a dependence on imports for economic growth has failed. Every economic success story for the last 50 years has relied on an industrial strategy , government involvement, and the targeting of specific industries. Good examples are China, South Kora, Japan, Israel, and Singapore.

The U.S. has taken the first steps in an industrial strategy with Bidenomics, which is about bringing manufacturing back after decades of offshoring. The new strategy includes the Inflation Reduction Act (generating $500 billion in investment), and the Chips Act (generating $150 billion in investment) and the $1.2 trillion Infrastructure Act.

If we are going to compete with an innovation strategy, then growing manufacturing is the key to success. Innovation is the key to productivity, productivity is the key to higher living standards, and manufacturing is the driver of productivity – not service. We won’t be able to achieve sustained growth or middle-class lifestyles for the majority without manufacturing.

Former Trade Representative Lighthizer said , “No country ever became rich by consuming, they got rich by producing”.

Michael Collins is the author of a new book, “Dismantling the American Dream: How Multinational Corporations Undermine American Prosperity.” He can be reached at mpcmgt.net.


More in Capital Investment