The depth and suddenness of U.S. economic and financial crises is shocking for the manufacturing sector, right on the national stage where readers of this journal perform. We are witnessing a time of American de-industrialization. Many factors are intimately entwined, engaged by bad tax policies, financial irresponsibility at all government levels, with politically corrupt and inept governance.

America is rapidly becoming “the first post-industrial nation on the globe.” Here are a some facts that illuminate this truth.
  • The U.S. has lost 42,400 factories since 2001; 75% of them employed over 500 people
  • The trade deficit with China rose again last year
  • The U.S. economy lost 500,000 manufacturing jobs in 2010; that is slated to continue at an equal or greater rate in 2011
  • Between 1999 and 2008 employment in foreign affiliates of U.S. parent companies increased 30%; concurrently, U.S. employment at American multinational firms declined 8%
  • The U.S. lost 32% of its manufacturing jobs since 2000
  • The U.S. spends $3.90 on Chinese goods for every $1 China spends on U.S. products
  • In 1959, manufacturing was 28% of U.S. economic output; in 2008, it was 11.5%
  • The Chinese economy is projected to be three times larger than that of the U.S. in 2040
It is essential that Americans confront several realities that our ill-informed and slothful citizenry have ignored. U.S. school systems have failed to educate children, and most disconnected parents have not commanded results. As a result, the nation has fewer STEM (science, technology, engineering, math) students than it needs to maintain competence. Besides, our poorly educated students do not exhibit a good work ethic. Foreign students who come to the U.S. for higher education now return home instead of staying here.

Labor unions in most manufacturing sectors have raised costs of operations to the extent that labor markets are unsustainable, encouraging industries’ departure to “practical” labor venues. Added to this problem are government intrusions with regulations and minutia that make business operations inefficient. It is also the inconsistency of government policies that is distressing to the private sector.

But the largest single factor to de-industrialize America – the canary in the coal mine that federal government ignores – regards the disastrous tax codes and fiscal policies. Manufacturing industry, as a result, has departed the U.S. and will continue to do so until the debt bubble bursts and stability ultimately returns.

A fundamental lesson that U.S. politicians need to learn is that manufacturing is a prized jewel in developing and highly industrialized nations. To foster it, our government must abolish the current tax system of deferrals, tax credits and accounting rules that encourage outsourcing. Government needs to step aside and defer to industry. It is imperative that politicians and the private sector understand that de-industrialization is accelerated by large federal deficits, with America becoming less productive and more protectionist as a result. Job loss depends inversely on labor productivity, and statistics show the U.S. is headed in the wrong direction. Deficits, job loss and de-industrialization are all linked. De-industrialization is both a result and cause of poor economic performance.

In a nutshell, if foreigners cannot sell their goods in the U.S. for dollars, who else will buy federal debt instruments? Interest rates would skyrocket to compensate, and financing our debt with valueless dollars will accelerate the entire process. This credit crunch would lead to greater loss of American jobs, and those making capital goods would lose more than others.

A major issue to examine for improvement in this spiral into collapse is to look at what the other top 40 economies of the world do that America does not. They all make extensive use of value-added taxes (VAT), which removes the tax burden of their economy on their export products and taxes imports. This would allow removal of the income-tax system in the U.S. as we know it, much to the chagrin of lawyers and accountants but to great national advantage nonetheless. The bad American tax system is at the heart of de-industrialization. A simple VAT could eliminate most of the tax-wrought inefficiencies of the nation, allow restoration of competitive manufacturing and eliminate U.S. debt and trade imbalances.IH