THE COLLAPSE OF
By: Devin Roundtree
University of Detroit Mercy
Revised December 2016
I will forever be indebted to the lessons of Frederic Bastiat, Henry Hazlitt, and Peter Schiff.
TABLE OF CONTENTS
Chapter I: The Decline Exists
Chapter II: Causes of the Industrial Revolution
Chapter III: Myths Behind the Industrial Revolution
Chapter IV: Causes of the Decline in Manufacturing
Chapter V: Myths Behind the Decline in Manufacturing
Chapter VI: State of Manufacturing Address
Chapter VII: The Dollar Collapse
Chapter VIII: The Collapse of Manufacturing
Chapter IX: Rebirth of Manufacturing?
CHAPTER 1: THE DECLINE EXISTS
For a country that once manufactured 90% of the goods it consumed in the 1960s, today is a stark difference when you go shopping everywhere from Walmart to Bloomingdale’s to discover that only half are made in America.[i] Yet the most astonishing aspect of America’s decline in manufacturing is not that it has occurred at unprecedented rates, but that government officials, the financial media, and the vast majority of economists deny that any decline actually exists. Since the peak in 1979, manufacturing employment has fallen 39.3% from 19.6 million to 11.8 million at the end of 2011. While the decline started 33 years ago, 5.4 million of the 7.7 million jobs lost have disappeared since 2000.[ii] The vast majority of these jobs were lost when factories began to go out of business at rapid rates over the last decade. From 2001 to 2009, an estimated 42,400 factories closed their doors. Despite the loss of millions of jobs and thousands of factories, the government claims that America’s manufacturing industry has miraculously continued to expand. According to the Federal Reserve, by the end of 2011 the real output of final products and non-industrial supplies rose 77% from $1,857.5 billion when manufacturing employment peaked in 1979 to $3,287.4 billion in 2011.[iii]  Final products comprise of consumer goods such as Hostess cupcakes and fixed capital like robotic arms that are used to assemble cars. Non-industrial supplies pertain to construction materials and business supplies such as granite and x-ray machines that are used for construction or providing a service. While the output of final products and non-industrial supplies fairly represents manufacturing activity, it is only a snap shot of America’s productive capacity. The Fed reports that the real output of materials increased 56.8% from $1,446.7 billion in 1979 to $2,268.2 billion in 2011.[iv] Materials include the production of non-agricultural raw materials such as iron ore and cotton, and the manufacturing of industrial supplies like pig iron and textiles. Officially, the Fed does not publish the annual output of materials because these products are also used to produce countless of consumer goods, fixed capital, and construction and business supplies. This problem, better known as double counting, explains why only final goods and services are recorded in Gross Domestic Product data. Though, when it comes to measuring manufacturing activity, let alone all economic activity, the production of materials cannot be rendered nonexistent because it, “misconceives the true nature of the economic process.”[v] Without materials, fixed capital cannot exist, and without fixed capital, consumer goods and the services that depend on them cannot exist. If U.S. Steel closes a pig iron factory in Pittsburgh and opens up one in China, it reduces America’s productive capacity.
So what explains this miraculous rise in manufacturing output that has enabled America to produce 77% more with 39% less workers? William Strauss, a senior economist at the Federal Reserve Bank of Chicago, provides an official explanation of this phenomenon.
The increase in both the number and quality of machinery over time, along with technological improvements in production processes and inventory management, have given rise to greater manufacturing sector output at lower unit cost. Productivity growth in the manufacturing sector has averaged 2.9% over the past 60 years. In essence, this means that manufacturing sector output has risen each and every year by around 2.9%. What took 1,000 workers to produce in 1950 could be produced with 184 workers in 2009.[vi]
Undoubtedly, computers and robotics have helped increase productivity, but if today’s manufacturers are so productive, than where are they hiding all the goods? Why are retailers, such as Walmart full of imported goods whereas before they were born in America? Why are manufacturers like Ford becoming more dependent upon foreign inputs, when in the past it had the capability to manufacture nearly every part of the car at its River Rouge Plant in Dearborn, Michigan? And how is that this growth has occurred despite the loss of entire industries that the U.S. dominated just 2 decades ago such as clothing and electronics? This brings to mind an old adage that, “numbers don’t lie, but lairs figure.”
The only reason government statistics show real increases in production is due to the methodological changes made to the Consumer Price Index since 1982. During the high inflation of the 1970s, the Federal Reserve’s inflationary low interest rate policy came under public scrutiny. Since the late 1960s, the inflation of the money supply was partly used to finance the growing welfare state, the Vietnam War, and even trips to the moon. But after the recession in the early 1980s, the government had to figure out how to have its cake and eat it too. Instead of maintaining a balanced budget and returning to the gold standard, the government simply decided to lie about the increase in prices.
In the late 1980s, the Federal Reserve chairman, Alan Greenspan, and the chief economist to President Bush, Michael Boskin, championed the argument that the CPI overstated price inflation. In their famous hamburger example, Greenspan and Boskin argued that if steak became too expensive than consumers would switch to hamburger meat. In order to track these changes, they suggested that the Bureau of Labor Statistics (BLS) make frequent substitutions to the basket of goods to reflect changes in consumer demands in the face of rising prices, a method known as chain weighting. While the BLS has yet to implement chain weighting, it did adopt a geometric weighted index when Bill Clinton assumed office.[vii] In the past, simple arithmetic weighting was applied to the basket of goods that the BLS tracked. If the basket included only a Panasonic flat-screen TV at $500 and an iPhone at $500, a 10% increase in the price of the TV would lead to a 5% increase in the index. Though with geometric weighting, the government conveniently assigns higher values to goods that have relatively stable prices and lower values to goods with more volatile prices. So if the TV accounts for 25% of the basket and the iPhone accounts for 75%, than a 10% increase in the price of the TV only leads to an increase of 2.5% in the index.
In order to account for housing prices, the BLS does not track selling prices, but conducts a survey among homeowners that asks them how much it would hypothetically cost to rent their house. This became extremely problematic during the housing bubble when renters became homeowners. As the price of houses skyrocketed, the cost of renting remained relatively tamed. In addition, the BLS also uses hedonics and seasonal adjustments to underscore rising prices. During the technological revolution of the 1980s, statisticians argued that the astronomical improvements in computers needed to be reflected in the productivity of computer manufactures. In his book, Crash Proof, Peter Schiff explains the process of hedonics.
If a new computer has 10 times the power of the model it replaced, the manufacturer’s productivity is increased by a factor of 10. In other words, the employee who put the computer together has improved his output 10 times over, an obvious and ridiculous (but real) distortion of the productivity statistic.[viii]
The BLS now uses hedonics to calculate the CPI. While the BLS attempts to account for positive and negative changes in quality, the process is often subjective and further distorts the CPI. In a 1995 report, the BLS stated that it made a downward adjusted to gasoline prices for January because the reformulated gasoline that was required in some parts of the country was believed to be environmentally beneficial. So instead of reporting an increase of 1.1% in the price of gas, the BLS reported an increase of .4%. Not only was the price adjustment subjectively determined based on some unproven environmental impact, but the additive placed in the gas was later found to be environmentally harmful.[ix] The remaining distortion to the CPI applies seasonal adjustments to prices that fluctuate wildly throughout the year. For example, if gas prices usually go up 5% during the summer, the CPI will only report a price increase if prices rise higher than 5%. However, the BLS fully reports any drop in prices.
In all, the new CPI method has reduced reported rates by about 7 percentage points from the original method according to Shadow Government Statistics (SGS) who uses the government’s own admission to calculate the difference in reporting. John Williams, the architect behind SGS, noted that, “In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” The CPI has become so ridiculously manipulated, that if today’s method was applied during the 1970s when consumer prices doubled, the CPI level in 1980 would only be about 8% higher than the level in 1970! It is only when output is reset to the original CPI method, do you get a more accurate reading of the state of manufacturing.
The manufacturing data displayed above still includes seasonal adjustments and the use of hedonics, but nonetheless shows that real output of final goods and nonindustrial supplies dropped 54.4% from the peak of $8,315.6 billion in 1988 to $3,793.2 billion in 2011. While the decline began 24 years ago, the vast majority of this contraction has occurred since the turn of the century. The production of materials, which includes manufacturing activity, also reached an all time high in 1988 at $5,795.8 billion before falling 54.7% to $2,624.8 billion. Although, total output in real terms does not create an accurate comparison until the growth in population is accounted for.
Because the production of materials remained flat from 1979 to 1989, the production of all tangible goods per capita peaked in 1979 at $58,516, before falling 64.8% to $20,597.4 in 2011. The manufacturing of final goods and nonindustrial supplies per capita rose to a high of $34,010.7 in 1988, but also fell 64.2% to $12,173.49 by 2011. The Federal Reserve’s productivity argument does hold some truth since the real output of tangible goods expanded 7.2% during the 1980s after manufacturing employment began to fall in 1979. But this argument was only true during this time because the loss of jobs was relatively marginal. When manufacturing employment went into a free fall in the late 1990s, it became impossible for increases in productivity to outweigh the loss in production tied to millions of job losses. Unfortunately, the rapid decline in output does not serve as the only indicator of America’s perishing manufacturing industry.
Since to make a profit means to combine scarce resources in such a way as to produce something of greater value, profits are rightfully claimed as the proper measurement of success for any industry. And by this measurement, even government data shows that the manufacturing industry has struggled. According to the Bureau of Economic Analysis, the manufacturing industry put up $245.2 billion in profits in 2011, but real profits during the 1960s were at the same level. Though under the original CPI method, real profits crossed the trillion Dollar mark in 1966 and reached a high of $1,080.4 billion in 1978 before falling 77.3% in 2011. Given that real output dropped over 50%, the decline in total profits should not come as a surprise. Yet real profits are also lower on a company by company basis notwithstanding the great improvements in technology. Back in 1978 when real profits peaked, the top 10 manufacturers, which also were the top 10 businesses in America, had a combine profit of $15.1 billion. This equates to $180.3 billion in today’s money and trumps the profit of 2011’s top 10 manufacturers that finished with $121.9 billion.[x]
Profits and wages go hand in hand, so it should also come as no surprise that the latter has suffered even in the face of increases in worker productivity. The 1980s not only marked the end to America’s expansion in manufacturing output, but also to the rise of real wages for factory workers. The average pay for a factory worker rose along with profits to a height of $72.23 per hour or $144,460 a year in real terms in 1978, and plummeted 73.8% to $18.94 per hour or $37,880 in 2011.[xi] Once again, the use of the original CPI method exposes the flaws in government data that misleads the public to believe that real manufacturing wages are at the same rate as in the 1970s. This may seem unbelievable, but back in the day, a typical factory worker could afford a nice size house, a new car, his wife did not have to work fulltime and healthcare and college tuition was affordable. And he could do all of that without going deeply into debt. The only way for that to be possible today is if you got paid well north of 6 figures a year.
Because the original CPI method was wrongly accused of grossly overstating the change in prices, this data might be seen as misleading. However, using the original CPI method is not the only way to expose the sketchiness of the government’s data on manufacturing output. For example, annual output of automotive products supposedly increased 150.3% in real terms from 1980 to 2010. But during that time, the number of automobiles made in the U.S. remained relatively flat, falling 3.1% from 8,009,841 to 7,762,544. In addition, the components of automobiles were increasingly being made abroad then shipped to the U.S. for assembly. From 1987 to 2002, foreign made inputs used in the production of American automobiles surged from 16.3% to 28.7%. While automotive products account for just one industry, they currently represent 9.5% of all finished manufactured goods. If the government is this wrong about the real output of auto products, than how can the remaining data on manufacturing output be regarded as accurate? In the name of accuracy, the use of any consumer price index to determine the real out of manufactured goods is inappropriate because the vast majority of manufactured goods are not consumer products, but tools, machinery, and intermediate goods used in further production. Ideally, a mix between the CPI and the Producer Price Index (PPI) would solve the problem, but the PPI produced by the BLS has undergone even more methodological changes than the CPI and there is no viable alternative. While the output data presented in this study is not pin point accurate, it should be regarded as a conservative estimate since prices on producer goods historically rise more than prices on consumer goods.
There remains little uncertainty that the manufacturers who have survived in America have done so partly because of increased productivity, but the positive signs stop there. Employment, production, profits, and wages have all declined greatly, and as a result, the United States fell behind China as the no.1 manufacturer in the world. The transformation of America’s economy should not be seen as insignificant. The decline in manufacturing has coincided with a catastrophic decline in the standard of living not just for the poor and the middle class, but even the rich. It is not by chance that the income of the middle class has struggled along with the manufacturing industry. The middle class was born during the Industrial Revolution and continued to grow as America’s productive capacity expanded throughout most of the 20th century. Despite what the Wall Street protestors believe, the rich have not avoided trouble. Not only do manufacturing jobs pay more than service sector jobs, but owning a factory does so as well. Manufacturers are capable of paying higher wages because they earn higher profits; both of which are due to the capital intensive nature of manufacturing that increases worker productivity and reduces costs. So when the rich went from owning and investing in factories to owning and investing in retailers, real profits fell and the wealth of those at the top tagged along.
If only the experts were capable of seeing what is already visible, than this study might be unnecessary. The purpose of this work is to inquire into the cause of America’s decline in manufacturing, the future outlook of the industry, and how to reverse course. Despite popular conceptions that places blame on machinery, cheap foreign labor, and even economic progress, the fault rightfully rests on America’s lack of economic freedom. Because the U.S. Dollar remains the world reserve currency, the remaining manufacturers have largely survived by feeding off the savings and capital of foreigners. The Dollar has become grossly overvalued due to the foolish decision by foreign governments to prop up the Dollar by devaluing their own currencies. The artificial strength of the Dollar allows America to print money at will and exchange it not just for plasma TVs and smartphones, but for raw materials, supplies, and machinery. Though, as America continues to recklessly inflate its currency to finance entitlement spending, foreign governments will be forced to stop subsidizing the American economy. The Dollar will inevitably be dethroned as the world reserve currency likely by gold. When the Dollar collapses, American manufacturers will lose access to foreign capital. In the end, Americans will be forced to live within their diminished productive means, but foreign manufacturers, particularly in Asia, will quickly recover from an initial contraction and thrive.
CHAPTER II: CAUSES OF THE INDUSTRIAL REVOLUTION
In order to understand why America’s manufacturing industry has deteriorated, it must first be understood what drove it to prosperity. If you had to choose one century in human history that stood out the most, it would have to be the 19th century. If you were to make a graph of the standard of living through time, it would appear relatively flat for hundreds of years and then skyrocket starting in the late 1700s. This period, known as the Industrial Revolution, is often marked by the life changing inventions such as the steam engine, telegraph, and railroads. Yet monumental inventions alone do not differentiate this century from past ones. For example, during the 13th century, eyeglasses, the mechanical clock, and the spinning wheel were invented, but delivered little impact to the typical standard of living. Despite numerous inventions, life was relatively unchanged since the fall of the Roman Empire. What was it that ignited the Industrial Revolution and in the process lifted millions out of poverty and into the newly created middle class? In short, it was freedom.
Hitherto, world economies suffered severely from government intervention. With monarchs and despots at the head of states, private property was essentially nonexistent. Trade among nations was heavily restricted to favor surpluses so that rulers could accumulate piles of gold; a system known as Mercantilism. To top it off, usury laws stunted the growth of the banking system by restricting the flow of scarce savings to entrepreneurs. Though, things began to change when the ideas of free market advocates such as Richard Cantillon, Adam Smith, and Jean Baptiste Say gained popularity. For the United States, its economic freedom and the beginning of its industrialization began with the ratification of the Constitution in 1787. After decades of economic oppression by the British government, the Founding Fathers came to understand the consequences of government intervention and the Constitution they created mirrored their life lessons. This does not imply that the Constitution became the free market’s best friend as slavery was still permitted in southern states. However, the Constitution did usher in the most economic freedom of its time for the citizens of America. What made the Constitution unprecedented was its establishment of sound money, free trade, low taxes, and individual liberty. By themselves, inventions are useless, but with economic freedom, they become innovations that benefit the standard of living for everyone.
At the beginning of the 19th century, England was the economic powerhouse of the day and the U.S. was a poor nation that lacked savings and capital. Despite being labeled as a “leak” on the economy by Keynesian economists, savings is the lifeblood of manufacturing and thus economic growth. When people increase their savings via banks and the bond market, interest rates fall allowing the production of raw materials and capital goods to expand the most. Because these industries are more capital intensive and time consuming, they are more sensitive to interest rates. In order for businesses to build factories and mines, they have to borrow large sums of money over multiple years, so a small change in interest rates can render a project profitable and possible or unprofitable and impossible. Effectively, savings voluntarily transfers the 4 factors of production (land, labor, capital, and entrepreneurship) from the production of consumer goods, to the production of raw materials and capital goods. Raw materials and capital goods are of utmost important because without them infrastructure, consumer goods, and services simply cannot exist. The sole purpose of capital goods is to reduce marginal production costs and create better consumer goods and services at lower prices.
America was short on savings, but with a good amount of economic freedom it represented the land of opportunity. Instead of generating wealth from scratch through decades of saving, America was able to speed the process up by attracting plenty of foreign investment and the Constitution’s establishment of free trade made it all possible. For the first time, a Constitution established free trade by enforcing uniform duties across the country that could only be levied to, “pay the Debts, and provide for the common Defense and general Welfare of the United States.”[xii] This implicitly means that tariffs intended to protect the welfare of specific industries and businesses are unlawful. Under British rule, the colonies could only export raw materials and manufactured goods were prohibited in order to protect British manufacturers. So through the Constitution, the Founding Fathers ensured that America’s tariffs could only be used to raise revenue. The Constitution even established free trade among the states with the Commerce Clause that gives Congress the authority to, “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”[xiii] Before the Constitution, it was customary for states to enact tariffs on their neighbors to protect their businesses unintentionally at the expense of consumers. By giving Congress the authority to abolish those interstate trade restrictions, the Commerce Clause was intended to make trade between states, foreign nations, and Indian Tribes more regular.[xiv] Article II. Section 10 of the Constitution even asserts that states are not allowed to levy any impost or duty, unless used to finance inspection laws, without the consent of Congress. Even further, all laws remained under the revision and control of Congress. All of this does not imply that Congress never used tariffs to protect certain industries. One of the reasons that southern states succeeded before the Civil War was due to the protective tariffs on manufactured goods that helped some manufacturers in the north, but put southern plantation owners at a disadvantage. However the Constitution did usher in the most relative free trade and allowed Americans to enhance the country’s comparative advantages. Without the constitution, cities such as Detroit and Pittsburgh could not have gained the respective nicknames of the Motor City and Steel City.
In Crash Proof, Schiff explains just how America used free trade to greatly enhance the country’s productive capacity.
We (America) borrowed money from England, but with minimal government interference we used it to develop an economic infrastructure, first by building farms, then factories, railroads, and telegraphs, eventually becoming an industrial nation in much the same way the Chinese are now developing industrial sophistication. So we borrowed to invest. Our investments enabled the production of vast quantities of consumer goods, which we sold back to our creditors to both pay interest and retire principal. In the end, our creditors got consumer goods and we were able to turn a huge current account deficit into a huge current account surplus[xv]
From the years 1790 to 1875, the US ran trade deficits 71 out of the 86 years. In the beginning, the trade deficits were small, starting at $3.6 million in 1790, but quickly grew to as much as $190.6 million by 1872. By the end of deficit trend in 1875, the U.S. racked up almost $2.4 billion in trade debt.[xvi] Just as Schiff pointed out, these deficits in goods represent the amount lent to America by the rest of the world, particularly England. The trade deficits were the outcome of investors around the world seeking to make a profit on America by buying stocks and bonds to finance infrastructure, factories, and machines. American financial assets held by foreigners soared from $87 million in 1820 to $379 million in 1860 as foreign investors rushed in.[xvii] The U.S. also received new funds as millions of foreigners immigrated and deposited their life savings in gold and silver at American banks. Of course Americans did not use these new funds to buy consumer goods from the rest of the world, but capital goods that served to enhance the productive capacity of the country. In the early stages of the industrial revolution, finished manufactured goods accounted for over 50% of America’s imports.[xviii]
As the 19th century rolled on, American businesses increased their productive capacity at an amazing rate. In the first half of the century, businesses increased the production of reproducible tangible wealth, e.g., wheat and shoes, at an annual rate of 4.4%. Yet, with the conclusion of the Civil War, came the freedom of almost 4 million black slaves representing 13% of the population. While it is true that slaves were used to construct countless of buildings and infrastructure, this doesn’t mean that slavery was an efficient means of doing so. Slaves were expensive to begin with and had to be clothed, fed, and sheltered. This is much more complicated than paying wages. But the biggest downside to slavery is that slaves themselves had little to no incentive to increase their productivity. At the end of the day, all of their output belonged to their masters and they were still slaves. So the abolishment of slavery represented a massive release of human capital free to utilize their God given talents. The end of slavery was an economic game changer. In the latter half of the century, the growth rate of reproducible tangible wealth jumped to 5.2%.[xix] The result of this growth increased the reproducible tangible wealth per person from $166 in 1805 to $1,540 per person in 1900, or by 828%! [xx] By the end of the 19th century, the components of imports and exports began to reflect the unbelievable growth of the manufacturing industry. The importation of finished manufactured goods fell from over 50% to just 24%, and the exportation of finished manufactured goods rose from 5% to 28%.[xxi] In 1875, the 86-year trend of trade deficits ended and the era of massive trade surpluses began. The trade surpluses were so large that by 1897, America had paid back the world the principle amount of $2.4 billion in goods it borrowed. As the graph below depicts, America’s accumulative balance of trade jumped to $1.68 billion in trade surpluses by 1900.
At the beginning of America’s foundation, it was considered the financial safe haven of the world. For much of the 19th century, there were no individual income taxes, no corporate income taxes, no capital gains taxes, and no payroll taxes. The lone exception came during the Civil War in 1862 when an income tax was levied on high income earners to finance the war. However, the Constitution explicitly states that, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” In the 1895 case Pollock V. Farmers Loan Trust Co., the Supreme Court ruled that the current income tax was a direct tax and thus unconstitutional. As a result of the tax limitations set by the Constitution, the federal government was forcibly kept small. This meant that individuals and businesses could invest as much as they wanted and reap all of the benefits without Uncle Sam taking directly from their pockets. With so much economic freedom, there is little wonder why millions of foreigners risked everything to immigrate to America.
During the Revolutionary War, Americans experienced the destructive effects of inflation when Congress printed so many Continental Dollars to finance the war that its value sunk to zero. So the Founding Founders made sure that the government was grounded in sound money. While many parts of the Constitution require the Federalist Papers to fully understand, there are no ambiguities when it comes to the subject of money. The states are forced to use gold and silver in payments of debts. The federal government can only coin money and regulate its value. Unlike during the War, the government cannot make purchases with bills of credit and it has to borrow money via bonds if low on taxes. Most importantly, the Constitution does not give Congress the power to make anything, including green pieces of paper, legal tender. While the bimetallic standard established by the Founding Fathers was arguably the best monetary systems to date, it was not a pure bimetallic standard based on the free market. In a free market it is unnecessary for the government to interfere by minting coins; the silver Dollar was actually a privately minted coin before Congress decided to adopt it in 1792. Though more importantly, it was a big mistake to allow Congress to fix the price of gold and silver. Gold and silver are like any other commodity in that their value must change to reflect supply and demand. Large discoveries of gold and silver during the 19th century constantly resulted in the over and undervaluation of gold to silver, complicating foreign exchange. Nevertheless, with the country anchored to a bimetallic standard, the government was forcibly kept small allowing the economy to grow, interest rates remained low and relatively stable, and the universal standard of living enhanced as prices fell and savings increased.
It is often forgotten that the government has no money or resources, just the ability to take them from one to give to another. So for every Dollar the government spends, the private sector has a Dollar less to spend and invest. It matters not whether the government gets the money from taxes, debases the coinage, or inflates the currency. The end result is the transfer of real wealth from private citizens to the government. If the government decides to inflate to finance the building of a highway, than businesses that depend on resources such as tar, concrete, steel, and construction workers get priced out of the market. Rising prices as a result of the government’s inflation of the money supply is known as the hidden tax. America’s bimetallic standard gave global investors a double tax incentive to invest in the country. Increasing tariffs was largely unpopular and there was no central bank to print money and buy bonds. Therefore, the size of government remained small relative to the rest of the economy, and as a natural consequence there were more resources available to build mines, factories, and infrastructure.
When government’s role in monetary affairs was limited, prices were allowed to fall as the production of goods and services outpaced the increase in the supply of gold and silver. In a free market, prices generally fall because entrepreneurs discover new techniques for making better products at lower costs. Competition gives businesses a natural incentive to lower prices to increase market share and profits. The beauty of this process is the indirect effect on labor. In order to reduce costs, workers have to become more productive via tools and machinery, training, or pure hard work. More efficient workers equates to more valuable workers and higher wages. Since every price is a cost to someone, the increase in productivity of one benefits all. Falling prices allowed the standard of living to rise rapidly during the Industrial Revolution and helped usher in the middle class. During the 19th century, consumer prices fell 51% and would have fallen much further if not for war time inflation when the government violated the Constitution by abandoning the bimetallic standard.
Sound money not only caused prices to steadily fall, but interest rates as well. In absence of war time inflation, those who saved and invested their money in the U.S. did not have to factor in rising prices that would have destroyed the value of their savings and bonds. Rising prices will forever be the biggest turnoff to savers because if you buy a one year CD at 5%, but prices rise 10%, you are now 5% poorer instead of richer at the end of the year. However when prices fall, people have the incentive to save more due to the double increase in purchasing power they earn on interest and lower prices. The increase in savings pushes interest rates down, and capital intensive industries expand faster as it becomes more affordable to borrow to buy machines and tools that increase productivity. While consumer prices dropped 45.7% from the end of the Civil War to the end of the 19th century, the average rate on high grade railroad bonds dropped from 6.02% to 3.13%.[xxii] High grade railroad bonds represented the prime rate at the time, which means that the manufacturing industry benefited greatly during this time as interest rates fell. Interest rates were also less volatile because gold backed banknotes restricted the distortions caused by inflationary bank credit. Banks repeatedly attempted to lower interest rates to attract more borrowers by fraudulently making loans out on their customers’ gold deposits that they promised to redeem unconditionally (a system known as fractional reserve banking). The Austrian Business Cycle theory explains how loans made from demand deposits causes businesses to make “malinvestments” as they expand production in response to artificially low interest rates. Banks who inflated recklessly ran the risk of having more banknotes and deposits redeemed in gold than they had on reserve igniting a bank-run. Whenever reserves ran low, banks had to quickly liquidate their bonds at a discount and as a result interest rates spiked causing businesses that depended on the artificially low rates to lose money. This phenomenon is mistakenly believed to be an unfortunate consequence of the free market. Instead it is an unfortunate consequence of the government not doing its job to protect the property of depositors from fraudulent banks. Still, the threat of bank runs kept interest rates in check. From 1865 to 1899, high grade railroad bonds, and thus the prime rate, never fluctuated more than 50 basis points from year to year. With rates naturally this low and steady, businesses were able to borrow cheaply to make long term capital investments, without the concern of interest rates spiking in the future and making their investments unprofitable.
Since the Constitution declares only what the government can lawfully do (as clarified by the 10th Amendment), it established a government with few regulations and an abundance of individual liberty. Aside from providing post offices and coining money, the Constitution does not give the government much room to interfere with the free market. Therefore the government lacks authority to create environmental and labor regulations. The government cannot legally transfer wealth from one individual to another in the form of bailouts, subsidies, unemployment benefits, or healthcare. On the flip side, a man could take advantage of his right to life, liberty, and property in the manner he chooses as long as it does not infringe upon the rights of others. Businessmen were capable of building factories with ease compared to today because there were no complicated federal, state, and local permits and inspections 150 years ago. And without having to spend time and money complying with regulations, businesses could devote their scarce resources to producing valuable goods for society at affordable prices.
In his book, The Mystery of Capital, Hernando De Soto argues that it was America’s well protected and acknowledged property rights that permitted the vast capital investments of the 19th century. One cannot have individual liberty if he does not have the right to his own property, and one cannot fully utilize his property if his ownership is not recognized. In order to build large factories, railroads, telegraph lines, and telephone lines every piece of land had to be assigned an official owner. This legitimized private contracts between private landowners and businesses, and allowed for the easy exchange of property via deeds and titles. Although this process was mostly facilitated by state governments, the Constitution recognizes private property and provides for the protection of it from government seizure in the 5th Amendment.
CHAPTER III: MYTHS BEHIND THE INDUSTRIAL REVOLUTION
Research & Development
Although the Industrial Revolution continues to be known as a free market phenomenon, some argue that government intervention played a helpful role. It is undeniable that the federal and state governments helped finance many of the new innovations and infrastructure projects of the 19th century. From 1806 to 1852, the federal government built the National Road, which stretched from Cumberland, Maryland west to the Ohio River, at a price tag of $7 million.[xxiii] In the first half of the century, state governments financed the building of canals. The Erie Canal, which was one of the largest and most famous, cost the state of New York $7million as well. In the second half of the century, the federal government provided $65 million in loans to help finance railroads and the First Transcontinental Railroad was the biggest recipient. And when it came to research and development, the federal government provided Samuel Morse the funding he needed to conduct his experiment with the telegraph.[xxiv]
Despite the impressive rap sheet, government funding was an unnecessary hindrance to the Industrial Revolution that threatened individual liberty. One of the biggest misconceptions about government funded R&D is that without the government, these projects would never come about. Of course there is always a lesson in history that teaches us otherwise. In 1790, John Fitch built the first American steamboat with the intention of using it for public transportation. Fitch wasted no time in asking for federal funding, but was promptly turned down. Given the potential profitability of his steamboat, Fitch was not discouraged and eventually secured private investments. Unfortunately, because of the fear of steamboats exploding, Fitch’s idea to create passenger boats failed miserably. Though, Fitch’s work was not in vain for society. A mechanic and artist by the name of Robert Fulton was inspired by Fitch’s work and partnered up with the famous war hero and silversmith Paul Revere to build a bigger steamboat for commercial use. Fulton and Revere unveiled the largest steamboat of its time, the Clermont, in 1807 by doing a test run upstream on the Hudson River from New York City to Albany. The boat moved at only 5mph, but made the trip far faster than on land. In a few years, steamboats crowded American rivers and passenger boats finally caught on.[xxv] The essential lesson is that when private money is at stake, investments must be profitable. As explained earlier, profits are a positive sign for society because it represents the use of scarce resources to create something of greater value. Whereas when the government makes investments with the taxpayers’ money, political and not profitable motives drive decision making. If certain projects are not taken up by private investors, it either means that they are not profitable and don’t create value for society, or there is not enough savings to finance the project. Ironically, if the federal and state governments had never taxed people by the millions to fund infrastructure and R&D, than people would have been able to save more, which would have lowered interest rates making such projects profitable in the future. If the government attempts to remedy the problem of too little savings, it will lead to the second problem with government financing.
Once again, the government has no money or resources, just the authority to take money and resources. The Austrian economist Henry Hazlitt noted the irony of government infrastructure projects with regards to the publicly funded Norris Dam.
The thing so great that “private capital could not have built it” has in fact been built by private capital-the capital that was expropriated in taxes (or, if the money was borrowed, that eventually must be expropriated in taxes). Again we must make an effort of the imagination to see the television sets that were never allowed to come into existence because of the money that was taken from people all over the country to build the photogenic Norris Dam.[xxvi]
What makes government financing of public goods so dangerous to individual liberty is that it permanently removes the lid to Pandora’s Box. If it “benefits society” to build a highway system, why not build high speed rail? If high speed rail is so beneficial to society than why not provide broadband? Though in order to provide these services, the government must take from some people to give to those who claim benefits for all.
While the proponents of government interference have misconstrued history, they are due some credit when it comes to patents. By solving the age old problem of inventors getting ripped off from businessmen that were supposed to buy the blueprint or the process of making a product, patents do indeed protect private property. In this sense, patents are not interventionist and are no different than car titles. Though, by granting patents to goods themselves, inventors are granted unjust monopoly rights. There is nothing inherently illegal about imitation and the old adage about it being the sincerest form of flattery should be applied to patent laws. Imitation is actually the beauty of capitalism since it makes competition and all the innovations and low prices that it brings possible. Unfortunately, American patents were granted to processes and goods. What made America’s patent laws even worse was that they were granted on a first-come first-served basis. It was not uncommon for two or more individuals to invent the same product with a similar process simultaneously. How could one argue that it is just to grant a monopoly to the first man who shows up, and tell the second that he is too late to benefit from his hard work?
CHAPTER IV: CAUSES OF THE DECLINE IN MANUFACTURING
So if freedom allowed for America’s Industrial Revolution, it should be evident that the reduction in freedom has led to America’s decline in manufacturing. Despite slipping in ranks over the last decade, the Heritage Foundation puts the U.S. in tenth place on their 2012 Economic Freedom Index. Somehow China, one of the fastest growing economies in world history, sits at 138 out of the 179 countries analyzed. Though if Americans are so free and the Chinese so oppressed, why are American businesses flocking to China faster than Irish immigrants ran to America 100 years ago. Why did the CEO of Coca-Cola say that doing business in China was easier than in the U.S.? There is no vote for freedom greater than the vote of people’s feet. America no longer reigns as the free market Mecca and America’s fall from freedom has everything to do with the abandonment of the Constitution. Just as the Constitution established the freedom necessary to create a vibrant manufacturing industry, it was the abandonment of the Constitution that opened up the floodgates to government intervention that has come to destroy the manufacturing industry.
Of course politicians did not depart from the Constitution directly, but did so through decades of misinterpretations and deception. Since the time of the Constitution’s ratification, the General Welfare clause has been abused due to its ambiguous wording. During the Kentucky resolutions to adopt the Constitution, Thomas Jefferson even clarified the General Welfare clause by stating, “that words meant by that instrument, ought not to be construed as themselves to give unlimited powers.”[xxvii] Yet Politicians continue to justify government programs such as Social Security based on the interpretation that the government can do whatever it desires if supposedly for the good of the people. The General Welfare clause was intended to ensure that the powers of Congress, which are explicitly stated in Section 8 of the Constitution, work for the benefit of the general population. Somehow this was misconstrued to justify the transfer of wealth from the young to the old and from the rich to the poor.
Yet the manipulation of the General Welfare marginally compares to that of the Commerce Clause. As stated earlier, the Commerce Clause was intended to reduce trade restrictions between states, Indian tribes, and foreign nations. However the modern interpretation allows the government to dictate every act of individuals and businesses if their actions have any direct or indirect effect on interstate commerce. Effectively, this means that the government has no boundaries at all. Even if I choose to grow and consume my own food instead of buying imports from California at Krogers, I am indirectly affecting interstate commerce and thus my farming can be regulated in every aspect. While this sounds ludicrous, it was the actual outcome of the 1942 Supreme Court Case Wickard versus Filburn. Of course such an interpretation would render the Constitution, which was created to put restraints on the federal government, pointless. Lastly if the modern interpretation of the Commerce Clause stands correct, than Congress has the authority to dictate the minimum wage in Zimbabwe; after all their regulatory powers extend not just to states, but to “foreign nations.” To top off the manipulations of the Constitution, Politicians argued under the Necessary and Proper Clause that they could take any action deemed necessary to fulfill the unlimited powers of Congress. Consequently the limited powers listed under Article 1. Section 8, in which the Necessary and Proper Clause refers to, were completely ignored.
These misinterpretations not only served to justify unconstitutional policies that violate individual liberty, but altered the mindset of the government as a necessary means to protect life, liberty, and property. Unfortunately, the manufacturing industry became an innocent bystander in the way of government’s parabolic growth. As a result, America’s iconic industry began to falter as saving rates plummeted and regulations mounted.
The obvious impact of income taxes on manufacturing is that less income means less savings, and less savings means less resources devoted to manufacturing. If not for the 16th Amendment, today’s income taxes would not have been possible since the Constitution explicitly outlawed direct taxes, “unless in Proportion to the Census or Enumeration herein before directed to be taken.”[xxviii] Congress previously passed an income tax in 1894, but was ruled unconstitutional a year later. And there is a good argument to be made that only corporate income taxes are constitutional because courts in the early 19th century defined the word “income” as a surplus of revenue; individuals of course do not come with balance sheets. Nonetheless, when income taxes were reintroduced in 1913, the top rate was only 7%, the bottom rate was 1%, and the personal exemption was $3,000 (standard deductions not instituted until 1944).[xxix] Given that the average income was about $750, the majority of workers paid no income taxes, and even most in the upper class only paid 1% with the bottom tax rate capped at $20,000. Today’s income taxes drastically differ despite rates falling from previous highs. The bottom rate is 10%, the top rate is 35%, and the standard deduction ($5,950) and personal exemption ($3,800) doesn’t even exclude a part time cashier at Target from paying income taxes.
As the 20th century rolled on, income taxes picked up new friends named payroll taxes and capital gains taxes. States and municipalities also got in on the action with their own income taxes. As taxes grew during the 20th century, the life blood of manufacturing became scarcer. For example, a Ford factory worker earning $5 a day in 1914, earned $1,250 a year tax free, which equates to almost $99,500 in 2011 Dollars. If he chose to save 10%, $9,950 in today’s value would go to financing numerous of business ventures, including manufacturing. But saving this much would be difficult with today’s federal income rate of 28%, Medicare and Social Security rate of 13.3% (employee and employer combined contribution), Michigan income tax of 4.35%, and Detroit income rate of 2.5%. Even with $13,950 in federal, state, and city tax exemptions and standard deductions, that same factory worker could only take home $61,032.35 and save $6,103.24 at 10%. This represents a 38.7% reduction in total savings and would substantially restrict the manufacturing industry. Liberals are correct that the top federal income tax rate was far higher in the past (remaining at 91% during 1950s and early 1960s) when the economy grew faster, but correlation does not infer causation. Other factors such as low regulations and less government spending countered the effects of high rates, and with numerous deductions, very few were taxed at such high rates. This also ignores the fact that after every large tax reduction, i.e., 1922, 1964, and 1982, the economy grew faster as more income was delegated to savings and investment. In addition, when tax rates were higher, many states did not have income taxes or were much lower compared to today’s rates.
Social Security, Medicare, Medicaid, unemployment benefits, and education spending were all ushered in under the manipulated General Welfare clause as insurance and safety nets starting in the 1930s. At $2,270.8 billion, these programs now make up 59.8% of the $3,795.6 billion federal budget in 2012.[xxx] This amounts to $19,133.48 per household, but when you account for social welfare spending by states ($8,547.21) and municipalities ($7,599.30), the grand total stands at $35,279.99 per household.[xxxi] [xxxii] With the median household income at less than $50,000, government spending on social welfare is swamping Americans, and this spending is the chief reason that taxes have increased dramatically. Unfortunately, social welfare programs carry unintended consequences that curtail the fundamental reasons people choose to save. People have always saved for rainy days with the biggest fear of losing a job or becoming too ill to work, but unemployment benefits and disability insurance weakened the necessity of saving for such reasons. In modern times, the lengthening of life expectancy created the need to save for retirement when you literally became too old to work. Though, Social Security and Medicare influence people to save less because of the expectation that the former will take care of basic necessities such as food and utility bills and the latter will cover most expenses on medication and checkups.
The essential reason social welfare causes people to save less is because it deceives people into believing that the government saves for them. People are aware how much they pay in taxes to finance these programs and are told by the government that surpluses go into a trust fund for the future unemployed, sick, and retired. In reality, these trust funds morphed into Ponzi schemes the minute Congress created them. Despite the title “trust fund,” the government does not save or invest any surpluses from payroll taxes that finance programs like Social Security, but replaces the money with an I.O.U. and spends it on other programs. As Schiff noted, the only distinction between Social Security and the pyramid scheme that Charles Ponzi pulled off in 1919 is that, “Social Security is much bigger, involves an entire country, and was implemented without giving participants a choice. At least Ponzi didn’t force anybody to buy in.”[xxxiii] The government’s actions differ little from those of Bernie Madoff and are nothing more than crimes of embezzlement. David Walker, the former Comptroller General, pointed out in the documentary I.O.U.S.A. that the surpluses from Social Security were so large that they even allowed President Clinton to mischievously take credit for budget surpluses.
In the last 40 years, we have had 35 budget deficits and only 5 budget surpluses, but remember we’ve been running large annual surpluses in our Social Security Program for years. These surpluses are spent every year to help pay other bills in the federal government. Without the Social Security surpluses, our real track record on federal deficits looks a whole lot worse.
This explains how $422 billion in “surpluses” from fiscal years 1998-2000 increased the national debt by $261 billion during that period.[xxxiv] [xxxv] The outstanding intragovernmental debt stood at $4.72 trillion as of February 2012, and nearly all of this represents the misappropriations of government trust funds over the decades.[xxxvi]
Nothing has done more to diminish savings and thus destroy America’s manufacturing industry than the decision to disregard the Constitution and abandon the bimetallic standard. Since the born of the republic until 1971, it was sound money that forced bankers to operate somewhat honestly. It was sound money that chained down the government so that markets could be free. And it was sound money that allowed the manufacturing industry to flourish and the living standards for all to rise. Though, the government did not abandon gold and silver overnight. The trouble all began in 1873, when the 4th Coinage Act demonetized silver by ceasing the minting of silver coins and defining the Dollar as both a weight in silver and gold. With the price of gold and silver fixed, decades of silver discoveries made the white metal overvalued. Silver minting resumed in 1878 with the Morgan Dollar, but the move away from bimetallism and to fiat currency was set in motion. After the creation of the Federal Reserve in 1913 it was all downhill from there. Under the Fed, all private bank notes denominated in gold and silver were outlawed in lieu of the Federal Reserve note, and all gold held in bank vaults was transferred to the U.S. Treasury and the 12 regional Fed banks. The creation of the Fed was patriotically publicized as the means to create a single stable currency for America, and to stabilize the banking industry. Admittedly, while the thousands of different banknotes complicated business (something that could easily be solved today with debit cards), it increased competition among bankers to hold adequate reserves to back their notes. With regards to the Fed’s mission of stabilizing the banking industry, this could have easily been accomplished if judges did not let fraudulent bankers off the hook. Under the Fed, all banks are instructed to inflate simultaneously instead of competing to maintain the highest reserves. As soon as the Fed officially began operations in 1914, prices began to rise and business cycles worsened as they evolved into national phenomenons. In 1933, President Roosevelt, behind the pretense of stimulating the economy, made gold coins illegal, transferred the nation’s gold to Fort Knox, and permanently suspended the redemption of Fed notes for gold by Americans. Due to a “silver shortage”, silver was completely removed from dimes and quarters in 1965, and from half Dollars and Dollar coins in 1971. In reality, silver prices rose because the Fed inflated the currency to finance budget deficits and subsidize banks. Lastly in 1971, President Nixon removed the Dollar’s last ties to gold by suspending redemption by foreign governments. The Dollar, which began as a silver coin became a piece of intrinsically worthless paper.
If the government had any intention of maintaining the value of the Dollar, it would have been futile to absolve silver and gold as official monetary units. The truth is that while bankers benefit from inflation, the government benefits more. Through central banking, politicians can covertly tax the people for wars and welfare, and blame rising prices on evil “speculators.” Since prices consistently rise, the government can also pay back long term loans in depreciated currency. Big businesses also benefit from inflation because they can borrow these inflated loans, make investments before prices rise, and like the government pay back loans in depreciated currency. Though because of the business cycle, big businesses often become victims when interest rates unexpectedly rises and reveals their malinvestments. Though under fiat currency, big businesses do not need to panic unlike everyone else. As seen during the housing collapse, the government can easily inflate to bail big businesses out under the guise that they are “too big to fail.” Corporate welfare always looks bad, but politicians get away with it because they do not have to increase taxes directly to pay for bailouts, just indirectly through rising prices. As beneficial as fiat currency is to the government, bankers, and big businesses, it is equally as damaging to the manufacturing industry. What makes fiat currency and all the inflation that comes with it so harmful to manufacturing is that it creates disincentives to save, and allows the government to spend without limit.
People do not save because they want to, but because they have to. Human nature centers on satisfying needs today, and saving is the exact opposite of what nature compels. Though, given the uncertainties of life and the desire to have what is unaffordable, people have the incentive to save. These incentives to save fuel the manufacturing industry by directing scarce resources into the production of capital goods that will make higher quality, more abundant, and lower cost consumer goods and services in the future. Yet the Federal Reserve ruins this natural economic process. Through inflated consumer credit, people no longer have to save up for anything. Consumer credit seemingly exists for everything including houses, cars, appliances, and TVs. From the time the U.S. abandoned the gold standard in 1971 to 2011, consumer debt skyrocketed from $8 billion to $803.8 billion.[xxxvii] Of this amount, $590.2 billion or 73.4% was accumulated since 1990. As a result, saving rates declined from over 8% during the prior 3 decades to just 4.74% in 2011.[xxxviii]
Manufacturing depends on savings not only to expand, but just to survive. If there is a high level of savings, companies can expand production through capital investments. If there is only a moderate level of savings, there is only enough resources to go around to maintain a constant productive capacity. Machines and tools eventually ware out and need replacement. Though if savings are low, there is not enough to replace depreciated capital, let alone allow for any net expansion. The essential reason that manufacturing output has declined by over 50% since 1988 is due to the rapid decline in saving rates since the 1980s. Despite what the Monetary economists believe, the printing press cannot substitute genuine savings, because genuine savings represents scarce resources that are voluntarily transferred from the consumer goods industry (retail, wholesale, and consumer goods) to the capital goods industry (raw materials, machinery, and equipment). Under fractional reserve banking, these two industries often compete for the same resources. If steel is used to make cars, it cannot be used to make a machine that makes higher quality cars at a lower cost. The inclusion of fiat currency and a central bank without inflationary limits creates a war between the capital goods and the consumer goods industry.
Henry Hazlitt pointed out more than 6 decades ago that the artificial low interest rates created by central bank inflation, “tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth.”[xxxix] One of the most notable examples of this causal effect was U.S. Steel’s acquisition of Marathon Oil in 1980. With price inflation in double digits, U.S. Steel decided to forgo a $6 billion investment in new furnaces and casting machines, and instead opted for Marathon because it held oil reserves that were rapidly appreciating due to inflation.[xl] With regards to personal saving rates, there is a reason why they started plunging in the 1990s. Since 1991, real interest rates have remained negative on the average 6 month CD, and last year the spread between price inflation and the average nominal rate crossed the 10% mark.[xli]  With real rates in negative territory for so long, those who continue to save have become more interested in stocks that usually rise when the Fed inflates. Yet there is a big difference between the two. Unless you are buying newly issued stocks, money is not being funneled to businesses for investment, but just to traders or to everyday people with a 401(k).
While social welfare is damaging enough to manufacturing, it is still restricted under a commodity standard. When President Nixon took the U.S. off the gold standard he not only permitted, but encouraged the Fed to inflate the currency to help finance social welfare. Prior to the 1970s, the national debt usually soared during major wars, but since then the debt has soared mostly due to social welfare spending. Therefore, under fiat currency all of the harmful effects of social welfare programs are exacerbated.
Regulations & Corporate Welfare
Ever since Congress defied the Constitution and passed the Interstate Commerce Act in 1887 to regulate railroads, regulations have spread like wildfire. And with every new regulation, individual freedom faded. A study by the Small Business Administration reports that federal regulations alone cost businesses $8,086 per employee in 2008; representing a 43.5% increase from $5,633 in 2005.[xlii] Once again, the addition of state and municipal regulations such as trade certificates, zoning laws, and inspections only serve to increase the burden on businesses, and thus employees. While varying in costs, the effects are real. One only has to look at the flight of auto manufacturing from the Midwest to southern states (where regulations are often less intrusive) to understand that these regulations are increasing the cost of production. Though, regulations do not burden all companies equally. The SBA study cited that the average cost of regulations amounted to $10,585 per employee for businesses with 20 and less workers, versus $7,755 per employee for businesses with over 500 employees. Unfortunately, the discrimination of regulations on small businesses versus larger ones was intentional. There is a reason why big businesses are always at the forefront in advocating and even participate in writing major sweeping regulations. Small businesses are small because they face higher production costs that prohibit growth. So the additional costs brought on by regulations effectively put small businesses out of commission and grant the big guys with a greater market share. Regulations not only harm small businesses the most, but have a greater impact on the manufacturing industry. Union laws, minimum wage, safety rules, and environmental regulations have combined to make the perfect storm against manufacturers across America.
While it seems that no occupation is without a union, unionization originated with manufacturers who usually mistreated and underpaid workers. The original intent of unions was to increase wages and better working conditions, but in most cases unions went too far and forced employers to hire non-unionized workers to remain productive and profitable. Though, government laws have given unions privileges at the expense of employers by forcing them to only hire union workers and restricting their right to freely fire workers. Union laws have all been made in name of protecting the rights of workers. Yet such rights do not exist, only individual rights to life, liberty, and property. Any right that places control of one’s property, i.e., a business, in the hands of another, i.e., a union, is not a right, but a privilege. Ironically, workers are harmed in the process because they lose the right to bargain with employers over their own labor. And due to union laws, many manufacturers have gone out of business or shipped operations overseas. Those who remain in the U.S. have fled to states with relatively lenient labor laws. Most notably, Boeing built a $750 million factory in South Carolina mostly due to the state’s right to work status.
The essential mistake in all union laws is that they put the cart before the horse. In a free market, an increase in worker productivity actually lowers the cost of labor per unit of output. As the marginal cost of labor falls, profits rise as output increases. As workers become more productive they become more valuable to employers, and higher wages are paid from higher profits. The key is that profits must rise in order to make higher wages possible. Henry Ford provides the textbook example of this lesson. During the Great Depression, Henry Ford increased wages with the belief that it would stimulate demand. The plan backfired and Ford eventually had to lower wages to stave off losses. Union laws effectively force upon employers what Ford voluntarily committed by mistake. The irony of union laws is that the wage hikes and safety improvements that are forced upon employers would come naturally over time. Employers compete not just for customers, but for workers. Those who provide the best working conditions at the highest wages will receive the most industrious and profitable workers. Once again, Henry Ford provides an excellent example of this argument. The reason why Ford made that fatal flaw during the Great Depression is because he did not fully understand what enabled him to famously increase wages to $5 a day in 1914. At that time, turnover was high among employees and Ford wasted a substantial amount of time and money training new workers for the same job opening each year. The solution came in doubling wages to $5 a day and reducing the workday from 10 hours to 8. This equals to $398 in today’s money, which is actually higher than the contemporary average pay (including benefits and pensions) of $464 a day once taxes are accounted for.[xliii]  Union advocates do not like to acknowledge this, but the $5 a day campaign was done prior to the creation of the United Auto Workers union. What made this all possible was the installment of the moving assembly line in 1913 that reduced costs and boosted profits. While Ford finally learned this vital lesson after his mistake during the 1930s, the government is still slow to come.
In many cases, big unions are no different than big businesses, which explains their support for the minimum wage. Just like any other regulation, minimum wage puts workers that are less productive out of business and artificially increases the wages for the rest. In a free market, low skilled workers can only find work if they offer their services at a low price. Consequently, ever since President Roosevelt passed the first minimum wage law in 1934, the unemployment rate among teenagers and minorities have remained substantially higher than the general population. From 1934-1935, an estimated 500,000 African Americans lost their jobs as a direct result of the minimum wage law.[xliv] During the industrial revolution, children went from working on the farm to working in factories. As real wages for the Average Joe continued to rise, more children were able to attend school, but the government was not pleased with the free market’s pace. The legal working age of 16, which was also supported by unions, joined forces with the minimum wage to ensure that young people and minorities did not compete to keep labor costs down.
Given the original intent of unions, safety regulations have also been a big hit with unions. These laws only cost the average business $606.45 per employee, but safety rules clearly affect manufacturers disproportionally due to the innate danger of these jobs. However, the market regulates itself in absence of government intervention. Employers have the incentive to keep their employees healthy and safe. Nobody wants to spend time, money, and resources training employees only to see their investment go down the drain when workers get injured. But when the government enacts their own safety rules they take away people’s right to work at their own risk. Unfortunately, the tragedy of the Triangle Shirtwaist factory in New York put an end to the free market setting its own safety regulations. In 1911, the factory caught fire and claimed the lives of 146 women. What made the death count so high was that the employers locked the doors to the stairwells and exits to ensure that the women would not slack off. This left a single elevator as the only exit from the factory that occupied the 8th, 9th, and 10th floor. Despite numerous lawsuits, the employers were found innocent of any negligence. Nonetheless, Triangle Shirtwaist went under and other manufacturers implemented changes to prevent a similar scenario. Yet the federal government, along with states and municipalities, took a step further and began to enact safety and labor regulations to improve dangerous working conditions. In the end, the government succeeded by regulating manufacturing jobs out of existence. In 1911, New York was known for the production of clothing, but 100 years later, these factories are now converted condos.
Over the last year, a Youtube video of an Alabama coal mine owner, Ronnie Bryant, has become a classic example of the effects of environmental regulations on industrial production. At a public hearing, Bryant stated that he decided to forgo opening up another mine that would employ 125 workers at pay ranging from $50,000 to $150,000 simply because of the cost and headache of complying with regulations, particularly environmental laws. With the cost of compliance already at $250,000 for each of the 2 mines he currently operates, Bryant decided it was not worth it. The Environmental Protection Agency is one the fastest growing agencies in Washington and in 2008, environmental regulations cost businesses $1,520.17 per worker. Today’s environmental regulations are so aggravating and costly, that it is questionable whether the U.S. would have had an industrial revolution if past businesses had to comply with present EPA laws. Just like safety, the absence of environmental regulations does not mean that under a free market pollution would go untamed. Pollution from factories often infringes upon the life and property of others. It is the job of the court system to hear cases of those offended and decide if a manufacturer is guilty or not. With legal exposure, manufactures will have the incentive to reduce pollution as much as possible.
Alone, each of these regulations is burdensome enough, but together they have led to the closure of thousands of factories and mines. Even within manufacturing, regulations have affected some more than others. When it comes to the production of durable goods, much of what remains in America involves capital goods such as heavy machinery. In the past, the U.S. also manufactured large amounts of consumer goods. The production of capital goods involves more capital intensive equipment, which spells higher productivity, higher profits, and higher wages. Though the production of consumer goods requires relatively less capital and more labor, and this equates to lower profits and lower wages. As regulations continued to increase, producers of consumer goods quickly became unprofitable and as a result these businesses were the first to be outsourced. The effect of regulations also explains why the wages of remaining factory workers has fallen despite increases in productivity. Regulations are costs to employers and in an attempt to pass them off they increase prices, reduce quality, and reduce or forgo wages increases. In the case of manufacturing workers, wages were simply prevented from rising and fell in real terms as inflation spread. The great myth behind regulations is that without the government, businesses would operate recklessly. The truth is that the free market regulates itself.
The U.S. enjoyed its highest level of freedom from the end of the Civil War when slavery was outlawed until the establishment of the Federal Reserve in 1913. Consequently, America enjoyed its highest level of economic growth with the real out output of reproducible tangible goods pushing past 5% each year. Though as regulations mounted and the amount of savings fell, the output of all tangible goods increased at just 2% in the 1970s and 1980s. Production only fell marginally during the 1990s, but fell at an average rate of 4% from 2000 to 2011.
CHAPTER V: MYTHS BEHIND THE DECLINE IN MANUFACTURING
Labor Saving Devices
AMONG THE MOST of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long continued unemployment, machines get the blame anew. – Henry Hazlitt[xlv]
The government’s false data on manufacturing output has once again revitalized the theory that machinery is responsible for most of the 7.7 million jobs lost in manufacturing. Yet those who preach about the dangers of “labor saving devices” are no more correct today than 250 years ago when English cotton spinners destroyed newly invented spinning machines on the account that they would render them obsolete. Instead the number of people employed in the spinning and weaving of cotton skyrocketed from 7,900 in 1760 to 320,000 in 1787.[xlvi]
Automated machines do not lead to fewer jobs in the production of goods, but more because machinery serves to lower costs and thus expand production of goods and employment within the industry. The classic example is of course Henry Ford and the assembly line. When Ford instituted the moving assembly line in 1913, the labor hours needed to make a Model T were cut in half from 12.5 hours to 6. By 1914, Ford needed only 93 man minutes to make one Model T. With substantially lower labor costs, Ford was able to bring the price of the Model T down from its original $850 in 1908 to $360 in 1916.[xlvii] With a price far lower than the competition, the sales of Model Ts soared; 170,000 were sold in 1912, 500,000 in 1915, and 1 million by 1920. In order to keep up with demand, Ford had to rapidly expand his labor force. After Ford finished construction of the River Rounge Complex in 1927, 75,000 men were initially employed, far above the 13,000 employed in 1914 at the Highland Park assembly plant.[xlviii] Moreover, the capital innovations of Ford spilled over not just to other auto manufacturers, but to the entire manufacturing industry.
Time and time again, improvements in technology have led to large increases in production and employment within industries. This was even true in food production when the invention of tractors put millions of farmers out of work, only to find jobs in factories making food products. Much like today, manufacturers of the past intended to cut workers to reduce labor costs by investing in machinery, but the natural pursuit of profits forced manufacturers to add more workers just to keep up with demand that was stimulated by the cheaper goods that the machines produced. The only difference today is that American capital innovations are mainly serving to offset the rising cost of supplies and regulations, and therefore do not result in lower prices. For instance in 2007, the Department of Labor increased the federal minimum wage to $7.25 and stripped American Samoa of its exemption to the law. With operating facilities of Chicken of the Sea and Starkist housed on the tiny island, American Samoa was a major producer of canned tuna for decades. But the new minimum wage represented a 93% increase over the $3.76 minimum wage for caners that previously existed. In response, Chicken of the Sea closed down its canning factory in 2009, laying off 2,041 factory workers, and announced plans to open up a $20 million factory in Lyon, Georgia that would use automated equipment and employ only 200 workers to produce the same amount of tuna that was no cheaper than before. The layoff represented almost 12% of American Samoa’s workforce alone.[xlix] In absence of regulations like the minimum wage, capital effectively becomes “labor enhancing devices” not “labor saving devices.” Just as Henry Hazlitt wrote in 1946, machines will always remain the scapegoat, but America’s failure to make stuff is due to the burden of having too little freedom.
Cheap Foreign Labor
In 2010, ABC news ran a miniseries entitled “Made In America,” in which they explored the country’s lack of manufacturing. In one episode, people in New York’s Grand Central Station were asked to strip down and expose the country of origin of their clothing. As expected, China was the most common country that popped up, but nobody wore an article of clothing manufactured in the U.S. It was then stated that because the average manufacturing wage rate in China was $5 an hour ($8 based on purchasing power parity) versus $19 in the US, it was impossible to compete with the likes of China when it comes to low cost goods. Over the last decade, the cheap labor theory has influenced the minds of the general public and the vast majority of economists. Yet the cheap labor theory is merely an economic sophism that falters even under its own metrics.
Economists tend to look at America’s $300 billion trade deficit with China as evidence that it is cheap labor that is driving manufacturers overseas. Businesses are said to naturally have an incentive to outsource operations to cheap labor countries and import products to the U.S. which runs up the trade deficit. If you narrowly focus on the U.S. over the past couple of decades, then this appears to be true. But no thorough analysis could possibly come to the same conclusion. If Japan and Germany’s rising manufacturing industry (supposedly fueled by low wages) did not hamper America’s during the 1950s and 1960s, why is China’s cheap labor all of a sudden holding America back? If America’s high wages cannot compete with China, how are advanced countries like South Korea and Australia, capable of running large trade surpluses with China? If low wages are such a dominating factor in manufacturing, why in the world are American businesses fleeing to China? As Schiff pointed out, “There are plenty of areas in the world where labor is much cheaper than in China, but that export nothing.”[l] If China’s low wages initially attracted American manufacturers during the 1990s, than why are they continuing to outsource to China when real wages in the mainland have risen substantially over the last decade. Lastly, if high wages are naturally a deterrent to manufacturing, how is that American companies were able to continuously increase real wages for most of the 20th century, even though America had established itself as the wealthiest country at the turn of the century?
The answers to the above questions rest on the understanding that in a free market, real wages go up because increases in productivity reduce production costs and thus consumer prices. Government regulations only serve to increase production costs and diminish the value of each worker. Businessmen often say that they are relocating to China because labor costs are lower, but in economic reality they are fleeing from American regulations that increase the cost of production. It is not cheap labor, but overpriced labor that is responsible for outsourcing. The cheap labor theory is essentially the labor theory of value wrapped in sheep’s clothing. Conceptualized by Adam Smith and popularized by Carl Marx, the labor theory of value claims that prices of products are objectively determined by the labor used in production. However, prices are always determined subjectively by customers. It matters not what the cost of labor is or how many hours used in production, if consumers do not like the product it is worth zero. If any doubt of this remains, one only has to remember the failure of New Coke. Regardless of this, cheap labor theorists have used the labor theory of value to argue that it is impossible for high paid American workers to compete with relatively low paid Asian workers in producing low-cost goods. This argument not only neglects history, but expresses ignorance for how wages and overall prices are determined.
The last and most ridiculous common explanation of America’s decline in manufacturing argues that the economy has progressed into one based on services. As the ABC miniseries alluded to, the production of simple goods such as socks are supposedly beneath Americans. Somehow being a greater at Walmart is a step up on the socioeconomic ladder. The faultiness of this theory is simple. When Americans were leaving farms for factories, their new jobs came with a higher standard of living. Conversely when Americans traded factory jobs for retail and call center jobs, real wages fell off a cliff.
CHAPTER VI: STATE OF MANUFACTURING ADDRESS
Despite all of the damage caused by inflation, taxes, welfare programs, and regulations, the United States stands as the 2nd largest manufacturer in the world. Though America’s manufacturing industry only manages to survive by the artificial strength of the dollar, or in other words by leeching on foreign savers. Since the end of World War II, the dollar has remained the world reserve currency. What this means is that instead of governments using gold to back their currencies as they did during the Classical Gold Standard, they use dollars. Furthermore, if a gasoline company in Japan wants to buy oil from Saudi Arabia, it would have to transact in dollars. The advantage clearly goes to America, because the dollar earns a premium when foreign governments buy dollars as a store of value and when foreign businesses buy dollars to facilitate trade. It was the Bretton Woods Agreement that established this system, but in order for it to work efficiently, the U.S., which already housed half of the world’s gold supply in 1948, had to keep its promise to redeem an ounce of gold to foreign governments at $35. Unfortunately, the U.S. wasted no time before violating this contract with the world by printing more dollars than it had gold. As the government inflated to help finance everything from social welfare to the Vietnam conflict, the U.S. flooded the world with worthless dollars. For a while, foreigners did not voice too much opposition as Germany and Japan were too busy experiencing an industrial boom. Though as America’s export of dollars became overwhelming, France began to demand gold and other countries followed suit. In 1971, President Nixon, “directed the secretary of the Treasury to take action necessary to defend the dollar against the speculators,” by temporarily suspending the convertibility of the dollar into gold. In essence, President Nixon declared bankruptcy and despite declaring that the suspension of gold redemption would not affect prices of American goods, runaway inflation defined the decade. In order to prevent an all out currency crisis, Paul Volker, the former chairman of the Federal Reserve, slowed down the printing press by pushing the prime rate of interest to an all time high of 21.5% in 1980.[li] Of course the U.S. did not continue the gold standard as promised by President Nixon. Needless to say, America has fallen back to its old habits and at a rate far worse than before.
This brings us to the present day. As the manufacturing industry continued to contract and savings continued to fall, those manufacturers still in businesses became more dependent upon the hard work of foreigners, primarily the Asians. With the power of the dollar, American manufacturers have been allowed to buy an excessive amount of raw materials, supplies, and capital from foreign producers. All of this is being reflected in the growth of foreign supplies used in manufacturing and the trade deficit. In 1987, manufactured goods were comprised of an estimated 12.4% of foreign inputs. By 2002, the composition of foreign inputs soared to 22.1%, and given the massive decline in manufacturing since then this figure is likely north of 30%.[lii] The last time America had a trade surplus was back in 1975. The trade deficits started off small, but ballooned to over $800 billion prior to the financial crisis in 2008 and as of 2011 stood at $726.7 billion.[liii] While Asian made consumer goods highlights the trade deficit, 57.4% of the $2.21 trillion in imports last year were comprised of raw materials, supplies, and capital goods, and this does not include agriculture and auto products used for manufacturing.
America’s annual trade deficits are not only the biggest in history, but are miles above all of the other global trade deficits combined together. This is not the first time the US has fallen deeply into debt with the rest of the world, but today’s situation is far different. In the 19th century, manufacturers were borrowing largely to expand their productive capacity by building new factories and improving infrastructure. Therefore, America had the means to pay back the debt by producing an abundance of goods, and using railroads and canals to transport the goods to its creditors in Europe. Today, manufacturers borrow largely to produce goods that are consumed by Americans. In the past, the U.S. manufactured large amounts of industrial supplies, but with its dependence on foreign supplies, the U.S. has largely become one big assembly shop. In other words there is no way to pay back the massive build up in debt. Much like the 1950s and 1960s, it is the emergence of East Asian countries, led by China that is allowing the U.S. to currently inflate without limits. Yet America of today is not the same as yesteryear. The U.S. has squandered its savings and built up an unprecedented level of corporate, private, and government debt. When China grows tired of the dollar like France once did, there will be no way to save the dollar. And as the dollar collapses, so will the manufacturing industry.
CHAPTER VII: THE DOLLAR COLLAPSE
Never before has international trade been so unbalanced and the dollar is the source of the problem. Throughout each year, the Federal Reserve provides loans and purchases financial assets held by commercial banks by digitally creating hundreds of billions of dollars out of thin air and posting the money to the accounts held by each bank at the Fed. Banks then take these inflated dollars and lend them out to investment banks, businesses, and consumers at artificially low interest rates. As these dollars travel from bank to bank, the money supply expands through the process of fractional reserve banking. For every new dollar a bank receives in new deposits they only have to reserve 10 cents at the Fed, but they are free to make loans out on the remaining 90 cents. Retailers and manufacturers take these newly created dollars and go on a shopping spree abroad. When these inflated dollars flood foreign commercial banks, their central banks, who are currently inflating their own currencies albeit at a lower rate, are presented with a dilemma. They can either allow their currencies to appreciate or inflate more to artificially prop up the dollar. Unfortunately, foreign governments have chosen the latter option. In an effort to maintain some of the value of their dollars on reserve, foreign governments invest in U.S. Treasuries and corporate bonds issued by Government Sponsored Entities such as Fannie Mae and Freddie Mac. By doing so, dollars are circulated back to American banks, expand further through fractional reserves, and are exported back to foreign banks initiating a vicious cycle of inflation. Foreign banks and corporations also hold U.S. Treasuries, but to a far lesser extent. Of the $5.12 trillion in Treasuries held abroad as of 1st quarter in 2012, only $1.39 trillion or 27.1% was owed by private banks and businesses.[liv]
Over the last 2 decades, Asian, Latin American, and Middle Eastern countries have led the way in stacking up on dollars. And with $1.17 trillion in U.S. Treasuries alone, China stands as the biggest consumer of dollars in the world.[lv] In the 1980s many of these countries had worthless currencies after years of hyperinflation and chose to peg their currencies to the dollar to gain some stability and respect in the global economy. While the best solution would have been to adopt gold and silver, the decision to peg their currencies to the dollar was better than nothing at the time. Now these countries have the fastest growing economies in the world and no longer need so many dollars. With so much production, their currencies could arguably stand alone. Yet year after year, they take in more needless dollars and as a result international trade has become more disheveled than during the era of mercantilism. But with such a high disregard for dollars, it is surprising that they continue to prop up the dollar. Foreign governments have chosen this perplexing course of action for 3 reasons. Because foreign governments do not understand the economics of international trade, they mistakenly promote surpluses and discourage deficits. Secondly, foreign governments have gotten caught up in the American hype that if they discontinue subsidies to the U.S. in the form of currency pegs, than nobody will consume their products and all of their people will be unemployed. Lastly, foreign governments believe that if they stop propping up the dollar, than their dollar investments will collapse.
Understanding trade surpluses and deficits appear to be a task intentionally avoided by governments. When England had a relative abundance of savings and physical capital during the 19th century, their interest rates were relatively low compared to other nations. Therefore British investors looked to America in order to earn a high rate of interest. The U.S. lacked savings, but had plenty of freedom and profitable opportunities. When the British invested in American banks, American manufacturers borrowed this money to buy raw materials, supplies, and capital goods produced in England. Consequently, England ran trade surpluses and the U.S. ran trade deficits. In the end, both nations benefited as the U.S. borrowed to enhance its comparative advantages and England grew wealthier as their foreign investments rose in value along with the American economy. Under a free market, trade surpluses and deficits are both beneficial. Though, when governments interfere to cause deficits and surpluses, they no longer carry the same benefits because voluntary trade no longer exists. The Chinese are correct that if they stop pegging their currency to the dollar, its massive trade surplus will diminish substantially. But this will not equate to a worse economy, but a wealthier one as Asians begin enjoying the fruits of their own labor instead of gifting them to America.
When Hillary Clinton became President Obama’s Secretary of State, one of her first assignments was to travel to China and convince the government to continue to buy U.S. Treasuries so that Americans can continue to consume Chinese goods and keep them employed. Unfortunately, Chinese officials still believe this nonsense and they are not alone. Consumer demand is not some magical trait that only Americans carry. Developing nations have the capability to consume, because they have the capacity to produce. If foreign governments stop pegging their currencies to the dollar, their consumption levels will take off. Since foreign governments have to debase their currencies to maintain their pegs to the dollar, removing these pegs mean that their currencies will strengthen. As a result production costs will fall, foreign manufacturers will expand operations, and prices will fall stimulating demand. This does not imply that the transition will be painless. Some manufacturers who are dependent upon the dollar pegs will be forced to restructure to cater more to domestic demands or go out of businesses. Though in the long run, foreigners will be far wealthier because they are currently wasting resources by lending to Americans who cannot possible pay them back. For every company that will suffer in China when the dollar falls in value against the Yuan, there will be numerous of companies in China that will expand and hire more people. The effects of inflation are no different in countries like China than in the U.S. The inflation that depresses the Yuan and props up the dollar serves only to benefit a few Chinese exporters at the expense of the entire country.
American investors have displayed an unbelievable level of arrogance when it comes to the financial relationship with countries like China that suppress their currencies in favor of the dollar. They assume that these countries will never allow their currencies to rise to the true market level because their American assets will fall substantially in value. For example, the exchange rate between the dollar and the Yuan is 1 dollar for every 6.3 Yuans. Suppose if China’s government stops debasing their currency and the Yuan rises to 1 dollar for every 3 Yuans. The appreciation of the Yuan would depreciate their $1.16 trillion in US Treasuries from 7.31 trillion Yuans to 3.48 trillion Yuans. But in the words of Muhammad Ali, American investors have “misjudged” and “miscalculated” foreign governments. Americans investors do not fully understand that in order for foreign governments to prevent their currencies from rising, they have to devalue their own currencies. So as America inflates, the world must inflate. As a result, China has accumulated the largest malinvestment in the history of banking, and it is called the United States of America. While America’s inflation was bearable from 1980 to 2008, the monetary and fiscal policies pursued since the beginning of the recession has tipped the scale and future budget deficits will threaten the life expectancy of the dollar and any foreign currency pegged to it.
Every nation that has succumbed to hyperinflation had one thing in common, too much debt. Even Adam Smith understood the monetary consequences of high debt levels more than 200 years ago.
When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has even been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.[lvi]
For those who believe that the dollar will continue to serve as the world reserve currency, you have to simultaneously believe that no matter how big federal budget deficits grow, countries like China will continue to buy dollars and U.S. Treasuries. For decades, America’s national debt grew steadily even though the country was not involved in any major war. But since the beginning of the new millennium, America’s national debt skyrocketed from $5.78 trillion to $15.58 trillion as of March 2012. The only reason the U.S. is currently not having a debt crisis similar to Greece and Spain is because the Federal Reserve has kept interest rates at historic lows and foreign governments continues to accumulate dollars and buy Treasuries. The government owes foreigners about $350 billion in T-bills that mature within one year alone. With the 2012 budget deficit on pace for $1.56 trillion, the government would have to cut spending by at least $1.85 trillion in one year in order to pay off its debt if foreigners did not roll their Treasuries over. Such a cut would represent 48.7% of the current $3.8 trillion budget. Last summer, President Obama and the Democrats faced off with Republicans over how to increase the debt limit. During a rare moment of honesty, President Obama told the world that the government would not make interest payments if it could not borrow more money, despite the fact that tax revenues are more than adequate to currently cover interest payments. What the President meant was that if it comes down to paying back America’s creditors or spending more money, the government will forsake its creditors. With such an admission, it is astonishing that people cannot see that the U.S. is a bankruptcy waiting to happen.
At $15.58 trillion the national debt appears daunting, but it gets far worse when $118.5 trillion in unfunded liabilities are accounted for.[lvii] What lies at the heart of the out of control budget deficits are entitlement spending on Social Security and Medicare. In 2008, the first of the 77 million post-World War II baby-boomers became eligible for partial benefits under Social Security and Medicare. As they retire over the next 18 years and become eligible for full benefits, the annual deficit will quickly reach the $3 trillion mark. Remember, $4.74 trillion of the current debt is owed to government trust funds. So as baby-boomers retire, Social Security and Medicare trust funds will be cashing in their government bonds and the government will have to look elsewhere to raise cash. In 2010, the Social Security administration paid out more in benefits than it received in taxes 6 years before expected.[lviii] Hitherto, foreign governments and investors were willing to finance at least half of America’s deficits prior to the recession, but the tide changed with the rapidly growing debt and lower interest rates. Since the beginning of the 2012 fiscal year, foreigners have only been willing to buy about 30% of new debt auctioned to the public. With saving rates already at historical lows, American citizens are not there to pick up the tab. But, the world will not have to guess what the American government will do as baby-boomers continue to retire and deficits continue to grow. When in doubt, the government will inflate just as Adam Smith said it would 236 years ago. Ben Bernanke has proven that he will inflate behind the doors to bailout companies. As a result of an audit-the-Fed provision inspired by Congressman Ron Paul and included in the Dodd-Frank Act, Senator Bernie Sanders revealed that the Fed created trillions of dollars to bailout domestic and foreign banks and corporations starting a year before Congress authorized the $700 billion bank bailout in September of 2008. The audit reports that the Fed provided $3.3 trillion in liquidity and over $9 trillion in short term loans at near 0%. Among the biggest recipients were Citigroup with $1.8 trillion in liquidity, Morgan Stanley with $2 trillion in liquidity, and Bear Sterns with $1 trillion in short term loans at .5%.[lix] In 2009, the Fed denied for months that it was monetizing the debt, i.e., inflating to buy recently auctioned U.S. Treasuries. By fall time, the Fed announced that it had engaged in quantitative easing to the tune of $300 billion. Rather it is called monetizing the debt, quantitative easing, or done indirectly. It is impossible to raise taxes high enough to fund entitlements and millions of prime voting old folks care less where the money comes from.
Many investors believe that price inflation will not rise uncontrollably because the Federal Reserve will increase interest rates like it did in 1980. Somehow this argument overlooks simple mathematics. Unlike in the 1980s, double digit interest rates will bankrupt the federal government. In 1980, the national debt stood at $845 billion or 32% of GDP, but the debt now makes up 100% of GDP.[lx] [lxi] When the Fed tightened interest rates starting in 1980, the rate on 5 year Treasuries jumped to 13% by the end of the year and averaged 12% until 1985.[lxii] As of March 2012, the government owes $10.847 trillion to the public and this debt has an average maturity of 5 years and 2 months.[lxiii] Assuming that bond investors continuously roll their Treasuries over, interest payments paid to the public would rise to $1.3 trillion or half of current revenues if rates rise from the present level of less than 1% to 12%! Given that the debt is now 3 times as large relative to the economy then in 1980, a rate of 12% should be regarded as a conservative estimate. Of course it is unrealistic to assume that all bond holders will not ask for their money back at a time when the world is questioning the financial health of the U.S. government. With so much borrowing and so little saving in America, there is no doubt interest rates will rise past 10% if the Fed stops or significantly slows inflation. It is Ben Bernanke’s job to focus on interest rates and assuming he can do basic math, he fully understands that the U.S. cannot survive double digit interest rates like it did in the 1980s. This is why the Fed will attempt to maintain low rates indefinitely, which ironically will guarantee much higher rates in the future as Hazlitt points out.
It remains to be pointed out that while new injections of currency or bank credit can at first, and temporarily, bring about lower interest rates, persistence in this device must eventually raise interest rates. It does so because new injections of money tend to lower the purchasing power of money. Lenders then come to realize that the money they lend today will buy less a year from now, say, when they get it back. Therefore to the normal interest rate they add a premium to compensate them for this expected loss in their money’s purchasing power.[lxiv]
Before this decade ends, foreign governments will be forced to make a decision that will determine the fate of their economies. The U.S. will inflate uncontrollably to finance entitlement programs. Either foreign governments can continue pegging their currencies to the dollar and go down with the ship or they can allow their currencies to appreciate. No matter what choice they make, the value of their Treasuries will go down the drain. When price inflation becomes too visible to ignore, private investors will be the first to jump ship from Treasuries. Foreign governments that are now holding onto their Treasuries in vain will see the nominal and real value of their bonds plummet. The dollar’s role as the medium of exchange for international settlements also does not rest on foreign governments’ decision to abandon the dollar. When the dollar begins to rapidly lose value, every fiat currency will become suspect. Gold was used to facilitate international trade for centuries and businesses will not hesitate to re-adopt the stability of precious metals. While a global currency crisis remains a strong possibility, foreign governments will be pressured internally to allow their currencies to appreciate. Over the last couple of years, China has experienced riots at factories, schools, and shipyards due to price inflation, and this is only the beginning. Soon or later, foreign governments will abandon the dollar and the only way to salvage their currencies will be to back them with gold. Just as economists claimed that the housing collapse was unpredictable, the same will be said of the dollar’s demise and gold’s comeback, but the writing is on the wall. In 2010, central banks became net buyers of gold with 87 tonnes for the first time since the 1980s. And in 2011, central banks stepped up the pace with 440 tonnes. Over the last decade, China, India, and Russia have led the way by increasing their gold reserves by hundreds of tonnes each. And for the first time in over a decade, South Korea and Turkey are making their first gold purchases. Foreign governments may say they still have faith in the dollar, but their actions are saying otherwise.
There was a time when the dollar was literally as good as gold, but now it is merely a credit card that is about to get maxed out. Given that deficits are set to rise to $3 trillion, prices will spiral upwards if the government continues to inflate to finance spending. A repeat of the 1970s is not the best case scenario, because it is already the present scenario. Prices are rising more than 10% based on the original CPI and with gas at $4 it certainly feels like it. Whether the U.S. experiences hyperinflation depends on what it does when the dollar is finally stripped of its title as world reserve currency, and the world begins cashing in their Treasuries. If the U.S. declares bankruptcy and reduces spending to match revenues, then the dollar will retain some of its value. However, if the U.S. inflates to pay off its debt and finance entitlements, than hyperinflation could result and the dollar will become completely worthless. Either way, America should not be worried about $4 gas but more like $40 gas. With prices rising this fast, no American nor foreigner will want to own dollars, let alone save them. When American manufacturers lose the support of foreign savers, interest rates will rise sharply, making most producers unprofitable. Foreign capital goods will largely become unaffordable, and all of the manufacturers who depend on these imports will suffer.
CHAPTER VIII: THE COLLAPSE OF MANUFACTURING
But our trading partners, by accumulating dollars, haven’t stopped inflation; they have only delayed its effects. One day the flows will reverse, with the Chinese and others using their dollars to buy consumer goods as well as properties in the United States. When that happens, prices will rocket upward, as Americans compete with foreigners for a scarcer supply of goods. – Peter Schiff[lxv]
While consumers will undoubtedly be priced out of the market when the dollar collapses and the U.S. loses the ability to inflate and import, manufacturers will equally be affected; about 2/3 of all imports are capital goods. It is impossible to pinpoint the degree of the decline, but the housing collapse gave a sneak preview of things to come. When the Fed was inflating, home prices where skyrocketing and so was the trade deficit. But as the Fed began lifting interest rates off their historic lows of 1% starting in late 2004, the pace of increases in housing prices began to slow and so did the trade deficit. As shown below, the rate of decline in the real output of final goods and nonindustrial supplies slowed during the boom from 5.4% in 2002 to 2.4% in 2005 as the trade deficit increased substantially in real terms. By 2009, the trade deficit fell 55.2% in real terms since 2005 from $1,354.4 billion to $607.4 billion. With real exports down 19.4%, it was the 35.9% decline in imports that was the driving force behind the fall in the trade deficit. Only on 2 prior occasions did the U.S. run up a huge trade deficit and later experienced a collapse. From 1872 to 1876 the trade deficit fell 152.1% in real terms as the U.S. began its 95 consecutive year run of trade surpluses until President Nixon rescued America from the evil speculators. While real imports did experience a significant decline of 19.1%, the balance of trade soared into positive territory primarily because exports rose 35.6% in real terms. Again in 1991, the trade deficit sat 66.2% lower in real terms than in 1987, despite imports rising slightly, because real exports increased 27.7%. In both cases it was exports, not imports that lead the way, which makes what happened during the housing collapse unprecedented in American history, but it will not be the last time.
|TRADE DEFICIT AND MANUFACTURING OUTPUT, 2011 $|
Change in Real Trade Deficit
|Change in Real Output of Final Products and Nonindustrial Supplies|
|Based on Original CPI Method|
|Sources: Federal Reserve Board of Governors, U.S. Census Bureau, and Shadow Government Statistics. Produced by Devin Roundtree|
As soon as the trade deficit started falling in real terms in 2006, the decline in manufacturing began picking up pace. From 2006 to 2009, the annual output of final goods and nonindustrial supplies fell $1,834.6 billion in real terms or 31.4%! During the same time, the output of materials, of which includes many manufactured goods, fell $1,390.1 billion or 33.7%. This means that over half of the decline in manufacturing since the peak in 1988 came during this 4 year period in which the trade deficit collapsed. Of the $747 billion drop in the real trade deficit between 2006 and 2009, an estimated $576.6 billion was worth of imported capital goods. This had a tremendous impact in reducing the production of all tangible goods by $3,224.7 billion. For every $1 drop in the real trade deficit comprised of imported capital goods, the production of tangible goods suffered by a factor of $5.59! When the trade deficit finally increased again in real terms in 2010, the decline in manufacturing slowed from 15% to 2.2%. The severe impact of the fall in imports is due to two reasons. The industrial supplies that are imported are used to produce goods of greater value and these goods are often sold to other American manufacturers for further production. Though most importantly, the lack of imports affects manufacturing to such a degree because manufacturers have become so dependent upon foreign capital.
Upon the dollar’s dismissal, the trade deficit will not fall by just 55.2%, but 100% as the balance of trade turns positive for the first time since 1975. Of the $726.7 billion deficit that the U.S. ran up last year, about $480 billion comprised of capital related goods. If the dollar collapsed tomorrow, there is a realistic chance that the production of all tangible goods would fall by almost $2.7 trillion or over 40% of the 2011 output! Yet the collapse will not stop there. In 2008 and 2009, saving rates were rising as people responded to their home equity that evaporated overnight. Meanwhile, foreign investors were buying up Dollars as a safe haven from the global downturn. In the future, domestic savings and foreign investment will disappear faster than home equity. With little savings and a worthless currency, a 50% drop in manufacturing would be a blessing. Some economists argue that if the Dollar falls in value, than manufacturing will expand as exports rise in response to foreign demand. What is missing in this argument is the understanding of how dependent manufacturers are on America’s capability to inflate and buy up capital goods around the world. Exports will rise relative to imports, but manufacturers will not be enjoying themselves.
All of the inflation that the Fed has been creating over the last couple of years will run its course. This time around, interest rates will rise not because of the Fed, but due to global bond investors jumping ship for commodities and equities. And just like the housing bubble, the malinvestments in the economy, especially in U.S. Treasuries, will be exposed as prices and interest rates rise more than expected. Once again, the trade deficit and the manufacturing industry are busy sending signals even though interest rates are slow to respond. After rising 16.7% in real terms in 2010, the increase in the trade deficit slowed down to 3.5% in 2011 and is on track to go negative in 2012. Consequently, the decline in manufacturing output increased slightly to 3.5% in 2011 and as of the first quarter in 2012, output is set to drop 12.5% on an annualized basis. Soon it will become very visible that the economy never recovered. Next time the economy rapidly deteriorates, everyone will be expecting Bernanke to walk in the door with a printing press and inflation will not abate, but accelerate. The clock is ticking and within 5 years the dollar’s time could finally be up.
No matter the degree of the decline, the dollar collapse will not be an equal opportunity employer; some industries will be affected far more than others. The answer to which industries will suffer the most depends on three factors, sensitivity to interest rates, level of competitiveness, and dependency on foreign inputs. When the dollar begins to tank, interest rates will spiral upwards as foreigners cut back on their corporate bond investments. Throughout the year, manufacturers have to borrow on short term basis to cover production costs. In addition, factories have to replace worn out tools and machinery by borrowing large sums of money. Therefore when interest rates spike, manufacturers who are most sensitive will be forced to cut production the most. With regards to comparative advantage, it must be kept in mind that American companies compete with manufacturers around the world for raw materials and industrial supplies. Manufacturers, whose production costs are substantially lower than foreign competitors, will not do as poorly as their less efficient counterparts. Given that countries export more of what they do efficiently and less of what they do inefficiently, the balance of trade highlights the industries that will have to cut production and those that will have to close shop. Perhaps the best indicator of an industry’s outlook is its current dependency on foreign inputs. Through the dollar collapse, global trade will finally be rebalanced as Americans are priced out of international markets. Therefore manufactures who use foreign capital in the production of their goods will be forced to either cut back production or go out of business. Since the majority of foreign trade comprises of capital goods, accounting for America’s balance of payments will also give a good indication of who will get the short end of the stick. Though all three factors are important overall, each factor will impact each industry differently, complicating predictions. Nonetheless, the outlook for certain industries is clearly evident.
The only thing wrong with America’s dependency on foreign oil is that it does not pay for it. Of the 18.8 million barrels of oil that the US consumed every day in 2011, 47% was imported on net and the US ran massive deficits with major oil exporters.[lxvi] [lxvii] America depends on Mexico for 11% of its oil imports, and had a $65.6 billion trade deficit with its southern neighbor last year. The U.S. obtains 24% of its oil imports from Canada and last year’s trade deficit reached $35.6 billion. Not surprisingly, OPEC nations are the biggest oil suppliers to the US at 40%. In 2011, the U.S. ran a deficit of $127 billion with the oil exporters.[lxviii] [lxix] So what will happen when the dollar collapses and Americans can no longer consume 20% of the world’s production of oil?
Initially you would think that oil refining will contract substantially, especially because it is capital intensive and thus sensitive to interest rates. Though, America’s efficiency and sheer capacity to refine oil temporarily gives it an absolute advantage over other countries. The US has 149 oil refineries with the capacity to produce 17.6 million barrels per day or 21% of the world’s capacity.[lxx] China comes in at no. 2 with a capacity of 6.2 million barrels per day.[lxxi] When the dollar collapses, some of the oil previously refined in the U.S. will be sold mostly to China and her neighbors where oil producers will get a better price. The U.S. will continue to refine oil at lower levels of production, but exports of refined oil will soar. Not surprisingly, this phenomenon has already begun as the wealth of foreigners, particularly in Asia, continues to rise and the wealth of Americans continues to regress. In 2011, petroleum products became the no. 1 export in the US; a decade ago, oil goods did not even break the top 25.[lxxii] Eventually the US production of oil will fall substantially when the construction of foreign refineries accelerates. It costs too much and takes too long to ship oil from Saudi Arabia across the world to Louisiana to be refined and then reshipped back across the world to China for final use. While American oil refiners will survive the initial blow to the dollar, domestic industries that use oil in the manufacturing of other goods will not fair so well. For every barrel of oil that is refined, 22.5% is used to manufacture products other than fuel.[lxxiii] Everything from petroleum jelly to clothing is made from crude oil, and unfortunately the U.S. has many absolute and comparative disadvantages when it comes to the production of many of these consumer products.
In essence, it was not President Obama that allowed General Motors and Chrysler to be bailed out in 2009, it was the Dollar’s role as the world reserve currency. Manufacturing cars is one of the most capital intensive and thus interest rate sensitive jobs in the world. Each year expensive equipment and tools ware out and replacement costs are constantly on the rise. The cost of production itself is so high, auto companies often borrow via short term bonds. A study conducted by the Political Economy Research Institute ranked motor vehicles 3rd among 19 manufacturing industries as the most dependent upon foreign inputs with 28.7% of the parts used in production coming from abroad.[lxxiv] Since the study was conducted 10 years and over 40,000 factories ago, foreign supplies could easily make up more than 40% of today’s American made cars. In 2011, $254 billion worth of cars and car parts were shipped to the U.S. With extortionist union laws and ridiculous environmental regulations, the Big 3 no longer enjoys low production costs. As of 2011, China ranks no. 1 with an annual production of 18.4 million automobiles. Similar to America’s share of oil refining capacity, China’s production of vehicles makes up 23% of global production. U.S. and Japan are almost neck and neck at 8.7 million and 8.4 million a piece.[lxxv] The auto industry makes up 64% of all durable goods produced in the U.S. and the impact of the Dollar Collapse will be devastatingly visible.
It might come of a surprise that manufactured food products will decline noticeably when the Dollar collapses. The production of food products is relatively insensitive to interest rates. In 2011, the U.S. had a net surplus of $4.1 billion in foods, feeds, and beverages.[lxxvi] And the study by PERI ranked food as the least dependent on foreign inputs. So why all the gloom and doom? While the food industry is not directly dependent upon foreign supplies, it is indirectly. Advocate’s of farmers’ markets are familiar with the statistic that on average food travels 1,500 miles before it gets to the grocery store. So if America’s consumption of oil falls, so will the manufacturing of food products. Grocery stores have to account for the cost of shipping in their final prices. And shipping costs will soar when trucking companies cannot afford as much diesel because Exxon is exporting it to China at a higher price. It matters not if Cheez-Its can be produced profitably, because the increase in shipping costs will make them unaffordable.
While the manufacturing industry will suffer greatly, the raw commodities industry will not do as poorly and in some cases thrive upon the Dollar’s collapse. Foreign governments and private institutions hold trillions of US Dollars and Treasuries and when people lose faith in the Dollar, everybody will be selling at once. Effectively, there are only 2 ways to escape the Dollar quickly, buy foreign currencies and financial assets or buy internationally traded commodities. Ludwig von Mises spoke of the “crack up boom” when referring to people’s decision to buy commodities in response to runaway inflation. When the Dollar collapses, foreigners will flood the U.S. with Dollars buying up commodities such as oil, copper, and wheat. The 3 factors that will impact manufacturers will also apply to the raw commodities industry. Though, the determining factor for each producer depends on if the selling price of the commodity in question rises proportionately more than the cost of producing and shipping it. The wheat and oil industries present a great example of how commodity producers in the U.S. will manage in the near future. Given its abundance, the value of wheat is so low that it is priced by the metric ton on commodity exchanges. Conversely, the versatility and scarcity of oil makes it a high valued commodity; after all they don’t call it black gold for nothing. The differences in value explains why during the high inflation of the 1970s, the price of oil surged 1,080% from $3.35 to a high of $39.50, but wheat only rose 350% from $138 to $619.[lxxvii] [lxxviii] While capital investments have allowed American producers of wheat to enjoy a high level of profits, the heavy use of fuel in running tractors and other farm equipment will pose a threat. Whereas the extraction of oil uses little fuel in comparison. In the case of Exxon Mobil its operating costs of just $11 results in a much larger profit rate even when interest, depreciation, and taxes are accounted for.[lxxix] Because of its low value to volume ratio, the cost of shipping wheat is high. This means that oil’s high value to volume ratio results in relatively low shipping costs. When foreign governments stop pegging their currencies to the Dollar, commodity prices will rise substantially in terms of Dollars, but fall in foreign currencies, especially if backed by gold. This will allow oil to be imported cheaply from the US to be used to expand the production of agriculture commodities abroad. American producers of commodities similar to oil will survive and perhaps prosper when the Dollar collapses, but producers of commodities similar to wheat will lag behind.
CHAPTER IX: THE REBIRTH OF MANUFACTURING?
Just like curing addiction, the first step to rejuvenating America’s once iconic industry will be to acknowledge that it is actually failing. After hitting its all time high in 1978, manufacturing profits never recovered and by 2011 sat 77.3% lower in real terms. Manufacturing wages also peaked in 1978 and in similar fashion fell 73.8% off its highs. A year later, manufacturing employment hit its high with more than 19 million workers before declining 39.3%. Ten years later, manufacturing output enjoyed its last days of its 200 year run in which output climbed higher. By the end of 2011, output contracted by 54.4%. Much like an addict, America has to stop blaming everybody else for its mistakes. Poor Asians have nothing to do with it, machines are the oldest and the poorest excuse in the book, and there is nothing natural or progressive about the decline in manufacturing. The fault is on America and America alone. Far from flawless, the Constitution nonetheless restrained the government enough so that the economy and the middle class could blossom. Though, as the Constitution became more misunderstood, misconstrued, and manipulated, economic freedoms were lost upon the passage of every regulation. As taxes, social programs, and fiat currency took hold, savings became a scarce commodity. The combination of burdensome regulations and low savings slowed the rate of growth in manufacturing output for decades. When Fed chairman Alan Greenspan, President Bush, and Congress upped the ante starting in 2001, the burdens became too great and manufacturing output went into a free fall. President Obama ran on change, but his fiscal and regulatory policies are worse than his predecessor, and no Fed chairman has inflated more than Ben Bernanke.
The last two decades have been about survival, and without the help of foreign governments subsidizing the Dollar, many of America’s remaining manufacturers would not be around today. Yet America’s financial relationship with the rest of the world is no more sustainable than the housing bubble was. The U.S. is indeed an addict and its drug of choice is inflation. Every industry in America is so dependent on inflation that the entire economy would collapse if the country went cold turkey by allowing interest rates to rise to free market levels. Yet the continuance of artificial low rates has only served to postpone the inevitable by making it worse. With a $118.5 trillion and counting in unfunded liabilities, the U.S. will not have to worry about inflation withdrawal, but inflation overdose. The Dollar has enjoyed an “exorbitant privilege” as the world reserve currency for far too long. Though, America’s exploding debt will be the nail in the coffin. Eventually foreign governments will not be able to keep pace with the Federal Reserve’s printing press. When the Dollar begins to fall substantially in the foreign exchange market, the manufacturing industry will follow suit. As a result, American manufacturers will be priced out of the market for foreign capital goods. And with interest rates well in double digits, few manufacturers will be left standing. Only those who possess a strong comparative advantage will continue relatively unscathed.
While it is easy to predict that the American manufacturing industry will collapse, it is unclear if it will make a comeback any time soon. Much will depend on how politicians and the people respond to the Dollar collapse. When that fatal day finally arrives, the government will be forced to declare bankruptcy and drastically cut spending or inflate to pay off the debt and finance entitlement programs. Experience suggests that in times of crisis, the government will make all of the wrong decisions. If the government predictably chooses the latter option, than hyperinflation will likely result. Instead of the Dollar losing most of its value, it will lose all of its value. Prices on consumer and capital goods will skyrocket and the little savings that Americans have will buy next to nothing. Unfortunately, hyperinflation will not be the worst of our worries.
For decades the United States has been on the “road to serfdom” that Austrian economist F.A. Hayek warned of back in 1944 when western economies began to adopt socialist policies during the Great Depression. A century ago, America was a nation of small government, sound money, and individual liberty. As a result, everybody wanted to immigrate to the U.S., but America today is a far cry from the nation crafted by the Founding Fathers. The U.S. is no longer land of the free and home of the brave, but land of the taxed, the regulated, the inflated, and home of the entitled. A declining manufacturing base is a bad sign, but it is a dangerous sign when the rich are denouncing their citizenship and moving abroad at the highest rate in American history. This is a common feature of oppressive communist nations, not free capitalist nations. If the manufacturing industry has any chance of returning to its former glory, the American public and government must understand that it was individual freedom that made it all possible, and social engineering that caused its demise.
 Data from Federal Reserve reported in 2005 Dollars.
 The reproducible wealth per person is adjusted to the value of 1829 Dollars.
 2011 value based on original CPI method.
 Employer payroll contributions are essentially paid through reduced wages.
 Real interest rates based on original CPI method
 Today’s equivalent daily pay based on 2011 Dollars using original CPI method. Contemporary daily pay based on $58 an hour for 8 hours.
 All manufacturing data set to 2011 Dollars based on original CPI method.
 All trade data set to 2011 Dollars based on original CPI method.
 A decline in real exports would ceteris paribus lead to an increase in the trade deficit.
 Theoretically, the U.S. does not have to run a balance trade with each country to have an overall balanced trade. For instance, suppose the U.S. buys clothes from India with Dollars, India uses these Dollars to buy TVs from Japan, and Japan uses these Dollars to buy wheat from the U.S. In this scenario, each country runs a trade surplus and a trade deficit with a different country, which creates a net balance. But this only works if the medium of exchange is globally accepted.
[i] ABC World News with Diane Sawyer, “Made in America: What’s in Your Home?,” Youtube, Uploaded February 28, 2011, http://www.youtube.com/watch?v=38MfZ17nT50&list=PL949EBCBFB63A3488&index=104&feature=plpp_video (accessed April 28, 2012).
[ii] St. Louis Federal Reserve, “All Employees: Manufacturing (MANEMP),” http://research.stlouisfed.org/fred2/series/MANEMP/10 (accessed April 18, 2012).
[iii] Board of Governors of the Federal Reserve System, “Industrial Production and Capacity Utilization G. 17,” http://www.federalreserve.gov/releases/g17/gvp.htm (accessed April 19, 2012).
[iv] Board of Governors of the Federal Reserve System, “GVIP. T53000.S–Materials–gross value–gross value, seasonally adjusted.”
[v] Mark Skousen, The Structure of Production (New York and London: New York University Press, 1990), 189.
[vi] William Strauss, “Is U.S. Manufacturing Disappearing?,” Federal Reserve Bank of Chicago, August 19, 2010, http://midwest.chicagofedblogs.org/archives/2010/08/bill_strauss_mf.html (accessed April 19, 2012).
[vii] John Williams, “The Consumer Price Index,” Shadow Government Statistics, October 1, 2004, http://www.shadowstats.com/article/consumer_price_index (accessed April 19, 2012).
[viii] Schiff, Crash Proof, 40.
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[xii] Founding Fathers, The Constitution of the United States and The Declaration of Independence (Washington, DC: U.S. Government Printing Office, 1997), Article I. Section 8.
[xiii] Founding Fathers, Constitution, Article I. Section 8.
[xv] Schiff, Crash Proof, 160-61.
[xvi] National Bureau of Economic Research, Trends in the American Economy in the Nineteenth Century (UMI Publishers, 1960), 600,605.
[xvii] Douglas North, “Trends in the American Economy in the Nineteenth Century: United States Balance of Payments 1790-1860,” National Bureau of Economic Research, http://www.newworldeconomics.com/archives/2011/091811_files/US%20Balance%20of%20Payments%201790-1860.pdf (accessed April 25, 2012).
[xviii] Robert E. Lipsey, U.S. Foreign Trade and the Balance of Payments 1800-1913 (Cambridge, MA: National Bureau of Economic Research, 1994), 24.
[xix] Raymond W. Goldsmith, The Growth of Reproducible Wealth of the United States of America from 1805-1950, p 269.
[xx] Goldsmith, Growth, p 272.
[xxi] Lipsey, Foreign Trade 1800-1913, p 24.
[xxii] Sidney Homer and Richard Sylla, A History of Interest Rates 4th Edition (Wiley Publishers, 2005), 283-84.
[xxiii] Anita Louise McCormick, The Industrial Revolution (Enslow Publishers, 1998), 46.
[xxiv] McCormick, Industrial, 54-62.
[xxv] McCormick, Industrial, 49-52.
[xxvi] Henry Hazlitt, Economics In One Lesson (New York, New York: Crown Publishers, 1979), 36.
[xxvii] Jonathan Elliot, The Debates in the Several State Conventions on the Adoption of the Federal Constitution 2nd Edition (1836), 542.
[xxviii] Founding Fathers, Constitution, Article I Section 8.
[xxix] Tax Foundation, “U.S. Federal Individual Income Tax Rates History, 1913-2011 (Nominal and Inflation-Adjusted Brackets),” September 9, 2011, http://www.taxfoundation.org/publications/show/151.htmlU.S (accessed April 23, 2012).
[xxx] U.S. Government Printing Office, “Budget of the U.S. Government ,” http://www.gpo.gov/fdsys/search/pagedetails.action?packageId=BUDGET-2012-BUD (accessed April 23, 2012).
[xxxi] U.S. Government Spending, “Government Spending Details,” http://www.usgovernmentspending.com/year_spending_2012USbn_13bs1n_4000#usgs302 (accessed May 2, 2012).
[xxxiii] Schiff, Crash Proof, 167.
[xxxiv] CNN Politics, “President Clinton announces another record budget surplus,” September 27, 2000, http://articles.cnn.com/2000-09-27/politics/clinton.surplus_1_budget-surplus-national-debt-fiscal-discipline?_s=PM:ALLPOLITICS (accessed April 24, 2012).
[xxxv] Treasury Direct, “Monthly Statements of the Public Debt (MSPD) and Downloadable files,” http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm (accessed April 24, 2012).
[xxxvi] Treasury Direct, Monthly Statement.
[xxxvii] Federal Reserve Bank of St. Louis, “Total Revolving Credit Outstanding (REVOLSL),” http://research.stlouisfed.org/fred2/series/REVOLSL (accessed April 24, 2012).
[xxxviii] Federal Reserve Bank of St. Louis, “Personal Saving Rate (PSAVERT),” http://research.stlouisfed.org/fred2/series/PSAVERT (accessed April 24, 2012).
[xxxix] Hazlitt, One Lesson, 186.
[xl] Brian Domitrovic, Econoclasts (Wilmington, Delaware: ISI Books, 2009), p 133.
[xli] Board, “Selected Interest Rates (Daily) H. 15,” http://www.federalreserve.gov/releases/h15/data.htm (Accessed May 2, 2012).
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[xliv] Jim Powell, “Why Did FDR’s New Deal Harm Blacks?,” Cato Institute, December 3, 2003, http://www.cato.org/publications/commentary/why-did-fdrs-new-deal-harm-blacks (accessed April 24, 2012).
[xlv] Hazlitt, One Lesson, 49.
[xlvi] Hazlitt, One Lesson, 50.
[xlvii] History Channel, “This Day in History: October 7, 1913 Moving Assembly Line at Ford,” http://www.history.com/this-day-in-history/moving-assembly-line-at-ford (accessed April 24, 2012).
[xlviii] Daniel Gross, Forbes Greatest Business Stories of All Time (Published by John Wiley & Sons, Inc, 1997).
[xlix] Diana Furchtgott-Roth, “Thousands lose jobs due to higher federal minimum wage,” Reuters, May 14, 2009, http://blogs.reuters.com/great-debate/2009/05/14/thousands-lose-jobs-due-to-higher-federal-minimum-wage/ (accessed April 24, 2012).
[l] Schiff, Crash Proof, 179.
[li] Fedprimerate.com, “Prime Interest Rate History,” http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm (accessed April 24, 2012).
[lii] James Burke, Gerald Epstein, and Minsik Choi, “Rising Foreign Outsourcing and Employment losses in U.S. Manufacturing, 1987-2002,” University of Massachusetts Amherst: Political Economy Research Institute, 2004, http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_51-100/WP89.pdf (accessed April 24, 2012).
[liii] U.S. Census Bureau, “Trade in Goods with World, Not Seasonally Adjusted,” http://www.census.gov/foreign-trade/balance/c0015.html (accessed April 24, 2012).
[liv] Treasury Direct, “Major Foreign Holders of U.S. Treasuries,” http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt (accessed April 24, 2012).
[lv] Treasury Direct, “Major Holders.”
[lvi] Hazlitt, One Lesson, 175.
[lviii] Mary Williams Walsh, “Social Security to See Payout Exceed Pay-In This Year,” The New York Times: Economy, March 24, 2010, http://www.nytimes.com/2010/03/25/business/economy/25social.html (accessed April 24, 2012).
[lix] John Nichols, “Fed’s ‘Backdoor Bailout’ provided $3.3 Trillion in Loans to Banks, Corporations,” The Nation, December 2, 2010, http://www.thenation.com/blog/156794/feds-backdoor-bailout-provided-33-trillion-loans-banks-corporations (accessed April 24, 2012).
[lx] Data 360, “GDP United States,” http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230 (accessed April 24, 2012).
[lxi] Treasury Direct, Monthly Statement.
[lxii] The Board of Governors of the Federal Reserve System, “Selected Interest Rates (Daily) – H.15,” http://www.federalreserve.gov/releases/h15/data.htm (April 24, 2012).
[lxiii] Karen Brettell, “Analysis: As debt maturity looms, U.S. needs to extend,” Reuters, September 1, 2011, http://www.reuters.com/article/2011/09/01/us-bonds-debt-extension-idUSTRE7803QD20110901 (accessed April 24, 2012).
[lxiv] Hazlitt, One Lesson, 187.
[lxv] Schiff, Crash Proof, 82.
[lxvi] Ronald D. White, “U.S. dependence on foreign oil wanes as domestic production booms,” The Los Angeles Times, October 29, 2011, http://articles.latimes.com/2011/oct/29/business/la-fi-oil-boom-20111029 (accessed April 24, 2012).
[lxvii] Charles Hugh Smith, “We’re No. 1 (and No. 3)! Surprising Facts About the U.S. and Oil,” Daily Finance by AOL, February 28, 2011, http://www.dailyfinance.com/2011/02/28/surprising-facts-about-us-and-oil/ (accessed April 24, 2012)
[lxviii] U.S. Energy Information Administration, “Petroleum and Other Liquids: U.S. Imports by Country of Origin,” http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm (accessed April 24, 2012).
[lxix] U.S. Census Bureau, “U.S. International Trade in Goods and Services December 2011,” February 10, 2012, 9-10, http://www.census.gov/foreign-trade/Press-Release/2011pr/12/ft900.pdf (accessed April 24, 2012).
[lxx] Betsy Stark, “Inside the Nation’s Largest Oil Refinery,” ABC News, August 12, 2008, http://abcnews.go.com/WN/story?id=5564785&page=1#.T5c7GtnK0f5 (accessed April 24, 2012).
[lxxii] New York Associated Press, “In a first, Gas and other fuels are top U.S. export,” USA Today, December 31, 2011, http://www.usatoday.com/money/industries/energy/story/2011-12-31/united-states-export/52298812/1 (accessed April 24, 2012).
[lxxiii] The Need Project, “Petroleum,” 2011, http://www.need.org/needpdf/infobook_activities/SecInfo/PetroS.pdf (accessed April 24, 2012).
[lxxiv] James Burke, Gerald Epstein, and Minsik Choi, “Rising Outsourcing,” 7.
[lxxvi] U.S. Census Bureau, “International Trade,” 12.
[lxxvii] Federal Reserve Bank of St. Louis, “Spot Oil Price: West Texas Intermediate (OILPRICE),” http://research.stlouisfed.org/fred2/series/OILPRICE (accessed April 24, 2012).
[lxxviii] Trading Charts, “Wheat (Kansas) Historical Prices/Charts,” http://futures.tradingcharts.com/historical/KW/1974/3/linewchart.html (accessed April 24, 2012).
[lxxix] Robert Lenzner, “Exxon Mobile CEO Says Oil Price Should be $60 to %70 a Barrel,” Forbes , May 14, 2011, http://www.forbes.com/sites/robertlenzner/2011/05/14/exxon-mobil-ceo-says-oil-price-should-be-60-70-a-barrel/ (accessed April 24, 2012).