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Economic expansion in the United States: beyond free market manufacturing.

Economic Expansion in the United States: Beyond Free Market Manufacturing

As America's economic expansion continues to defy skeptics, most economic indicators support a positive outlook that encompasses the GNP, interest rates, inflation and the unemployment rate. Other factors, however, illustrate the bleak condition of our manufacturing sector and the urgent need for action from Washington.

Since the United States enjoyed its last merchandise trade surplus in 1981, we have gradually become content with dismal trade figures. Between 1981 and 1987, our manufacturing imports increased over 100 percent, whereas exports increased a mere 16 percent. The balance of trade for high-tech goods continues to break even (i.e., exports equal imports ), yet we imported more than $25 billion worth of electronics from Japan in 1987 and exported only $5 billion. For non-high-tech goods, our balance of trade deteriorated from a $10 billion deficit in 1980 to $138 billion in 1987. Furthermore, America's merchandise exports represent a paltry six percent of gross domestic product-a percentage equal to that of Yemen. At the other end of the spectrum, merchandise exports in Canada stand at 28 percent of GDP, 15 percent in Japan and 30 percent in Germany, while Hong Kong, Singapore and the Netherlands Antilles actually export more than their GDP. Clearly, as several scholars and executives have argued, the U.S. economy is driven by an overly domestic orientation and massive consumption.

Although capital spending by manufacturers is expected to increase 6.1 percent over last year, America's ratio of capital investment to output is only 11 percent, compared to 22 percent for Japan, 15 percent for France and 13 percent for Germany and Britain. From 1977 to 1987, for example, General Motors spent $75 billion on capital improvements, yet its domestic market share fell 10 points. The comparison in R&D outlays is equally grim. Between 1985 and 1987, Japan increased non-defense R&D expenditures from 2.5 percent to 2.8 percent of GNP and Germany raised spending from 2.4 percent to 2.6 percent. American companies, on the other hand, decreased non-defense R&D outlays from 1.9 percent to 1.8 percent of GNP.

As the output of our workers steadily improves, the relative condition of industrial productivity continues to worsen, for the United States still enjoys an advantage in GDP per employee over all other countries, but our average annual increase since 1973 has been only .4 percent, compared to 2-3 percent for Japan, France, Britain, Canada and Germany. Moreover, our output per employee-hour has increased an average of 3.5 percent annually since 1979, while Britain's has increased 4.3 percent and Japan's 5.6 percent. In the auto industry, for instance, Toyota improved the number of vehicles produced per worker per year from 38 to 60 between 1970 and 1985. Yet America's most productive auto company, Ford, raised this factor from a mere 12 to 15 vehicles. Japanese auto makers require an average of 19 labor hours to produce each vehicle; the Big Three take nearly 30 hours.

Finally, compensation costs also shed an interesting light upon the state of our industrial base. The average hourly pay of factory workers in the United States increased from $9.84 in 1980 to $13.44 in 1987, or about 37 percent. In Japan, hourly wages jumped from $5.61 to $11.14-an increase of nearly 100 percent. And this surge came at a time when Japanese manufacturers made tremendous strides in terms of exports, profits and global market share. Perhaps even more surprising is the fact that hourly compensation costs of the major industrialized countries have actually been declining relative to those of the United States: Based upon an hourly pay index of 100 for the United States, Japan stands at 55, Germany at 85 and Canada at 96. So despite our efforts to downsize and streamline, American manufacturers are still lacking in automation and computerization and are too reliant upon unskilled labor.

Given this predicament, what is to be done about America's manufacturing sector? Those who argue that individual companies within the free market will redeem us from this situation obviously underestimate the competition. Indeed, the time has come for Congress and the administration to implement incentives designed to increase industrial investment, exports, and productivity.

Companies will undeniably have to make significant commitments to remain competitive, regardless of federal policies-one certainly hopes that manufacturers continue to invest in plant and equipment, R&D and productivity training programs simply because it is in their best interest. But in reality, individual companies can do only so much. The government must create an environment in which our manufacturing companies realize greater opportunities to compete internationally, especially given that the United States' share of the world manufacturing trade has declined from 14.9 percent in 1970 to 10.5 percent in 1987. What the United States needs is an industrial recovery program.

To begin with, incentives must be adopted to induce greater individual savings and equity investment. Higher savings rates add funds to financial institutions' reserves and result in lower interest rates, which businesses can then borrow for expansion and capital improvements. One of the most positive results of the Tax Reform Act of 1986 was the phase-out of debt interest deductions for individuals which discouraged borrowing. Equally detrimental, however, was the curtailment of IRA deductibility, which discouraged savings. The ultimate incentives would free all individual savings from taxes, eliminate corporate debt interest deductions (which would favor equity financing over debt financing).

In addition to the recently resurrected capital gains legislation, industrial investment tax credits should also be renewed. Congress has simply placed too much emphasis on reducing the deficit and not enough on sensible economic policies. As a comparison, Japan's deficit stands at 71 percent of GNP, while America's is at about 55 percent. But the Japanese save at a rate of nearly four times that of Americans, thus creating more capital at lower interest rates for Japan's businesses to tap for expansion.

Second, an industrial policy committee must be established to target and support selected industries. This body would be composed of business, government, and academic leaders, as well as the chairman of the Federal Reserve Board in order to ensure that monetary and industrial policy coincide. Ideally, Congress would have no authority over this committee except to receive semiannual reports and to investigate suspected mismanagement. Manufacturing and R&D consortiums, such as Sematech and the Semiconductor Research Corporation, must also be supported for the primary purpose of generating exports. The objective of an industrial policy is to rapidly disseminate new products-both durable and nondurable-and technologies for worldwide, commercial applications. The current disorganized policy of developing new technologies for defense purposes and then patiently waiting for commercial products is no longer competitive in global markets. Other arguments for an industrial policy include proposals by James Galbraith of the University of Texas at Austin and Bruce Scott of the Harvard business school.

Third, Securities and Exchange Commission laws must be revised to eliminate short-term earnings reports of publicly owned companies. By shifting first to only semiannual reports, annual reporting could be phased-in over a two- to three-year-period. Managers in the United States have long been criticized for being too short-term oriented, but our existing financial markets dictate this perspective. By extending the period between earnings reports, managers would have a greater opportunity to focus on long-term, strategic goals. The successes of companies that abide by long-term orientations show that they are in the best interest of not only the company and employees, but investors as well.

Finally, incentives must be created that promote the growth of apprenticeships. Instead of training young adults at vocational schools and then hoping they find related jobs, a better alternative would be to offer manufacturing companies a tax credit for hiring teenagers directly out of high school and then training them to fill technical and other skilled positions. Not only would this quell our inability to meet the increasing demand for technical jobs, it would also reduce the teenage unemployment rate and provide excellent career opportunities for high school graduates who are unable to attend college.

As our global economy becomes more competitive, America's desire for a free marketplace seems less likely. Although manufacturers have been investing record amounts in capital improvements, comparisons show a dismal outlook. The U.S. government must take immediate and aggressive steps to reverse the trend toward industrial demise regardless of appeals for a free market system-which is fast becoming a delusion.
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Author:Woolley, Kurt A.
Publication:Industrial Management
Date:May 1, 1990
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