American Economy In A Vise Grip
Our leaders and economic commentators keep telling us we must reestablish the flow and availability of credit—get banks lending again—to dig our way out of the current recession. We're told once everybody can borrow again, the good times will roll. People will borrow and buy. Staunch free-market advocates, such as Alan Greenspan, temporarily talked about the potential need to nationalize our banks. Ayn Rand capitalism has crashed and burned. Citibank, for its part, came to the trough for a second government bailout while it's reported they're raising everybody's interest rates. Thanks, Citibank!
Personal Finance 101 is never carry credit card debt. Pay off balances monthly and don't pay interest. The more paid in interest, the less you'll have to purchase other stuff. The more you borrow, the more you'll pay in interest. That's nothing new. Yet, Americans have borrowed to spend. So has the government.
When thinking about our country's current economic plight, two points seem paramount. One, about two-thirds of our economy depends upon consumer spending. If consumers don't spend, our economy stalls. Two, according to economists, for the last twenty years or so, Americans' real, average wages have been falling. To cut costs, many companies have moved to China, and America has lost much of its manufacturing base. Good-paying manufacturing jobs have vanished and have been replaced with lower-paying, futureless, service sector jobs.
Because the average American consumer is the average American worker, it seems to follow our country's standard of living would need to fall as wages fell. Americans, earning less, would have less to spend. Today, many economists agree on this obvious point. America will, overall, experience a lower standard of living in the future.
But, for well over the past two decades, Americans continued to spend as if they were just as affluent as in the past. How did they finance this spending? Initially, one-income earning households were replaced by two income earners. Spouses joined the workforce. The added income may have temporarily even created the illusion of growing affluence.
Then came the borrowing. Consumers borrowed on credit cards, or they borrowed through home equity loans. Borrowing for consumption was never sustainable. Credit limits wouldn't be extended to the moon and more debt meant more interest to pay, pushing out spending on other necessities. America's growing household debt bridged the difference between earnings and spending.
Then, bankruptcies surged. According to the experts, most notably Elizabeth Warren, the major cause of bankruptcies are: 1) Divorce or death. One earning spouse disappears; 2) Job loss; and 3) Medical crisis and the resulting medical bills. (http://www.youtube.com/watch?v=akVL7QY0S8A&feature=related
The Coming Collapse of the Middle Class, lecture by Elizabeth Warren)
The banks successfully in lobbied Congress and rewrote the bankruptcy laws. It was sold to the American people as bankruptcy "reform." It would be more difficult to file for bankruptcy, and the amounts the consumer owed wouldn't be written off by the banks. The amounts would be carried as assets on the corporate books, giving the bank the illusion of doing better. But, the banks forgot an old saying: You can't get blood from a turnip. Simply put, consumers who couldn't pay their debt would not be able to pay their debt. Changing the law would not change that fact.
Fortunately, or not, depending on your perspective, the housing bubble came in opportunistically to offer another source of funds to financially strapped Americans. House prices rose, Americans felt rich again, and they "cashed out" some of their equity, often to pay the credit card companies. This allowed spending to briefly roll on. Eventually, foreclosures increased as debt overwhelmed the stressed consumer, bringing America to the present state. (I dislike the phrase "cashing out equity" as it is commonly used in this context. Actually, the consumer is taking out a loan that must be paid back. The only true way to "cash out equity" would be to sell the house and move into a more modest abode.)
Meanwhile, those of more affluence saw rising real estate prices as a profit-making opportunity. Many purchased highly-leveraged, high-priced homes to resell. Many did very well. When house prices tumbled, those who still owned homes lost money.
So, what can we do to improve the financial position of Americans, so they can earn and spend, instead of borrow and spend, and so that they can become more secure financially?
Looking at Warren's points, we can't do much about death and divorce. Many Americans today realize the importance of meaningful healthcare reform. Our for-profit healthcare system is dysfunctional.
Putting aside the healthcare mess, job loss is the major obstacle confronting America. Manufacturing jobs have left America and moved abroad. These were largely good-paying jobs. These jobs were responsible for the creation of America's middle class. While economists focused on Citibank, AIG (back for another $30 billion handout. You're welcome), GM, and other big companies, students of entrepreneurship know most jobs are created by smaller companies.
Consider the plight of workers at the company which made the Vise Grip. The Vise Grip is a locking pliers used by mechanics, welders, farmers, do-it-yourselfers, and pretty much anybody who is involved in building, construction, repair, and maintenance.
In 2008, Irwin Tool, owned by Newell Rubbermaid, moved production of Vise Grips to China. Vise Grips had been produced in DeWitt, Nebraska for the past 80 years. Irwin said the move was necessary to keep the Vise Grip brand competitive with lower cost imports.
The move of Vise Grip abroad received little business press, but was noticed by online bloggers and users of the tool. Message boards visited by machinists, welders, mechanics, and other professional tradesmen all lamented the move. Many were going online to stores like harryepstein.com to purchase a lifetime supply of American-made Vise Grips before they vanished. They aren't interested in purchasing Vise Grips made in China. In general, they frown on "commie crap" Chinese tools. Experience has shown these tradesmen that many high-quality American tool brands of the past have been reduced in quality today.
One blogger explained it well:
This is the what is known as "Branding". A company like Newell Rubbermaid buys up a famous brand product like Vice-Grip, shuts down the American factory, lays off hundreds of people and moves the manufacturing to China. There the product is produced with inferior raw materials and a streamlined manufacturing process that produces an inferior product. They ship it back from China in a new fancy bubble package and sell the product as if nothing has changed until customers realize that this is not the quality product they were accustomed to. A few years later after diminishing sales because of an inferior product and customer backlash, the company then sells the name off to someone else but the product is still made in China with inferior materials and customers eventually stop purchasing the product. After a short time they sell the name off to another holding company looking for a quick profit but by then Vise-Grip is only a memory talked about at coffee breaks at the repair shop or the barn where farmer Joe talks with the neighbor about the price of corn and that old tractor still sitting there. (http://madeintheusabyamericans.blogspot.com/2008/09/newell-rubbermaid-moves-vice-grip-to.html)
While the move of Vise Grip overseas is only a small story, the collective effect of many smaller and mid-sized companies relocating operations abroad is destroying America's job base.
With manufacturing jobs moving overseas, it's difficult to figure out how America will create good jobs for most Americans. Without those jobs, it's difficult to figure out how our consumer-driven economy can recover. The American economy, itself, is in a vise grip.
Entrepreneurial Change And Creative Destruction
The history of the Vise Grip pliers might offer a ray of hope to America's economy. Bill Petersen invented the Vise Grip and patented it in 1924. It was produced by Petersen Manufacturing in DeWitt, Nebraska for the next 80 years. (http://www.authorsden.com/visit/viewarticle.asp?AuthorID=23328&id=42812) (http://www.asktooltalk.com/articles/toolhistory/vise-grip.php) Petersen came to America from Denmark to farm and be a blacksmith. He was not as successful as he hoped. Blacksmithing was dying as a mass industry. Cars and tractors replaced horses, and blacksmiths struggled, as a once common trade became a niche. The tool he created for his own use became his economic salvation. It's possible had Petersen had more blacksmithing business, he might never have marketed his innovation nor had the business success he had.
Some students of business and entrepreneurship would call what happened to the blacksmithing trade creative destruction. It was the radical innovation of the automobile that cost blacksmiths their jobs. Innovation brings change, and change can wipe out entire industries. The change also brought new opportunities, as thousands of people would be employed by the automobile industry.
Looking back, we can ask the question: Shouldn't the government have bailed out the struggling blacksmiths? Today, it's obvious it wouldn't have made any difference. Short of the government deliberately crushing the emerging auto industry, the blacksmithing industry would dramatically contract.
Today, our government has bailed out banks and auto makers. It has given consumers cash for clunkers, helping struggling car dealers. First time homebuyers are being handed thousands of dollars to help the real estate industry. Unemployment benefits are being extended. I even heard the expression: Dollars for Dishwashers. What the Hell? All of these programs are, no doubt, well-intentioned, but none of this will fundamentally affect the changes America faces. The jobs "saved" are saved only temporarily. A government infusion of cash will not create sustained employment. It will not make American wages competitive with Chinese wages. It will not save America's manufacturing industry. It will not provide employment for the bulk of America's middle class. It will not allow consumers to spend once again.
Many of America's most respected economists, such as Paul Krugman, have said the bailouts were necessary to keep the economy from collapsing. This probably is true, but it begs the unpleasant question: Is a certain level of economic collapse in America unavoidable?
The "innovation" moving jobs overseas is one of globalization. Business owners have more mobility today. The most wealthy operate internationally. Reducing wages adds to profits and creates new opportunities for workers in China, India, and other emerging world powers. But the effects of globalization on American workers are dismal. We live in a new world order, where the rich freely romp the world, but where workers are locked in, geographically speaking. The gap between the richest and everyone else is huge. International business interests have no concern for the well being of American workers.
How will reduced prosperity play out in America? Some economic observers predict a significant devaluation of the dollar relative to other major currencies. This could happen intentionally or unintentionally. If the American government continues to borrow against the future, it's difficult to see how the dollar will stay strong relative to other currencies.
Some knowledgeable people say a devalued dollar would be good for America. They say it would boost exports and reduce imports, essentially encouraging Americans to live within their means. It would make it less "expensive" for America to pay down dollar-denominated debts.
On the other hand, dollar devaluation would annoy holders of dollar denominated bonds, who would see a wealth decrease. It could hurt America's credit rating. Further, China and many emerging powers depend upon exports to America to provide jobs in their countries. China, in particular, has a growing population. Unemployed, that population could pose a political threat to the political powers in China. The Chinese government relies upon Americans to continually spend more and more. An economic collapse in America would have reverberations in China.
Perhaps the greatest fear is a "jobless economic recovery." We're told employment lags business growth coming out of a recession. Stocks recover. But, workers will see improved prospects a little further down the road. We hope. However, it's possible job recovery will occur in China and other countries, leaving America with a persistently elevated level of unemployment. That might be what we could call a "game changer." America, economically-speaking, would be a different country. And, the future would be notoriously hard to predict.