Western Economies

WESTERN INDUSTRIAL DEVOLUTION

By John Fetter

(Donald Trump got elected because the West stopped making clever stuff to sell at a profit. This article was written in 2012.)

Western nations were once powerhouses in manufacturing. Germany still is, comparatively speaking, and the USA to a lesser extent, while the rest appear to have lost interest in making things people want to buy. In the past quarter century the West, (US and EU), has relinquished its leadership in manufacturing, in large part because it was decided - intentionally or unintentionally - that the service and financial sectors are sufficient to sustain their economies. But they are not. The service and financial industries do not create articles of trade and therefore cannot maintain, let alone raise, a nation's standard of living.

Today's Western economists and politicians unwittingly confirm they are content to disregard the essential fundamentals that sustain modern societies when they unblushingly blurt out that manufacturing accounts for only about 10-15% of their GDP, therefore it represents nothing special. They come across as genuine when they explain that consumer spending, which amounts to two-thirds of GDP, is more important. A point of view that has helped Western business leaders maintain an untarnished image whenever they have closed down factories in their hometowns and established new ones abroad, so that they can make the same products more cheaply, which are then offered for sale to the people back home. They all seem gripped by a curious lack of wanting to know whether this way of doing things could be responsible for raising current unemployment levels and taking away the future employment opportunities of their children, grandchildren and great grandchildren. The German approach is very obviously different. German society places considerable emphasis on the nurturing of industrial production and runs high quality vocational training in significantly more than 300 distinct trades, enabling it to continue to grow manufacturing and to keep exporting products with remarkable efficiency. By the end of 2013 Germany had the largest current account surplus in the world - plus $267.6 billion, and the USA the largest current account deficit in the world - minus $379.3 billion.

Western business managers are being taught a myriad of ways of sharpening their accounting skills, coached how best to snare customers, exhorted again and again to maximize profits and bullied into pleasing their shareholders, (later, when tasked to achieve these objectives, a significant number go on to excel only at improving their personal wealth). Few, if any, appear to receive even two cents worth of motivation on how develop new products. The result is that down the line, making cheaper products is what they put on their agendas, making better products is not. Inventors are viewed as eccentrics by this group-think establishment. The only glimmer of light is shown when independent, out-of-the-box thinking, entrepreneurial creators are successful in business, they are lauded as heroes by the public at large.

Unemployment in the Western world currently averages well over 10% and unless manufacturing tangible articles of commerce is reinstated, this figure looks set never to come down again. Unemployment is not only likely remain the norm during the lifetimes of our children, it will continue to grow and will continue growing inexorably during the lives of our grandchildren and great grandchildren. The workforce in the West seems to have been subscribing to the belief there is little point in being involved in any kind of work that dirties the hands. Entitlement is put before participation. Young workforce entrants are not interested in becoming artisans, engineers or scientists. They all want to become bankers, lawyers and are thronging to take business administration courses. The system has gone out of kilter to such an extent that, for example, there are now probably a hundred activists who want to stop oil exploration, stop nuclear power stations - but who still want to enjoy the benefits of modern amenities - for every person qualified to actually carry out such developments.

No one wants to look at the bigger picture anymore. Business is looking only as far as the next financial report, the political establishment the next election, the workforce the next vacation. There is a growing danger that if the lights should go out and stay out, not only will no one in authority have anticipated it, no one will have the vaguest idea why it happened nor will anyone know how to fix it!

Democratically elected governments are voted into power by promising to do and seeming to do things that are popular among the citizens at large - but they rarely achieve their stated objectives. Remarkably, Western governments did manage to deliver on one promise - housing mortgage subsidies. They made it possible for nearly everyone to purchase a home. Interest rates were kept down. Mortgage repayments were made tax deductible. Borrowers were able to secure loans of up to 100% of the purchase price. Home owners were even permitted to pay off only the interest owing. So massive has been the the increase in demand for home ownership that, over time, real estate prices have been pushed way beyond rational affordability. (Yes, prices fell post 2008 but only marginally.) Money that could have been used to develop new products, train personnel, renovate and build new factories was directed to chase after real estate paper profits instead.

The 2008 sub-prime crisis was brought on by loans given to home buyers when they were demonstrably not earning sufficient to repay their loans, and selling-on the debt to unsuspecting investors elsewhere. It was underpinned by a quantitative analytical mindset that considered mathematical financial models such as the Black-Scholes-Merton and El Karoui equations invincible - ignoring the fact that these models overlook human unpredictability. A much bigger crisis is brewing. Today's average prospective home owners are finding it almost impossible to buy housing at realistic prices. There is currently an astronomically large private debt owed on exorbitantly overpriced real estate. Unemployment is slowly and insidiously infiltrating the ranks of even the most conscientious mortgage repaying homeowners. Government debt in the European Union just keeps growing and is currently at an average of 80% of GDP. In 2012 US government debt shot up to 120% of GDP, the biggest it has ever been in peacetime, of which 50% is owned by countries that are big exporters to the USA.

Government and big business in the West, starting decades ago, found it easier to promise generous retirement and health-care benefits than to give in to pay increase demands. It might have helped to solve the problem in the short term, however, it is set to trigger large scale bankruptcies in the long term. Payments on these deferred benefits have been coming due with a vengeance. It turns out that the promises that were made, increasingly, cannot be met. There simply isn't enough money.

Globalization provides outstanding advantages when trading partners are specialists in their own right and are able to exchange raw materials, goods and services of roughly equal aggregate value. Globalization looks destined to backfire on Western countries that bring in endless waves of shipping containers filled with consumer goods, supertankers filled with crude oil, without the essential counterbalancing effect of equivalent export volumes to maintain at least a reasonable balance of trade.

Western democracy is an arrangement designed to put a select few, whose only discernible qualification was to be able to garner a requisite number of votes, in positions of authority over a highly sophisticated free market system, bestowing them the freedom to tinker and hopefully thereby achieve short term objectives that please the people who voted for them. Corporate propriety lofts captains of large Western public corporations ever upwards until contact is lost with the echelons that engender the corporate lifeblood. Together, by way of analogy, their organized machinery appoints generals with dispensation to lead the charge from entrenchments located far from the battlefield. Add the insulating properties of the golden handshake to complete the biggest leadership disconnect of all time.

People seem to care less about creating wealth through ingenuity, entrepreneurship and hard work - and more about extracting wealth, for example, through political, financial and market manipulation.

The notabilities in charge of Western economies have been saying they are doing everything in their power to get the situation under control. They were happy to oversee manufacturing being abandoned during their watch - now, they must find a solution. Hint No 1 - put manufacturing on top of the list. Problem - they do not understand manufacturing. Suggestion - ask the Germans. Bigger problem - they are unlikely to do so. Reason - emotional baggage. (Opinion expressed, no allegiance.) Hint No 2 - lead from the front not from behind. Hint No 3 - get rid of the absurd government regulations that are strangling the life out of manufacturing.

The majority of Western nations have highly capable value-add workforces that can help to make their economies robust again. The effect of minimum wages and strict labor laws, however, has been to make unacceptably high percentages of these workforces not just unemployable but permanently unemployable. They have helped to make the apprentice systems in many countries unworkable. It has become very expensive for businesses to provide employment plus the requisite legislated benefits. As result, there has simply not been enough financial throughput at the manufacturing level to sustain and buttress these grassroots generators of wealth. Conservative politicians propose austerity, socialists increased spending. Why not do something productive, like helping industry to get stuck into making a healthy abundance of clever stuff and selling it at a profit?

Western communities are suffering from a lack of common purpose among the hierarchies that constitute their economies. The system overall is highly capable but there is not enough cohesive effort being put into making it work properly. The people living in Western societies have, collectively, been throwing away their futures. In contrast, there are two and a half billion people across the oceans who are extraordinarily enthusiastic about manufacturing just about anything. It is precisely this enthusiasm that looks increasingly likely to be the catalyst that will help to push the West right off the economically significant portion of the map.

(Written Dec 2012, last updated Feb 2014)

There are two methods, or means, and only two, whereby man's needs and desires can be satisfied. One is the production and exchange of wealth; this is the economic means. The other is the uncompensated appropriation of wealth produced by others; this is the political means. It is easier to seize wealth than to produce it, and as long as the state makes the seizure of wealth a matter of legalized privilege, so long will the squabble for that privilege go on.  ― Albert Jay Nock (1870-1945)