Our greatest primary task," said Franklin D. Roosevelt in his first Inaugural Address, "is to put people to work." Roosevelt had no doubt that this task took precedence over all others. "Our international trade relations," he continued, "though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy."
Today, with nearly 31 million American workers now effectively unemployed -- including an unprecedented 14.9 million who are unwilling part-timers or who've dropped out of the work force because they can't find employment -- the "primary task" before the Obama administration and this Congress is also to put people to work. The real unemployment rate in the country today isn't the official 10.2 percent but a staggering 19.2 percent.
Even the average full-time worker is now working only 33 hours a week, a record-low that represents a loss of hours and wages of 17 percent. And these dismal figures do not adequately depict the particularly adverse effect of the recession on people of color and recent immigrants.
The global economic crisis that began in 2007 and our own ongoing jobless recovery are each the result of the very wrong-headed globalization of finance and trade that began in the early 1980s and continued over the next two decades, long before Barack Obama became president.
The abuse of the promise of globalization arose out of two mutually reinforcing, flawed models of growth: first, debt-financed overconsumption in America and a few other major developed economies; and second, dramatic over-savings and under-consumption in the major production-oriented export economies of Asia, especially China.
The shift of the U.S. from a nation that produces wealth to one that consumes it has created an American economy that is inherently prone to crisis, structurally unbalanced, and incapable of maintaining, let alone growing, a large, vibrant middle class. As American manufacturing has been offshored, chiefly to China, the U.S. trade deficit of manufactured goods has increased from 1.9 percent of gross domestic product in 1998 to around 3.7 percent today, and for several years before the current great recession began, it held steady at 6 percent.
Because of the record trade deficits accumulated over just the last 10 years -- including a cumulative $6.4 trillion in manufactured goods alone -- the U.S. economy is now about $1.5 trillion smaller than it would have been otherwise. This massive loss of economic growth now challenges our ability to recover economically and pay for needed but costly health care, energy, and Social Security reforms.
We need to return to a reasonable balance between manufacturing and services. Today, manufacturing constitutes just 11.5 percent of our GDP and employs just 8 percent of the U.S. labor force -- huge declines from levels just a couple of decades ago, declines that coincide directly with our transformation from the world's largest creditor nation to the world's largest debtor.
For the first half of the last century, we estimate manufacturing constituted about 35 percent of the nation's GDP. Even after our GIs returned home from World War II and military production ceased, manufacturing in 1947 still made up 26 percent of GDP, and it never went below 21 percent until 1980.
But starting with the Reagan and first Bush administrations, and continuing through the next two administrations, the federal government was remarkably indifferent to manufacturing. As a share of GDP, manufacturing has been flat or most often down every year since 1980. These administrations were usually discreet about their indifference, though Michael Boskin, who chaired George H. W. Bush's Council of Economic Advisers, is credited with saying, "It doesn't make any difference whether a country makes potato chips or computer chips!"
Even though more than 5.5 million manufacturing jobs have been lost just since 2000, mostly overseas, some administration officials evidently believe that the decline in our manufactured goods (and, by extension, the labor force that makes them) can be made up by a favorable trade balance in such products as software, legal services, university tuition, and motion pictures.
They couldn't be more wrong.
America cannot prosper over the long term with less than 12 percent of its GDP coming from manufacturing. This sector should generate at least 20 percent of our nation's GDP. And when it does, 12 million more workers will be employed directly and up to another 30 million workers indirectly as a result of the very high multiplier effect of new manufacturing jobs.
Even companies that have relied greatly on offshoring American jobs have come to realize that we are on an unsustainable path for the economy. Jeffrey Immelt, the CEO of General Electric, has said, according to Reuters, "The world's largest economy can no longer count on consumer spending to drive demand, nor can it rely on Wall Street financial wizardry if it wants its population to continue to enjoy a high standard of living. GE, like many U.S. companies, has turned too many core technological procedures over to outside contractors and foreign operations and has outsourced too much."
When even CEOs of multinational corporations are citing the need for bolstering domestic manufacturing, it is extremely disconcerting to hear some in the administration and Congress still argue that a service job is just as valuable as a manufacturing job. The fundamental differences between manufacturing and service jobs are indisputable:
n Compensation for manufacturing jobs is on average 15 percent greater than for non-manufacturing jobs.
n Manufacturing, especially in import-intensive industries such as textiles and electronic- and computer-equipment production, offers the best opportunities to women and people of color for wage parity.
n Manufacturing has by far the largest multiplier effect of all job sectors, creating $1.40 of additional economic activity for each $1 of direct spending, 2.5 other jobs on average for each job in the sector, and, at the upper end, 16 associated jobs for each high-tech manufacturing job. By contrast, each new service job, even a high-tech one, creates on average no more than 1.6 associated jobs.
n Service jobs do very little to help the U.S. balance of trade.
In the transition from campaign to administration, Obama's focus on employing and invigorating Main Street was subordinated by some in his administration to the task of resuscitating (and not even reforming) Wall Street. Now, in order to right our economic ship, the administration and Congress need to embrace an all-of-government manufacturing policy that has as its stated objective doubling the percentage of GDP and employees the sector represents.
They also need to adopt "buy domestic" requirements for federal procurements, which represent 20 percent of our nation's GDP. The United States is the only nation among the G-20 not to have a significant "buy domestic" procurement program, yet no single economic stimulus initiative would do more to resuscitate U.S. employment and reduce our massive trade deficit. In May, China, which is by far the single largest importer of goods to the U.S., confirmed its policy of 100 percent domestic procurement. We should call our new comparable requirement the "U.S. Domestic Investment Act."
Consider, as an instance of our current misguided policy, the proposed $1.5 billion wind farm in Texas that has applied to the federal government for financing from the stimulus package. This wind farm would create only 300 jobs in the U.S., but it would create 2,000 jobs in China, where the wind turbines would be manufactured. Rather than use U.S. tax dollars to stimulate the Chinese economy, our government needs to start buying American and bolstering domestic manufacturing.
The government also needs to significantly increase its investments in modernizing and rebuilding our infrastructure. It needs to establish a National Infrastructure Bank that would enable the federal government to leverage the private capital markets to fund infrastructure of national or regional significance without affecting the nation's yearly budget. It needs to provide tax and amortization incentives for large-scale private-sector funding of public infrastructure, as well as investment tax credits for retrofitting buildings in ways that conserve energy. And it needs to commit $500 billion to a 10-year green-transportation effort that would be funded through an increase in gasoline taxes. Provided it has an associated buy-domestic requirement, each $1 billion invested in public infrastructure generates on the order of 40,000 permanent new American jobs.
The government must also assist American businesses and their workers by demanding trade agreements that have meaningful labor and environmental standards, forbid illegal subsidies and currency manipulation by other nations, and have enforcement "teeth." One way to effect the latter would be for Congress to enact the pending Trade Enforcement Act of 2009, which would require the U.S. trade representative to initiate negotiations over foreign nations' unjustified trade practices and, as needed, to reach compensatory settlements. The government especially needs to establish a new trade relationship with China, starting by using its power to levy tariffs to compel China to stop artificially devaluing its currency, which has fueled China's economic growth and recovery at the expense of our own.
We need as well to make changes to our tax code that boost domestic manufacturing and reward corporations for creating jobs in the U.S. Congress should reduce corporate income taxes and move to a value-added tax on imports. A VAT, which all of our major trading partners currently have in place, would go a long way to restoring the competitive advantage that our domestic producers have lost to their overseas competitors. Congress should also create a permanent 10 percent investment tax credit for renovating and modernizing manufacturing facilities and their equipment.
Even though it seems a political impossibility to label anything right now as "second stimulus," we can't run away from the major fiscal efforts needed to reduce real unemployment to a rate of 5 percent -- which would require the creation of 22 million jobs, not the 9 million determined by the administration. To cover the cost of such a policy, we recommend four revenue initiatives, all aimed only at current tax abuses and the top 3 percent to 5 percent of taxpayers, which combined would generate about $212 billion a year for creating new jobs.
First, we recommend adopting a financial transactions tax. The FTT should be set at around one-quarter of 1 percent of the value of all financial transactions -- stocks, bonds, derivatives, futures -- and it should be levied on corporate, partnership, and very high-income individual buyers and sellers of securities.
"We must lay a new foundation [that] will move us from an era of borrow and spend to one where we save and invest," President Obama has said, "where we consume less at home and send more exports abroad." An FTT whose proceeds are dedicated to job creation would meet the president's goal. It would mark a shift in the nation's resources that the public could easily understand and support. It would move financing toward longer-term and thus more prudent time horizons, and it would produce revenues of around $150 billion each year.
The FTT should be augmented by three other tax changes: finally ending those "tax breaks for companies that ship jobs overseas" (as Obama promised during the 2008 campaign), which would raise at least $25 billion a year; classifying and taxing the carried interest earned by hedge-fund and private-equity managers as ordinary income at a 35 percent rate rather than as a capital gain at a 15 percent rate, which would generate around $12 billion per year; and raising (only) the top tax rate on long-term capital gains back to the 28 percent rate signed into law by President Ronald Reagan, which would raise about $25 billion per year.
None of these investment initiatives and national economic-growth policies are anti-competitive or anti-globalization. They are simply necessary, balanced, and reciprocal economic policy for the world we live in.
If we don't have the right policies in place and the proper safeguards, then we are undermining the very effectiveness of fiscal stimulus and removing it as one of the central tools to manage economic downturns. We will also continue to disadvantage American workers and taxpayers in favor of our major trade competitors, which already have initiatives in place that advantage their own manufacturers and producers.
Speaking to Congress in 1944, when his health was clearly failing, Franklin Roosevelt laid out his long-range goals for the nation. Outlining a second Bill of Rights -- an economic bill of rights -- he called for recognizing "the right to a useful and remunerative job in the industries or shops or farms or mines of the nation."
In the current economic crisis, these are words we need to heed.