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June 7, 2013
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What’s Really Wrong with the US Economy

J. Richard Warren - GL Hill

Why this article should be important to you, and why you ought to read it in its entirety:

Imagine a scale with:

Fourteen million on the right.

One hundred million in the middle.

The rest of America on the left.

What did we expect?

In an earlier article entitled, “Yet Another Article About Why the Republicans Don’t Get It...” (available in the Archives section) we touched on some of the more critical issues facing America today, attempting to illustrate the contradiction inherent within today’s political discourse both Democrat and Republican.

Although having voted for Gary Johnson, we did share one common footing with Mr. Romney: (at least) 47% of Americans are not pulling their weight in America today, leaving the capable remainder to support them through one government program or another. A long, painful, downward spiral since the inception of the New Deal that has left America where it is now without much hope of recovery. Ever. Without revolution in one form or another.

This situation is untenable in any economic schema: Communist, Capitalist or otherwise. Even Ernesto Guevara would shake his head in dismay, probably quipping that we are polar-opposite of his Modern Man ideal. And we are. “Work” means nothing to many of us today.

Authored in 2011 the below article remained hitherto unpublished. It is a comprehensive and heavily researched analysis of our current fiscal state. Read it and weep.

For the many years preceding this last economic “slow-down” Americans have been exposed to a plethora of articles all seemingly pointing to some single factor that led us to our current state, laying blame wherever possible to push that writer’s agenda. Yet causality from an economics perspective is rarely that specific.

Perhaps what’s missing is a more heuristic approach since most of us have some vague concept of what’s gone wrong, and by taking a brief look at the various trends over the last several decades we may be able to identify the nexus between what  we did and where we are.

From our view America’s economic machinery can be divided into just three categories: The first are those types of work that are Economically Positive (E+), Manufacturing, and in most cases, Agriculture and Farm work. The second are Economically Neutral (En) and includes only Service sector employment. The third are Economically Negative (E-).

E+ work includes primarily Manufacturing jobs along with Mining, Agriculture, and Farm work. Staying with the principle factor of Manufacturing, here’s what’s occurred in the relatively short time since 1950 when about 40% of all jobs in the United States were categorized as Manufacturing: We made nearly everything that the American Consumer (including the U.S. Military and its affiliates) could want.

We had virtually no reliance on imported oil (for processing into gasoline) at that time. “Imported” was caviar and the rare individual who could afford a Jaguar, Mercedes, or Triumph.

Today, owing to a variety of reasons, Manufacturing employment in the United States is about 9%: As a result one may easily argue that we’re a country of three hundred million friends all passing basically the same dollar around from one to the next because there is very little new wealth being added to the economy. So why is this important?

Some argue that it’s good for the environment since we no longer have a large number of pollution-creating businesses with which to contend. Let’s talk about that: The Non-Durable goods we now import, at one time made here in America, are now popularly identified by the authors as not as durable, being better defined as “Really Non-Durable” goods. The brooms we buy can’t be left sitting on the porch exposed to the elements year-after-year (yet still functional) as they once were; the clothing we buy from various Asian countries tends to break-down, fray and lose buttons after the first washing; patio furniture disintegrates when left outside on the…patio.

How much energy does it take to manufacture a Non-Durable product versus a Really-Non-Durable product? About the same. How much of the world’s very finite natural resources does it consume? About the same. How much pollution does it create that we – globally – must contend with? More. Why? Fewer controls on offshore manufacturers have resulted in what in some cases is irreversible environmental damage. That’s one of several reasons why many of our manufacturers relocated to overseas locations, and it’s hardly a secret.

Can we buy those things that we now need for less money? Yes we can (in the very short term). Unfortunately we’re doomed to buy replacements again and again, whereas those goods we manufactured here (past-tense) far out-lasted the imported. Does the manufacturer benefit through increased profits that in most cases are not subject to taxation? Yes. Is the profit associated with manufacturing this product finding its way back into America’s communities? No. Have we upset the balance of economics globally to our disadvantage?

In 1987 our Trade Deficit was $152,119,100,000 U.S. Dollars. At that time Manufacturing jobs in the United States stood at a little more than 20% of all jobs. (In 1950 we had no trade deficit, but a Trade Surplus and nearly 40% of our workforce was dedicated to Manufacturing.)

In 2010 Manufacturing stood about as it does today at 9%. Our corresponding Trade Deficit is…well it’s astronomical at $634,896,800,000 U.S. Dollars. This year it will most assuredly exceed that amount. If we make nothing, we have nothing to export. (Interestingly, if Software Engineering and its related activities had not been included as a Manufacturing activity our actual percent of jobs in this category would be substantially less.)

Multiplier Effect (ME): Manufacturing jobs have always been viewed as having a positive effect on other sectors of the economy. Although varying, most seem to agree that a Manufacturing job will generate more to the community for every dollar of wage paid than any other type of employment.

In California during the early 1980’s while doing legislative work specific to Employment Security, we generally held that every one Manufacturing job resulted in a return of about five  other jobs, supporting employment in the Services and Government sectors, Welfare, and so on, none of which can make this claim as we will discuss below.

Working for America ( uses the very modest Multiplier Factor of 143%, yet declares that Service jobs represent only a 73% return for cost (only seventy-three cents of every dollar spent for Services re-emerges in the economy).

So Manufacturing jobs strengthen our economy by adding wealth both on a local level and globally: While passing the metaphorical dollar around our little group of three hundred million we add more dollars (that are not derived through the mere act of printing money).

Let’s place Manufacturing jobs on the right side of our scale. Assumed with Manufacturing is the equivalent activity of growing food or Mining natural resources for consumption here in the U.S. and for export, further offsetting the Trade Deficit. (Unless otherwise noted, data for the above supplied through Bureau of Labor Statistics, Census, and US Commerce.)

E- programs and work are all of those activities that do not directly add wealth to the economy: in fact they are Subtractive. They are the sum cost of supporting all other Americans, other than perhaps Service employment.

They are not profit-driven but represent work and related expense that is seen as necessary, vital, important, socially significant, or entitlement in nature. And, from the office of the President of the United States to our nearly trillion-dollar budget for National Defense and Law Enforcement, all the way down the line to Bob-the-local-Building-Inspector none add to the wealth of the country. Some may safeguard our economic wealth but in doing so function as a cost-center – an expense - to our Manufacturing sector.

Currently (early 2011) there are about 312,000,000 people living in America. Our universe of those who are capable of working is about 239,500,000: what is defined as Civilian Non-Institutional population (people 16 or more years of age). Here’s how the Bureau of Labor Statistics (BLS) defines it: “The civilian noninstitutional (sic) population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

The actual Civilian Labor Force, though, is far less at 154,538,000. BLS defines this workforce as “…all persons classified as employed or unemployed” as described above. That means it is the total of 140,129,000 people with jobs, plus the 14,000,000 who are “officially” unemployed, plus the 7,100,000 who “currently want a job”.

Where are the others? A short answer is, too young, too old, unable due to disability or military service. (Military Service accounts for about 2,000,000.)

So there are about 140,000,000 people working in America today – less than half the overall population. 9% of them are in Manufacturing jobs that support economic growth. Being generous let’s call it 14,000,000 people who do something for a living that brings in more than it costs, leaving us 126,000,000 non-manufacturing workers.

In the Subtractive category (E-) are:

Federal employment. As of March, 2011 the Office of Personnel Management identifies 2,124,000 Full Time Equivalent employees working for the U.S. government. That is up from 1,763,000 in 2000.

State government employment. Total state government employment currently stands at 3,836,500. Depending on the source, that number is up anywhere from 2 to 6 percent in the last decade, or more if one uses pre-9/11 figures.

Local government employment. Cities and counties as of 2009 employ about 11,114,889 people.

In addition Non Governmental Organizations (NGOs), funded partially or completely through one or more government agencies employ more than 9,000,000 people. While some may argue that NGOs are funded to some extent (or wholly) through private donations, the associated tax loss must be subvented by others, therefore resulting in direct government support to these organizations – everything from OxFam to your neighborhood spay and neuter clinic.

En: How many people left? From the above we know that about 26,100,000 people work for the government, in one form or another and exclusive of the military, 14,000,000 making something, leaving us a remaining workforce of 100,000,000 people.

Most of these people are employed in the Service sector of our economy, encompassing the vast array of employment represented in this very general classification. They are sales associates, nurses and doctors, mechanics and landscapers, and anyone who does not make something in his or her job, notwithstanding how good they and others may feel about that work. Regardless, their activity does not add to the wealth of the country.

Other E- (Subtractive) factors:

Social Security, while funded by employer and employee contributions, remains Subtractive. Currently there are about 38,500,000 people aged 65 and older who are receiving payments through this system and an additional 16,315,000 as surviving spouses, children and the disabled for a total of 54,815,000. This number will continue to rise, shortly very dramatically, as those who engineered this chaos reach retirement age: the Baby-Boomers, to which generation the writers belong. Some recipients qualify for both Social Security and Supplemental Insurance payments.

Supplemental Security Income, again funded by both employer and employee contributions, has become a refuge for the many in America who are unable to find work owing to some form of disability, real or fabricated. The number receiving this type of benefit has dramatically increased in the past few years as accessing the system has been perfected by those whose job it is to represent claimants. Currently the number of recipients is 8,057,000.

Public Assistance/Welfare in America, like all other entitlement programs, has dramatically risen in the last five years for those who have exhausted their unemployment benefits, and all subsequent extensions, and must fall-back on this system to provide for their family: it is the last vestige of hope for many. And, thus, the number of recipients has risen from 2008’s 2,700,000 to 2009’s 3,009,319. Today in 2011, the estimated number of recipients approaches 3,500,000 (perhaps more).

Unemployed and receiving benefits accounts for more than 14,000,000 Americans. “Discouraged” former workers – those who have dropped out of the system and exist through Public Assistance, odd jobs, or transient lives – account for more than 7,000,000, and the number probably goes much higher since they have fallen away from the system.

How does it balance out?

On the right side of the scale we have 14,000,000 workers who manufacture, by today’s definition, some form of product and thus bring wealth into our system.

On the left side of the scale are 2,000,000 military; 26,100,000 government and quasi-government workers; 54,815,000 Social Security and related recipients; 8,057,000 Supplemental Income recipients; 3,500,000 Public Assistance cases; 14,000,000 receiving unemployment benefits, for a total of more than 108 million people. Thus (E-)1086/(E+)146 = 7.71(F1).

In other words for every one (1) manufacturing job there are 7.71 others who are an Opposing Force. Using the more liberal Multiplier Effect described above of 5:1, we can see that we’ve outreached our ability to grow (or just to sustain) our economy by 65%.  And we passed that mark some time ago when our total Subtractive factors exceeded (5*146=) 70,000,000 people.

But what about the money? Aren’t Americans making more? Our answer is fairly concise, “Who cares?” The value of a dollar or of ten or of one million dollars is vague and inconsistent. A friend once said, “When gold reaches five thousand dollars an ounce we’ll be able to buy a loaf of bread for five hundred dollars.” The value of the Dollar is relative and volatile.

To understand what went wrong and how to fix the problem, we need to look at the one immutable factor of our economy, people.

A few paragraphs above we set aside our Service sector employment, numbering nearly one-third of the U.S. population at 100,000,000. A catch phrase during the 1980’s and 1990’s while we (the authors) were consulting to a variety of industries was “Value Added”: it was important that we were able to identify some empirically-based positive change in the way the company did business to demonstrate our worth or value (to make certain that our invoices were paid). In some cases – to what extent remains nebulous – we could do so with those client companies who manufactured a product.  For those who did not, there was no metric other than improved service levels reflected on some vague Likert–scale summary depicting Happiness levels, which in reality did and do nothing to bring greater wealth to our society. Waste Reduction in Service industries benefited only shareholders and those others who participated in any incentives shared for reduced operational cost.

In other words, Waste had an impact on those who derived their compensation from the efforts of others but did not add wealth to the economy. Similarly, Services themselves do not add wealth, and may, in fact, lead to an undeserved sense of economic well-being, such as when the BLS reports an increase in Service sector employment.

Imagine a scale with:

Fourteen million on the right.

One hundred million in the middle.

The rest of America on the left.

What did we expect?

Fixing It

We need to bring the economy back into alignment. Moreover, we need to bring it further back than just “in alignment” if we propose to reduce our National Debt. To stabilize the economy necessitates growth in E+ and/or reduction/transfer/shift in E- (and En). To address America’s long-term debt, piling ever higher, means that we must make a more dramatic change.

It’s that simple. Yet, it’s that complex owing to:

Our abandonment of our manufacturing infrastructure and a misguided and government-reinforced generalization of what constitutes job growth. (Plainly evidenced in the American Recovery and Reinvestment Act of 2009, which funded jobs, to a very large extent in the Service sector. The effect? Adding some (large) percentage of the (borrowed) $267,000,000,000 to the profit margins of companies whose added jobs added nothing to the overall foundation of our economy.)

American Consumerism. We are driven to acquire at the lowest cost those things we “need” giving no thought to the true cost of acquisition, nor to the cost-benefit of its acquisition. For the most part, jobs, life-span, obsolescence, and environmental consequences do not enter the decision-making process.

Work, itself, has lost its significance to many, replaced instead by a vague yet committed sense of entitlement.

A loss of perspective by: Those who work; those who own the companies; those who invest in the companies; those who could otherwise work but do not; those who run our government; those who interact and advise all of the aforementioned.

Are we heading to a collapse? We don’t know. What we do conjecture, though, is that Collapse may be one of the only ways in which this very broken system may be rebuilt: It’s been decades in the making.