Chapter 13: Invest in American manufacturing

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Invest in American manufacturing

The fastest and most enduring way to build broad, widespread prosperity (“the American Dream”) for any country is through manufacturing; it’s why the main job George Washington gave Alexander Hamilton was to figure out how to reboot and build American manufacturing (as I detail in The Hidden History of Neoliberalism: How Reaganism Gutted America).

Many products manufactured in China — including products sold into the domestic Chinese market and equipment used by the Chinese military — require parts from America. China is trying to end this reliance on us.

They’re throwing massive resources into becoming technologically independent of the United States, and it’s a safe bet that their desire to seize Taiwan the way Putin has attacked Ukraine is part of their equation.

In this, China is simply doing what George Washington and Alexander Hamilton laid out in 1791, and if we don’t quickly return America to that vision — abandoned as part of the neoliberal Reaganomics’ “free trade” scam — the 21st-century will, indeed, be the “Chinese Century.”[clvi]

Technological independence and international trade policy are, it turns out, two sides of the same coin.

​In 2016, the single topic that most likely propelled Donald Trump to the White House in Midwestern swing states was “free trade,” as he repeatedly pointed out the stupidity of promoting offshore manufacturing simply to reduce labor expenses.

He promised to bring manufacturing back to America, and voters in the former manufacturing powerhouses of the Midwest bought his sales pitch. (Sadly, he was so incompetent that his efforts actually made things worse.)

Trump wasn’t the first president to understand the importance of this, however.

​When General Henry Knox rode up to Mount Vernon in the late summer of 1789 to tell George Washington that Congress had just elected him as the first President of the United States, Washington had two requests for his old friend.

First, he asked Knox to let folks know he’d be delayed by a few days because he wanted to say goodbye to his mother, who was elderly and ailing (turned out, it was the last time he saw her alive).

Second, Washington asked General Knox to ride all the way up to Delaware to visit Daniel Hinsdale, a man who’d been manufacturing black-market American-made fine men’s clothing in defiance of British law for several decades. Knox brought to New York (where the swearing-in took place on what is now Wall Street) a fine American-made suit, which Washington proudly wore.[clvii]

​Thirteen years earlier, British economist Adam Smith had made worldwide headlines with his bestselling 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, proposing that the main thing that made a country rich was independence in manufacturing.[clviii]

The process of converting raw materials with little value into finished products was, to Smith’s mind, the best and only practical way a nation could grow wealthy without overseas conquest and plunder.

A tree limb in the forest, for example, had no monetary value, but when labor and the tool of a knife were applied to it and it was turned into an axe-handle, it now had a value that could be passed down through the generations — what Smith called wealth.

That axe-handle became part of the wealth of the entire nation, and even if it was sold overseas that wealth would still be centered here because its value was simply converted into currency which stayed in America.

This understanding led President Washington to commission his Treasury Secretary, Alexander Hamilton, to propose in 1791 his 11-step Report on the Subject of Manufactures, also known as “The American Plan.”[clix]

Hamilton proposed protective tariffs on then-imported goods that could be made in the USA, government subsidies for companies that wanted to move manufacturing from overseas to the US, federal subsidies for the development of new technologies, a massive investment in infrastructure (particularly roads and water-power systems) to support industry, and a requirement that the US government purchase only American-made products whenever possible.

By 1793 Congress and the Washington administration had put nearly all of his plan into effect, and major parts of it stood all the way up until Reagan’s neoliberal revolution.

​Hamilton’s plan was such an important part of the story of America becoming the wealthiest nation on Earth that virtually 100% of the cost of operating our federal government from our founding until the Civil War came from tariffs.

The salary of every president from George Washington to Abraham Lincoln was paid by tariffs, as was the salary of every federal official and the cost of everything else the federal government did.

Fully two-thirds of government revenue came from tariffs from the end of the Civil War until World War I, and a third of government revenue came from tariffs between then and the Reagan Revolution of the 1980s. (Today it is under 2%.)[clx]

American manufacturing was at the core of the American Dream, with good union manufacturing jobs offering stability and prosperity to a growing American middle class. It also made America the technological leader of the entire planet.

Nixon had “opened” China on behalf of Pepsi, and Reagan and Bush negotiated the NAFTA agreement that was at the heart of the 1992 presidential campaign. “Free trade” was such a hot issue that year that it brought billionaire Ross Perot in as a single-issue candidate with his famous “giant sucking sound from south of the border” commentary: he carried almost 20 percent of the vote on that single issue.

This isn’t the first time trade was at the center of American political debate. Back during the Republican Great Depression, Congress passed and President Roosevelt signed the “Buy American Act,” which mandated all government purchases must come from American manufacturers.[clxi]

FDR and the Democrats saw government purchases of American-made products as such a big magnet, able to hold American manufacturers to our shores, that they could even slightly reduce tariffs with the rest of the world, something FDR had campaigned on in 1932. (Average tariffs on imported products at that time ran between 20% and 40%.)[clxii]

In part because of the Buy America Act, the US dropped tariffs dramatically after World War II, but American manufacturing continued to dominate products sold in this country and around the world largely because of nontariff trade barriers, government purchasing, and partially because of the destruction of Japan and Germany in World War II.

Sam Walton’s autobiography, titled Made in America, epitomized the situation prior to Reaganism when Wal-Marts had big “100% Made In America” banners.[clxiii]

​During the 1980s, though, President Reagan radically expanded the use of a loophole in the Buy American Act that allowed the president to sign “waivers” to allow government agencies to purchase things from offshore manufacturers.

The waiver provision was in the law so our government wouldn’t be crippled if it immediately needed something that wasn’t domestically available; the assumption was that they would be used judiciously and rarely. And that was the case until the 1980s, when Reagan started handing out waivers like jellybeans.

As American government purchases of US-made products declined, so did US manufacturing jobs; it was the beginning of the destruction of the America middle class’s prosperity, previously fueled by domestic manufacturing.

Around that same time, another rationale for corporations seeking cheap labor and easy pollution regulations overseas began to take hold in the minds of the neoliberal intelligentsia: “free trade,” they said, was so magical it could even bring about world peace!

The argument was simple: history showed, they said, that countries that traded heavily with each other rarely went to war with each other. The example most often cited was that no two countries with MacDonald’s burger outlets had ever, at that time, gone to war (although they have since: see Russia and Ukraine).

This was also one of the main rationales for the development of the European Union, and it makes a lot of sense with countries that are contiguous and share similar levels of development. (Somehow they manage to overlook how dependent much of Europe was on German manufacturing during Hitler’s time.)[clxiv]

But the argument for trade as a tool to prevent war totally falls apart when that rationale is used as an excuse to ship manufacturing for products in heavy domestic demand to offshore facilities simply because labor is cheaper and environmental regulations are weaker.

​In 1981, IBM introduced the first major-market personal computer, the famous “Model 5150” otherwise known as the IBM PC. By 1983, they were selling a quarter million a year, and the federal government was ramping up purchases.

As IBM turned to offshore suppliers for more and more of their components, the trickle of Reagan’s waivers turned into a flood.

Bill Clinton continued the practice, and by 2000 IBM had moved all their production offshore (as had their major competitor, Apple) and Wal-Mart, founded on Sam Walton’s slogan of “100% Made in the USA,” had become America’s largest importer of Chinese-manufactured goods.

Thomas Friedman jumped into the act at the end of the 20th century, promoting the transfer of American manufacturing overseas with his now-discredited 1999 book The Lexus and the Olive Tree.[clxv]

Its impact, along with major campaigns encouraging “free trade” funded by American industrial and retail giants, echoed across American manufacturing and foreign policy for the next 20 years, as America continued to hemorrhage jobs and the middle class “American Dream” wealth that accompany them.

As a vast proportion of American manufacturing shifted to China, that nation underwent the most rapid transformation from poverty to First World affluence in the history of the world.

The “wealth” of America was transferred to China every time a cash-register rang at Walmart, an Apple Store, or in pretty much any other American retail outlet.

​The issue of so-called “free trade” is one that has galvanized Americans repeatedly throughout the history of America, from Hamilton’s “American Plan” to FDR’s Buy American Act to battles over NAFTA in the 1992 election and Trump’s election in 2016 with China at the center of his sales pitch.

And while tariffs around the world have generally collapsed, which is arguably a good thing because it increases general world prosperity, there are dozens of other tools America and other countries can use to encourage domestic manufacturing and technological innovation.

The progressive wing of the Democratic Party has opposed neoliberal “free trade” policies since the 1930s, and continues to do so to this day; Senators Bernie Sanders and Sherrod Brown, for example, have been relentless champions of campaigns to derail these policies and bring manufacturing back home.[clxvi]

As that part of the Democratic Party gains power, “free trade” will again be at the center of American political debate.

China, meanwhile, wants to keep American manufacturing within their borders, both for the revenue, to keep America helpless in the face of a threatened embargo (as may happen if we defend Taiwan), and — according to concerned intelligence officials — so they can insert into US-bound tech products the ability to spy on us.[clxvii]

A powerful, and relatively uncontroversial step the Biden administration could take now to reduce our dependence on China and begin restoring American manufacturing and technology would be to simply reduce the number of waivers to the Buy American Act, and for Congress to strengthen that legislation.

Government spending represents about 1/6th of the American economy, and if (as both Alexander Hamilton and Franklin Roosevelt demanded) that spending is again limited to products made in the USA, every manufacturing company in the country will rush to rebuild their US factories and R&D facilities.[clxviii]

America is today engaged in a war of sorts with China to control the wealth that manufacturing produces. Our different systems of governance and economics are also competing for the hearts and minds of the developing world.

The stakes are enormous, and particularly include whether American working people will still be able to achieve the middle class.

Combined with strengthening US alliances with Western Europe, returning manufacturing to our nation is the most important step we can take to balance China’s growing influence and power, both economic, military and political, and restore the American Dream.