First-time readers, the dialogue in this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about Revenge Revolution and author, Entry #1. List and general description of entries to date. Annual assessment if Revolution plausible.
Note: most characters appear in a number of entries, with many entries building on previous conversations. Profile of characters. You’ll catch on quickly. Thanks for your time and interest…and comments.
Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011. Section starts Entry #235. (Primer will be available as PDF in more traditional format after Chapter 5 or 6. Then the primer download will be updated regularly.)
Gelly: “Jordan, do you really think I’m a pick-pocket?”
Jordan: “What are you talking about, Gelly?”
Gelly: “In the primer chapter on creating wealth, you said people in service industries were like pick-pockets.”
Jordan: “I think you’re wording is a bit of a stretch…but I get the gist of what you’re saying.”
Gelly: “Actually, I liked the analogy. It helped me understand how wealth is created for a society rather than just an individual.”
———- TEXT of PRIMER ———-
During summer 2009, which was still early on in the Great Recession, Congress was considering whether to bail out Chrysler and General Motors. Many people stated that auto companies and auto production did not need to be in the US. In fact, some argued US consumers would be better off if auto manufacturing was done in lower-cost countries outside the US.
I’m not sure where these people took Economics 101 but all the economics I have studied indicates manufacturing has a direct and positive impact on wealth creation for a country. Wealth for a society is created one way — taking materials and processing them so the end-product is more valuable to buyers than the individual components.
The concept of creating societal wealth through manufacturing is apolitical. Whether your political beliefs are left or right, whether you are a fervent capitalist or fervent socialist, creating wealth for society works the same way – manufacturing.
Printing money can create wealth in the short term. So can mining and selling natural resources. But those resources often finite and are of value only, and only, if processed into another product.
For example, crude oil per se, has no value. Oil is feed stock for plastic and has value to companies manufacturing plastic products. Oil, when refined, has great value today for use in transportation, heating homes and generating some electricity. Oil would have much less value if more electricity and transportation were powered by non-fossil fuels.
Gold has no inherent value. Gold becomes valuable when it is processed into jewelry, part of electronics components or other products. Gold’s use as currency is arbitrary. A society’s currency could be based on certain types of rocks…or even paper, as it is in most countries today.
Understanding how manufacturing creates societal wealth is not difficult. For example, think of the manufacturing process as starting with iron ore – a bunch of rocks. Through various steps the rocks are formed into steel. Through another series of steps, the raw steel is turned into hoods and fenders for cars/trucks or support beams for industrial buildings. Each step in the manufacturing process adds value to what was originally a pile of rocks with no inherent value.
Farming, in a broad sense, is also manufacturing. Farmers take seeds and through various steps turn the seeds into corn or soybeans. The farmer then sells the corn to others who process it again, turning the corn into cereal or bio–fuel for cars/trucks. Each time the end product becomes more valuable.
Each step in the manufacturing also creates jobs. At each step, part of the “added value created” is distributed to workers through wages and owners through wages and dividends.
What about companies that offer services? Do these companies create wealth? Answer: No.
Service-related companies do not create wealth. These companies/organizations merely transfer money from one person’s pocket to another person’s pocket. Yes, some individuals may make more money in the transaction but others lose an equal amount. Thus, with services there is no net gain in wealth for society…unless the service makes the manufacturing sector more productive.
Medical care, for example, is a service that does not create societal wealth. The doctor and medical staff may be economically better off after some procedure, but the patient, the insurance company and other taxpayers have transferred funds to the medical staff. Unlike manufacturing, the doctor, nurse and others involved with patient care, created no wealth for society – they merely picked the other person’s pocket.
Before you become enraged, just think about medical care. For a society, the cost of medical care is, in many ways, like a tax. The cost of medical care transfers wealth from one pocket to another but does not create wealth overall. However, like some taxes (note the term “some taxes”, not “all taxes”), medical care is necessary to sustain a vibrant and productive society.
Retailing is also a service that creates no societal wealth. The primary benefit of retailing is a convenient venue to purchase manufactured goods. While most people think of retail stores, the “stores” can be physical structures, internet sites, business-to-business sales representatives or even door–to-door sales people.
The contribution retail “stores” make to local economic growth is not well understood. Retail stores, Amazon-like warehouses and other such facilities do not create jobs. I am always amazed when a new store or Amazon-like warehouse comes to an area where many retail stores exist. The news report often is, “X Brand New Store/Warehouse Coming to Town, 200 New Jobs Created.”
A new store does not create new jobs unless the market is under–represented with retailers. A new store does not cause people to spend more money, but merely reallocates the money being spent among other retailers.
The reallocation is particularly true for such retailers as Wal–Mart/Sam’s Club, Amazon et al. Wal–Mart/Sam’s Club draws customers from other stores and often pays lower wages than other stores. Further, most of the merchandise in Wal–Mart is manufactured outside the US.
Shoppers at Wal-Mart create a double negative impact on wealth creation by (i) supporting lower–paying jobs that replace higher paying jobs at existing local retailers and (ii) sourcing products outside the US at the expense of manufacturing jobs in the US.
The example should not be construed as anti–Wal-Mart. However, Wal-Mart is no patron saint. If the true economic impact of such stores as Wal–Mart were analyzed, the outcome would likely be negative, not positive. Amazon has become the ”new Wal-Mart,” with even more erosion of higher-paying jobs and US-manufactured goods.
As a society, we need to understand what economic policies create wealth and what economic policies merely transfer wealth between people‘s pockets. In many ways, the emphasis on service companies – banks, medical, retail – are like taxes, which transfer wealth between segments of society but create no overall societal wealth.
Trump Administration and Manufacturing. The promise by Trump during the campaign to bring back former high-labor-content manufacturing jobs is folly. Yes, manufacturing is critical to create societal wealth but technology has replaced much of the labor content in manufacturing. And the use of technology to replace workers will only continue.
If there is any doubt about the trend, merely look at agriculture. The implementation of technology has resulted in enormous gains in output with far fewer workers. The key for sustaining US manufacturing is not trying to create retro-manufacturing jobs but training workers help support technology for future manufacturing growth.