US Falling Behind Across the Board


On Monday, I reported that the US, formerly a superpower until afflicted with "new economy" syndrome, has lost so much manufacturing capability that it can scarcely produce one submarine every two years and one aircraft carrier every five years. US manufacturing capability is so reduced and shrinking so fast that the president of the American Shipbuilding Association recently said that in the next several years "more and more manufacturing of ship components and systems will migrate to China."

Not to worry say free trade economists. Shipbuilding is just one of those old manufacturing things that the nanotech US economy is better off without. Alas, according to Manufacturing & Technology News (July 8), so much manufacturing capability has already left the US that American nanotechnology capability is largely limited to pilot-scale, low-volume manufacturing.

In testimony before the House Science Subcommittee on Research, Matthew Nordan of Lux Research, Inc., said that any American nanotech ideas are likely to "be implemented in manufacturing plants on other shores."

Nordan says that in some fields of nanomaterials "the manufacturing train has already left the station." The US may even be falling behind in generating nanotech ideas. Last year China led the world in nanotech research, producing 14% more research papers than the US. Even South Korea and Taiwan spend more per capita on nanotech R&D than the US.

Sean Murdock, executive director of the NanoBusiness Alliance, told the subcommittee that the US could not live on ideas alone. Intellectual property is fine, Murdock said, but "if you look at the total value associated with any product, most of the value tends to accrue to those that are closest to the customer-that, in fact, make it."

Murdock also pointed out that an equally important part of intellectual property is manufacturing process knowledge-the manufacturing ability to turn a new principle into salable things. Without the ability to commercialize and manufacture products based on the new ideas, we not only lose the ability to capture most of the economic rewards but also eventually lose the ability to think up the ideas. Without process knowledge from manufacturing, it is difficult to recognize promising nanotech innovations.

In recent years I have stressed the erosion of the conditions on which the case for free trade rests. Production functions based on acquired knowledge lack the uniqueness required for the operation of comparative advantage, and the international mobility of capital and technology allows those factors of production to seek absolute advantage abroad in skilled, disciplined, low-cost labor. The real conditions in the world today no longer conform to the assumptions of free trade theory.

Thus, once world socialism collapsed and the highspeed Internet was up and running, first world living standards were no longer protected by unique accumulations of capital and technology. The changed conditions made it possible for American companies to use employees drawn from large excess supplies of foreign labor as cheaper substitutes for American employees.

The difference in labor cost is massive. Anyone who says the difference is irrelevant has no idea what he is talking about.

Nevertheless, as I emphasized three decades ago prior to Asia becoming an alternative manufacturing location for US companies, the US is severely disadvantaged for tax reasons as well. Because of tax reasons the US has a high cost of capital.

The American Producers Council Coalition recently stated the problem to the President’s Advisory Panel on Federal Tax Reform. Every major trading partner of the US, including every other OECD country and China, relies on border-adjusted taxes that abate taxes on their exports to the US, while taxing US goods imported from the US.

This discrimination is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries.

The solution is to abandon the income tax and replace it with a value-added or sales tax or even tariffs.

The Founding Fathers based US finances on the tariff. They did this because they understood that an income tax was a form of enserfment or slavery. A free person is a person who owns his own labor. Income taxes mean that the government owns a share of each person’s labor, just as feudal lords owned a share of the peasants’ labor.

Tariffs also help a country develop its industry by protecting its products from competition from lower cost producers abroad.

The Founding Fathers’ system of finance was overturned by those who believed tariffs fell heavily on the poor while benefiting rich manufacturers. An income tax was seen as a fairer distribution of the tax burden and as the way towards more equality in the distribution of income. A long political-ideological struggle ensued that overthrew the tariff system and re-enserfed the American population.

Today the income distribution is more unequal than ever, but every person who earns is enserfed to the state. If you, gentle reader, think you are not a serf, see what happens if you claim the products of your labor as your own and refuse to pay income tax.

No rational purpose is served by the present US tax system.

A real tax reform would no doubt save some remaining parts of American manufacturing, some US jobs, and some union representation.

However, just as free trade economists have turned a conditional policy into a dogma, the liberal-left have made the income tax a fighting matter. US prosperity is unlikely to survive a wrong-headedness that exists across the political spectrum.

Testimony from the June 29 hearing of the House Science Subcommittee on Research is available online at www.house.gov/science/hearings/research05/june29/index.htm.


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