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Can Re-Industrialization Save the Middle Class?

by TOM MCNAMARA

Saint-Cyr, Coëtquidan, France.

Most economists agree that the “Great Recession” of 2008 ended sometime around the summer of 2009. This is surely great news to the 47.6 million Americans who are eating thanks to the Supplemental Nutrition Assistance Program (SNAP), more commonly known as “food stamps.” And no doubt the 43 million Americans who are living below the poverty line (latest data from 2007-2011) will be comforted by the fact that the worst economic crisis in almost 80 years ended over 3 years ago.

The chairman of the Federal Reserve Bank, Ben Bernanke, has shown his concern for all of this by indicating that he will keep interest rates low to support the economy and further assist the recovery. He had better. The Commerce Department reported that personal income dropped 3.6 percent this past January, the largest drop in 20 years.

And while the economy has been slowly recovering, unemployment still appears to be a nagging problem. The headline rate is just under 8%. This translates into over 12 million Americans out of work, with 4.8 million of them having been out of work for 27 weeks or longer, and therefore considered as “long-term” unemployed.

An alternative measure of unemployment, and one that is reported less, shows an even more disturbing picture. U6, which measures the total number of people out of work, plus all the people who are working part time for economic reasons, plus all the people who are only marginally attached to the labor force, stands at an incredible 14.4%.

Income inequality is also at its highest point since just before the Great Depression. In 2010, the top 1% of earners received 93% percent of the growth in incomes for that year. The people in the middle, taking into account the effects of inflation, have lower household incomes today than they did in 1996. Your average male made $32,986 in 2011. In 1968 he made $33,880 (again, adjusted for inflation).

Aggravating all of this would be the findings of a study done by the National Employment Law Project (NELP). It found that most of the job losses during the recession were in what we would consider to be mid-wage occupations. Unfortunately, most of the jobs that were created during the (tepid) recovery have been in sectors considered as lower-wage occupations (primarily service jobs). Data from the US Census Bureau paints an even bleaker picture, showing that 25% of American jobs pay below the federal poverty line for a family of four ($23,050) and that one-third of adults who live in poverty also work.

Consumer spending accounts for roughly two thirds of the US economy. Stagnating wages, combined with a lack of good paying jobs and high unemployment in general, does not bode well for a sustained and robust economic recovery anytime soon.

Historically speaking, manufacturing jobs have, on average, paid better wages than service jobs (with the former usually providing better benefits as well). But manufacturing, as a percent of the economy, has been on the decline for decades now. Over 5 million manufacturing jobs have been lost since 2000 alone.

But is this an irreversible phenomenon? A new study out of the Massachusetts Institute of Technology (MIT) gives encouragement to those who believe that revitalizing American industry would not only be good for the economy, it would also create high skilled and high paying jobs. Researchers at MIT suggest that efforts be made to maintain, and rebuild, the country’s manufacturing base.

The report also calls for a new way of looking at manufacturing. Instead of thinking of it as some tired old relic that can only be found in the country’s rust belt, it should be viewed as a dynamic and evolving group of industries that are a source of new ideas and new skills. Moreover, manufacturing is not something that is automatically at odds with the knowledge based economy of the 21st century.

The researchers call for efforts to be made to develop the country’s capacity for innovation, which they see as being closely interconnected with manufacturing.

One finding might give pause to people who have been promoting outsourcing and the conversion of the US into primarily a “knowledge based” economy. What was found was that when companies separated the design elements of their products from the actual manufacturing, that is to say, they kept the high value adding activities in the States and sent the actual production to some low wage country like China, the opportunities for improved efficiencies and better design were lost.

President Obama, for his part, says that he is committed to revitalizing manufacturing and using it as a platform to create more middle class jobs. The Obama administration has said it wants Congress to approve a $7 billion package – $6 billion in federal tax credits for factory towns that are in need of help and $1 billion to create innovation hubs.

The President’s program, if implemented, would include:

* Creating a network of 25 manufacturing Innovation Institutes

* Lowering the tax rate for manufacturers to 25 percent and expanding, and making permanent, the research and development tax credit

* Promoting and building new partnerships with communities to attract manufacturing companies and their associated supply chains

* Increasing efforts to open new markets for American-made goods

All of the above proposals would tie in nicely with the findings of the MIT report, which calls for new types of collaboration and risk-sharing, primarily through joint public-private partnerships and industry-university agreements. But in this age of “sequestration,” one wonders what the chances are of anything being done.

Since 2001, the US has spent at least $1.4 trillion on its undeclared and unfunded wars in Afghanistan and Iraq. Since the recession of 2008, the Federal Reserve has pledged $7.77 trillion to rescue the financial industry, loaning at least $1.2 trillion to banks and financial companies affected by the crisis–a crisis, it is important to note, of Wall Street’s own making. If only a fraction of these sums were invested in the economy, manufacturing could be revitalized and we might very well witness a second version of the industrial revolution.

If we treated saving the Middle Class with the same gravity that we treat national defense, or with the same speed with which we give taxpayer backed government bailouts to support our “free market” capitalist system, the pain and suffering that millions have endured these past few years probably could have been avoided.

Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

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