Sunday, November 05, 2006

The Cost of Socialism...

The American Economy is one of the most competitive on the planet, right? The Bush tax cuts have worked their magic and we are more competitive than ever, right? Not so fast...

In a recent speech to the Detroit Economic Club, Dow Chemical Company CEO Andrew Liveris highlighted a little understood fact: The U.S. is one of the least cost competitive countries in the world, and the gap is growing. A recent report from the National Association of Manufacturers highlights the issue, and its causes.

If you're thinking that by "least cost competitive" I am comparing The U.S. to such notable low-cost coutries as India and China, think again. The U.S. is falling behind it's more developed brethren; countries such as Canada, Japan, German, and the U.K.! How big is the gap? Even after normalizing on the basis of unit of productivity, the U.S. still lags in cost competitiveness by 30 percent, up from 25% just 3 years ago. This means that it costs 30% more to manufacture one unit or one pound of something here, than it does everywhere else.

In a global economy, and especially in markets that are global such as heavy industry, chemicals, steel, etc. this is an untenable level of advantage. It reduces the U.S. to a local suppliers, and also strikes the U.S. from the list of location for new investment.

The causes of continuing increases? They can be traced to 5 distinct causes, all the result of failed political policy. If you think the Republicans are saving us from disaster, think again. None of these have been addressed by any recent administration. Here they are:

  1. Corporate Taxation: yes, while Bush was cutting income taxes, he failed to mention that these tax cuts were progressive, i.e. they gave a proportionately higher cut to the poor. Corporate taxes were not cut at all. While this was happening, competitive nations were reducing their corporate tax burden.
  2. Regulatory Compliance: the cost of compliance with such things as environmental regulation can be measured, and the tally is not pretty.
  3. Energy Cost: Over-regulation of nuclear and restrictions on drilling for oil have taken their toll. The demand has been shifted mostly to natural gas, and this fuel stock is difficult to transport. As such we now have a basic economic situation, demand is outstripping supply, and the costs are skyrocketing.
  4. Tort costs: when people view corporations as inherently evil, and their needs as a claim on the nearest corporation, then the justice system will be twisted into a form of ongoing punishment for corporations. This is what is happening today.
  5. Employee Health Costs: In today's world, healthcare is now a right.
The effect? Existing U.S. manufacturing supplies local, not global markets, and corporations looking for manufacturing that can serve global markets go elsewhere for investment. Liveris gives a very enlightening perspective on his company's investment decisions.

The ultimate solution: lasseiz-faire. Leave the free market alone. This is a policy that neither of the political parties are the least interested in, and one which even our business leaders cannot morally defend against. Witness, Liveris' comment regarding environmental regulation,
No one is suggesting that all regulation is bad; much of it we couldn't live without.
Anyone interested in the details needs to read both Andrew's speech (which other than a few philosophical inconsistencies, expresses admiration for the modern industrialist and America) and this detailed report.

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