Nearly a year ago the global economic collapse began, after months of turmoil in financial markets. It was clear then, as it is now, that the crisis was brought on by a worsening shortage of capital (i.e., an unmanageable imbalance between asset valuations and real values), and the pressure on credit markets as a result of that shortage. Everyone relying on credit, even indirectly, or seeking credit (i.e., everyone) has felt the effects. Industrial demand, which had been robust for the years preceding 2008, stopped. Without that demand, generating new capital has been nearly impossible.
Capital “grows” when things increase in value: raw materials are converted into metal, shaped, processed, packaged, and delivered. Demand puts the process in motion. Much of the debate in the past year has been over the best way get it started again.
Six months ago the American Recovery and Reinvestment Act, the federal “stimulus” package, was expected to jump-start a stalled economy. The estimated $787-billion outlay was meant to invigorate manufacturing and construction by delivering the capital needed to proceed with “shovel ready” programs. Then, these projects were to revive demand for materials, goods, components, and services, which would boost industrial activity overall, support employment, and encourage consumers to resume spending.
Needless to say, it has not worked. Manufacturing remains flat. Legislators can issue instructions, but they cannot authorize confidence. They cannot make capital “grow” according to their directions. Proponents of the federal-spending approach to industrial growth might argue that production programs need time to launch and take effect. This may be true, except that there is little indication of industrial activity as a result of the stimulus, certainly not in credit markets where investors’ confidence should be expressed.
Another point made by many proponents of intensive federal spending is that the federal government must adopt “Buy American” rules for the projects it finances. That $787 billion needs to be directed more purposefully toward the domestic manufacturers, they contend.
There is a broad philosophical question here: should the stimulus money benefit the producers (U.S. manufacturers) or the investors (U.S. taxpayers)? Proponents of federal spending may say this is a false choice. They believe the investment benefits both the producers who receive the investment and the investors who earn multiples from the capital generated by the activities it initiates (wages, industrial and consumer spending, taxes, and so forth.)
This diversion of opinion is one thing that has not changed in the past year. Arguments over federal policies to “support” manufacturing are decades old now. In recent years, the debate has sparked over “globalization,” and how the federal government should use its trade policies, manage currency, and direct spending to favor domestic manufacturers against their foreign competitors.
That’s not an issue that will be resolved soon. But, one thing that ought to become clear as a result of the current federal stimulus strategy is that domestic manufacturers cannot succeed apart from the global market. It might be stimulative to have the federal government seeding domestic manufacturing activity, but it cannot shield those producers from global competition. A forging produced in Michigan or Ohio competes for customers with products from China and India. Product quality and cost are determined on a global basis, by the buyers.
The government may be that buyer, but it risks much if it works too hard to extract its price. By forcing so much cash into circulation it may spur industrial activity, but it’s equally probable that it will initiate unmanageable inflation: too much money chasing too few goods because demand never really rises to the point indicated by the price that’s been set. That will create a new imbalance between assets and valuations, of the sort we’ve endured for the past year. The market will prevail again, rewarding the best competitors, where ever they are.