2016 –Â another U.S. election year when political candidates try to convince voters that only they can create more jobs and bring back the glorious economy of days past.
However, no one ever stops to consider the net effect of going backward, bringing traditional hands-on manufacturing jobs back to the country may actually do more harm than good.
The first and most popular solution that candidates use is to increase tariffs for U.S. companies trying to bring in goods from different countries. Great –Â level the playing field and make the overall cost of goods being sold on par to that of high-priced American labor.
However, currency manipulation and depreciation is a factor that is almost impossible to mitigate in developing countries. As the currency depreciates versus the U.S. dollar, the cost of business usually becomes more feasible for outsourcers as well.
Currency appreciation/depreciation versus others is most commonly based on the amount of currency held versus sold, as more jobs return to the U.S. and our economic outlook looks better and better on paper, money will flock to the U.S. dollar. Additionally, as more and more wealthy individuals from developing countries immigrate to the U.S., they also convert large amounts of their foreign currencies to our domestic currency and place an upward pressure on housing prices. Homes are by far the favorite asset of high net worth individuals from developing nations trying to move their depreciating assets quickly.
Sooner or later the effect of foreign currency depreciation will over take the cost of tariffs and we will once again be left with new wastelands of traditional factories. In the meantime, our GDP may increase marginally over its current average of about 2% per annum; let’s say it goes to 4% to 5% (still hard to imagine). Now the U.S. dollar is soaring high, foreign markets with vast numbers of consumers begin to have a difficult time importing our products, which are now far more expensive than their own due to their devalued yuan/yen/won/real, etc.
Our companies lose new opportunities abroad and have to make up for the lost revenue and shrinking margins by charging even higher prices in the U.S. to offset price cuts in foreign markets. Let's assume that the net effect of this problem leads to a 4% increase in domestic prices of common goods in the consumer price index.
Inflation has now set in. This is the key marker that the Fed uses in raising interest rates in the U.S. This is also the reason that interest rates have moved like molasses recently –because of our current deflationary economy.
Now the cost of capital increases for manufacturers as interest rates rise. So does the cost of a mortgage. Individuals begin to pay an increase of 1% more per year on average for their mortgages. Just as the GDP and inflation begin their upticks, companies are forced into laying off more and more individuals.
Increasing fracking and domestic oil production is another strategy that doesn't make a whole lot of sense. The price of oil is usually predicated on supply versus demand; the world is floating in oil at this point and another spike in supply will send oil prices down even further. That may be good for the overall CPI index, but who will subsidize that move? The lower oil goes, the more and more difficult it becomes for upstream operations to turn a profit.
The wise move would be for trade schools to teach traditional manufacturing laborers the skills needed to operate more and more efficient automated plants. If we can become a world leader in manufacturing automation, we can capture both the domestic and foreign markets. Not focusing on more workers per plant, but more plants (or plant output/footprint) per worker.
Couple this with renewable energy resources to power the plants, like Tesla’s (TSLA, Financial) self-sustaining Gigafactory in Reno, Nevada, and we may have a shot of beating the cost curve fight against foreign currency deflation. Industrial factory batteries to supply electricity during nonpeak times or times with little wind or solar energy generation is proving to be a sustainable model in nearly any environment.
The only way to drive down costs to balance the trade deficit while increasing well-paying manufacturing jobs is to reduce overhead operating costs.
Unfortunately, the political environment would have us believe that the GDP issue is a zero sum game on either side of the aisle. There is no agreement that we can have both jobs and renewable energy on our agenda. We have to pick one or the other.
In the end, the net effect of trying to recapture traditional outsourced jobs could be harmful to the U.S. economy. Sure, everyone will feel better about himself or herself, but if we look at the American household as we do a business, revenue may increase, but profit could plummet. If our economy grows by an extra 2% per year versus current averages but is still outpaced by inflation, are we really better off?
Disclosure: The author has no positions in Tesla.
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