As a British businessman and economist, I have been concerned with the state of the U.K.’s economy for decades. I’ve witnessed a devastating decline in the principal sector with the potential to drive up growth – manufacturing – and the resulting stagnation of our economy.
Many of the economic problems faced by the U.K. are mirrored in the USA. It too has become a low-growth economy as a direct result of its manufacturing decline. Areas in the North of England that once thrived as manufacturing hubs are now hollowed out and devoid of enough to sell to the rest of the world, much like the so-called Rust Belt.
In my new book, Why the West Is Failing, I explain how the US has been in danger of making the same mistakes as the UK and how it too urgently needs to reverse the sector’s decline. But just as President Biden hopes to improve industry’s prospects and use it as a tool for growth and prosperity, the rising dollar threatens to deal the sector a further significant blow.
Bloomberg predicts a 100 percent chance of a recession in the U.S. within 12 months, and inflation is rampant. At this time of volatility, it has never been more critical that the U.S. economy continues to grow – it is the only hope America has of confidently fending off these crises and those of tomorrow.
By hiking up interest rates, the USA may help to stabilize the situation in the short term, slowing down inflation, but at the expense of weakening the economy in the long term. The U.S. needs a comprehensive strategy for growth, not reactionary damage control.
A strong economy is also crucial if the USA is to stay competitive on the world stage. China, a manufacturing powerhouse, is still consistently hitting annual growth rates of about 5 percent per year, while today, the USA is lucky to hit 2 percent. There is a real risk of Chinese economic domination if the American economy doesn’t return to stronger levels of growth soon.
The key barrier to U.S. economic growth is blind dependence on services to drive the economy, at the expense of manufacturing. You can relatively easily double the productivity of a manufacturing plant through investment in better machines and technology, for example, but you can’t double the productivity of a hairdresser.
President Biden’s self-professed ambition for a “manufacturing boom” is an admirable policy, and it’s the right one. But at this very moment, the rising dollar is undermining any real chance of success.
Why? Because a high exchange rate makes exports more expensive and far less attractive to buyers. As the dollar continues to rise, industry profitability will slide, reducing its capacity to compete for much-needed investment. Without investment, increases in productivity on any scale are much harder to achieve.
The U.S. government needs to increase levels of investment and competitiveness if it wants the economy to return to a level of growth anywhere near the recent world average of 3.5 percent per annum, increasing levels of prosperity and average living standards proportionately. In Why the West is Failing, I outline how a competitive exchange rate – that favors manufacturing – is the key to achieving this.
As the world’s primary reserve currency, the U.S. dollar is naturally relatively strong. This provides the U.S. some benefits in terms of trade but at the expense of making U.S. manufactured exports relatively expensive – the result is a reduction in America’s share of world trade, which pulls down growth and hurts living standards.
By encouraging the dollar to be at a more competitive rate, the USA can help to revive its manufacturing sector, increasing the proportion of GDP that is contributed by industry and slowing down the loss of world trade. This would provide greater opportunity for increased productivity and growth in the economy.
Greater trust in the long-term profitability of U.S. manufacturing would fuel investment, particularly in technology, mechanization, and power – the key drivers of productivity increases. Such investment will be essential if the USA is to reach growth anywhere near perhaps 3 percent per annum.
If the USA takes decisive action to revive manufacturing, beginning with allowing the dollar to be at a competitive rate, growth should be capable of returning to a rate that has come to be assumed as impossible. This would give the USA the much-needed financial power to deal with the impact of inflation and tackle the recession head-on, as well as the capacity to deal with increasing costs such as climate change and Russia’s war in Ukraine.
But if nothing is done, the U.S. economy is in danger of being mired in an endless cycle of relative economic stagnation, slow growth, low investment, and static living standards. Government borrowing will continue to rise and consecutive U.S. administrations will find themselves increasingly defenseless in the face of new crises. And America’s global power will fade as China and other high-growth economies spread their influence further, unchecked by American economic power. There is a huge amount at stake here for the US economy, and indeed, for the future of the West.Mills is founder of U.K.-based consumer goods distribution company JML.
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