Stimulate Manufacturing and Production, Not Consumption and Consumerism

As store earnings plunged last week, the National Retail Federation proposed that the country create the mother of all sales by suspending taxes on all purchases. These tax holidays would occur in March, July and October and be national in scope.

The bill, they suggested, should be picked up by – who else? – the federal taxpayer, who would make up for the lost local revenues even for the five states without sales taxes. The rationale, suggests the Federation's chairman, J.C. Penney Chief Executive Myron Ullman III, in a letter to President-elect Barack Obama, would be "to help stimulate consumer spending as one of the first priorities of your new administration."

Now I can understand the manager at the local Target, Macy's or Nordstrom feeling a bit neglected as money pours out to prop up financial institutions and the Big Three. This proposed subsidy for mallrats, however, makes the previous somewhat-dubious bailouts look like good policy.

In fact, if there is one thing Americans do not need, it is yet another incentive to spend money they do not have. This has become a fixture of stimulus-think under the Bernanke-Bush regime. Remember the tax rebates earlier in the year? That was a big help, wasn't it?

Sadly, this "shop 'til you go bankrupt" strategy is being adopted by the new kingpins in Washington as well. Already you can hear Barney Frank, chair of the House Financial Services Committee, talking about a big stimulus to "prop up consumption."

This quick-fix approach has become a new genus of bipartisan madness. Like "the best minds of my generation ... looking for an angry fix" – to recall Allen Ginsberg's Howl – politicians and policymakers seem to feel we need some quick high to restore our battered economy.

Like a bad drug habit, reckless stimulation may make us feel better in the short term, but it could leave us shaky later on. To be effective over time, a stimulus plan must first address some fundamental challenges that have haunted the American economy for a generation.

Of course, there are countries that should be spending more. Places like China, Germany and Japan have gotten fat off our consumption. Now their beggar-thy-neighbor policies are backfiring as shopaholic nations, most notably the U.S., rein in their spending.

In contrast, our economy's failing stems from not producing nearly enough in goods and services to pay our bills. Our long-term weakness stems not from a shortage of consumer credit – the main obsession of Wall Street and both parties – but from the decline in manufacturing, growing dependence on imported fuel and deteriorating basic infrastructure.

Our consumption patterns – coupled with disdain for production – explain how our deficit in goods-related trade alone has soared over the past two decades from roughly $100 billion annually to over $800 billion. In the process, we have created an enormous shift in currency reserves to countries like China, Russia, India, Korea, Brazil and Taiwan. They produce and save too much; we consume and borrow too much.

Reversing this dangerous disequilibrium does not necessitate the end for American-style capitalism – as suggested recently by France's president, Nicolas Sarkozy – but instead a paradigm shift within it.

First, we need to swear off our addiction to hype-driven bubbles, seen first in technology and more recently in real estate. The fact that the government may be about to start yet another – this one colored "green" – suggests bad habits are hard to break.

Of course, bubbles certainly benefit some individuals and companies, most notably the financial sectors, who can best take advantage of wild speculative swings. The financial sector's share of profits more than doubled as a percentage of national income since the 1980s.

However, this pattern has not worked so well for most Americans, who have seen their wages stagnate or even fall. Most of us would benefit far more from robust growth that stems from productive industries like energy, fiber, food, logistics and manufacturing. Parts of the industrial Midwest, Texas and the Southeast have enjoyed expansions in these fields – until the onset of the recession, at least.

More important, productive economic growth creates demography far more egalitarian than the Namibia-like bifurcation that characterizes bubble centers like Manhattan and San Francisco. In fact, notes University of Washington demographer Richard Morrill, areas with greater concentration of these kinds of industries tend to suffer less inequality and offer better prospects for the average middle class worker.

Concerns over income equality should persuade Democrats – the supposed party of the people – to focus primarily on the basics of economic growth. This is precisely what we have not been doing for over a generation.

Just think of the billions sunk into convention centers, yuppie condos, performing arts centers and other ephemera. These produce some high-wage short-term construction and architecture jobs, but after that, they offer largely low-paying service work. Meanwhile the Chinese and other competitors dredge new harbors, build high-speed rail systems, new freeways and fiber-optic lines – the keys for pushing their economies to the next stage.

Sure, you can say the Chinese are also hurting from this financial crisis. But at least they can pay for their own stimulus. The Germans, Russians and Japanese, for now, can also dip into their dollar reserves to pay for new infrastructure investment. In contrast, we will have to beg the money for our stimulus like some busted-up small-town bookie.

More serious yet, the real problem may be whether we even want to make the changes necessary to boost our economy. Americans were once masters of both innovation and production, but we have begun to fall behind on both counts.

Indeed, our policies no longer focus on such things as manufacturing and energy production, deeming them beneath our dignity. As early as the mid-1980s, the New York Stock Exchange issued a report baldly stating that "a strong manufacturing economy is not a requisite for a prosperous economy."

At the same time, we have deluded ourselves into believing that a small number of "creative" alchemists – software engineers, hedge fund managers, urban developers – could transform code, cash and condos into limitless pots of gold. The huge winnings of these few would then allow the rest of us to spend like teenagers on a borrowed credit card, consuming everything made by the hard-working fools abroad.

By now we should know better. Americans possess no monopoly on "creativity." Our suppliers abroad are using the billions made from selling us everyday stuff to help finance future moves up the value-added scale. You can see it in every critical field from aerospace, steel and pharmaceuticals to software services, fashion design and entertainment.

Americans can meet this challenge but not by goading the family to spend more at Wal-Mart. Instead, we need to remember what actually drives economic growth. The ultimate fate of the economy will not be determined in the malls, but in the mines, oilfields, farms, factories, design shops and laboratories of a more productive economy.

This article originally appeared at Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.