The Mill is Never Coming Back
““For, as long as the [long shuttered] mill and factory remained, Miles feared, many would continue to believe against all reason that a buyer might be found for one or both, and that consequently Empire Falls would be restored to its old economic viability.” ”
A couple years ago I was giving a presentation in Peoria Illinois, a town most famous for being the birthplace and, for many years, the home of Caterpillar Tractor. But in 2022, after diversifying its production away from Peoria for years, CAT finally moved the headquarters to Dallas. As a Memphian, I often wonder what Memphis would look like without Federal Express. I imagine it would look a bit like Peoria. With CAT, went many of the engineers and all the senior management. The skilled labor in assembly, procurement, logistics etc. all went to Dallas or elsewhere. According to the census, the population of Peoria peaked in the 1960’s and has been falling fairly steadily ever since.
In Peoria, I met an economist who worked for the State of Illinois whose mandate was to help bring manufacturing back to the “downstate” region. He told me that the objections he met were unanimous. To paraphrase, “We don’t have the engineers or the highly skilled labor that manufacturers are looking for and our unskilled labor is going to cost far more than anywhere else. Free land and tax breaks aren’t going to make up the difference”
The novelist Richard Russo’s Empire Falls is a fictional place in upstate New York, but it is also a town just like Peoria and hundreds of others in the US. Globalization has happened and there is no putting that toothpaste back in the tube. Whether in Empire Falls or Peoria or Warren Ohio, or Helena Arkansas, the mill is never coming back.
Mississippi is the poorest state in the US, and yet GDP per capita in Mississippi is roughly equivalent to that of Germany. To some degree, the loss of manufacturing jobs in the US is a result of our success. We are the wealthiest large country on earth, by far. Millions of Americans work in service industry jobs that pay far more than the far-flung factory jobs the current administration wants to reshore. Our massive trade deficit is largely result of high American incomes, high American fiscal deficits and high American consumption. Also, while we have a massive trade deficit, inversely, we have a massive capital surplus which means that the rest of the world chooses to invest their savings in the US. While the strong US dollar hurts our ability to export, it enables the confidence globally that US assets, whether bonds, stocks or real estate are a safe haven.
To be clear, not all forms of protectionism are counterproductive. China plays by its own rules and there are vital US industries that must be protected like autos, aviation, defense, semiconductors, etc. Also, I have no issue with thoughtfully implemented reciprocal tariffs. The US consumer is the global 800lb gorilla and there is no reason why we should accept disadvantageous trading agreements. That said, punitive tariffs on our closest allies and trading partners as well as talk of dollar devaluation bely economic common sense.
David Ricardo introduced the concept of Comparative Advantage more than 200 years ago. The concept that countries benefit from free trade has been proven correct again and again over the last couple of centuries and no country has benefitted more than the US. The current administration’s rhetoric that our trade deficit is evidence of other countries taking advantage of us is historically and economically nonsensical.
We don’t have a time machine. We can’t go back and re-write NAFTA or the terms by which China entered the WTO. We can play the hand which we are currently dealt. The US needs high ROI investment. The US needs to focus on ensuring that our population is the best educated in the world so that we continue to be the center of global innovation. We need an immigration system that allows us to grow and compete for the world’s entrepreneurs. We need state capacity that can enable progress, while proving to the world that growth can be achieved with less fossil fuel intensity. And call me an idealist, but the US must always strive to be “the shining city on the hill” that exemplifies freedom, functional democracy and pluralistic, not oligopolistic capitalism.
In the end, the current administration’s lurch toward populist economic nostalgia that forsakes our advantages and exaggerates our disadvantages risks begetting a recession for both the US and global economy. We are embarking on not just a radical economic experiment, but one that runs counter to economic orthodoxy that has been imperfect but undeniably effective
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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