Why are mainstream economists, right and left, so determined to push back any attempt to subsidize manufacturing in America? The question will arise anew tonight when President Obama presents his budget, complete with tax provisions to support manufacturing. After the president addressed the issue as his first topic in the State of the Union a couple of weeks ago, many esteemed economists seemed to rush to the offense. Obama proposed using tax carrots and sticks to encourage manufacturers to stay here, return here, or get out of those low-wage emerging markets. Some mainstreamers, seeming to represent the conventional wisdom among them, openly scorned the idea. At least one, Laura Tyson, has stood her ground in favor of a policy focus on manufacturing.
I understand the mainstream economic reflex. After working so hard to get world nations to reduce trade barriers for the last 40 to 50 years, they and their successors view subsidizing manufacturing in the U.S. as a retreat. It could provoke retaliation, as well. And moving the world toward free trade makes eminently good theoretical sense -- to a degree. The anti-manufacturing subsidy bias is really a subset of the firm, almost unshakable allegiance to free trade theory among the American mainstream.
I also understand the mainstream neoclassical reflex, having taken a few of those courses. Indeed, sometimes I am a neoclassical myself. When you fundamentally believe that economies adjust efficiently and that the markets will decide, if left unimpeded, which industries should naturally rise and fall, it is profoundly difficult to accept tinkering with matters unless very much warranted. If manufacturing is declining in America, the conventional thinkers say it is largely because first, the same business can be done more efficiently elsewhere, or second, American business has better places to put its money, usually by investing in services-oriented industries, some of them highly sophisticated. There may be manufacturing "market failures" to compensate for, but probably not many.
But here my questions begin to arise. These are by and large the same economists who, as a group, rarely raised public ire over the many subsidies the federal government bestowed on U.S. finance, at least until the recent financial crisis. Who did the American high dollar policy since the 1990s help? Finance, which could import mounds of capital and lend at low rates. Consider how little complaint there was about the interest rate tax deduction. Should you really get an interest rate deduction when you borrow to take over another company through an LBO or a privatization, and then keep a big slice of the equity for yourself? Should you get that deduction for leveraging up your investment bank's trading department or your underwriting of collateralized debt obligations?
Did economists rise in chorus over conflicts of interest with ratings agencies, asymmetric compensation incentives at Wall Street banks, or the almost complete secrecy under which derivatives are traded? All of these were express violations, not merely of progressive economic thinking, but of conservative laissez-fare thinking. If they had done so with the same vigor with which they attack those who want to stimulate manufactures through government subsidies, perhaps I would understand their passion. But they did not.
Since there is plenty of uncertainty -- including my own -- about this issue, let me just pose some rhetorical questions to a phantom mainstream economist in hopes he or she will clarify the issues.
1. Doesn't America already have an anti-manufacturing strategy? It has enthusiastically supported a high value for the dollar since the 1990s. The high dollar raises export prices but, as noted, very much helps Wall Street attract capital flows and lend at low rates. Shouldn't we get the value of the dollar down?
2. Don't Germany, China, and many other countries subsidize their own manufacturing industries? Do you really think the World Trade Organization works all these out? If they do subsidize, isn't it only fair to place manufacturing on a level playing field and subsidize our own?
3. Doesn't manufacturing having a multiplier effect? Some say we can never boost the share of manufacturing adequately. So what if we create even as much as another 2 or 3 million manufacturing jobs. (The president is settling for a couple of hundred thousand.) But wouldn't manufacturing's multiplier effect stimulate the rise of other manufacturing and service industries and the creation of other jobs?
4. How can we get our trade deficit down if we don't sell more manufactures? They account for about seven-eighths of our exports. I know the answer some of you will give: savings. But do you really think raising our savings rate will reduce capital inflows adequately to lower the dollar in order to promote more exports?
5. Without manufacturing, what will we export? Isn't there a point at which we lose too many industries and labor skills to make a comeback? Given the symbiotic nature of business clusters and supply chains, aren't we rapidly losing the subsidiary companies that make manufacturing and exports possible?
6. Weren't persistent trade imbalances a major cause of the 2007-2008 financial crisis as debt levels soared? Don't you worry that the export-led models of China, Germany and Japan are unsustainable? On a worldwide basis, they are really debt-led growth models. How do we get balance without promoting our exports?
7. Isn't manufacturing a source of innovation in and of itself? Isn't that where the scientists and engineers are? Don't we learn and innovate by doing? One commentator recently said that those innovations are exploited by others, so it doesn't matter. Really? Then maybe we should stop promoting R&D altogether.
8. Where will the good jobs come from? You always say high technology. But America now imports more high-technology products than it exports, especially to China. Even Germany has a high-technology deficit with China. I ask again, where will the jobs come from as technology gets more complex? Do you think more education is really an adequate answer, the only answer?
9. Why did the job market do so poorly throughout the 2000s? If you say we can't know where jobs will come from, that the market will decide, then why aren't you worried about the job market's poor performance over the last decade, with huge losses in manufacturing jobs? Again, you say, inadequate education. Yet according to CEPR's John Schmitt, we have not produced more good jobs as GDP grew -- good jobs measured by wages and benefits provided. Is there hard evidence we don't have the labor to fill the high-technology jobs -- and if we did, are there enough jobs going unfilled to make a difference?
10. Will the jobs come from services? The rapid growth of finance has fouled up the numbers. Finance services did provide high-paying jobs, but we now know many of these were phantoms. And the salad days may be over. The other big area of productivity growth in services was retail. We all know what kinds of jobs Walmart provided.
I ask these questions sincerely. The president's program is not ideal, but it is calling attention to a problem. We need an open discussion about manufacturing policy, infrastructure investment, and industrial policy that avoids snooty recriminations and recognizes that no one has all the answers.
Cross-posted from New Deal 2.0.
Scott Paul: Professor Romer Needs Manufacturing 101
Jerry Jasinowski: Weighing the Economic Evidence
Daniel Burrus: How to Save the Manufacturing Sector
Devon Swezey: How to Bring Back U.S. Manufacturing Jobs
In U.S. Manufacturing Revival, Small Businesses Could Play Crucial ...
U.S. Manufacturing Is a Bright Spot for the Economy - NYTimes.com
U.S. manufacturing is No. 1, for now - Business - US business ...
Can American manufacturing really be cornerstone of economic ...
Lolwut? That had nothing to do with the financial crisis
2) How many times do we have to relearn that a bureaucracy cannot approach the markets for choosing products desired by the consumer? We are relearning this lesson all over again with the artificial market distortions and failures of the Obama "clean energy economy" and Obamacare socialist policies.
3) The Asian government directed mercantilism models have repeatedly created bubble economies and fails. See 1980s Japan, 1990s Asian tigers and China within the next five years.
This also kept the prices of imported commodities for manufacturing down as compared to the surge in prices after the Fed effectively doubled the money supply since 2008.
It's perspective. Economists measure success solely by corporate profit. Note that as our economy has collapsed, corporate profits have remained strong. (1)
Classical economists believe a dramatic gutting of the American and European standard of living is necessary.
Globalism leads to a global standard of living. Half of the planet lives in the 3rd world, countries like China and India. A typical worker earns about $200 per month. (2) In India, a worker's family must share a port-a-potty with 15,000 neighbors. (3)
The new global standard of living will apply to all but the "Elite". Teachers, Doctors, welders, taxi drivers, cooks, lawyers, etc. There will still be a premium paid to occupations that require greater skill and education, but the overall scale will shift. Divide last year's income by 13 for a rough estimate of your future.
The good news is the number of mega-yachts is exploding, having increased by more than 400% since 1997. (4)
References:
1. http://motherjones.com/kevin-drum/2011/11/how-wall-street-turned-income-inequality-gold
2. http://www.nytimes.com/2011/12/03/opinion/will-china-stumble-dont-bet-on-it.html
3. http://sanitationupdates.wordpress.com/2011/06/29/india-mumbai-tackling-open-defecation-in-dharavi/
4. http://www.msnbc.msn.com/id/25804188/ns/travel-luxury_travel/t/where-big-boys-go-berth/
Well, maybe she has finally seen the light since her pro-globalism stand under Clinton.
She is four minutes in (and I highly recommend watching the full interview):
http://www.youtube.com/watch?v=SZTzPmn-87w&feature=related
Yes, we need pro-manufacturing policies. But the trouble with subsidies is that they are ALWAYS politically generated, and attempt to pick winners and losers irrespective of true supply and demand market forces.
Instead of subsidies (=corporate welfare) better to have changes in tax code and trade policy to promote domestic private investment. If our government wasn't so corrupted by corporate money it might actually be able to help restore our global competitiveness.
What do these industries have in common? Every single one gets significant investment by the government, either for R & D or through defense contracts. We can lead the world when we put our minds to it and our money behind it.
7) Yes but so are other sectors, so what?
8) Millions of other places, like they have been coming from.
9-10) What you mean the unemployment being 5.5% while wage growth happened. When people like yourself analyze wages and see them stagnating you fail to take into account a few things.
First the illegal immigrant population pulls down wages. Second stop using the term median household income as number of people per household has been shrinking, when you look at individual income and add in benefits, you will notice wage growth.
I could go on.
In the end the big thing to remember is that most economists do not believe any industry should be subsidized manufacturing included. Subsidies put the government in charge of picking winners and losers and often favor dead companies (see the banks) that the government has a vested interest in.
Also do you not note, that manufacturing in the US has been on the rise and has been even through the recession? Productivity and the value of manufactured goods are still at all time highs, jobs are lower because of continued automation and specialization, that is going to continue to happen and the more government throws up roadblocks to hiring employees the more employers will stick with investing in technology vs people. Too bad you cant see that.
1) A high dollar since the 90's? Have you not noticed that contiued slide of the US dollar against most currencies, due to continued debasemeny by the Fed? The purchasing power of the dollar has been declining for decades.
3) Do you actually understand the multiplier effect? By the way you used the term loosely I bet not. By your very definition growth in any industry and the increase in jobs would lead to a "multiplier effect" of supplemental job growth.
4) Why do we need to get the trade deficit down? Do you not understand that when a chinese company sells a US company its products it is then paid in dollars that are..... ta da spent often on other goods and services in the US. Call it a capital account surplus and you will understand my point.
5) Services, we are already the number one exporter of accounting, legal, and consulting services, but of course this is never accounted for in our "trade deficit."
Since all of the gold that was accumulated by previous US generations (by manufacturing things in exchange for foreign gold before de-industrialization of the USA) has been sold and that money has been spent to pay for our past US government expenses and for our past imported consumable products, the USA is now printing and selling new paper US Treasury Bonds (Money) that are redeemable for title to our privately owned real estate, factories, farms, casinos, hotels, office buildings, ports, breweries, distilleries, businesses, etc. that were created by previous US generations instead of gold in order to pay for government expenses that are in excess of collected taxes (and to pay for our imported consumer items) instead of Gold from Ft. Knox.
And non-wealth producing nations like the USA might destroy their own economies with (deficit) government spending which will impoverish all of their citizens by selling and/or mortgaging existing NATIONAL WEALTH and spending the proceeds for federal government activities!
The US government must pass new US laws that encourage US businesses to re-industrialize and do business in the USA and/or repeal the existing US laws that discourages and economically prohibits US businesses from doing business and creating jobs in the USA.
I think you should make those suggestions to some politician. Maybe they'll sponsor a bill to that effect that will immediately get them recalled from office.
I've got a better idea, why don't we start by changing our tax codes to incentivize American corporations to bring their manufacturing sector back to America.
Stop forcing U.S. manufactured goods to compete with foreign manufactured goods produced with slave labor and with no regard to environmental degradation.
Good or bad, we have imposed additional costs on U.S. manufacturing in terms of wage standards, health and safety regulations, environmental regulations, etc. It is bad policy to open up U.S. markets to goods built by foreign manufacturers who don't play by the same rules.
Fair trade, not free trade.