Tuesday, February 28, 2012

Liberals Demonstrate Conservative Bias for Manufacturing

Last Friday, over at TripleCrisis, Jeff Madrick posted 10 Questions for Economists Who Oppose Manufacturing Subsidies. Conversations regarding this topic have been persistent for much of President Obama’s term in office and are unlikely to dwindle heading towards the election. Although the questions are posed towards mainstream economists, of which I am not, here are some succinct, sensible, non-mainstream responses in opposition to to manufacturing subsidies.  

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?

Answer - Lowering the value of the dollar will make exports cheaper, but it will likewise make imports more expensive. Many Americans, not on Wall Street, will therefore be able to purchase less goods with the same income. Reducing the dollar value is also an imprecise mechanism that could very well drive up food and energy prices well in excess of any benefits to manufactures.

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?

Answer - While Germany, China and many other countries do subsidize their own manufacturing industries, America currently does as well. A cursory glance at the tax statements of GE, GM, Ford and a host of other manufacturers will display a multitude of tax breaks/loopholes specifically to support American manufacturing. A better questions is whether or not American taxpayer dollars are best used supporting/bailing out manufacturing companies so that foreign consumers can buy goods at cheaper prices.

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?

Answer - Despite receiving massive subsidies over the past decade(s), the companies mentioned in question 2 have been shedding American workers. Efforts to stimulate manufacturing jobs are more likely to redirect funds from other sectors, resulting in American job losses outside of manufacturing. Accounting for the potential production of those 2 or 3 million outside of manufacturing, any multiplier effect is not necessarily positive. A cardinal rule of economics is there is no free lunch, hence creating manufacturing jobs will not be free.

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?

Answer - This question assumes that reducing the trade deficit is definitively positive and that a lower dollar is needed to promote exports, both of which are not true. Until this past year, Japan ran persistent trade surpluses notwithstanding an almost perpetually rising Yen. Regardless, a different answer than the one expected: services. As noted above, manufactures are not the only form of exports (or imports). During the past century, US exports shifted dramatically from agriculture to manufactures. Over the next century is may shift again towards services.

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?

Answer - As mentioned above, similar arguments were made when manufacturing began encroaching on agriculture’s territory. Looking back, few people probably wish that agriculture had been protected so that many of us would still be working on farms today. Google makes enormous profits across the globe even though it manufactures almost nothing. What’s wrong with most Americans eventually working in offices rather than factories?

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?

Answer - Trade imbalances and debt levels are separate, relatively uncorrelated factors, of which the latter was more likely a major cause of the financial crisis. Total debt levels soared in the US and many European countries with import-led models as well. If debt levels are a major problem, which I believe is true, than one option to achieve balance would be reducing subsidies to acquiring debt, such as the mortgage interest deduction.

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.

Answer - Manufacturing is one source of innovation, but what about companies like Amazon, Netflix, Apple and Facebook. Is buying goods online today not cheaper and quicker? Is watching movies and listening to music not more accessible for less cost? Can we not interact with people all over the world far quicker and more easily? These companies and others are constantly innovating and improving our lives, undeterred by a lack of manufacturing or scientists..

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?

Answer - Why are manufacturing jobs so ‘good’? Does this imply that all non-manufacturing (or high-tech) jobs are ‘bad’? What about teachers or doctors? The future offers a potentially massive increase in service jobs with new markets that have not yet been conceived. Education within schools may not be adequate and is certainly not the only answer, however education through increasing work apprenticeships may be a good place to start.

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. Yetaccording 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?

Answer - According to CEPR’s Dean Baker, in The End of Loser Liberalism: Making Markets Progressive, supposedly “free-trade” agreements have exposed many lower wage (manufacturing) jobs to foreign competition while erecting barriers against trade in higher wage areas such as health care and law. At the same time, patent laws and tax codes have been continually adjusted to protect large corporations and enforce monopolies. The economy is also structured to encourage home buying/building, which for some time vastly expanded construction jobs beyond a sustainable amount. Even with all of these poor choices, about 92% of Americans desiring work are employed today. Americans have the knowledge and expertise to reach full-employment, but policies that raise the cost of hiring workers and discourage small business creation are not helping.

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 Wal-Mart provided.

Answer - Yes, services will provide one source of new jobs but hopefully finance will not be a significant contributor. It remains unclear why manufacturing jobs are necessarily better than retail or other service jobs. Either way, the beauty of capitalism is that the future is unknown but there has been no better economic system in history for supporting growth. Jobs will return, but manufacturing subsidies are not the best approach and may well cause more job losses than they create.

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