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Tuesday, October 25, 2016

10 Questions For Economists Who Oppose Manufacturing Subsidies

Economists who never spoke up about financial sector subsidies are in an uproar over President Obama’s support for manufacturing. But what’s their alternative?

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.

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Copyright 2012 The National Memo
  • haklerherr

    Of course the United States should have a strong manufacturing section in is economy. There are lots of new and complex products that we can manufacture here without being in competition with the clothing and plastic product manufacturing done in the rest of the world. We should be the ones manufacturing the high grade computers and electronics and we should be able to develop these industries in highly productive ways that beat out the other countries manufacturing them. These are fairly new industries which should be being manufactured in efficient clean and modern manufacturing plants. These industries are not bound by decades of labor contracts, unions, and regulations that affect the auto industry or steel industry. Why should all of this modern manufacturing be done in Japan or China? Are we too lazy to develop a new technological manufacturing plants from the ground up. Where are our Henry Fords who do like he did and create manufacturing plants which the like of were unheard of in his time which created a car any one could afford and then pay his workers three times the growing rate so they could buy his cars. The rest of the manufacturing industries eventually followed his example and made the United States the industrial giant that won World War II because we could mass produce war machines at a number unheard of before.

    Must we just give up our manufacturing industries to cheap labor over seas and countries who are willing to invest in manufacturing? This is not about fair trade because fair trade means you have products to trade. By refusing to use government incentives to develop new industries is just plain dumb, other countries are and beating the United States to the market. Then we try and enter that market and use our own government incentives they scream unfair. This is silly. It would be different if the United States put its full political and economic power behind certain industries and tried to drive others from the market. But this is not we will do. Economic incentives to start a company and stabilize it so it can be competitive on its own is not unfair trade. Neither is helping the manufacturing companies during times of economic recessions. Well paid workers in our own United States manufacturing plants can buy more products made in other countries and help their industries. We are now not just talking about circulating the United States wealth throughout the United States we are talking about circulating the world’s wealth through out the world and not letting the world’s wealth pool in the hands of a few wealthy individuals or families. Which again means that we can no longer think in terms of socialism, Communism, or Capitalism when operating on the world stage because we are dealing with large multinational companies which through stock holdings and other financial transactions tightly interwoven with each other.