The Corner

Don’t Give Special Treatment to Manufacturers

The president thinks manufacturers deserve special treatment. “If you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here,” he explained in his State of the Union address. He has reaffirmed his position with a budget that creates or expands some 7 tax credits and other incentives for manufacturing and in-sourcing jobs. The president also took his plan on the road in recent weeks. Finally, today, he’s announced that manufacturers will be taxed at a lower tax rates than other U.S. corporations.

Besides the obvious unfairness of a system that rewards some (in this case, manufacturers) at the expenses of others (companies that do business abroad or non-manufacturing companies in the U.S.), these policies don’t even make sense.

First, in today’s global economy, maintaining slogans like “Made in America” are often misleading. For instance, a few weeks ago, the New York Times had a story about how almost all Apple products are manufactured overseas. Trying to build a policy around such a concept is a bad starting point. And there are good reasons for that:

It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that ‘Made in the U.S.A.’ is no longer a viable option for most Apple products.

Second, data collected by economist Mark Perry shows that U.S. manufacturing is already doing remarkably well without taxpayer help. For instance, he writes:

While the overall economy (real GDP) grew by only 1.7 percent in 2011, the manufacturing component of U.S. industrial production grew at more than twice that rate (4.0 percent). And manufacturing output in the Midwest “rust-belt” region of the country grew by an incredible 8.4 percent last year, suggesting that the traditional manufacturing heartland of America is leading the industrial comeback.

Third, a key argument for encouraging manufacturing is to create jobs and reduce unemployment. There are many problems with this. The goal ignores the fact that unemployment today isn’t the result of the losses in manufacturing jobs. That decline has been going on for 30 years and has been largely made up for by gains in productivity.

In addition, it is pretty obvious that the president’s preferential treatment won’t bring back the low-skill jobs that were lost. A recent piece in the Washington Post explains that, while president is making a big deal about bringing U.S. jobs back to the U.S., “many manufacturers say that, in fact, the jobs are already here. What’s missing are the skilled workers needed to fill them.” Basically, as factories were transformed through automation, low-skill jobs were lost as the laid-off workers were unqualified to run the new equipment.

That’s very consistent with the problem faced by the designers of the stimulus bill: Unemployed workers from the residential-construction business didn’t have the skills necessary to go build roads and bridges, even as the demand for these workers increased due to the injection of infrastructure money. My colleagues Garrett Jones and Dan Rothschild have also found in their work on the stimulus that 42 percent of the jobs created or saved were filled with workers poached from other companies, not the unemployment lines.

Obama’s former chairman of the Council of Economic Advisers, Christina Romer, recently broke ranks with the administration when she argued in a New York Times op-ed that manufacturing shouldn’t get special treatment:

As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

I wish the president [and any other lawmakers for that matter] would stop playing favorites with the tax code and taxpayers’ dollars, and instead improve this country’s financial outlook by reforming Social Security, Medicare, and Medicaid.

Update: Matt Mitchell makes the case against special treatment here. The Economist weighs in on the issue here and the Economix blog does it  here.

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