The Government Manufacturing Boom

Which of the following scenarios seems more likely?

1. Across the board, businesses were missing countless profitable investment opportunities prior to 2022. The United States Congress, through legislation, made those investment opportunities clear to them. The opportunities exist only in the United States and not in the EU’s similarly developed economy.
2. The U.S. government is currently inflating a manufacturing-construction bubble that is politically popular. Congress has flooded industries with massive amounts of cash that businesses are happy to spend but aren’t putting to best use. The boom is happening only in the United States because the EU didn’t pass three massive industrial-spending bills in quick succession.

Scenario 2 seems more likely to me. As I noted back in September, economist Paul Winfree found that total private fixed investment has basically stagnated while this manufacturing-construction boom has occurred. That stagnation suggests that most of this manufacturing spending is driven by subsidies rather than market demand.

All of this is happening in an economy with essentially no labor-market slack. What this means is that just about every worker on projects that are part of the manufacturing-construction boom was likely taken off of other projects that would have been more profitable.

It also means that these new manufacturing facilities, when completed, will have a hard time finding workers in the existing labor stock to fill them. The current unemployment rate in the manufacturing sector is 3 percent. The overall unemployment rate is 3.7 percent. Get ready for politically unpopular calls for increased immigration in response to government acting on the politically popular calls for increased manufacturing.

Over the next several years, the U.S. could be in for a massive object lesson in what can go wrong with government-directed investment.