Reviving U. S. Manufacturing

I agree with the premise of Harold Meyerson’s column in the Washington Post today, that we need to rely less highly on retail sales for economic growth than we do. Unfortunately, he supports the premise with his praise for the industrial policies of the Obama Administration, yet another instance of the broken window fallacy:

Within the Obama administration and on Capitol Hill, there are moves afoot that could begin to end this travesty. Last week, the president announced $2.4 billion in grants from the American Recovery and Reinvestment Act to U.S. companies developing batteries for hybrid and electric cars. The embattled Waxman-Markey climate change bill has a provision to lend $30 billion to auto parts companies to convert to alternative energy manufacturing plants. Sen. Sherrod Brown (D-Ohio), who is Congress’s leading proponent of American manufacturing, is calling to make permanent the research-and-development tax credit (right now, it must be renewed every couple of years) and injecting some pro-American considerations into our trade policy.

Barring tariffs and import quotas there is nothing that can be done to make the United States the center of the battery, hybrid, or electric car manufacturing world. Toyota produces all of its Priuses in Japan, it has run into substantial production barriers, and it doesn’t seem to be making any money on the Priuses it does sell suggesting to me that their sale in the United States may be an artifact of our CAFE system. GM’s Volt is unsalesable without steep government subsidies. That’s not the sort of thing that becomes more profitable with volume.

If there were one thing the Obama Administration should do to foster a resurgence of manufacturing, it would be to stabilize the financial sector. If it were two things it would be to stabilize the financial sector and foster a stable business environment. That would mean sacrificing its green objectives and its desire for sweeping changes in the healthcare sector so I don’t think we can expect that.

There are plenty of other things that we could do as well although some would be quite painful. For example, we could be much tougher bargainers with China. As long as China pegs its currency to the dollar, has insufficient domestic consumption, and imposes barriers to U. S. goods, it’s going to be difficult for U. S. manufacturing to grow. Given the heavy dependence on borrowing that the Administration’s agenda requires and the perception that we’re dependent on Chinese banks to purchase our debt which IMO is greatly exaggerated, I doubt we’ll see much action in this direction.

The R&D tax credit is small potatoes. We could abandon the business income tax altogether. Or allow current year expensing of all business expenses. Last time I looked we were the only major industrialized nation that had our bizarre system of depreciation.

We should be a greater presence in the heavy industrial goods marketplace than we are. Our competitor there is Germany and I honestly don’t know how we’ll recover the machine tool markets we’ve squandered over the period of the last forty years.

Manufacturing isn’t the only game in town. There’s also agricultural production and services other than healthcare.

Although they could have some marginal impact don’t expect either manufacturing or agriculture to pick up the millions of jobs that have been lost over the last year. Neither industry works that way any more.

For services other than healthcare to have greater importance in our economy we’d need a major change in attitudes away from quantity towards quality; away from replace and more to installation, service, and repair. It’s hard for me to see how that will take place, at least in the near term.

There’s an old saw to the effect of “lead, follow, or get the heck out of the way”. That’s pretty good advice for the Obama Administration which, at least in the area of business, doesn’t seem to be able to make up its mind.