This post is in response to a Facebook post by a Mr. Eric July which had been reposted by an acquaintance Mr. Jay Pellegrino. I met Jay through a mutual friend Josh Cantor and he happens to be a fellow Clarkson alumni. While more conservative than I, I’ve come to find he’s equally pragmatic. To that end, I responded. Here is the link to the post I’m responding to below.
I find it funny how people develop whole arguments based on cherry picked data and absent an elephant sized amount of context. One can and should look at the period from just after WWII to the 1960s as the hay day of American manufacturing. As a portion of GDP, in 1953 it was above 28%, while by 2017 we were at 12% (Source: https://www.stlouisfed.org/on-the-economy/2017/april/us-manufacturing-really-declining,noting the authors go on to discuss GDP vs. Real GDP, a and how those percentages overstate the decline). What’s also true is that the portion of the labor pool working in manufacturing has declined, having peaked at over 19 million workers in 1979 and never getting close that since (Source: https://www.bls.gov/opub/btn/volume-9/forty-years-of-falling-manufacturing-employment.htm). So one ought to ask, if you are wanting to realize an improvement in domestic US manufacturing, what were the underlying reasons for said “golden era” so that we can apply those lessons now.
The author you posted posits this is because of a low corporate tax rate (CTR) and regulations. But he starts at 1952 and doesn’t tell you what the rate is prior to that. Well, here is a link to that data (as far back as I can find it): https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/. If you look at the data, you’ll see that the CTR really doesn’t track all,that well with having spurred on manufacturing or not, given that the rates varied between 21% to 53% (depending on earnings) during WWII. It’s also not lost on me how his whole argument shows an every declining CTR while at the same time manufacturing is declining. It’s as if the whole argument that CTR having any effect on manufacturing is moot (which, it is and it isn’t). And as for regulations, the author doesn’t explain what regulations are costing us manufacturing jobs or manufacturing output as a portion of GDP. I submit that regulations cost something, and certainly regulatory schemes that are lax or imbalanced with our competition have an impact, but then there are the long term (e.g. healthcare costs, etc.) and other costs (e.g. health and well-being, lifespans, etc.) the come along the way that ore than offset the short term gains. I’ll come back to CTR and regulations later, but for now let’s get back to the massive elephant in the room about then and now, context.
Again, why was manufacturing in the US so powerful after WWII? Well if we just sit back and pull in the global context, it’s not hard to realize it has very little to do with US tax policy and entirely everything to do with the rest of the world in relation to the US. In 1945, the US stood as the only major economic power that did not have the ravages of war visited upon it. Its manufacturing base was unscathed by a single bomb, its infrastructure had not been run over by tanks, its homes were fully left intact. The war never made it to US shores, excepting Hawaii and several small Pacific territories, so rebuilding at home was not on the agenda. And it also had just had a huge government infusion into the economy to build out the manufacturing sector to become the famed “arsenal of democracy”. While there’d be a need to be retool to produce domestic goods instead of military wares, there was massive capacity to produce things already in place. And then let’s not forget the financial status of the US both for the government and private sectors. Yes, the US was by far the largest creditor nation, having helped bankrolled the war for the Allies and having encourage thrift and savings which could immediately be put to use to buy homes, retool, invest in education, new technologies, and become the unrivaled economic engine that it became within a decade. And also contributing was massive foreign investment in friendly markets to ensure there were buyers for what America made and sold, as well as an obliteration of tariffs moving toward free trade that made market penetration deep and without much of a gate to worry about.
The point of all this is that CTR had next to nothing to do with why our manufacturing boom happened after WWII, it had much more to do with the fact we were practically the only ones able to manufacture goods at scale on the entire globe. After Europe and Japan rebuilt and got humming again, this all started to slip. With China finally getting out of its own way (and our “opening” with them) and now India, Southeast Asia, and parts of Africa and South America getting in on the action (thanks to decades of stability and relative world peace), the US is in a much different place. The pandemic highlighted a massive problem in this regard, in that we let it slide too far and for too many things. We’ve created massive vulnerabilities by putting too much reliance on being able to get goods from places that may be working in completion if not being outright hostile to us and our way of life. We also saw the fact that our investments in infrastructure made in the 50s and 60s were in need of reinvestment and redevelopment as were are getting outpaced by our competitors. We need to do more to near shore or re-shore manufacturing, and fast.
Now I’ll say that among the only things I thought Trump et al did right in his first term was to cut the CTR to a historic low. Yes, it can’t be denied that we need the private sector to help create the jobs and prosperity to be able to compete and drive innovation. I’ll admit we need to look at regulations, but not so much to eliminate them, but to streamline them, understand the short and long term costs, and to find ways to bring balance so as to not negatively effect the growth we need in manufacturing. But the CTR reduction and the regulatory world don’t change the fundamentals that require other actions. And his use of tariffs proved counterproductive for the economy and this change, because the reciprocal response tariffs prevented our goods from getting to the open markets we need to have to make a trade balance in our favor. What was needed was direct investment in fixing our infrastructure (e.g. IIJA), investment in new and emerging technologies as well as proven areas of manufacturing market growth (e.g. IRA and CHIPS Act, even as more needs to be done), figuring out the full labor needs especially as it relates to immigration (still yet to be addressed comprehensively), and training and education pathways for the labor pool to be able to move manufacturing back to the forefront (still yet to be done). The last four years got us a good start on this, but now who knows where we will go. The last few weeks haven’t given us much hope that we will build on the needed work, rather the opposite.
All this to say, the analysis about CTR and the regulatory state here is built on a false premise and thus its conclusion is just wrong. If we are having an honest conversations (which is what the author started with) you have to start with the full story, with all of the context, and looking at the full scale of what needs to be done. The author is right, tariffs alone won’t fix this (actually tariffs are a horrible way to address this need), but neither is it true that you can blame taxes or the regulatory state as the major contributors to our US domestic manufacturing problem.
No comments:
Post a Comment