Should we “promote” manufacturing?

Warren Coats Contributor
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The United States is the wealthiest country on earth and its citizens are among the wealthiest per capita because it produces more than any other and because its citizens each produce more on average. My ten-year-old grandson would have no trouble understanding this at all. The food on the table and the iPad in his hand did not fall out of the sky. My five year old granddaughter might still believe in the tooth fairy, but she will learn the truth soon enough.

We are more productive because our government has provided a supportive environment for enterprise including: a stable and efficient legal foundation for interacting (trading) with each other and protecting our property, basic infrastructure (roads, harbors) for getting our goods to market, and basic research to support private development of technology and products, and because it has stayed out of the way of experimenting risk taking entrepreneurs searching for the best uses of their resources (material and intellectual). The quality of our education is also a critical input into our productivity as is the quality of our shared public morality that guides our voluntary relationships and interactions. Hopefully I have flagged at least half of what matters most.

Measures that limit or interfere with our choice of employment, where we invest, and where and what we buy almost by definition reduces our productivity and our incomes and hence our wealth. If our first choice is constrained or limited by some government law or regulation, the second or third best choice we are forced to make must be inferior and will result in a less profitable outcome, forcing us and the economy to have less. Who would support such restrictions and why would they do so?

The support for wealth reducing restrictions on trade come from those companies with uncompetitive (less productive) businesses (e.g. steel tariffs) and those workers with uncompetitive wage contracts (the older UAW auto workers) who would like protection from more productive, cost effective competitors if they can get away with it, and from those who just don’t understand what they are asking for. We can protect inefficiency a little bit without serious harm to our standards of living, but over time such restrictions would move us further and further from the wealth maximizing allocation and reallocation of our human and capital resources to their best, most productive uses. We would fall from the economic leadership position we now hold.

Should government promote manufacturing and punish outsourcing some functions abroad as the Obama administration is proposing? There may be government tax and other policies that artificially encourage outsourcing. If so, they should be removed as they lead entrepreneurs to make choices that are not the most productive absent the government’s distorting interference. But if the policy tries to discourage imports with taxes or other policies in the mistaken belief that they are “keeping” jobs here, the policy will reduce our productivity and wealth by keeping workers in jobs in which they are less productive. It would be better for more of our resources (workers and capital) to shift to producing more competitive exports with which to pay for these imports.

A small taste of the tax and subsidy incentives being piled into an already complex structure of government that interferes with the allocation of our resources can be had by peeling the cover of the new Senate Energy Bill. University of Hawaii economist James Roumasset reports that:

“Section 2116 explains that 400,000 such vehicles will be virtually given away at low cost — or perhaps no cost — to people living in ‘selected communities diverse in population’ and ‘demographics.’ Additionally, pages 264-265 require that any new construction or remodel of an existing structure must include the installation of proper hookups for charging an electric vehicle. So even if you have no intention of owning such a car, adding that extra bedroom will require you to spend additional money to install battery-charging infrastructure in your garage…. You mean after taking 61% ownership of GM, the feds can just subsidize themselves?” he asks. But to neutralize these incentives for energy efficiency—I mean to promote a doubling of exports, President Obama has just announced an “Export-Import Bank’s $250 million loan guarantee, which will finance $3.1 billion of exports to Canada and Mexico of more than 200,000 U.S.-made vehicles, including [gas guzzling] Explorers….”

And this goes on and on.

The government can make a positive contribution to our standard of living by improving and/or maintaining our infrastructure (roads, communications, etc) and improving our lagging education needed to keep our workers in the forefront of using productive technology. There are good and bad ways of doing so. Generally the best contribution from government is to provide and oversee an efficient framework in which the private sector makes the resource allocation choices.

Education, for example, is critical to our productivity and is too important to leave in the hands of government any longer. Government’s ownership and operation of the education industry has seen us slide down the ranking of the quality of the world’s work forces year after year. Privatize education with government financing (vouchers) and oversight. If we try to protect inefficient uncompetitive workers and enterprises from competition at home or abroad, our standard of living will decline.

Warren Coats retired from the International Monetary Fund in 2003, where he led technical assistance missions to central banks in more than twenty countries. His most recent book, “One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina,” was published in November 2007. He has a Ph.D. in economics from the University of Chicago and lives in Bethesda, Md.