[Benjamin Lusty is a lawyer and an occasional contributor to Publius Online]
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Presidential elections invariably turn out half-thought economic proposals. One current hot policy ticket is lavish tax advantages for manufacturers, presumably in hope of priming employment growth (and votes). President Obama, for example, proposes to reward manufacturing companies with a mix of tax credits and subsidized loans (i.e., politically directed credit). On the other side, Rick Santorum would absolve manufacturers from federal income tax altogether (i.e., politically directed credit, but through the US Treasury’s back door). Mitt Romney vows that “getting tough” on China will bring more work back to the shop floor (i.e., diplomatic bluster punctuated by a few WTO arbitrations). Slick stuff. But none of the contenders bother to articulate why singling out manufacturing for special treatment makes economic sense, especially for the rest of us.
Most of the political class uncritically assumes that jolting manufacturing is an unquestionable good. But inconvenient questions arise: Why does manufacturing merit the “remedial education” of protective tax advantages? Why should tax policy favor a company that builds airplanes over a company that sells bird seed? Does Boeing really need a leg up on the local pet shop?
Sweater subsidies under a Santorum Administration?
Some argue that manufacturing deserves special attention because it is in crisis, as evidenced by historical decline in assembly-line employment. The pro-manufacturing faction asserts that the mere fact that fewer people work in factories than in the past proves that the sector is failing. This argument has intuitive political appeal, but it confuses the overall health of manufacturing with the raw number of only one of its inputs—labor.
In truth, American manufacturing is not in crisis. America is still the largest manufacturer in the world, out-producing China (yes, China) by some 40%, a major gulf considering the massive disparity between China’s and America’s respective working populations. Further, American manufacturing output soared over the recent decades, more than doubling since 1975—even as employment in manufacturing fell. Contrary to signaling decline, the fact that American manufacturers can make far more with far less is a sign of underlying strength, leading both to lower consumer prices (which expand the breadth of potential demand) and better investment of labor and capital.
Besides, in our modern innovative economy, manufacturing isn’t even where the money is anymore. Indeed, it’s relatively worthless. Consider the iPhone and iPad—among two of the most in-demand products on the market. Research indicates that final assembly only accounts for 1.8% and 1.6% of the retail prices of these “iProducts,” respectively. The value of design, marketing, and distribution, by contrast, equates to roughly 58% and 30% of their retail prices. In other words, an iPhone’s design and marketing is 33 times more valuable than its assembly (at least as measured by the input cost).
Manufacturing is becoming even less valuable for more traditional and less technologically intensive products, such as automobiles. French carmaker Renault posits that assembly only accounts for 15% of the value of their cars. The money then, isn’t in twisting the steel that constructs these products, but in shaping the concepts that design them. If that’s the case, why subsidize the worthless stuff?
In truth, blue-collar boosting—touting plans to prop up manufacturing jobs–is better politics than it is sound economics. Americans love manufacturing jobs, or at least the idea of manufacturing jobs.
But frankly, politicians need to lead past it. Irrational attachment to factories, whether cynical or sentimental, only holds the country, and innovation, back. Complicating the tax code to the marginal benefit of a few companies that happen to have Washington’s temporary approval is a shoddy excuse for an economic policy. America needs manufacturing jobs no more than it needs any other job, and bending the economy to subsidize manufacturing will only cause real, long-term damage.
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