Just Fill the Darn Potholes, We’ll Do the Rest: Caroline Baum

Feb. 2 (Bloomberg) -- Let’s face it: U.S. presidents are hopelessly in love with the idea of a manufacturing renaissance and an export-driven economy.

It isn’t hard to understand why. Factory jobs, on average, pay more than those in the services sector. A job at the local General Motors plant, with all the benefits that accrue, used to be a ticket to a middle-class lifestyle for those without the benefit of a college education -- sometimes for father and son alike.

Those days are gone. The dream never dies.

Presidents facing tough re-election contests are easily seduced by the idea of going back to the factory, just as some folks from earlier generations yearned for a return to an agrarian society -- but for different reasons. In September 2003, with 2.7 million manufacturing jobs disappearing on his watch, President George W. Bush appointed a new jobs czar “to focus on the needs of manufacturers.”

President Barack Obama has been pushing “Made in America” since he took office. In his State of the Union address last week, he laid out a blueprint for “an economy built on American manufacturing.” The following day, he took his show on the road, stopping at Conveyor Engineering & Manufacturing Inc. in Cedar Rapids, Iowa, where he told employees and assembled dignitaries the government has “to help these companies succeed,” starting with a change in the tax code.

Oath of Office

I’m all for changing the tax code -- to something we can comply with via a postcard-size return. Creating new exemptions or tax breaks to induce companies to do what the government wants them to do isn’t the answer.

The tax code shouldn’t favor manufacturers over service providers; farmers over miners; exporters over importers; borrowers over savers. As part of the oath of office, presidents should be required to commit to the following:

The tax code should be designed to raise the revenue the government needs to perform its legitimate functions (Obama and Ron Paul may disagree on what constitutes “legitimate”), not to produce socially desirable behavior (buy homes, have children).

It should promote economic growth, not punish success.

It should be constant, not an ever-changing vehicle for managing the business cycle.

When it comes to the government’s involvement in the private sector, we need more Darwin (natural selection) and less Lenin (central control). Everyone knows the government can’t pick winners and losers.

But other countries do it, you say. They support favored industries.

Just because everyone else does it doesn’t make it right. What seems to work in the short run -- Japan’s vaunted industrial policy, for example -- often fails in the long run.

Some history is in order. U.S. manufacturing as a share of the overall economy has been in decline for 60 years. As a percentage of nominal gross domestic product, manufacturing output shrank from a peak of almost 30 percent in 1953 to about 12 percent in 2010, according to the Commerce Department’s Bureau of Economic Analysis.

Manufacturing employment peaked at 19.5 million in 1979, when it represented almost 22 percent of the workforce. Last year, the 11.7 million manufacturing workers accounted for less than 9 percent of total employment, according to preliminary data from the Bureau of Labor Statistics. During that time, the value of U.S. manufacturing output kept increasing, thanks to strong productivity growth.

Advantage U.S.

Production was outsourced to China for one reason: comparative advantage. The idea that a country is better off if it can import lower-cost products instead of making them at home has been the foundation of free trade since David Ricardo wrote about it in 1817.

Consumers are better off, as well. Tax incentives for domestic producers, as proposed by Obama, or tariffs on foreign-made goods all benefit the producer at the expense of the consumer. (Mercantilism is like Keynesianism: It keeps coming back to haunt us.)

The irony is that manufacturing jobs are starting to return to the U.S. or, more correctly, new ones are being created. Why? Because China is losing its cost advantage. In order to keep the yuan undervalued, the People’s Bank of China has to print its own currency in exchange for the dollars received by exporters. Wages are rising, both in nominal terms because of inflation and in real terms as Chinese workers become more productive.

A study last year by Boston Consulting Group Inc. estimated that the cost savings of manufacturing in China -- taking into account duties, transportation and supply-chain risks -- will shrink in the next five years to a point where it behooves manufacturers to produce in the U.S.

Manufacturing employment has increased 334,000 since the low in December 2009. Southern, non-union states offer an increasingly hospitable environment for factories. NCR Corp. opened a new plant in Georgia to produce automated teller machines. Caterpillar Inc. plans to build a new construction-equipment factory in the U.S. Ford Motor Co. is bringing 2,000 jobs back from China and Mexico after reaching an agreement with the United Auto Workers union. Even a family-owned North Carolina furniture manufacturer decided to reopen a factory that has been shuttered for more than a decade.

These companies aren’t producing in the U.S. for altruistic reasons. They are doing it because it makes business sense, and they are letting the market, not the government, be their guide.

As a rule of thumb, government should fix the potholes -- repair the crumbling infrastructure -- and leave the driving to us.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)

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