America’s War on Manufacturing

clyde

The following originally appeared on Philly.com.

In the wake of calls for tax breaks and other measures to support manufacturing from President Obama and the leading Republican presidential candidates, there has been an outcry from economists against such industrial policy.

But Harvard Business School professor Gary Pisano makes the excellent point in the latest Harvard Business Review that America has long had an industrial policy that is essentially anti-manufacturing.

Pisano notes that U.S. agriculture has long been heavily subsidized. The bill is about $50 billion annually. Universities are tax-exempt and receive large government research grants. Health care also receives an enormous tax break because employer-provided health-care plans are paid for with pretax dollars. The mortgage interest tax deduction provides a huge subsidy to the housing industry and stimulates banking Finally, Pisano notes that the private equity industry is heavily subsidized with an income-tax rate, called carried interest, that is set at 15 percent.

Pisano could have added to his list the military-industrial complex. Lockheed and other major corporations would be shadows of their present selves without the Pentagon. The National Institutes of Health spend more on biotech research than the rest of the world combined, which explains why the U.S. biotech industry is the world leader. Then there are the subsidies for big oil and the support of the airline industry through public funding of airports and flight control systems.

Finally, there is the big enchilada, the financial industry. In 1980, it accounted for 6 percent of all business profits. By 1990, that number was 30 percent; by 2005, 40 percent. How did that come to be? Abolition of regulatory rules, light regulation by the Federal Reserve, and carried-interest tax rates are just some of the special supports provided to the industry. And when it all came crashing down, Washington bailed Wall Street out and didn’t even fire anyone.

It looks to me as if the only part of the economy not getting special help — and, indeed, being neglected and even attacked by the government — is manufacturing.

Our tax system also subsidizes consumption and taxes saving and investment. So America’s industrial policy is to over-consume and to promote agriculture, military production, housing and construction, medical care, finance, and a variety of services while moving manufacturing offshore.

The issue is not whether we have an industrial policy; it’s what kind of industrial policy we’re going to have. The fantasy of pristine free markets is just that — a fantasy that exists only in economists’ models. In the real world, there is inevitably massive government intervention in the economy. At the moment, American industrial policy is what emerges from the arbitrage of special interests. It is incoherent, contradictory, and counterproductive.

Rather than opposing industrial policy, economists should be promoting one that could boost long-term wealth creation. Manufacturing would then be treated at least as kindly as banking and finance.

Clyde Prestowitz is the president of the Economic Strategy Institute. He writes about the global economy for Foreign Policy.

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