Spengler

Santorum Is Right About Manufacturing

Much as I dislike any sort of interference with market allocation of investments, I have come to the reluctant conclusion that Rick Santorum is right to propose special tax breaks for manufacturing, and hereby retract my January 15 criticism of his plan.

There are four issues to consider:

1) Americans urgently need to save more as the Boomer generation retires. The only way to increase savings without shutting off domestic spending is to export and save the proceeds, and to export, America needs to manufacture more;

2) Americans are terrified of investing in manufacturing as emerging Asia establishes its competence in everything from cell phones to computer aircraft;

3) National security; and

4) A disturbingly large percentage of America’s workforce has been sidelined by the loss of America’s monopoly position as the world’s main destination for investment.

 

The last is the most devastating.

 

Just 40% of working-age Americans without a high-school diploma, and 55% with a high-school diploma but no college, presently are working – against 72% with at least a four-year degree. Nothing like this has happened before, and its consequences are catastrophic.

This is killing American families. More than half of all children born to mothers under 30 are born outside of marriage, As the New York Times reported on Feb. 16, “One group still largely resists the trend: college graduates, who overwhelmingly marry before having children. That is turning family structure into a new class divide, with the economic and social rewards of marriage increasingly reserved for people with the most education.”

Charles Murray’s book Coming Apart has already attracted national controversy. I can’t attest to the accuracy of his conclusions, but he clearly is on to something.

If there are few jobs available for Americans without a college diploma, we will have a permanent, growing underclass. Apart from the dreadful human cost, the cost of the overloaded safety net will make it impossible to shrink the budget deficit.

Santorum’s emphasis on jobs for people like his coal-miner grandfather has to strike a chord under these circumstances. Much as I admire Mitt Romney, and continue to believe that he will be the Republican candidate in November, sometimes he seems to think that the U.S. economy is a Harvard Business School case study. At the moment it is the scene of a vast human disaster.

That is one side of the story. Another side is America’s loss of position as the world’s premier destination for global investment. When Ronald Reagan was president, China was still Communist and emerging Asia was barely on the radar. America became a magnet for the world’s savings, and Americans borrowed foreign savings against rising home values, rather than save for themselves.

Savings stagnated as current account deficit widened
– and reversed after the crisis


Source: Bureau of Economic Affairs

The savings of the rest of the world, in short, invested in an already overbuilt American housing market that has few prospects for recovery. The toothpaste can’t be squeezed back into the tube. America needs to compensate for its years of under-saving, and the normal way to do that is to export more to other countries and save the proceeds (or, correspondingly, to import less). The reduction in the current account deficit is the correct outcome, particularly as it is driven by a jump in exports.

US exports of goods and services

Source: Bureau of Economic Affairs

Only a tiny proportion of the American labor force, though, contributes to the rise in exports. Manufacturing in the US is so capital-intensive that a substantial increase in output has a negligible impact on employment. Giving the manufacturing sector a tailwind by eliminating the corporate income tax for goods-producing industries is the sort of measure that the situation demands.

There is no venture capital going into manufacturing at the moment.  The National Venture Capital Association publishes data on investment by sector,  and the high-tech manufacturing sector is down by 40% to 90% since 2003.

Sectors Where Venture Capital Investments Fell the Most Since 2003 (2003 = 100)

 

Source:  National Venture Capital Association

No-one in the seed capital business wants to touch manufacturing these days. It’s too easy to buy things from Asia. Overall, private non-residential fixed investment remains 6% below the 2008 peak in nominal dollars; with inflation, that’s 15% below the peak.

That can’t be good. And the implications for American strategic vulnerability are daunting. I am told that most of the chips that will go into the new F-35 fighter will be manufactured in China.

America still has strengths in high-value-added manufacturing, for example, the world’s best nuclear power plant technology. And we have the capacity to come back in a wide variety of fields, including heavy machinery. New York’s Second Avenue Subway line, under construction not far from my house, is built with German digging machines and heavy cranes. There’s no reason America can’t compete with Germany in this field, or for that matter in precision machine tools.

For American manufacturing to boom, real wages will have to adjust to competitive levels — which probably means a modest decline. Germany’s example is relevant. During the last decade, German wages fell about 4% in real terms, in contrast to its competitors. But Germany’s industrial competitiveness improved, and real wages have begun to rise again, while the rest of the Eurozone is sinking. The Wall Street Journal reported on March 15: “German wages grew 3.7% in the fourth quarter of 2012, up from 3.1% in the third quarter. But in Ireland and Portugal, average wages fell by 1.9% and 1.7% respectively. Considering the fiscal difficulties both economies face, it is a welcome development for their governments and shows they are attempting to balance their books.”

If manufacturing jobs are offered, unemployed Americans will be happy to take them, even if they pay somewhat less than during the bubble years.

For social, macroeconomic, and national security reasons, America has to revive manufacturing. And Rick Santorum is right to emphasize it.  I would like to hear Santorum talk less about contraception and more about the way that Obama’s economic mismanagement is undermining American families. In fact, I would like to hear more about that from Romney, who I believe is the strongest candidate to face Obama in November. A lot of Americans are hurting, and hurting a lot, and Rick Santorum has found a way to get their attention. Governor Romney should listen closely.

 (Thumbnail on PJM homepage based on elements by Shutterstock.com.)