Loss of Manufacturing is the Federal Government’s Fault (Issue #471)

Anne Marie Cox of Catholic News Service (CNS) reported on the president during his recent campaign swing through four states.  On September 29th President Barack Obama visited a Mid-West family in a Des Moines, Iowa neighborhood and spoke to a group assembled in backyard lawn chairs.  The local parish priest, Father Michael Amadeo of the Holy Trinity School, was the last one to pose a question.  The priest shared a story about a parishioner.  Apparently the 55-year-old father had lost his manufacturing job over one year ago and the family was struggling.  The priest asked what the president’s economic policies would do in the next year to help people in that circumstance.  If anyone were looking for hope, however, they might as well have phoned a call center in India.

President Obama responded that many of the manufacturing jobs simply will not return, because modern factories are so efficient and require fewer workers.  Moreover, some jobs are moving overseas where wages are cheaper.  His concluding advice was for the unemployed man to keep his skills honed and to be ready when the economy finally turns around again.  The president plugged clean energy as a promising business alternative and then left.  Not only was the president less than empathetic to the priest’s question or the plight of unemployed man, his administration has got its economics all wrong and government policies are sure to drag this recession all the way to Kingdom Come.

The following analysis is taken from Tom Pauken’s excellent book, Bringing America Home (2010).  In it he details those policies behind our nation’s marked economic decline.  A central reason for huge trade deficits and the shift of economic power from Main Street to Wall Street is a business tax system that gives private-equity moguls incentives to take imprudent risks with the companies they control.  In this respect, they have a distinct advantage over owners of U.S. companies who would like to run their businesses in a tried and true conservative fashion or pursue capital accumulation-based strategies, but find that our tax structure “disincentivizes” them.  The United States has a corporate income-tax rate of 35 percent.  That rate is an economic incentive for financiers to load a company up with high levels of corporate debt in order to avoid taxation.  It is a no-brainer—you can write off debt on your taxes, but savings and investments get taxed heavily.  No rational businessman would want his company to accumulate significant savings if the interest on those savings is taxed at 35 percent.

American businesses that have their plants and employees in the United States also do not operate on a level playing field with our trading partners or competitors.  Every major trading country in the world except for the United States provides a tax advantage for domestic manufacturers.  Even as other countries have removed tariffs over the past four decades, they have been careful to put into place value-added taxes or VATs that provide their companies with a significant economic advantage over foreign businesses.  Austin business economist David Hartman has developed data on the effects of a border-adjusted VAT.  Starting with France in the mid-1960s, European countries began adopting border-adjusted VATs that now average 19 percent.  All Organization for Economic Co-operation and Development (OECD) countries, made up of over 30 developed countries—all except the United States, that is—have since adopted VATs or their equivalents averaging 18 percent.  As a result, U.S. goods carry the full burden of federal, state, and local taxes, plus an added tax averaging 18 percent when they are shipped to foreign markets.  To make matters worse, foreign goods that are shipped into the United States enjoy an 18-percent VAT abatement—yet are subject to none of the taxes imposed on U.S. manufacturers.

It really is small wonder that so many big companies have moved their manufacturing outside the United States.  It is more of a wonder why the rest haven’t gone!  The hollowing out of our manufacturing base and the resultant unemployment and regrettable socio-economic inequalities that have been produced, were predictable.  They were caused by the federal government’s regressive tax and trade policies.  The president shows every indication of perpetuating the same policies of what Doug Ingram has called a design for “exporting prosperity.”  In the past ten years the United States has lost one-third of its manufacturing jobs. Obama did not start the problem, but Obama’s deficits after less than two years in office already exceed President George W. Bush’s after eight years.  Unemployment is stuck at nearly ten percent and is likely to remain there for two more years.  The Democrat Congress, for the first time in recent memory has not even passed a part of the proposed budget out of committee for the fiscal year that already began.  In other words, the president honestly can’t give much hope to the priest in reply to his question.  Either the president doesn’t know what to do in the next year, or else his intent is for more of the same that got us in this mess in the first place.