Wondering

by Don Boudreaux on June 29, 2008

in Taxes

Reading this op-ed in today’s Washington Post — an op-ed with several flaws and false premises — causes me to wonder the following:

How many people who ridicule the idea that higher corporate taxes meaningfully reduce a country’s total output of goods and services also believe that government subsidies meaningfully increase a country’s total output of goods and services?

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{ 16 comments }

piperTom June 29, 2008 at 11:02 am

Depends. If the recipient is Haleburton, they'll consider the subsidy a complete waste. But a company that "gives" jobs to "working families"? That's different.

Why yes, I AM cynical. Thanks for asking.

M. Hodak June 29, 2008 at 11:20 am

Leading question, eh, Don? Those apparently separate ideas are really the manifestation of a single, underlying collectivism, anchored by a belief that government action is more "rational" than private action, or that a broken window is a boon to mankind.

jorod June 29, 2008 at 3:19 pm

The only jobs dying out are unionized jobs, everyone else is doing fine.

Government production is oxymoron.

lowcountryjoe June 29, 2008 at 5:19 pm

Come off it! Government produces some things really well: short-sighted legislation, paperwork, angst, tension, bureaucrats, resentment, etc…

Sam Grove June 29, 2008 at 5:57 pm

One thing that government is really good at producing is politics, and politics is really good at producing misinformation.

I hope that makes sense.

The Albatross June 29, 2008 at 10:42 pm

Labour costs are only 10 percent of making things? If I recall wages are about two thirds of GDP, so I wonder where he got this number. I have spent quite a bit of time in manufacturing plants (or at least more than Mr. Kaplan), and I can gurantee you that labour costs are more than 10 percent, and we sure as hell are not making a 90 percent profit! Of course, there is capital expenses, depreciation, yada, yada, but only 10 percent labour?–I smell some Eron magic with these numbers.

Jon June 29, 2008 at 10:54 pm

As I recall from my Managerial accounting courses, the Direct labor inputs were much larger than 10% of the value of final goods production.

Some "fuzzy math" going on in the Washington Post.

The Albatross June 29, 2008 at 10:58 pm

Sorry, the second to last line should be "Enron" and not "Eron"–just didn't want to invite the usual charge that since there is a spelling mistake, ergo my entire post is invalid.

Jason June 30, 2008 at 3:43 am

"many foreign countries keep their currencies valued extremely low against the dollar…We should deal with these (currency) issues in our international trade negotiations, but we haven't."
It looks like the FX markets are handling that themselves.

"Consider Airbus."
Ha, isn't this a great example of what not to do? How about, consider Concorde.

"If these statutes were really working, we would see hundreds of new cases each year"
Better agreements = more trade complaints? That wouldn't happen to benefit "a partner in the international trade practice," would it?

"Take health-care costs. In Europe, these costs are absorbed by the government."
And then what, they disappear? Free lunches for everyone if the government absorbs the costs?

"The truth is, very few high-tech companies are building new plants in the United States."
Is this really the metric for progress? If we have free trade, why does it matter where a microchip is made if I can easily buy it and almost certainly much more cheaply than if it was made in some government-sponsored domestic plant?

"Despite all the bad news, the United States still has a manufacturing sector and still produces about $4.5 trillion worth of goods a year"
Whoops, buried the lede on the second page. How does this compare to all those other countries you praised on page one?

"why make anything in this country at all?"
Is this a nightmare scenario or a near-utopian goal? Most people I know don't "make anything" and yet they seem to be doing quite well. Doesn't look like Mr. Kaplan "makes anything" either.

Hammer June 30, 2008 at 9:22 am

It seems to me our friend at the W. Post suffers the same issue as most people when thinking about economics: tunnel vision.

Yes, if the government subsidizes an industry, that industry will grow. However, other industries will shrink, the over all effect being to a greater degree. However, people usually only focus on one facet that needs fixing, like exports, the steel industry, textiles and the like, so they don't see the whole effect.
In a way it is like energy/matter in a closed system. You never create or destroy it, you simply move it from one form to another. The same can be said of an economy in a fixed, finite time frame.

As a fun side note, the author is also incorrect about the paper industry moving to China. Brazil has the best climate for growing trees for paper, and has a very large industry doing just that.

James Hanley June 30, 2008 at 1:13 pm

I'll point out just 2 of the mistakes Gilbert Kaplan makes in this article.

1. He correlates decline in manufacturing jobs with decline in manufacturing. A look at BEA statistics will show that manufacturing output has continued to grow in the U.S. Coupled with declining manufacturing employment, that means what he sees as a decline is actually a dramatic increase in manufacturing productivity–and apparently he hasn't read Smith since he doesn't see that increasing productivity is the cause of increasing national wealth.

2. He worries we're not producing enough hi-tech products. Here he's equating hi-tech with high added value. But there's no one-to-one correlation on that. Although I haven't checked the numbers myself (so take this with a grain of salt), I was told by a businessman friend recently that U.S. production and exportation of machine tools has grown significantly, and that machine tools have high value added. If you can make more value from producing machine tools than computer chips, should you really be obsessed with the term "hi-tech," or should you focus on making as much money as possible?

But Kaplan's an attorney focusing on helping clients win trade disputes. That's substantially different than being an economist focusing on understanding how to maximize a country's productivity.

lowcountryjoe July 1, 2008 at 8:20 am

Good post, James. You know what our focus should be on? [and this is not a knock specifically directed at you, so I hope you don't take it that way] Our focus should be on discouraging the use of central-planning language as it pertains to the national aggragate measurement numbers.

Martin Brock July 1, 2008 at 10:32 am

As I recall from my Managerial accounting courses, the Direct labor inputs were much larger than 10% of the value of final goods production.

Kalan writes, "Labor costs are already less than 10 percent of the cost of making many products, including steel and semiconductors." I suppose he means that labor is less than 10% of the cost of some finished goods on the books of a corporation near the end of the supply chain. For example, if I buy two $45 widgets, glue them together and sell the combination for $100, then my labor is 10% of my cost (ignoring the glue and marketing and other costs), but this calculation ignores the labor costs of my widget suppliers.

So Kaplan isn't saying that labor is a small fraction of total costs. He's saying that many U.S. manufacturers don't directly employ the labor contributing to their products.

Martin Brock July 1, 2008 at 10:42 am

Kaplan probably also ignores the labor that builds a highly automated factory. It's like saying that a car running on pure ethanol uses "zero percent" fossil fuels, ignoring the fact that producing a gallon of ethanol requires energy equivalent to half a gallon of gasoline, mostly from fossil fuels.

Dallas Weaver July 1, 2008 at 2:30 pm

Even his second point about government R&D isn't valid for very creative fast moving areas. Example, Japan spend billions on its 5th generation initiative to overtake Intel in processing chips and computers — billions down a rat hole. France did the same with major memory chip and network programs — they still aren't players but put billions down the drain.

Our old line steel companies dumped all attempts to be on the leading edge 4 decades ago when US steal closed their leading research facility. It doesn't take government leadership to beat that type of incompetence, just someone who thinks in terms of innovation — like the mini-mills which ate "Old Steals" lunch.

Mr. Econotarian July 1, 2008 at 8:36 pm

Here is the data showing US real value-added manufacturing product rising steadily from 1987 up to 2005 with a slight blip in 2001:

http://www.uschina.org/public/documents/2006/09/us-manufacturing.pdf

Here are some new US manufacturing plants from a Google News search from the last week:

"RALEIGH, N.C. — Excela PharmSci, a Virginia-based pharmaceutical firm, will build a pharmaceutical plant in the Caldwell County city of Lenoir, creating 55 new jobs."

"California has gazumped New Mexico to land the new plant that electric car company Tesla Motors will build to manufacture its upcoming zero emissions sedan, the Model S."

"The decision about where Volkswagen may build its new U.S. auto plant may be made sooner than expected. A German automotive website reports Volkswagen will make it's preliminary decision next week as to where it wants to go among three places – one of the choices is Chattanooga."

"COXSACKIE, NY — Ushering in a new era for one of Greene County's largest employers, DynaBil Industries Inc. broke ground Thursday on a new plant. The aeronautics parts manufacturer, which started in a local garage 31 years ago, plans to move into a $2.7 million facility that will be built and owned by Galesi Group of Rotterdam. The company will lease the building at Greene Business & Technology Park, located off Route 9W."

"RICHMOND, Va. (AP) – An automotive components company is planning to open an assembly plant in Roanoke, creating 60 jobs. Gov. Tim Kaine says the Westport Corporation will invest $3 million to open the 203,000-square-foot plant."

"ELGIN, IL — An Elgin employer is ramping up its production capabilities to meet the growing demand for wind power, a nonpolluting electricity generator. Siemens Energy & Automation Inc., the largest producer of wind turbine gear drives in the United States, announced today that it will open a second plant in Elgin for its mechanical drives and wind energy businesses…The new plant, expected to be completed in March 2009, will create about 300 new jobs in production and 55 new office jobs in the next three to four years."

"Last week, Merck revealed plans for a third phase of expansion of its new vaccine plant in Durham, NC. The company began building the new facility in 2004, and announced an expansion to the project in 2006 while it was still under construction. When the projects are complete, Merck will staff another 400 new employees in its scientific branches."

"With one snip CertainTeed's new Vigo County [IN] plant was open.
"What we are seeing today is the culmination of two to three years of work," CertainTeed Vice President Thierry Denis said.
Since 2006 the building materials production company has had building in the Vigo County Industrial Park in the works it just took a little time to get their building up and running…
"This is one of the largest fiber cement plants in the world," Denis said "It has the largest Hachet machine in the world. and that is the name of the process we use and it is the largest machine in the world."

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