Thursday, June 16, 2011

Bringing U.S. Manufacturing Back; Part 4 of 5, Competing Internal Identity

Photo Credit - Flickr Common

President Obama campaigned in 2008 on “transforming America.” Many Americans may not have completely understood what image of America was in Obama’s identity philosophy. In 2011, his vision has been characterized by some as an America more in the model of a European style socialist country.

It is apparent through his actions, Obama believes in a stronger Union presence in America’s labor and increasing taxes paid by the higher earners to support bigger government. Obama’s vision has proved out to be one of bigger and more intrusive federal government into the free enterprise private sector.

American business and the unemployed, as an example of competing ideology, are concerned about what impact the Environmental Protection Agency (EPA) would have on bringing U.S. manufacturing back if Cap & Trade policy is instituted by the EPA, led by President Obama, and around Congress?

The National Economic Research Associates (NERA) recently “evaluated impacts of EPA’s Clean Air Transport Rule 9CATR) and Utility Maximum Achievable Control Technology (MACT) proposals. The study found under these proposed regulations “electricity sector costs would increase by $184 billion or $17.8 billion per year.” NETA also found, “Net employment in the U.S. would be reduced by more than 1.4 million job-years over the 2013 2020 period, with sector losses outnumbering sector gains by more than 4 to 1.”

More regulation directly impacting industry, and the jobs and livelihoods of those in the specific affected industry, is an extreme competing internal identity already being seen in the U.S. Thousands of San Joaquin Valley farmers have been put out of business to save smelt fish. There are talks currently regarding West Texas oil fields being shut down to save sand dune lizards. These types of examples leave Americans considering the realisms of environmentalist priorities with regard to the necessary economics of people, production, and maintaining jobs and industry.

Numerous other relative factors in a competing U.S. internal identity are also being weighed and debated. Dr. Matthew Lieber shares his thoughts on some of these competing factors in the shaping of the internal identity of the U.S.

BKH: Thinking in terms of the Great Depression history and Hayek versus Keynes, Hayek was eventually proven correct. What are your thoughts on modern day Reaganomics versus Obamanomics in creating jobs and restoring low unemployment?
ML: It is all about communications. Presidents preside over, but do not manage the economy, with economists supplying ideas and policy options. We know what Reaganomics is – tax cuts, military spending, deregulation and monetary tightening. Clarity comes from historical perspective but also from President Reagan’s effective real-time communications.

Obamanomics is a branding triumph of political conservatives over the White House. Conservatives know what they mean by it, while liberals disagree defensively. Mixed results and criticism are less surprising than the President’s ineffectiveness as economic communicator. Guiding public opinion calls for narrative more than analytic messaging. Toughness in support of vision breeds confidence.

In fact, Obama’s policies have mixed continuity with Bush (bailouts, tax cuts extended) and a Clinton-style third way. The stimulus was well conceived and resulted in jobless recovery instead of a Depression. Deficit fixation now will kill the recovery and worsen the debt, but a tougher opposition has exploited existing narrative structures to define today’s austerity agenda.

BKH: All liberals and the majority of Democrats believe taxing the rich, now defined as $250,000 income for couples and $200,000 for an individual, will pay for continued government spending that will result in recovery from the current Great Recession. What are your thoughts on this?
ML: This controversy involves one debate about fiscal multipliers and another about fair tax policy. Technically, you should stimulate by running a deficit not raising tax rates. Then there needs to be an adjustment to balance after recovery.

We were running a deficit throughout a growth cycle due to war and tax cuts. Ideology entered as Democrats viewed Bush tax cuts as temporary and objectionable in a time of shared sacrifice. They fear wealthy lobbies will make a two-year extension permanent. Most of the revenue in question is on income above one million; everyone enjoys the same low rates up to 250,000.

Regressive tax policy has concentrated wealth, boosted unearned income, and deepened national debt. How much concentration is too much? Henry Ford’s wisdom was that capitalism required worker incomes sufficient to fuel consumption. Relying on 2% super-rich consumption in a democracy is questionable - economically, it is just not working.

BKH: Every tax dollar taken from private business is potential capital available for expansion and hiring. Every tax dollar taken from taxpayers is potential personal income to be spent in the economy. What impact does taking money out of the private sector have on private sector job creation and production returning to the U.S.?
ML: The impact of tax policy on investment is a marginal factor, distinct from direct job-creating effects of investment. Fundamentally, states and markets are two different ways to allocate capital. The U.S. model of private sector job creation succeeded in the 1980s and 1990s. In the 2000s, private investment in housing and finance was inefficient, with fewer jobs created pre- and post-recession. This calls into question a tax-cut fixation.

In retrospect, government should have curbed, not subsidized, risky borrowing and lending that fed the housing bubble. What drives business investment decisions are opportunities for profit beginning with market demand. Favorable taxation be supportive on the margin, but beware jurisdiction-shopping. Private firms play one state against another, which relocates but does not raise productivity.

BKH: The U.S. has the second highest corporate tax rate in the world. What impact does this have on maintaining existing and creating new U.S. location of private sector business and manufacturing and resulting U.S. job creation?
ML: It would be more efficient and attractive to investment if the U.S. simplified and reduced tax rates for corporations and individuals. Well-funded interests intervene to write industry- and firm-specific loopholes into the tax code, as General Electric shows.

Private interests are motivated to pursue lucrative subsidies, whereas the national interest in a rationalized, pro-investment regime lacks such champions. This environment stalls U.S. action, which requires concerted efforts by reform-minded industry leaders, analysts and lobbyists. Naming GE Chairman Immelt to head the competitiveness panel could yet prove helpful.

BKH: If infrastructure and other work programs set up by the government run over budget and over completion time, which is a majority of projects, costing millions and billions more than originally agreed in funding, what is the impact on the taxpayer investment dollar in practicality and public trust?
ML: Comprehensive analysis of taxpayer-funded projects is complicated by the need to evaluate effectiveness on multiple non-quantifiable policy goals. Beyond financial return on spending, considerations include job creation and moral hazard in relation to a baseline scenario without intervention.

The 1995 bailout of Mexico generated financial gains for the Treasury, and more importantly, prevented a Mexican collapse that could have destabilized world markets.

Stimulus projects confront structural feasibility and micro-level difficulties. Structurally, the U.S. lacks a government apparatus, other than the Pentagon, capable of dispensing outlays on the scale required -- $1 trillion or more – to kick start the US economy. Thus the doubts about the impact scale of Obama’s stimulus: under $1 trillion over 2-3 years amounts has been too little.

In the tradition of Hamilton, Clay and Lincoln, we should create a national infrastructure corporation staffed by elite talent with a Marine Corps ethos . Hard budget constraints, which discipline organizations to control outlays and meet deadlines, are uncommon in public sector enterprise. But excellent leadership, shared spirit, and a bit of autonomy enhances accountability and limits wasteful spending in needed public projects.

BKH: Could the National Mediation Board (NMB) and the National Labor Relations Board (NLRB) in fact be killing jobs and U.S. plant location with anti-business attitudes and lawsuits and anti-private sector biases?
ML: Perhaps Boeing claims so, but I see this as a contest over the returns from federally-subsidized aircraft manufacturing. Company moves from high-cost northern states to right-to-work states are rewarding for management and shareholders as firms reduce exposure to benefit liabilities, strikes, and higher wages and taxation. Relocation benefits conservative areas and hurts union employees and surrounding middle-class communities. One person’s efficiency gains are another’s corporate greed.

BKH: Unions tout they are for the workers in America. Considering they are a part of the special interests in Washington receiving special political favor over tapped out non-Union working taxpayers, how can they be seen as of the “powerless and poor” class in America?
ML: There are status quo unions and a smaller number committed to social change. It depends whether activism goes beyond narrow organizational interests. American Federation of Teachers is a professional union, while the Service Employees International Union (SEIU) more aggressively addresses lower income issues. The latter is joining a larger battle for rhetorical and organizational initiative between political actors on left and right within a downwardly mobile society.

Poverty has been increasing in recent years, with Food Stamp rolls growing and expanding into white suburban populations. “Get your hands off my shrinkin’ state” – thus Palin and the Tea Party use populist rhetoric to defend conservative budget priorities, with unions as foil.

On the other hand, should economic grievances form, labor activists may manage to overcome cultural wedge issues and revitalize class politics in America. That is unlikely but not unimaginable. Bringing poor people together is controversial and difficult. By leading issue coalitions, strategic union activism can broaden its impact and counter defensive strategies and membership attrition.

BKH: What is the morality of working Americans funding extraordinary job security, higher pay for equal work, and Cadillac benefit plans and retirement packages for public Union workers that many themselves do not and will never have?
ML: The morality issue depends on what you see unionized labor doing for ordinary Americans in white, blue and pink collar positions. It is about how and where you see a fairness problem. The greater the focus on union privileges, the more it looks like an assault on free enterprise.

On the other hand, pointing out the deeper break between wealthy and ordinary Americans recasts the distinction between haves and have-nots. A broadly frustrated spectrum of working and middle class people would respond to progressive campaigns that communicate common sense truths and crossover aspirational themes. On morality, public sector unions should emphasize competitive accountable service provision. That would build support beyond their membership core.

BKH: Can U.S. manufacturing realistically come back to America and be competitive in product pricing in a global economy with Union cost and control demands, intrusive and costly government regulation demands, and the second highest corporate tax rates compared to manufacturing in other countries?
ML: Absolutely, US manufacturing can come back, but the question is in what form. Recent months have shown export recoveries in Indiana, Wisconsin and Connecticut. A business-friendly environment is one factor, but we should avoid a “race to the bottom.” Reducing our wages and living standards to levels in China and India in order to compete would be absurd.

The greatest resurgence would combine investment- and demand-led manufacturing. High-value manufacturing is popular and obviously desirable, though not a jobs machine. For a U.S. scale workforce, we need mid-level and service activities that employ millions at compensation levels sufficient to support a family. That will take years but is possible by expanding specialized manufacturing, rebalancing trade with China, and gradually reflating the economy via export-led growth.

BKH: May/2011 job figures reflected 83,000 private sector jobs were created, and a closer look reveals 60,000 of those were created by McDonalds. McDonalds received an ObamaCare waiver recently. Could they have created these jobs if they had not? What is the impact ObamaCare additional regulations and cost will have on maintaining existing U.S. jobs and bringing new jobs to the U.S.?
ML: I don’t know about the hypothetical. Employee healthcare burdens should not prohibit McDonald’s hiring. We want business realities, not benefit policies, to drive hiring.

The 2010 Patient Protection and Affordable Care Act allowed multiple ways to boost coverage and enable flexibility. Where should Americans access health insurance? Universal government insurance would have been simpler, but the 2010 Act maintained private insurance with multiple pathways.

Reform aims for more Americans to obtain insurance at work. Transitioning to employer mandate requires flexibility, especially in a recession. Workers under 26 can be covered on parents’ plans. The Act established the individual mandate Romney instituted in Massachusetts. In an interdependent economy, persons inevitably consume healthcare and bear responsibility for paying into the system that provides it, just as drivers are required to purchase auto insurance.

BKH: What is the impact on private sector job creation and bringing U.S. manufacturing back if Wall Street and banking sector jobs and public Union jobs seem to have a favored security in Washington policy over Main Street and private sector jobs?
ML: Actions by Presidents Bush and Obama increased federal direct intervention into U.S. industries. Big banks and the auto firms received massive taxpayer financing. The fall 2008 credit crisis forced an unsavory choice between compromising market principles and a catastrophic Depression.

No one stood up and said let the whole thing go, except Ron Paul. Allowing Citibank and Bank of America to fail would have ripped apart Main Street. Liquidating Big Three automakers would have undone the industrial Midwest.

The bailouts, while ugly, were sound bipartisan decisions. The absence of restructuring has been less sound. When you buy a company, you take over its management. There should have been more aggressive prosecution of fraudulent bankers.

BKH: What is the impact of politicians ignoring or fighting the reality that Right to Work states, states with zero or lower income tax, and states with business friendly regulation attract job growth?
ML: Politicians on the left represent constituencies that lose from labor market deregulation. They oppose policies that benefit shareholders and boost inequality and early retirements.

The opponents’ posture is understandable. Their ability to block pro-business policies is being tested. I suspect they will slow down but not stop the business reform agenda. They would be smart to use messaging that appeal to all the working stiffs, half of whom are not left-wing.

Their messages should be “End privatized profits with socialized losses.” and “Competitive markets, access for all.” Those are perhaps too abstract to rally activists. As political stakes increase, each side is going into campaign mode and seeking red meat messages.

BKH: What would be the overall economic impact of the federal government bailing out high budget deficit states many see as a result of anti-growth policies like higher tax rates, extreme environmental cost and interruption, miles of business red-tape regulations, and huge failing social programs?
ML: This undesirable pathway could further politicize economic policies, since the states in question lean Democratic. Emergency in California, which alone is the seventh largest economy in the world, could spur national interest arguments to justify temporary support. I doubt many Americans want to pay for any one state’s long-run deficits. Establishing a precedent would be controversial, so state leaders would be reckless to expect a bailout.

BKH: Is it possible to maintain existing manufacturing and attract new manufacturing if investors perceive a President or major political party to be anti-business, anti-wealth, pro-Union, pro-over regulation, and pro-tax hikes?
ML: Yes, but a delicate dynamic is involved. Perceptions of the President rank below business factors in determining investment patterns. But, they can become a negative political factor.

President Franklin D. Roosevelt’s handling of similar epithets of his critics is instructive. He responded with a warm laugh and rhetorical elbows to the ribs. Roosevelt had to include industry after overreaching and during wartime. Roosevelt realized throughout that profits motivate business actors.

Winning the Future is a positive slogan for President Obama to sell the U.S. to investors with trillions on the shelf. He can make that slogan meaningful with a multi-faceted engagement with industry leaders-- behind the scenes, from the bully pulpit, setting incentives and sanctions—to interactively realize a shared vision for industrial resurgence.

Roosevelt’s economic leadership demonstrated a feisty, yet flexible charisma and positive communications. Kennedy, Reagan and Clinton all drew from that. Obama has all the ability and now should emulate Roosevelt’s positive style.

See also:
Part 1, Who is Professor Matthew Lieber?
Part 2, Global Neighbors & Competitors
Part 3, U.S. Foreign Policy
Part 5, Success Realities

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1 comment:

  1. Interesting interview, except that the interviewer seems unclear on the distinction between questions and assertions.

    Calls to mind the joke about the professor at a cocktail party: "enough about me, let's hear what _you_ think about my work."