Tuesday, February 26, 2008

Industrial Policy

The newest firestorm in the blogosphere is over Obama's corporate tax reform plans. I've seen too many blog posts to link to them all. Will they really help us? Are they just vaporware, or does he have real plans? Where can we find the details?

It seems they should be important, because some people are worked up.

According to Paul Craig Roberts on Counterpunch (click through to read the whole thing):

As reported by the Financial Times, Obama proposed a lower tax rate for US companies that maintain or increase their US workforce relative to their overseas workforce.

Economists, who have crawled out on a limb in defense of jobs offshoring, quickly denounced Obama's plan. As the US economy continues to lose relative ground, economists hold more tightly to their misconception that a country benefits by moving high value-added, high income jobs abroad and replacing them at home with low value- added, low income jobs. This view, which places the rights of capital far above the rights of labor and the duties of citizenship, is economically nonsensical as well. Whatever the defects of Obama's plan, it shows more serious thought than can be found among Washington policymakers and the economics profession.


I haven't been able to get at the article in the Financial Times, so I looked for links to Obama's speeches that were closer to home:

I don’t know about a time-out, but I do know this – when I am President, I will not sign another trade agreement unless it has protections for our environment and protections for American workers. And I’ll pass the Patriot Employer Act that I’ve been fighting for ever since I ran for the Senate – we will end the tax breaks for companies who ship our jobs overseas, and we will give those breaks to companies who create good jobs with decent wages right here in America.

Here at last we have something specific, a reference to s specific bill with the details worked out. Here are some details from the Patriot Employer Act, not a link to the original bill but a summary on Obama's Senate web site:

The Patriot Employers legislation would provide a tax credit equal to 1% of taxable income to employers that:

After all that? One !@#$%^& percent, not of revenue but of taxable income? What about all the companies that pay no taxes at all - how will this affect them? Speaking of which, what about companies not incorporated in the United States? If this were a value added tax it would hit companies regardless of where they were incorporated - but I don't see that on his website. Has he told the Financial Times something not on his own website? He's still talking about the Act I just quoted in his recent speeches.

I'm not saying this isn't a small step in the right direction - though I'm not sure it is. We need to think hard about industrial policy though, and before we can ask if Obama's policy will bring us towards our goals, we should ask what our goals are.

We need an example – a nation which has successfully used industrial policy to promote growth. That nation is China. For all their faults their growth rate has been phenomenal over the past few years, greater than that of any industrialized country. We must certainly consider the costs as well as the benefits of the policies we look at – but look we must.

According to the libertarian ‘fundamentalist’ interpretation of Adam Smith, industrial policy can never benefit industry. The original Adam Smith speaks out for government funded public education, favoring those industries which require a large number of educated workers. Other than that, his disciples haven’t distorted his work too much – he’s pretty laissez fair.

So, look at the Chinese industrial policy, forcing auto makers to build plants in China in order to be allowed to sell cars there. Perhaps this has been of no long term benefit to China. Perhaps all Chinese efforts to foster electronics and computer industries are doomed to leave Chinese manufacturers worse off than a laissez fair policy would have left them. So maybe we have nothing to worry about.

Those of us who don’t find that completely convincing may need new ideas. In modern American corporate life, it is not uncommon for people to change jobs. Sometimes something may make a balance sheet look good for ten or twenty years forward but not benefit a corporation or the nation that gave birth to it in the long term. With all it’s corruption and inefficiencies, the Chinese government seems to have found ways to manipulate our institutions. Perhaps with national unity of purpose even government can be effective.

I’m not suggesting that there is a secret Chinese Adam Smith who has written a book about how to take advantage of a capitalist society where ‘campaign contributions’ are legal, although certain kinds of overt corruption are much rarer than they are in China. Adam Smith didn’t so much invent entirely new ideas as codify, relate, and organize disparate ones, discussing for the most part what was already done by business owners and suggesting it worked for the common good. Similarly, through trial and error the Chinese have come upon tools which may be the seeds of something much larger.

Suppose we decided that Chinese divergence from free market principles will not be its own punishment. Our industrial policy would probably come in two parts – interim and long term.

Although the doctrinaire conservatives of today might not wish to acknowledge it, a good start for our interim policy might be Ronald Reagan. Don’t look so surprised. When Japanese auto imports were threatening Detroit, he didn’t push protectionist legislation, which would have been anti free market. No he got the Japanese auto companies to agree to voluntary quotas. I don’t know if he threatened them with protectionist legislation behind closed doors, but they certainly knew legislation had advocates in congress. The Chinese will understand the logic, and the name of Reagan may help attract American support. It won’t be easy though. The Japanese already had a great deal of market share to lose why Reagan made them an offer they couldn’t refuse – and if we wait until the Chinese have that much before saying anything, the dollar might collapse. The Chinese own huge quantities of dollar denominated assets, so they wouldn’t want that to happen – unless they concluded it would advance their long term strategic interests. Hmmm.

Lets think about our long term interests. The Chinese have found many clever ways to encourage American companies to manufacture things in China, where the skills and knowledge of workers, engineers, and managers are eventually available to Chinese companies. Of course they have low labor costs to tip the scales in their favor – but it seems long term policy is a part of it.

Asked whether Chrysler was worried that the alliance might help Chery develop into a competitor that might threaten its U.S. partner, LaSorda told The Associated Press, "No, we're not. With us or without us, they're going to grow. So the question is, 'Are you going to go with a winner?'"

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Ford is not saying how many workers it expects to take the buyouts by a March 18 deadline. But Wall Street analysts say the company has set a goal to get 8,000 employees to sign up.
General Motors is also extending buyout offers to all of its 74,000 hourly employees, while Chrysler is offering buyouts to workers on a regional and individual plant basis.
The belt-tightening comes after years of declining market share and increased competition from foreign automakers, led by Toyota.


It may well be that American auto companies are indeed doing the rational thing in terms of maximizing shareholder return - cutting jobs in the USA, accepting gradual losses of market share now in exchange for short term earnings which don't have to be discounted by risk or forgone interest. Is this really the best thing for the country? If not, the problem isn't really the free market. After all, it's the Chinese acquiring our technological skills rather than the reverse. Yet the strategy of building huge monster trucks which don't fit in a garage doesn't seem a long term winner for a variety of reasons - one being that China may do it too.

Cost cutting is needed, but there's no reason why American cars can't be world leaders for modern technology and low maintenance and quality, much as Toyota is today. I wonder how we could structure free market incentives so that making this a long term project would be cost effective.

Savings will be needed - and the first place to start is upper and middle management. The USA automakers seems to have more people in management than many other companies.

Ford is planning on giving retirement incentives to older workers and rehiring new ones for less. The union is part of the plan, so it doesn't seem all bad for workers. Maybe work rules could be changed too - right now it's hard to shut down plants that are temporarily unprofitable. Maybe workers could even be encouraged to get temporary jobs elsewhere during temporary shutdowns, with a small subsidy instead of full salary from their regular employer.

1 comment:

Rich said...

Wow, a lot here to digest. I like it when I learn something at a Blog. I visited you today because we are on the same Economics Carnival. I see I'm in very good company indeed.

China has always been an iteresting subject for me. Going back to when Henry Kissenger was willing to expend any amount of lives and treasure to stop the communist incursion in Southeast Asia.

Do you find it as Ironic as I do that the largest Communist Country in the world is our 2nd largest trading partner? (we sell more to Canada)

Rich