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Right Turn
Posted at 08:45 AM ET, 02/23/2012

Back to the future: Dump the manufacturing tax breaks

Libertarian economist Veronique de Rugy, like many others in her profession, has stepped forward to explain why a special tax break for manufacturing is a very bad idea. She runs through a list of reasons, including this:

While the overall economy (real GDP) grew by only 1.7 percent in 2011, the manufacturing component of U.S. industrial production grew at more than twice that rate (4.0 percent). And manufacturing output in the Midwest “rust-belt” region of the country grew by an incredible 8.4 percent last year, suggesting that the traditional manufacturing heartland of America is leading the industrial comeback.

In short, a decline in manufacturing jobs “has been going on for 30 years and has been largely made up for by gains in productivity.”

As de Rugy reminds us, former Council of Economic Advisers chairman Christina Romer has made the same argument: “Public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.”

So why do supposedly informed politicians such as President Obama and presidential candidate Rick Santorum persist with such an obviously flawed policy approach? In Obama’s case, he is likely pandering to Big Labor, which is heavily represented (not uncoincidentally) in manufacturing, where jobs have been in decline. It’s also a pleasant story to tell to Rust Belt voters whose parents and grandparents had good-paying but low-skilled manufacturing jobs.

As for Santorum, he seems overcome with nostalgia as he talks about coming from the coal fields. (Mining isn’t manufacturing, but let’s not get distracted.) He, too, pines for the revival of those very towns and the same businesses in which previous generations — not his parents, who were medical professionals — made their living.

But why not have a forward-looking tax system for the 21st-century economy? It’s puzzling to realize why Santorum and many Democrats don’t present a more candid picture of the economy. In his report on income inequality in response to a study by the Congressional Budget Office, Rep. Paul Ryan (R-Wis.) wrote:

In the nearly 30 years covered by this CBO study, the pace of technological change, particularly in computers and related technology, has been rapid.
These new technologies have diffused throughout virtually all segments of the economy, fundamentally changing the skill set sought by many employers and even the nature of work itself. This change has favored individuals with the skill sets to best leverage that technology. This trend is evident in the so-called “wage premium” for individuals with college and advanced degrees relative to those with just high school degrees and below.

So rather than try to recreate an economy from a bygone era, why aren’t we, as others have proposed, working on maximizing growth, investing in new industries (i.e., reducing the cost of capital) and reforming our education, immigration and worker training systems? Ryan argues that’s precisely what we should do: “Increased trade and globalization has also played a role in widening earning and income gaps because, like new technology, it has tended to reduce demand for lower-skilled workers in the United States while raising demand for higher-skilled workers. The United States tends to export goods with a heavy skilled-labor component while importing goods produced by lower-skilled workers. This is the comparative-advantage profile of a highly developed economy, and it has shaped various segments of the domestic labor market and relative wages. The trend is most evident in the U.S. manufacturing sector. The U.S. economy has generally shifted away from lower-skilled manufacturing, such as the apparel and textile industry, and toward a service sector that requires a high-skill, high-intellect workforce.”

Santorum doesn’t have any advisers on economic policy. Perhaps he should get some. Or better yet, he should sit down with Ryan and get briefed on why his tax plan is not the right one for 21st-century America. There’s still time to junk his old plan and come up with something that doesn’t imitate Obama’s economic illiteracy.

By  |  08:45 AM ET, 02/23/2012

Categories:  2012 campaign, Economy, Taxes

 
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