Undermining American Capitalism

By Jonathan Nicastro

Thursday, June 22, 2023

 

Some on the right want conservatives to pursue more activist industrial policy. The think tank American Compass, founded by former Mitt Romney economic adviser Oren Cass, has been among the leading organizations calling for this change. In its recent publication, “Rebuilding American Capitalism: A Handbook for Conservative Policymakers,” the section on industry demonstrates poor economic reasoning and would be a recipe for failure.

 

The blurb for this section begins by describing agriculture, manufacturing, and resource extraction as the industries that “deliver the most productivity growth” and “foster technological progress.” In one of the section’s memos, Tablet columnist Michael Lind argues that “all industries are not created equal.” Specifically, Lind claims that the nontraded-local-service sector enriches the country less than consumer electronics, automobiles, and aerospace manufacturing.

 

But to lament the shift from manufacturing towards a service-driven economy is to endorse economic regression — to return to a reality in which people need to work more for less. Manufacturing has become a lower share of overall employment in the U.S. not because the U.S. makes less stuff, but because it takes fewer people to make stuff now than it did 50 years ago. That increase in what economists call “total factor productivity” is a sign of economic development, and it has occurred in every country that advances to higher levels of per capita income.

 

The first subsection, “Create Demand for Domestic Manufacturing,” is riddled with more fallacies. It proposes to “establish a 50% local content requirement (LCR) for goods that are critical to national security or the industrial base.” If LCRs are precisely prescribed, a 50 percent requirement seems rather round to have been calculated with any degree of technical rigor. Moreover, if LCRs are such a boon, why stop at 50 percent for only some goods? The report claims that LCRs create guaranteed demand for domestic production. This is correct, insofar as LCRs mandate domestic inputs for final goods (i.e., items ready for consumer purchase). But doing so would increase production costs for domestic firms, translating to higher prices and less demand for American-made consumer goods.

 

The report laments “artificially cheap” imports. But the effect of Chinese steel subsidies, for example, is to reduce prices for American-made steel-containing goods. By prohibiting American firms from accessing such cheap inputs, the authors articulate a plan to diminish the competitiveness of domestic firms, as occurred when President Trump imposed tariffs on steel. Similarly to the LCRs, this would increase the demand for imports, whose relative prices would decline, but the handbook elsewhere prescribes a general tariff to make those more expensive as well. So American consumers and businesses would be left paying higher prices for finished goods and inputs to production whether they purchased them from home or abroad.

 

Other policies are similarly misguided. A proposal that the Departments of Commerce and Defense determine which goods are “critical for national security or the U.S. industrial base” would entrust government officials with the power to direct economic production. Such credulity belies conservatives’ skepticism of technocracy and top-down planning, and their well-founded concerns about regulatory capture. As Dominic Pino observed of a similar act proposed by Josh Hawley, it amounts to “a new way for incumbent firms to sic the federal government on their competitors.”

 

Further misconceptions abound beyond the level of policy. The report claims that offshoring “industrial capacity in pursuit of lower costs diminished America’s ability to compete or innovate” over the past several decades. But America is the most dynamically efficient economy in the world — i.e., the most innovative. Although the level of innovation is hard to quantify, one proxy is the value of a nation’s patents. The U.S. Department of State, using data from PatentVector, reports that U.S. patents are worth $3 trillion, while China’s are only worth $488 billion. Relatedly, American R&D spending is the highest in the world: $668.4 billion or 28 percent of global R&D spending, as documented by the National Science Board.

 

Even though U.S. companies already lead the world in R&D, the report calls for a government-led (read: taxpayer-funded) research-and-development effort that would “match whatever funding industry invests in a consortium with federal funds.” The goal of this policy is to reclaim American supremacy in the fields of “semiconductors, aerospace, and telecommunications.”

 

Just because something is assembled somewhere, however, does not mean that it is produced there. The value-added chain is quite long, and many of its most important stages are immaterial. Taiwan and China do have significant market shares of some aspects of the global semiconductor value chain, but according to an October 2020 report, America dominates overall — no CHIPS act required. The U.S. controls over 60 percent of the “fabless” market, which designs but does not manufacture nor assemble chips, while China’s share is less than 20 percent. The American share of the integrated-device-manufacturers (IDM) market, which designs, manufactures, and assembles chips, is approximately 50 percent, compared with China’s near-zero. Intel chips are not assembled in the U.S., but they are ideated, innovated, and iterated upon here.

 

Again displaying envy of other nations, the report argues that an “American development bank,” modeled after the European Investment Bank, could helpfully reduce the risk incurred by “longer-term, higher-risk, lower-return projects.” This is really an argument for moral hazard. When a person, firm, or government does not bear the costs of poor investment decisions, that entity is liable to make more such decisions. Who bears the cost? The American taxpayer. To prefer new national-level programs on top of existing private and public funding mechanisms is to ignore that mammoth public investment inevitably results in overcapacity, waste, graft, and a lack of innovation (see: the F-35 fighter-jet program).

 

One industry allegedly in need of help from such a bank is “the commercial maritime industry,” which it would help “modernize.” But that industry is already the beneficiary (or victim) of more protectionism and government support than nearly any other. The Jones Act was passed to ensure “adequate domestic shipbuilding capacity” in the event of war by restricting “water transportation of cargo between U.S. ports to ships that are U.S.-owned, U.S.-crewed, U.S.-registered, and U.S.-built,” as the Cato Institute describes in a report. The Jones Act achieved the opposite of its stated purpose, but American Compass thinks it will get the protectionist formula right this time.

 

The final subsection, “Let America Build Again,” calls for the repeal of the National Environmental Policy Act of 1970. Give credit where it’s due: It rightly blames the NEPA for “imposing red tape on energy and infrastructure projects and triggering environmental reviews.” Environmental reviews have also empowered NIMBYs to prohibit the construction of new dwellings, which has harmed our lowest-income earners, who cannot afford to adequately house themselves and their families. But this is an exception to the section’s overall character.

 

Those at American Compass cannot casually disregard substantive economic arguments against its top-down planning as what Lind caricatures as “family-wrecking, nation-weakening libertarian globalism.” The burden of proof is on them to justify their technocratic machinations — a position conservatives ordinarily oppose.