Friday, January 18, 2008

Elizabeth Sullivan's "Authentic" Snake Oil

In an editorial in the Plain Dealer of Cleveland, Elizabeth Sullivan lambastes the winner of the recent GOP primary in Michigan, Mitt Romney, for “dishing out…illusions” regarding the loss of American manufacturing jobs. In this she is certainly correct not only about Romney, but about most modern politicians.

Ms. Sullivan then takes positions on the issues of American jobs and international competitiveness, which deserves some scrutiny. Since Ms. Sullivan is somewhat vague on particular points, I have had to make certain assumptions about what she is advocating. This caveat aside, I believe that I am correctly understanding the thrust of her position.

Correctly denigrating the “Easy answers that are a throwback to failed policies of the past”, she says the following:

“To regain America's economic edge, nothing but a broad overhaul will suffice in the way America thinks about trade, investments in education, innovation and competitiveness and the critical role of manufacturing in driving both U.S. well-being and technological change.”

Who could disagree with that statement? But, as with all statements of a general nature, the “devil is in the details”. After giving an overview of the “crises in manufacturing”, a mouthful emerges in the final paragraph. “What America needs are not the glib asides of a presidential snake-oil salesman…”, Ms. Sullivan declares. This is certainly true. What, then, does America need? We need “… an authentic industrial policy that treats trade as an opportunity…”.

In other words, another snake-oil salesman. All we need is another man with another plan to be imposed on the private economy by governmental coercion. But government planning (industrial policy) is just more of the same “Easy answers that are a throwback to failed policies of the past”. It is just more poison. To understand why, it is important to draw the distinction between government and private economic action.

Private activity, i.e. a free market, is governed by the principle of non-coercion. In essence, the free market is voluntary trade between productive individuals based on mutual consent to mutual gain, with each acting in his own self-interest for the furtherance of his own well being…a win-win situation.

Government’s only means or tool of operation, on the other hand, is legalized force. This is proper, so long as it is not abused. Government economic intervention is the override by force of the voluntary choices of free individuals by bureaucrats and politicians; in essence the awarding of special unearned economic privileges to some at the expense of the best interests (and rights) of others who are forced to accept an unchosen obligation. Since the recipient paid nothing in return and the victim had a net loss, this represents an economic (and moral) lose-lose situation.

Government intervention, then, is not the answer. Since it prevents people from acting in his own best interest, the law of unintended consequences becomes operative. A prime example is included, ironically, in this very same paragraph:

“Lost manufacturing jobs in Cleveland and lost worldwide sales for U.S. corporations have become interrelated problems. And at the root of the former, rising health care costs and other ‘legacy costs’ [ex., pensions] in manufacturing continue to injure U.S. competitiveness and long-term industrial strength.”

It is government policies dating back to the 1930s and 1940s that imposed these “legacy costs” on American business. For example, the third-party-payer system for health insurance was imposed via tax policy and shifted the responsibility for medical care from the individual, where it properly belongs, to the employer. In lieu of wage and salary increases, the employer instead assumed responsibility for the employees’ health coverage. This has now come back to haunt American business, which made promises it could not keep and should not have made.

Ms. Sullivan wants this new industrial policy to “look…at preserving manufacturing jobs as a matter of priority.” “In the decade from 1995 to 2005,” she reports “this country lost a staggering 3 million manufacturing jobs, according to the Brookings Institution.” But most of those job losses were due to greater manufacturing efficiencies, technological innovations and such which drive down the cost of manufactured goods (Heritage Foundation report). This relentless cost-cutting raises the general standard of living by making goods more affordable while at the same time raising the productiveness of American workers, resulting in rising real wages.

The focus on the “staggering [loss of] 3 million manufacturing jobs’ is also very misleading in at least two important ways. First, as the Heritage Foundation reports, manufacturing job losses due to rising productivity is a worldwide phenomenon. Second, job losses are not restricted to the manufacturing sector. 15 million jobs are lost yearly in America. Of these, only 3% are lost to global trade. Yet, the number of people employed grows steadily because 17 to 18 million new jobs are created every year in America. It seems Ms. Sullivan is engaging in a bit of demagoguery herself.

As to the small percentage of job losses “going overseas”, there is a virtuous cycle here, too. The cheaper goods entering the United States also raises the American standard of living by leaving more disposable income in the hands of people, which can be invested, used to pay down debt, or spent on other goods, including American-made goods. In any event, the government has no moral right to “save manufacturing (or any other) jobs” at the expense of the rights of other Americans to purchase goods made by people outside the US (i.e., to engage in voluntary, uncoerced trade).

No one has an inherent right to a job. If the voluntary economic decisions of millions of individuals (the market) leads to the shrinkage of some businesses or industries with resulting job losses, no one has the right to override those choices by governmental coercion…i.e., industrial policy. Ms. Sullivan’s vague call for a new industrial policy that is “authentic” is just another call for another glass of snake oil. The best thing the federal government can do for “jobs” is to begin rolling back its massive tax and regulatory regime…i.e., get out of the way of businessmen, entrepreneurs, and investors who take the risks and make the investments that lead to job creation.

The best “industrial policy” is no policy at all. It’s not that economic planning is unnecessary. The question is who should do the planning. Ms. Sullivan says state bureaucrats and politicians acting on the blind political expediency of the moment. But the only people who can and should plan “the economy” are the millions of individual producers and traders who actually are the economy…i.e., the people, each pursuing his own welfare and happiness in accordance with his own rational self-interest.

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