A point by point rebuttal to Matt Yglesias’s ill-informed post on the president’s State of the Union address.

Posted by spaul on 01/25/2012

EDITOR'S NOTE: Slate columnist Matthew Yglesias penned a critical response to the president's State of the Union speech last night, calling it "muddled" and suggesting that it espoused "mercantalism."  Alliance for American Manufacturing (AAM) Executive Director Scott Paul found some of Yglesias' assertions to be inaccurate and ill-formed. In response, he authored a point-by-point rebuttal...

The State of Our "Mercantilist" Union. Yglesias sees the president's proposals as "mercantilism."  Actually, that’s what China practices. It’s called exporting your unemployment challenges. We’re the opposite of mercantilist. The U.S. has the largest current account deficit in the world, bar none. Trying to achieve some balance is not mercantilism, it’s called finding equilibrium.  Now if the U.S. had a major trade surplus and was looking inward, I’d be worried. If Yglesias wants to direct his ire somewhere, he should focus on Beijing, where they practice classic mercantilism.

The Tire Case. Yglesias mocks a recent trade case where safeguard tariffs were imposed on a flood of massively subsidized tires from China. What he misses is that any subsequent reduction in Chinese tire imports has little bearing on employment in China.  Those same workers, when not making tires, are just as likely to be employed in other heavily subsidized state-owned factories that dump product into the U.S. market. (Beijing makes sure of that, otherwise they’d have a revolution on their hands!) To the extent that Yglesias believes Chinese workers buy DVDs, they are pirated. To the extent that American consumers are paying higher prices for tires, it’s the result of an increase in input costs, which has been widely reported except in the Wall Street Journal (because that paper has a decidedly large bias against trade cases). Yglesias’s theory may please some dead economists and philosophers like Ricardo, and it may also get him a membership card to the Council on Foreign Relations if he doesn’t already have one, but it falls flat (pun intended) in the real world. Ask any of those 1,000 new tire workers how it feels to have a good-paying job, Matt. They are now buying things, too.

Protecting America from Competition. Here, Yglesias stumbles badly by ignoring the vast weight of predatory, illegal trade practiced by countries like China. We aren’t competing in a free market—our private companies are competing against rampant state subsidies in China. That’s what distorts world markets. We have a RULES-based trade system, which means, if one country doesn’t follow the rules, an aggrieved country can penalize them, seek some compensation, and deter the offender from cheating again. Allowing China to cheat unabated on trade is akin to letting a criminal off the hook. I’m really shocked that Yglesias is so weak on this point.

Cheerleading Siemens in NC is Contradictory. Siemens has opened a North Carolina gas turbine factory in partnership with Piedmont Community College.  Yglesias inexplicably questions whether competitors in Germany will fret about this subsidization from a community college.  Actually, Siemens is investing in the U.S. primarily because it believes in the maxim, if you want to sell it here, make it here. That idea is one reason why the Germans have a balanced trade account. And, if every other country more or less follows that maxim (make it here, sell it here) while America doesn’t, that’s why we've ended up losing one-third of our manufacturing jobs in the course of a decade while piling up enormous trade deficits.

Manufacturing is a tiny part of the economy, so why bother?  If manufacturing occupied 20% of our economy now (as it does in Germany, and then some) instead of 11%, we’d likely have a balanced federal budget and a substantially larger middle class. Manufacturing is responsible for 90 percent of our patents and two-thirds of our private sector R&D. Manufacturing still has a 20% wage premium over other private sector jobs, though that has eroded somewhat. And, manufacturing has a higher multiplier effect (1 manufacturing job creates 4 to 5 other jobs) than service jobs.  And yes, Matt, that holds true even for service jobs like "blogging." So, while manufacturing may be small, it plays an outsized role in the American economy. That’s why it matters.

Tweaking the Corporate Tax Code Won’t Turn Around Manufacturing.
  Actually, he’s right there, taken alone. But if you implement a comprehensive strategy to grow manufacturing, you will grow industrial employment, not to 1950 or 1998 levels perhaps, but you will grow it. And, after losing 40,000 manufacturing jobs per month from 2000-2009, that’s welcome news. We’ve had versions of industrial policy in our nation since 1791—including in the Reagan years. A package of innovation, education, insourcing, tax, trade, and infrastructure incentives is a good start. And hey, that’s what the president proposed last night.

One last thing. Yglesias probably doesn’t appreciate the link between innovation and production or other larger factors at play. Apple, for whom Yglesias is clearly a fan, is an outlier. Apple chooses to go very low-tech in manufacturing (and very high-tech in design), employing hundreds of thousands of Chinese worker-slaves to assemble its gadgets instead of building a highly automated, high-tech facility in the United States, where it could really manufacture for roughly the same cost, if China’s currency reached a market-based rate. Unfortunately, China’s currency is still about 24 percent undervalued. That’s one of the reasons why Apple—and so many other manufacturers—have moved there. Take away that effective subsidy and it changes the entire equation. Apple will still reap $40 billion-plus in earnings a quarter, and Yglesias can still write woefully under-informed blog posts on economic issues on his Mac, only this time it will be stamped “Made in America.”

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