Protectionism: The Backwards Approach

Posted: Mar 29, 2002 12:00 AM
Many of those supporting President Bush's decision to impose tariffs on steel imports do so not so much because they care particularly about the steel industry. Rather, they are concerned that too much of the U.S. economy appears to be devoted to producing services, like banking, and not enough to producing goods, like autos. Typical of such people is Gov. Jim Hodges, Democrat of South Carolina, who recently said: "I do worry that one day we'll wake up and be a nation that can't make anything. We've got to realize that our American economy is one that knows how to make things." This view strikes many people as reasonable. After all, we don't want the United States to become a nation of "hamburger flippers," as former Clinton Labor Secretary Robert Reich used to say in the 1980s. Wealth and power come from factories, it is often said, not from shuffling papers in air-conditioned offices. In short, making "things" that people can see and touch is good. Services, sometimes called "invisibles" because they cannot be seen and touched, are per se inferior. This infatuation with "things" has justified many government policies. Tariffs on steel are just the tip of the iceberg. We also have tariffs on hundreds of other products, loan guarantees and other subsidy programs -- all to encourage the production of "things." The Japanese have a whole cabinet department devoted to this. They call it an "industrial policy," and many people, like Reich, have long thought we should have one, too. There are many problems with this theory. The biggest is simply that there is not the slightest bit of evidence supporting it. The truth of the matter is that the U.S. economy produces a higher percentage of goods as a share of total output today than at any time in its history. Production of goods -- "things" -- is not falling, as implied by the industrial policy advocates, but in fact has been rising steadily for the last 30 years. If one looks at the production of goods as a share of inflation-adjusted gross domestic product, which measures the total output of goods and services in the U.S. economy, one sees that goods production rose sharply during the 1930s through the end of World War II. At the trough in 1932, goods production represented just 28.3 percent of GDP. But by 1943, this figure had risen sharply to 35.5 percent. The production of goods then fell gradually during the 1950s and 1960s, falling from 34.6 percent of GDP in 1950 to 32.3 percent in 1972. This is ironic because many industrial policy advocates imply that the 1950s and 1960s were the "good old days," from their point of view. That is when manufacturing industries like steel were strong and vibrant, and paper-shuffling businesses like banking and finance were backwaters. The late 1970s and 1980s were a disaster, as far as the industrial-policy types were concerned. Factories were closing left and right throughout the industrial Midwest. American manufacturers were moving offshore, where they could get cheap labor and no unions. The people who made fortunes during that period did so in businesses like investment banking, where they used "junk bonds" to finance hostile corporate takeovers that produced nothing of value. This point of view was immortalized in movies such as "Wall Street" (1987) and "Other People's Money" (1991). The only problem is that it wasn't true. Production of goods as a share of GDP rose steadily throughout the 1980s, hitting 36.1 percent of GDP in 1989. This was the highest level in American history up until that point. Then a truly amazing thing happened in the 1990s. Production of goods literally skyrocketed from an already high base. By the middle of the decade, production of goods accounted for 38 percent of GDP, and by the year 2000 was up to 40.3 percent, according to official government data. In short, goods production is now about 20 percent higher as a share of GDP than it was in the "good old days." Economists are still debating what led to this surge of growth in manufacturing. However, none has suggested that tariffs or subsidies played any role whatsoever. It appears that most of the growth took place in businesses such as computers, software and telecommunications -- which lack the high visibility of steel and auto factories or textile plants. But, like Rodney Dangerfield, the high-tech newcomers seem to get no respect from the industrial policy crowd. This may be because the newcomers neither want nor need tariffs, subsidies or anything else from government, except to be left alone. There may be good reasons to impose tariffs on steel. But doing so because of a concern that the U.S. economy is not producing enough "things" is surely not one of them.