Stephen Miran & Scott Lincicome: Should the United States Prioritize Reindustrialization?

Summary

Podcast Summary: Future of Freedom Episode: Stephen Moran & Scott Lincicome: Should the United States Prioritize Reindustrialization?
Host: Scott Bertram
Release Date: October 7, 2024
Produced by: America's Talking Network

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Introduction

In this episode of Future of Freedom, host Scott Bertram delves into the contentious debate over reindustrialization in the United States by engaging with two distinguished guests: Stephen Moran, a Fellow at the Manhattan Institute and former Senior Economic Advisor at the U.S. Treasury, and Scott Lincicome, Vice President of General Economics and Trade at the Cato Institute. The discussion navigates through the complexities of reindustrialization policies, contrasting viewpoints, and the broader implications for America's economic and national security landscape.

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Defining Reindustrialization

Timing: [00:50]

Scott Bertram begins by clarifying the concept of reindustrialization. Stephen Moran defines it as the rebuilding of manufacturing pipelines in the U.S. to increase domestic manufacturing jobs, particularly those tied to national security concerns.

“I think people generally mean, and I follow the rest of the conversation, I think people mean a rebuilding of the manufacturing plans in the United States that we have a greater instance of manufacturing jobs here which were bound into national security concerns.” — Stephen Moran [01:05]

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Current State of U.S. Manufacturing

Timing: [16:54]

Scott Lincicome provides a nuanced perspective, highlighting that while U.S. manufacturing output remains robust—standing as the second-largest globally behind China—the sector's share of the economy and workforce has declined due to the expansion of the service industry.

“We are a very productive manufacturing workforce and we produce a lot of stuff that is used Here, domestically and exported all over the world.” — Scott Lincicome [17:12]

He emphasizes that the narrative of deindustrialization is misleading, as the manufacturing sector's value creation remains high despite a reduction in manufacturing jobs since their peak in 1979.

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Biden Administration’s Reindustrialization Approach

Timing: [02:05]

Stephen Moran critiques the Biden administration's approach to reindustrialization, labeling it as part of "Bidenomics." He argues that the strategy involves increasing regulations while simultaneously providing substantial government subsidies, leading to inflationary pressures and economic distortions.

“Their strategy is to increase regulations in various industrial sectors while at the same time throwing enormous government subsidies at these sectors.” — Stephen Moran [02:05]

Moran draws parallels with China's industrial policy, cautioning against the long-term sustainability of subsidies, which may result in underutilized industrial plants once subsidies wane.

“If you keep throwing dollars at building this industrial plant, but, and then the subsidies disappear, you end up in a situation like... you’ve got useless factories for which there's no end demand.” — Stephen Moran [04:08]

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Economic and National Security Implications

Timing: [06:02]

Moran underscores the importance of domestic manufacturing from a national security standpoint. He argues that reliance on global supply chains, especially those tied to adversaries like China, poses risks during crises, as evidenced during the COVID-19 pandemic and geopolitical tensions in Ukraine.

“It's important not to rely on supply chains that are too long and too complicated for products that can ultimately be absolutely necessary in an emergency.” — Stephen Moran [06:02]

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Strategies for Boosting American Industry

Timing: [08:09]

Stephen Moran proposes making the U.S. the most attractive place to produce goods by aggressively deregulating key sectors. This includes easing environmental, land use, and labor restrictions to lower production costs domestically.

“We need to try and make America the most attractive place in the world to produce. Right. That means two things... aggressive deregulation on a variety of fronts.” — Stephen Moran [08:09]

He criticizes the Environmental Protection Agency's additional regulations on the semiconductor industry, which he believes hinder domestic production despite substantial subsidies.

“What you need to do is we need to make it cheaper to produce here, not more expensive to produce here.” — Stephen Moran [09:11]

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Defense-Driven Industrial Policy vs. Climate-Driven Policy

Timing: [10:26]

Moran advocates for an industrial policy focused on defense rather than climate initiatives. He argues that defense-driven policies ensure sustained demand due to the perpetual need for national security, unlike climate-focused subsidies that may falter if consumer demand does not align.

“The military is always, you know, we will always live in a world in which national security threats are significant and relevant.” — Stephen Moran [10:26]

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Trade Policies and Tariffs

Timing: [12:10]

Addressing trade policies, Moran suggests raising tariffs on Chinese goods, especially in national security sectors, to reduce dependence on critical supply chains linked to adversaries.

“Tariffs are one way of doing that. Right. If you keep raising tariffs indefinitely on these products, eventually it will become uneconomic to continue sourcing them there.” — Stephen Moran [12:10]

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Workforce Readiness for Reindustrialization

Timing: [15:54]

Moran acknowledges a current deficit in the skilled workforce necessary for accelerated reindustrialization. He emphasizes the urgent need to invest in education and training programs to equip workers with technical skills relevant to manufacturing.

“We need to invest an enormous amount in educating and skilling up the workforce for technical skills for the manufacturing sector.” — Stephen Moran [15:54]

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Alternative Perspectives on Reindustrialization

Timing: [16:54]

Scott Lincicome offers a counterpoint, highlighting that the U.S. manufacturing sector is not in severe decline when considering productivity and output. He contends that recent narratives of an industrial boom are premature, noting that current trends show stagnation rather than growth.

“The United States manufacturing sector remains the second largest in the entire world behind just China.” — Scott Lincicome [17:12]

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Impact of COVID-19 on Supply Chains

Timing: [21:17]

Lincicome argues that the COVID-19 pandemic exposed the strengths of globalized supply chains rather than the vulnerabilities of domestic ones. He points out that many critical items, like toilet paper and baby formula, were predominantly produced domestically, yet shortages still occurred due to supply chain rigidity.

“Global supply chains were actually more resilient than domestic ones.” — Scott Lincicome [21:17]

He criticizes the push for reshoring, citing inefficiencies and vulnerabilities in purely domestic supply chains, which lack the flexibility to adapt during disruptions.

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The Jones Act and Protectionism

Timing: [25:27]

Lincicome critiques the Jones Act, a century-old law that mandates the use of American-built, owned, and crewed ships for domestic shipping. He highlights its detrimental effects on competitiveness and costs, noting that it has led to a restricted and inefficient shipping industry.

“The Jones act is this a hundred year old law that effectively makes requires anything that's shipped between two U.S. ports... has caused the cost of making a ship in the United States to be four to five times the cost in a place like South Korea or Japan.” — Scott Lincicome [25:27]

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National Security vs. Protectionism

Timing: [28:23]

While acknowledging that certain protectionist measures are justified for national security—such as procuring defense-related goods domestically—Lincicome warns against the overextension of such policies into the commercial sector. He argues that indiscriminate tariffs on a broad range of Chinese products, many unrelated to national security, harm the U.S. economy without providing corresponding security benefits.

“We don’t have that [defense-related]... we have tariffs on about half of everything sent imported into the United States from China.” — Scott Lincicome [28:23]

He further criticizes the conflation of national security with unrelated industries, leading to economic inefficiencies and higher consumer prices.

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Challenges with Industrial Policy Implementation

Timing: [32:28]

Lincicome discusses the inherent uncertainties in industrial policy, using the example of the electric vehicle (EV) sector. He points out that government-driven initiatives like subsidies and infrastructure investments have resulted in mismatches between production and actual consumer demand.

“The government wants to subsidize charging stations, but it put billions of dollars into that. And they've built... a dozen charging stations in the last couple years.” — Scott Lincicome [32:28]

He criticizes the "knowledge problem," where policymakers make long-term commitments without certainty about future market conditions, leading to inefficient resource allocation.

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Concluding Insights

Both guests present compelling arguments on the complexities of reindustrialization. Stephen Moran emphasizes the necessity of deregulation and defense-focused policies to ensure sustainable industrial growth and national security. In contrast, Scott Lincicome warns against broad protectionism, advocating for targeted measures and highlighting the inefficiencies of current policies like the Jones Act.

“These types of initiatives is that we... don't really know the future. So we call this the knowledge problem.” — Scott Lincicome [32:28]

The episode underscores the delicate balance between fostering domestic manufacturing, maintaining economic efficiency, and safeguarding national security in the face of global competition and evolving economic landscapes.

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Key Takeaways

• Reindustrialization Defined: The rebuilding of domestic manufacturing pipelines to increase manufacturing jobs, especially those tied to national security.

• Current Manufacturing Landscape: U.S. manufacturing output remains strong, but its share of the economy and workforce has declined due to the growth of the service sector.

• Critique of Bidenomics: Increasing regulations coupled with substantial subsidies may lead to inflation and economic distortions without ensuring sustainable growth.

• Defense vs. Climate Industrial Policy: Defense-driven industrial policies offer sustained demand compared to climate-focused subsidies, which depend on uncertain consumer demand.

• Trade Policies: Strategic use of tariffs can reduce dependence on adversary-linked supply chains, but broad protectionism can harm the economy.

• Workforce Development: Investing in education and training is crucial to prepare the workforce for a manufacturing resurgence.

• Protectionism and the Jones Act: Protectionist policies like the Jones Act can lead to inefficiencies and higher costs without delivering the intended economic or security benefits.

• Challenges of Industrial Policy: Uncertainties in predicting future market conditions can lead to misallocated resources and ineffective policies.

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Notable Quotes

• “Their strategy is to increase regulations in various industrial sectors while at the same time throwing enormous government subsidies at these sectors.” — Stephen Moran [02:05]

• “We need to make America the most attractive place in the world to produce." — Stephen Moran [08:09]

• “We are a very productive manufacturing workforce and we produce a lot of stuff that is used Here, domestically and exported all over the world.” — Scott Lincicome [17:12]

• “Global supply chains were actually more resilient than domestic ones.” — Scott Lincicome [21:17]

• “The government wants to subsidize charging stations, but it put billions of dollars into that. And they've built... a dozen charging stations in the last couple years.” — Scott Lincicome [32:28]

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For more insights and discussions on the intersection of conservatism and libertarianism, explore additional episodes of Future of Freedom and other podcasts from America's Talking Network at americastalking.com.

Transcript

[Scott Bertram]

Welcome to Future of Freedom. I'm your host, Scott Bertram. Future of Freedom is a production of America's Talking Network. You can check out all of our great [e-mail] to support great podcasts like this one, please donate by clicking the link in the show description. We bring you interviews today from different sides of the debate over reindustrialization policy in America. In a little bit we'll be joined by Scott Lincecum, Vice President of General Economics and Trade at the Cato Institute. First we talk to Steven Moran, Fellow at the Manhattan Institute and former Senior Economic Advisor at the U.S. treasury. Stephen, thanks so much for joining us.

[Steven Moran]

Thanks for having me.

[Scott Bertram]

It's a thrill to be here talking today about the topic of re industrialization here in the United States. When we toss around, around that term, which, which is often these days, what exactly do we mean by it or exactly what do you mean by it?

[Steven Moran]

I think people generally mean, and I follow the rest of the conversation, I think people mean a rebuilding of the manufacturing plans in the United States that we, that we have a greater instance of manufacturing jobs here which were bound into national security concerns.

[Scott Bertram]

I have read here and there about manufacturing in the US that perhaps employment is down but output is steady, perhaps increasing a bit. What do we know about that?

[Steven Moran]

Yeah, part of that is because of improved productivity growth and you know, and for sure output in manufacturing sector has continued to grow over the years. Nevertheless, employment in the manufacturing sector is a share of the total and in particular the US share of global manufacturing has been on a decline for a long period of time.

[Scott Bertram]

There have been efforts to go about this. The Biden administration, Bidenomics, there is an approach, they have attempted to pursue this idea of reindustrial industrialization. What have they tried and what's gone wrong?

[Steven Moran]

Yeah, so I've been quite critical of the bidenomics approach pursued by the Biden Harris administration in general. It seems that their strategy is to increase regulations in various industrial sectors while at the same time throwing enormous government subsidies at these sectors. What this has the, what this has the effect of doing is to, is to restrain production at the same time as stimulating demand. That has wound up being two things. One is quite inflationary, which is something that inflation has sort of come off the boil a bit in recent months, but was still running quite hot earlier in the year. And it's been a persistent problem for the last few years. And the other effect that it's had has been to distort the economy to an extent by funneling activity towards Sectors of the economy that might otherwise be inefficient. Now, if you take a look at an economy like China, where industrial policy has really been the driver of economic growth over the last couple of decades, what happens is what economists tend to call picking winners and losers. Right. And so what happens is the government picks a sector that it wants to stimulate, that it wants to grow for a particular policy reason. In China's case, for many years it was the housing sector. Lately it's been a variety of high tech sectors they've identified in the Bidenomics sector. In the Biden omics case of the Biden Harris administration, it's been various sectors, particularly clean energy, particularly stuff focused on the climate agenda. And by subsidizing these sectors for the sake of economic growth, you wind up driving activity into these sectors. But it's not necessarily the best thing for long term growth because you're funneling activity in sectors of the economy that don't necessarily have the highest productivity growth for the long term and where the economy wouldn't direct activity on its own.

[Scott Bertram]

And of course, another problem bot nomics is the fact that if we're maintaining subsidies, it's something we can't do indefinitely, certainly with our fiscal outlook here in the country.

[Steven Moran]

Yeah, absolutely. And again, I'd point to what's happening in China. And for many years they built housing for the sake of building housing for the sake of creating jobs in the construction sector. Now they have what are called empty cities where they have entire apartment complexes and entire neighborhoods that are unoccupied because they built these apartments, these buildings, not necessarily because people demanded them in the end, but because they, it was a, it was a goal of policy to create jobs in those sectors. Right. And the second you stop subsidizing that activity, what you end up with is, is an industrial plant and infrastructure aimed at building, aimed at building products for which there's no sustainable end use demand. And I worry that we're going to have something similar happen in the, in, in the clean energy and climate change focused areas of technology in the United States because they're ultimately reliant on significant government subsidies. We're funneling enormous amounts of taxpayer dollars at these sectors. Everyone's well familiar with the $7,500 credits for electric vehicles, but it goes well beyond that. And if you keep throwing dollars at building this industrial plant, but, and then the subsidies disappear, you wind up in a situation like, like, like it's, like it's plaguing China right now and in parts of its economy where you've buil plants that is, you know, had a use while you were subsidizing it, and doesn't have a use when you're not. And then there's no end demand for those products. And you've got. Instead of empty cities, instead of empty apartment buildings, you've got useless factories for which, you know, that are. That are designed to produce products for which there's no final demand.

[Scott Bertram]

Before we talk about a few of your ideas and suggestions, I wanted to ask specifically, what is the importance of this? Why is it so important that we are building things here in. In America? There are other. You mentioned China, but certainly there are other countries that have the capacity to build things like this. Why is it important? It happens inside our borders.

[Steven Moran]

Yeah. So from an economic perspective, from a purely economic perspective, you know, I think that lots of folks would agree with the free trade argument that it's. It's best to produce things wherever there's the best, best comparative advantage, and that's sort of going to be the most prosperity for everyone. And I think there's a lot of. There's a lot to that argument, but it completely ignores the national security context. Context. And what we've seen is that. What we've seen is that it's important not to rely on supply chains that are too long and too complicated for products that can ultimately be absolutely necessary in an emergency. We saw that in the pandemic with reliance on medical equipment from China, that we were ultimately reliant on China's goodwill to receive and which would not, you know, which might not be available next time. And we see it again in, you know, in the United States being somewhat restrained in its ability to achieve its national security goals in Ukraine, where we haven't been able to produce sufficient numbers of certain munitions that we want to deliver over there. And if a real. And, you know, right now we're just fighting proxy wars around the world, but if a real kinetic war were to break out, significant portions of our supply chain would either ultimately originate in China or originate in countries which might be expected to side with China in some sort of conflict. And so while from a purely economic perspective, there's enormous amounts to be said for the. For the free trade, for the free trade approach to things, you have to pay attention to, particularly goods that are responsible for the national security supply chain, for our ability to defend the American people and the allies abroad that we. That we desire to defend, that we're able to source those even in a crisis where significant parts of our Supply chain may, may be in enemy.

[Scott Bertram]

Stephen Moran is with us. Former senior economic advisor at the US treasury and also a fellow at the Manhattan Institute. If we want to boost American industry and we want to lower the cost of production here inside our borders, what can be done?

[Steven Moran]

Yeah. So the first thing we should do is try and make America the most attractive place in the world to produce. Right. That means two things. One, it means ending regulations that pursue, you know, that pursue what are just political, social goals, but make it very expensive to produce here. That means aggressive deregulation on a variety of fronts. On the environmental front, on the environmental front, on land use restrictions, on labor restrictions, and it also means trying to correct for distortions that result from industrial policies, from our strategic adversaries like China.

[Scott Bertram]

On the environmental front, I'm curious if there are, as there are in other sectors, these environmental roadblocks to the construction of industrial plants or even renovation of industrial plants, where they're located, how they're built, what needs to be included. Is that a hurdle to continued production here inside the U.S. yeah, I think it absolutely is.

[Steven Moran]

And so I think, for example, if you look at, if you look at the semiconductor industry, which the chips bill, you know, sort of aimed to aim to aim to stimulate, you know, with bipartisan support, we put, you know, tens of billions of dollars of taxpayer dollars for the semiconductor industry. And yet the, the EPA has decided totally on its own volition, not through any legal obligation by Congress, but the epa, the Environmental Protection Agency, has decided to create an entire separate regulatory program for semiconductor facilities on top of all of the other restrictions of the Clean Air act and the Clean Water Act. What that does is throw up additional hurdles in the place of opening up new semiconductor fabrication plants, of opening up new semiconductor industrial plant. And so what we've done is we've made it expensive to produce here, we've made it more expensive to produce here, and then try to solve the problem by throwing more taxpayer dollars at it. But that just results in higher prices. What we need to do is we need to make it cheaper to produce here, not more expensive to produce here.

[Scott Bertram]

You write that re industrialization can be aided through demand support from defense driven procurement, a defense driven approach as compared to, say, an approach under President Biden and the Bidenomics approach. What does that look like?

[Steven Moran]

Yeah, so I think it's critical to note that if you're going to pursue industrial policy, the problem is picking winners and losers. And in the examples I was giving before, likening a lot of the, a lot of the Climate tech, to a lot of the climate approach to the, to the Chinese approach of building empty cities. The problem is not knowing that you're going to pick a winner because the consumer may not ultimately want what you're, what you're building the factories to produce. The advantage of pursuing industrial policy for depends defense purposes is that the consumer is never going away. Right. The military is always, you know, we will always live in a world in which national security threats are significant and relevant. We will always live in a world in which we need to have a military capable of defending the American people. And so that's an industrial policy that's based on a sustainable long term demand. It's a cost of having, you know, having a national security budget is the cost of having a country creating lots of empty apartments or creating factories to build electric, electric vehicles that consumers may ultimately not want in 10 or 20 years. Is not, is, is. We don't know that that's going to be permanent. Right. It may be, but industrial policy doesn't have a good, have a good history, have a good track record of picking winners and losers in that sense. And so taking industrial policy down the defense line instead of down the climate line is much likelier to result in sustainable economic demand than what I think has been pursued by the Biden Harris administration.

[Scott Bertram]

You write that China is our core security threat. We should acknowledge that. And because of that, policymakers should raise tariffs on China, especially at national security sectors. Why would tariffs be effective in this particular instance?

[Steven Moran]

Yeah. So I think we've got to make it clear that we cannot rely on supply chains for critical national security products that either are linked to China or vulnerable to being curtailed in a significant conflict with China. Tariffs are one way of doing that. Right. If you keep raising tariffs indefinitely on these products, eventually it will become uneconomic to continue sourcing them there. And so giving a signal that you will continue to do so until the supply chain adjusts is a way of, as a way of incentivizing those supply chains to adjust.

[Scott Bertram]

There is an argument, I believe, one that was outlined by President Truman at some point, that increasing American production and sort of shutting down or shutting out external contributors could diminish, deplete the stock of raw materials domestically that would be available if there were a true time of possible emergency. Should we be aware of that and perhaps plan for that?

[Steven Moran]

You know, I don't think so. I don't think that's a real threat. I think that lots of folks have been concerned about peak oil and scarcity of other raw materials for a long time. And what we see over and over again in American history is that American ingenuity comes up with, with wonderful ways of extracting more out of the earth. It's a big continent. We are blessed with a huge array of national resources here. And you see this happening now with the development of new means of extracting rare earth material, rare earth elements out of the ground. And you saw that with fracking just a decade ago. Right. So over and over and over again, American ingenuity comes up with means of extracting more out of the continents that we're blessed to live on. And I would expect that continue to be the same in the future.

[Scott Bertram]

Stephen Moran is a former senior economic advisor at the US treasury, also a fellow at the Manhattan Institute. What's the timeline on something like this? Certainly we just talked about tariffs. If those are placed too aggressively, it could harm the short term availability of material for defense. What's the timeline look like on this as far as you're concerned?

[Steven Moran]

Yeah, so on the deregulate. So as I said before, I think you need two things. I think you need simultaneously deregulation combined with the signal that we have to extract certain supply chains from, from the purview of the, from the purview of China. And I think on the deregulation front that can be very fast. In particular in the wake of the low prete decision to end Chevron deference earlier this year. The tariff situation, the tariff front I think should ultimately move much more slowly because it can be disruptive to financial markets, can be disruptive to cut to corporate, to corporate production and it can be disruptive to the economy as well. I think providing clear and credible forward guidance of aggress, gradual increase in tariffs is a way of minimizing that volatility because you've taken the uncertainty out of it. You've taken, you've taken the unknown. There's no fear of the unknown if there's a clear path on which tariffs are going to go up. And by doing it gradually, I think you can give companies time to adjust. Right. The world isn't ending tomorrow, but it will end. But things will be rougher if they wait three years to adjust as opposed to taking action over the next quarter several quarters. And so I think the combination of clear, of a clear large long term shift, combined with very clear and credible forward guidance that it will be gradual in getting there will both minimize downside consequences as well as incentivize maximum response.

[Scott Bertram]

From the corporate sector and also the workforce. Do we have a workforce that is capable of accelerating reindustrialization, of taking on the tasks that we've outlined in this conversation.

[Steven Moran]

Yeah, so that's a great point. And I think the answer is at present, no. I think we need to invest an enormous amount in educating and skilling up the workforce for technical skills for the manufacturing sector. Now fortunately, that's something that doesn't, you know, I don't think it takes 20 years to do that. I think that we can sort of start doing that very, very quickly. You know, start, start expanding training programs very quickly. But I think it is something we absolutely need to do is we need to invest in, in manufacturing skills for the workforce.

[Scott Bertram]

Stephen Moran is a former senior economic advisor at the US treasury, now fellow at the Manhattan Institute. Stephen, thank you so much for joining us here on Future of Freedom.

[Steven Moran]

Thank you for having me. It's been a pleasure.

[Scott Bertram]

Now to hear another side of the argument about reindustrialization policy. We talk with Scott Lincecum, Vice President of General Economics and Trade at the Cato Institute. Cato.org you could also find him on xcottlincum. Scott, thanks so much for joining us.

[Scott Lincecum]

My pleasure. Thanks for having me.

[Scott Bertram]

Discussing today the topic of industrial policy re industrialization here in the United States, that debate, what's your description? How would you describe the current state of US Manufacturing? We're told often that it is in decline. Is it the case?

[Scott Lincecum]

Well, I think you need to take a near term and a long term perspective. In the near term US Manufacturing in the real economy is actually struggling. The last now more than a year have seen an industry in contraction. If you believe these Institute for Supply Management reports, the responses of CEOs, the reports in the Fed's Beige book show an industry that is just kind of stagnating. And I think that's contrary to a lot of what you read in the press these days is that we're in the middle of this big industrial policy led manufacturing boom. Well actually not yet. So far it's just a bunch of construction now. Long term though, I think this is where the narrative is extremely, I think misguided. The fact is that the United States manufacturing sector remains the second largest in the entire world behind just China. We of course have a population that's around a quarter the size of China's and on a per worker basis. So manufacturing productivity, we actually absolutely crush the Chinese and every other industrialized country, Germany, Japan, Korea, you name it. We are a very productive manufacturing workforce and we produce a lot of stuff that is used Here, domestically and exported all over the world, even on a historical basis. So just looking at the US economy, US manufacturing sector, in terms of output, so the stuff we actually make, and in terms of value add, so the value we add to the value generated by the sector remains right around its record high. It has stopped increasing. So throughout the 50s, 60s, 70s, 80s, it was going up. Now that has stopped, but it stopped at the peak. So we aren't exactly. Again, this idea that there's been this massive de industrialization is simply wrong. Based on the numbers. The difference is the changes are twofold. One, as a share of the economy, manufacturing has indeed shrunk because the rest of the economy, mainly services, has continued to expand. And by services, I don't just mean lawyers and big tech, I mean all. And I also don't mean MC jobs. That's a lot of blue collar work in service as well. And these industries have increased dramatically. There's been a lot of increase in healthcare work as well. We're an aging society and we're very wealthy, so that you consume a lot of health care. So the manufacturing sector as a share of the economy and as a share of the workforce has continued to decline. And then of course, just nominal manufacturing jobs has declined. It peaked in about 1979 and then as a share of the workforce peaked in the 1950s, and that's a different animal. So certainly there has been a substantial decline in manufacturing jobs, although we've gained about a million and a half of those since the Great Recession. So it hasn't been just a consistent straight down decline, but that has declined. And we can debate whether that's good or bad or whatever, but it isn't a sign of de industrialization because again, the economy itself is still generating tons of stuff.

[Scott Bertram]

One of the reasons this debate is at the forefront is because we all live through Covid and we saw supply chain issues and problems getting items, and we heard about the chip shortage and where are we getting our chips from? And we have to import them. So did we. Are we reaching the wrong conclusions? Are we taking the wrong lessons from what we lived through during COVID Yeah.

[Scott Lincecum]

We'Re reaching a lot of the wrong lessons because certainly, look, it is perfectly understandable that when shelves get empty, people start blaming, you know, start worrying about supply chains and globalization. And you know, we had pictures of ships backed up at the ports. And so in the moment, that type of concern and fear makes perfect sense. But when you step back and now we have years of data, it turns out that the idea that we should be on shoring stuff to boost economic resilience. Has turned out to be pretty wrong headed. And it's wrong headed for a few reasons. First is that a lot of the stuff that was a problem during the pandemic was actually made domestically. So toilet paper is a great example. It turns out we make, I think almost all of our paper products domestically now. Why? Well, because they are massive and lightweight and it is very difficult to ship them. You know, think about it, you know, we all experience this, right? You try to jam a thing of toilet paper from Costco in the back of your two seater, you're in, you're in trouble, right? So we make, we make. We actually made that all domestically and there's a lot of other products like that. And that gets to the second reason. Some of the worst pandemic related shortages were products that were totally made or almost entirely made here in the United States. And the big example of that is baby formula. So 98% of all baby formula consumed in the United States prior to the pandemic was made in the United States thanks to a bunch of trade barriers, tariff rate quotas and non tariff barriers and other things and then some domestic welfare issues and other things. And that was one of the worst crises and most prolonged crises of the pandemic. And that gets to the economics lesson is that it turns out that globalized supply chains were actually more resilient than domestic ones. Because, and this is an all kind of a classic all your eggs in one basket type thing, you know, just like we shouldn't be reliant on a single country for a product that includes, we shouldn't be relying on the United States for a product. Because what happened when with baby formula, well, one factory shut down and it crippled the entire supply chain. And even more importantly, because the supply chain was entirely domestic, it lacked the ability to adapt and kind of pick and choose sources that might be in better shape. And so what global supply chains did, and this again is now backed, it's not just baby formula. It was backed up by a lot of evidence that's come out since then. Economists just looking at nationalized supply chains versus globalized ones. What a diverse and global supply chain can do is allow these very brilliant people in the logistics business here in the United States to rush to find alternative sources, to rush to fill those gaps. And they already had the supply relationships, the marketing, the trucking, everything they needed to flip that switch quickly. Whereas the domestic supply chain doesn't have any of that. So not only is it vulnerable to a shock like the closure of a factory or a freak ice storm in Texas or now we have a quartz mine closure in North Carolina. So not only is it vulnerable to that shock, but it's slower to adjust and to adapt. And we actually again saw that throughout the pandemic. So the idea that nationalizing everything is actually going to make us more resilient just has been disproven in the data.

[Scott Bertram]

Scott, you've written previously about the Jones act and I read something that you wrote that surprised me, that the United States, because of the Jones act in large part has one of the most restrictive shipping systems in the world. What does that mean? What are the consequences for us?

[Scott Lincecum]

Right. Well, it's a poster child for the perils of protectionism. So the Jones act is this a hundred year old law that effectively makes requires anything that's shipped between two U.S. ports. So let's say you want to take oranges from Miami to Boston, it has to be on an American ship. So what we mean by American is made in America, owned by Americans, crewed by Americans and flagged under the US flag. So that sounds great, right? Oh, we'll have American ships and it'll be great for national security and the rest. The problem is that good old protectionism has caused the cost of making a ship in the United States to be four to five times the cost in a place like South Korea or Japan. Second, and that's because the industry has been totally insulated from competitive pressures for over a century, as anybody knows. Look, if you don't have to actually compete, you don't invest, you don't innovate, you don't stay lean and mean at the same time. It's given these US shipping companies and shipbuilders a captive US market. So they don't actually ship internationally. They only focus on places like Puerto Rico and Alaska and down the Mississippi river that you don't have any choice but to use a Jones act ship. Right? So you put that all together and you have an industry that's not just uncompetitive, but is shrinking and old. The fleet is dwindling quickly. The American fleet, because nobody's buying these ships. And it costs, because it costs so much, have a coastwise shipping industry, meaning we don't ship, I mentioned orange from oranges from Miami to New York. We don't, we don't do that anywhere that it isn't absolutely necessary. And instead what do we do? We put them on trucks. So if you're ever been sitting in traffic on I95 surrounded by 18 wheelers. There's a chance that's because of the good old Jones Act. And then the other I think really big issue with the Jones act is that it has created this very politically powerful industry that refuses any sort of reforms, even waivers during crises. So a hurricane hits Puerto Rico, we need to get fuel to them. The Jones act lobby will come out and resist any type of reform. And that's classic protectionism.

[Scott Bertram]

So I want to ask about that national security component because there is the economic argument for reindustrialization or protectionism. There's also national security. So is it worth it it for us to have more government involvement in some areas if it means that China, our enemy, will have less involvement in our economy and also less involvement in our international security concerns?

[Scott Lincecum]

So yes and no. I'll give you the good old lawyerly answer. Yes, in the sense that even guys like me acknowledge a national security case for protectionism in certain contexts. We don't want to be buying our tanks and our laser guided missiles from, from China. Right. That makes perfect sense to the extent you have buy American rules or prohibitively high tariffs or whatever on those types of defense related goods. Nobody even Milton Friedman supported stuff like that. The harder question is in the commercial space. And that I think really requires a much more steel eyed approach than what we're taking today. Because what we're doing today, and this is the problem with a lot of so called national security protectionism, is that we're applying national security quote unquote tariffs to metals. So steel and aluminum from our allies, from Japan, from Europe. At one point it was Canada and Mexico too. And we were applying it to products that had absolutely no potential national security nexus. Things like rebar, I mean really junky steel that has just come commodity products. And then on the China side, sure, if we want to restrict the use of certain Chinese microchips or inputs in certain defense products, or we're worried about other Chinese products for espionage reasons, okay fine, let's target those. But we don't have that. We have tariffs on about half of everything sent imported into the United States from China. And it includes stuff like tiki torches and baby blankets and a lot of things that are either consumer goods that have absolutely no national security linkages or are industrial inputs that again not national security related. So let's say like a little motor for you know, some toy that's made in America. And what do those do those harm American manufacturers? Because you know, about half of everything we import is inputs into American Manufacturing. So what you end up with when you say national security is people's brains turn off. They say, oh well then okay, we'll have tariffs on Mexican rebar, which again makes no sense. The other big thing that happens is the minute that you say national security protectionism. Well, what happens? Every industry comes to Washington looking for protection, claiming that it too is vital to national security. And certainly there are edge cases where maybe that is the case, but it also brings up tons of absurd cases. A certain senator from Florida has famously said that sugar is a national security issue and the sugar quotas are worthwhile. Garlic has been a national security issue and on and on and on. So certainly we can have a real and legitimate debate about national security related protectionism. And there are some clear cases where that's appropriate. But right now it is an absolute incoherent mess and it's costing the US Economy and American manufacturers a lot in terms of higher prices, lower output, less employment and the rest.

[Scott Bertram]

One final question for you, Scott. The problem of making policy today when we don't know what's happening tomorrow, if we look back at just say Biden electric vehicle policy over the past three and a half years or so, and there's an argument that is a re industrial kind of policy, this is important, we're going to move in this direction. And electric vehicles are the future. And consumers have said essentially no, they're not. And we've seen Ford, General Motors, others now step back from their all out push toward electric vehicles. Again, that problem just making policy today, not knowing what tomorrow will bring.

[Scott Lincecum]

Yes, so this is a classic problem with industrial policy generally. And for the audience to know, the United States government via a few laws has gone down a road of trillions of dollars in new subsidies for semiconductors, electric vehicles and a lot of other stuff over the last couple years. And it's a massive subsidy push. The problem with these types of initiatives is that we, like you said, we don't really know the future. So we call this the knowledge problem. You know, after F.A. hayek, the Nobel laureate, and that is that what looks good on paper today might not look so good tomorrow. And it certainly isn't going to look good in a decade or so. So one of the classic examples of this is in the 1980s, we thought we needed to protect semiconductors. So the Department of Defense we had wrote this big report about this. It was a security issue, but we picked the wrong type of semiconductor. We protected memory chips when we should have been, when the entire industry was moving towards logic Chips. And so we ended up with a bunch of tariffs on Japanese memory chips. And not only did we pick the wrong product, but that pushed American computer manufacturers offshore computer because chips got really expensive. Right. So we ended up picking the wrong product. We did a lot of damage and at the end of the day, we didn't do a lot of good. Right. And I think that we're starting to see some of that again with the industrial policy push today. And I won't even get into how these things get bogged down in politics. Right? You have union mandates and the CHIPS act and all this other stuff, Right. So, but just in terms of knowledge problems, stuff like you said for electric vehicles, everybody thought, oh, there's going to be this huge increase, consistent increase in adoption. They didn't think about how consumers might not be ready because of range anxiety, because of price and other things. And at the same time we were going to build a bunch of charging stations because that's one of the issues. Right. But there's a bit of a chicken and egg issue there. You need need consistent EV demand for chargers to make sense, but you need chargers for there to be consistent EV demand. We're kind of stuck in this now. The government wants to subsidize charging stations, but it put billions of dollars into that. And they've built, you know, like a dozen charging stations in the last couple years because of course it got bogged down in bureaucracy and federalism and all these buy American rules that mean it has to be American made. Charger made it very expensive and the rest. And so at the end of the day, like you said, we have all of, we're spending billions and billions of dollars. All this investment is tied up in potential new factories and EV adoption looks to be much, much slower than we thought. And you think about the opportunity costs because we economists, we try to think not just in terms of direct budgetary cost, but what could those resources be doing and what could all those tax dollars be doing? And that's why there are better approaches to this stuff, more flexible approaches via free market reforms. We could have improved tax policy related to the expensing of large manufacturing structures. We could improve trade policy so that we're not taxing everything you need to build a giant manufacturing facility, which we are doing via tariff policy today. We could improve immigration policy because these high tech sectors need lots of smart immigrants. We could improve regulatory policy because it takes years to get an environmental permit to get one of these facilities off the ground. So you could do all this free market stuff. That would let any manufacturer, not just of the things the government has chosen, but of any technology to invest and do so in a more sustainable and clear eyed way. But of course we didn't do any of that stuff and instead now we're kind of stuck with trillions of dollars of money coming out of the government fire hose and a lot of kinks in the hose and potential issues with demand.

[Scott Bertram]

Scott Lincecum is Vice President of General Economics and Trade at the Cato Institute, cato.org you can find him on xcottlinscombe. Scott, thank you so much for joining us here on Future of Freedom.

[Scott Lincecum]

My pleasure.

[Scott Bertram]

We thank both of our guests for joining us, Steven Moran, Fellow at the Manhattan Institute and former Senior Economic Advisor at the US treasury, and Scott Lincecum, Vice President of General Economics and Trade at the Cato Institute. For additional episodes of the Future of Freedom podcast and other fine podcasts from America's Talking network, check out americastalking.com or anywhere you find your audio. Thank you for listening to Future of Freedom, presented by America's Talking Network.