How to bring manufacturing jobs back from China
Focus on the costs of labor and energy, not trade wars
A huge part of Donald Trump's appeal is the sense that good jobs, particularly manufacturing jobs, have been outsourced to China. It's an open question whether globalization and free trade have been the total winner that some claimed it would be and the death of factory jobs has affected some communities deeply.
The problem is that every cure seems worse than the malady. Sparking a trade war would destroy people's paychecks by raising the price of consumer goods. Industrial policy has seemed hitherto incapable of producing more than make-work jobs.
Is there nothing we can do?
Actually, there are two good things we could do.
The first is so obvious that I don't understand why it wasn't passed 20 years ago. Instead it's an idea that remains relatively outside the mainstream in political debates. It's called wage subsidies.
The cost of labor is one very element in whether jobs go some place or another. So how about lowering the cost of work? Today the United States government levies an important tax on work, through the payroll tax. It artificially increases the price of American jobs. What if it lowered them instead?
This is basically the idea of wage subsidies. It's like the payroll tax, except with a negative rate. If an employer needs to pay someone $10 an hour, instead of asking him to fork over $1.5 on top, the government will instead pay $1.50 out of that. Or $.50, or whatever. That would be a progressive system where the higher the wage the lower the subsidy would be. Perhaps the tax would kick in again for top incomes to make up for it.
Most of the job loss due to globalization and automation is at the bottom of the income and skill scale. Many of the workers who have been laid off or are in danger of being laid off are marginal workers — for their employers, whether or not to hire them is a decision where a dollar an hour could make the difference.
There's already a rough approximation of the wage subsidy: It's called the earned income tax credit. This Ford-era policy has probably been one of the most successful, innovative pro-work and anti-poverty policies in the past 40 years. But it's still inefficient. Many people don't claim the EITC, because they don't know they're eligible or because it's too much paperwork. Because it's a tax credit, the effect doesn't kick in until after a year, and it doesn't affect employers' calculus. But policy could fold the EITC into an expanded wage subsidy program. It's a simple and powerful idea that could create lots of new jobs. It's too bad it doesn't get enough play. With the exception of Marco Rubio, few prominent politicians have taken up the idea.
Another very useful policy, albeit a much more complicated one to set up, would be to build more nuclear power plants. Nuclear power is green, surprisingly safe today, and although it costs a lot of money to set up, it's very cheap to run. It's simply the best form of power out there. And energy prices matter a lot to manufacturing. A Federal Reserve study suggested that the drop in oil prices due to fracking and natural gas boosted manufacturing activity. And it makes sense. The other big cost input to manufacturing, alongside labor, is energy. If you make energy cheaper, you'll make manufacturing cheaper, and you'll get more of it.
The country would also reap the many other gains of a good energy policy: less carbon emissions, energy independence, and cheaper energy prices for consumers.
The bottom line is: We don't need a trade war with China to bring good jobs back. But we do need smart policies. And those are thin on the ground.