Obama's SOTU: Still No Manufacturing Jobs
In his January 24 State of the Union speech, President Obama argued that American manufacturing is already coming back under his presidency. But his actual record on manufacturing jobs is dismal.
Normally, after a recession, laid-off workers get hired back. But America had 13.8 million manufacturing jobs when the Great Recession began at the end of 2007. Today, the nation has just 11.8 million, as shown in the graph below:
In his State of the Union speech, Obama claimed that he is turning around U.S. manufacturing and that he could accomplish even more if only Congress would pass his proposals.
For example, he again rolled out a proposal that he first made back in 2008 to tax American corporations on profits made by their foreign factories. They owe the U.S. government the difference between America's high corporate income tax and the lower corporate income tax rates that they pay abroad. But currently, they don't have to pay that difference if they leave the profits abroad.
Obama said, "If you're a business that wants to outsource jobs, you shouldn't get a tax deduction for doing it."
This is not a serious proposal. Obama knows that if Congress were to pass it, many corporations would move their corporate headquarters abroad to join their factories. The Republican alternative is to lower the U.S. corporate income tax rate to an internationally competitive level so that American corporations no longer have a tax incentive to move their factories abroad.
Obama's speech included a new proposed tax break for high-tech manufacturing companies who build their factories in the United States. It is reported that Apple, Dell, HP, and other high-tech manufacturers have ten times as many employees abroad as they have in the United States. Outsourcing is profitable given the low wages and other incentives provided by foreign governments. Obama wants to enter into the bidding war. He said:
If you're a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
Senator Rick Santorum proposes a much larger inducement. He would eliminate the American corporate income tax entirely for manufacturing corporations. Then all companies would completely avoid paying corporate income taxes on profits earned by their U.S. factories.
Obama claimed in his speech that he could replicate the surge in U.S. manufacturing growth that occurred after World War II. He said:
At the end of World War II, when another generation of heroes returned home from combat, they built the strongest economy and middle class the world has ever known.
But at the end of WWII, we were the world's leading international lender, not the world's leading international borrower. The direction for U.S. manufacturing jobs depends upon the direction of international loans. When a country lends to other countries, its manufacturing companies benefit from trade surpluses, but when it borrows from abroad, its manufacturing companies are hurt by trade deficits.
America's loans to Europe after World War II under the Marshall Plan caused a U.S. manufacturing boom. But America's borrowing today from foreign governments causes manufacturing job losses. The U.S. trade deficit over the last year was about $553 billion, representing about 5.5 million manufacturing jobs lost (based upon $100,000 worth of product per manufacturing worker).
Almost all of the emerging market countries are currently copying China's successful strategy of buying dollars in foreign exchange markets (currency manipulation) and then lending them to the United States in order to run trade surpluses with us. They lend us the dollars earned from trade so that their people won't use them to buy our goods.
In order to stop these loans, the U.S. simply needs to insist upon balanced trade -- in other words, insist that imports equal exports. The U.S. could impose a WTO-legal scaled tariff upon the goods of those countries with which we have chronic trade deficits. Then our trade-cheating partners would have to end their currency manipulations and other barriers to American products in order to continue the unfettered access of their products to American markets.
President Obama promised in his speech to get tough on China, but twice each year his Treasury secretary tells Congress that China is not manipulating its currency, despite the evidence to the contrary. As University of Maryland economics Prof. Peter Morici pointed out on January 26:
The president says he's been tough on China and will get tougher - but even he agrees that China's undervalued currency is the big problem. He promised to forcefully address China's currency as a candidate in 2008, has warned Chinese leaders he can take action if they don't revalue their yuan, but he never acts.
Obama's apparent strategy is to grow American entitlements to be paid for by loans from abroad and increased taxes upon America's productive sectors. He spent his first two years enacting a new health care entitlement. Now he is turning Social Security into a welfare program by reducing the Social Security tax that workers pay. To pay for all this, Obama needs foreign loans. And in order to get those loans, he has to give away American manufacturing jobs.
When running for office, Democratic politicians pretend that they will do something about America's disastrous trade policy. But once elected, they never do. Michael Lind put it cleverly in an article he wrote ("The Cost of Free Trade") for the Democrat-leaning American Prospect:
[T]rade divides the Democrats more than any other issue. The division is peculiar: It splits Democratic presidents into two people, the candidate and the elected official.
Obama's record on manufacturing has been dismal. As a result, he will have a hard time winning the industrial states this coming election. Potential Republican presidential candidates Senator Santorum and Governor Mitt Romney both plan to make trade a major issue in if they are nominated. Once elected, they may finally do what Obama has failed to do: put American manufacturing workers back to work.
The authors maintain a blog at www.idealtaxes.com and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.