There are a variety of motives for the industrial policy measures Biden has pushed through. The climate ones in the Inflation Reduction Act and the infrastructure bill are both obvious and important. There is also the belief that these measures will hasten economic growth. There is a good case for this. Much research shows that infrastructure spending increases productivity and growth. There are certainly visible bottlenecks that can constrain the economy, which became clear with the supply chain problems during the pandemic.
There is also a national security issue. This can be overplayed. We don’t really need to worry about being cut off from supplies of key inputs from Canada, and probably not from Western Europe, in the event of a military conflict. On the other hand, being heavily dependent on semiconductors from Taiwan, in a context where a conflict with China is unfortunately a possibility, is a problem. For this reason, some reorientation towards domestic production make sense.
However, one of the main motivations for these measures is to reduce income inequality by increasing domestic manufacturing. This is not likely to be the outcome.
Manufacturing and Inequality: One of the great tragedies of the last four decades was the war on manufacturing, pursued by politicians of both parties, that centered on a policy of selective free trade. While we continued to protect doctors and other highly paid professionals from foreign (and domestic) competition, our trade policy was quite explicitly designed to put our manufacturing workers in direct competition with low-paid workers in the developing world.
This competition had the predicted and actual effect of costing us millions of manufacturing jobs, and putting downward pressure on the wages in the jobs that remained. Since manufacturing had historically been a source of relatively high-paying jobs for workers without college degrees, our trade policy had the effect of increasing wage inequality.
It also decimated many towns and cities across the country that had been heavily dependent on manufacturing. There is no shortage of places, especially in the industrial Midwest, where the major employer closed up shop and left a community without a viable economy.
It is easy to identify villains in this story, NAFTA, the high dollar policy pursued by Clinton Treasury Secretary Robert Rubin, admitting China to the WTO, all contributed in a big way to the loss of manufacturing jobs. They also placed downward pressure on wages in the jobs that remained, but that doesn’t mean that getting manufacturing jobs back will be a step towards reducing inequality.
The problem is that the wage premium in manufacturing has largely disappeared due in large part to U.S. trade policy. The graph below shows the average hourly earnings for production and non-supervisory workers in manufacturing and the private sector as a whole.
As can be seen, the average hourly wage in manufacturing used to be higher than the average wage in the private sector as a whole. In 1980, it was 4.1 per cent higher. They crossed in 2006 and have continued to diverge in the years since. The average hourly wage for production and non-supervisory workers in manufacturing is now 8.9 per cent less than the average for the private sector as a whole.
This is not a comprehensive measure of the wage premium since we would have to also consider benefits, which have historically been higher in manufacturing and also specific worker characteristics, like age, education, and location, but this sort of change in relative wages almost certainly implies a large reduction in the manufacturing wage premium.
A big part of the reduction in the manufacturing wage premium is the decline of unionization in manufacturing. In 1980, close to 20 per cent of the manufacturing workforce was unionized. This had fallen to just 7.7 per cent by 2021, only slightly higher than the private sector average of 6.1 per cent.
Furthermore, while the Biden administration has been very supportive of unions, there is little reason to believe that the return of manufacturing jobs will mean a substantial increase in unionized manufacturing jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing actually dropped by 400,000 over this period.
While there will undoubtedly be some good-paying manufacturing jobs associated with the reshoring efforts in these bills, there is no reason to think they will have a major impact on income inequality. The impact of trade on manufacturing over the last four decades is not reversible. Losing millions of jobs in the sector was terrible from the standpoint of income inequality, but getting some of these jobs back will not be of much help.
Intellectual Property: Where the Real Money Is: Perhaps the most disturbing aspect of these bills is the fact that there is literally no discussion of who will own intellectual property being created through government spending in these areas. For some reason, there is virtually zero interest in policy circles in discussing the impact of intellectual property on inequality, even though it has almost certainly been a huge factor. Just as Republicans don’t like to talk about climate change, Democratic policy types don’t like to talk about intellectual property. They are much more comfortable just making assertions like “inequality is due to technology,” rather than discussing how some people have been situated to get most of the gains from technology.
The idea that intellectual property derived from government-supported research can lead to inequality should not sound far-fetched. The Trump administration, through Operation Warp Speed, paid Moderna over $400 million to cover the cost of developing a Covid vaccine and its initial Phase 1 and 2 trials. It then paid over $450 million to pay for the larger Phase 3 trials, in effect fully covering Moderna’s cost for developing a vaccine and bringing it through the FDA’s approval process.
It was necessary for Moderna to do years of research so that it was in a position to quickly develop an mRNA vaccine, but even here the government played a very important role. Much of the funding for the discovery and development of mRNA technology came from the National Institutes of Health. Without its spending on the development of this technology, it is almost inconceivable that any private company would have been in a position to develop an mRNA vaccine against the coronavirus.
Excerpted: ‘Industrial Policy is Not a Remedy for Income Inequality’.