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Politicians love to talk about “bringing back” American manufacturing jobs, but federal policies are actively destroying the ones that already exist.
The U.S. manufacturing sector is largely shifting from “old-tech” industries such as textiles and steel to high-tech fields such as advanced optics, custom semiconductors, pharmaceuticals, aerospace, and precision electronics. . Under free trade with the rest of the world, these industries would grow even more because they take advantage of our abundant skilled labor and scientific research capabilities.
But the American government cannot stop hindering our natural comparative advantage in advanced manufacturing.
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The biggest problem at the moment is the real exchange rate. Adjusted for inflation, the dollar is now roughly the strongest it has been in two decades, relative to our major trading partners.
Construction crews prepare the site for two new chip factories at Intel Corporation's Ocotillo campus in Chandler, Arizona, in September 2021. The project's $20 billion price tag marks the largest private sector investment in the history of Arizona. (Intel Corporation)
This is important because our high-tech manufacturers export their products to foreign markets, competing with their producers. The stronger the dollar, the more expensive American products are, since American manufacturers have to pay for materials and labor in strong dollars, but sell in euros, yen, and weak yuan.
The budget deficit and monetary policy affect the value of the dollar. Peacetime budget deficits are virtually the largest in history and monetary policy is tight. Combined, they push up the real exchange rate. Tight monetary policy has reduced inflation, which has been a good and necessary thing.
But loose fiscal policy increases demand for dollars to buy U.S. debt. If Donald Trump and President Joe Biden really wanted to help American manufacturers compete internationally, they would promise to cut federal spending to close the budget deficit.
Next topic: tariffs. These taxes on imported materials directly hurt advanced manufacturers. Tariffs on steel and aluminum imposed by the Trump administration and maintained by the Biden administration increase the costs of the materials our advanced manufacturers use as inputs, harming their international competitiveness.
Several studies find that these tariffs caused a net decline in manufacturing employment in the United States. I've spoken to executives at advanced manufacturing companies in the United States and they cite tariffs and trade compliance in general as one of their biggest headaches.
Trade barriers in the rest of the economy also indirectly harm our high-tech sector by propping up inefficient industries, preventing them from freeing up land, labor and capital for our growing export industries.
Democrats' Inflation Reduction Act and the bipartisan CHIPS Act were supposed to bring back “good manufacturing jobs” through industrial policy, which is another way of saying the federal government picks winners and losers. No subsidized chip factories have yet opened their doors and manufacturing output has slowed slightly.
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Even center-left economist Noah Smith, a supporter of industrial policy, is discouraged. He notes that billions in subsidies were earmarked for electric vehicle chargers, but none have yet been built. Meanwhile, the private sector is building tens of thousands of chargers without subsidies.
If Donald Trump and President Joe Biden really wanted to help American manufacturers compete internationally, they would cut spending to close the federal deficit. (Chip Somodevilla, Julia Nikhinson/Bloomberg via Getty Images)
The problem is that the federal government reduced its enormous subsidies with red tape and giveaways to special interests, what Bloomberg editors described as “a series of new government rules and pointed suggestions, intended to benefit unions, favor demographics, 'empowered community'. partners and the like.”
For anyone who knows anything about politics, this failure was predictable. Politicians win when they give special gifts to an organized interest. Growing the future of our high-tech sector is not yet as profitable as it should be.
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The US government has attacked our high-tech manufacturing sector with budget deficits that drove up the dollar, tariffs, and industrial policy. It's time they tried something else.
Democrats' Inflation Reduction Act and the bipartisan CHIPS Act were supposed to bring back “good manufacturing jobs” through industrial policy, which is another way of saying the federal government picks winners and losers.
States that are attracting manufacturing investment point the way. Over the past five years, states such as Nebraska, Utah, Arizona, Florida and Arkansas have grown their manufacturing sectors the fastest. These states have flexible labor regulations, educated workforces, and land use rules that favor growth.
Instead of hampering our advanced manufacturing sector with failed policies, the federal government should reduce deficits, tariffs, and bureaucracy. States can help by reforming their education systems to cultivate scientific genius rather than teaching to the lowest common denominator. These policies will help grow the industries of the future, not the inefficient producers of the past.
