September 2013

Economic Patriotism: A Pro-Growth Economic Plan for Iowa and the Nation

By John Hendrickson

With the lackluster economic recovery from the Great Recession and the persistent high unemployment the economy desperately needs pro-growth policies. President Barack Obama’s economic and regulatory policies are placing uncertainty over the economy; this is especially true with the Patient Protection and Affordable Care Act and the failure to confront the fiscal crisis symbolized by our growing $17 trillion national debt. One policy area that policymakers should consider in order to create economic growth is in the manufacturing sector of the economy. The United States, once considered the “Arsenal of Democracy,” was a manufacturing giant, and a restoration of this vital sector of the economy will only lead to better jobs, a stronger economy, and a more vital nation.

Even in today’s competitive, high-technology global economy, manufacturing is an essential part of our national economy. Overall “the manufacturing sector was responsible for 12 percent of the nation’s total economic output.”[1] The National Association of Manufacturers reports that in 2012 “manufacturers contributed $1.87 trillion to the economy, up from $1.73 trillion in 2011.”[2] In addition for every $1.00 spent in manufacturing, another $1.48 is added to the economy, the highest multiplier effect of any economic sector.”[3] Other economic benefits of manufacturing include:

  • Manufacturing supports an estimated 17.2 million jobs in the United States — about one in six private-sector jobs. Nearly 12 million Americans (or 9 percent of the workforce) are employed directly in manufacturing.
  • In 2011, the average manufacturing worker in the United States earned $77,060 annually, including pay and benefits. The average worker in all industries earned $60,168.
  • Manufacturers in the United States are the most productive in the world, far surpassing the worker productivity of any other major manufacturing economy, leading to higher wages and living standards.
  • Manufacturers in the United States perform two-thirds of all private-sector R&D in the nation, driving more innovation than any other sector.
  • Taken alone, manufacturing in the United States would be the 10th largest economy in the world.[4]

Manufacturing is also important to Iowa’s economy. Iowa’s manufacturing output in 2012 was an estimated $25 billion and it consists of 18.6 percent of gross state product.[5] Manufacturing in Iowa is not only a source for good jobs, but is also important for our total economy:

Iowa had the 30th largest state economy in the nation last year. However, relative to its GDP, Iowa is still one of the nation’s largest manufacturers. This is especially the case for non-durable goods, which accounted for 8.4% of the state’s total output in 2012, the fifth-highest percentage in the nation. In 2011, when non-durable goods manufacturing accounted for 8.3% of Iowa’s output, nearly half of this contribution came from food, beverage and tobacco manufacturing. At 4% of state GDP, this was more than any other state except North Carolina.[6]

Historically manufacturing has played an important role in our national economy, but in the last several decades American manufacturing has been in decline, even with some of the recent positive economic gains. Several reasons can be pinpointed for the decline of American manufacturing. One major reason is the reversal of trade policy in the United States. The United States through most of our history practiced a form of economic protectionism, that is, an economic policy that placed tariffs on foreign goods, while protecting our national economy. This policy of protection initiated by Alexander Hamilton and President George Washington continued throughout most of our history.

A significant change occurred under President Franklin D. Roosevelt, who started the nation down the path to globalization and the result was a series of trade agreements that continues today that resulted in not only the loss of manufacturing, but also the loss of our national sovereignty through organizations such as the World Trade Organization (WTO). As Patrick J. Buchanan wrote:

Under rules of globalization, U.S. corporations could, without penalty or opprobrium, shut their factories, lay off their U.S. workers, erect new plants in Asia, produce goods there, and bring them back free of any tariff to sell consumers and kill the companies that elected to stay loyal to the U.S.A.[7]

As a result the nation has lost over 5 million manufacturing jobs and, as Buchanan argues, the results are devastating:

Real wages of U.S. workers have not risen for 40 years. One in three manufacturing jobs vanished between 2000 and 2010. The nation that used to produce 96 percent of all it consumed depends now on foreigners for clothes and shoes we wear, the TV sets we watch, the radios we listen to, the computers we use, the cars we drive.[8]

The result is massive trade deficits as the United States becomes more dependent on imported goods and a growing service-based economy.

In addition to the loss of manufacturing and sovereignty, another side-effect of globalization has been the character of business itself. During the 19th and into the 20th centuries “Americans could at least count on business leaders’ being pro-American.”[9] As Robert W. Patterson argues:

Beloved or not, major corporations functioned as true stakeholders of America: fortifying American industry and building American factories, spearheading American innovation, paying billions of dollars in American taxes, and creating millions of high-paying ‘family wage’ jobs that helped create and sustain an expanding middle-class.[10]

Today, Patterson argues, many businesses are “no longer committed to a particular place, people, country, or culture, our largest companies have turned globalist while abdicating the responsibility they once assumed to America and its workers.”[11]

The second major reason for the decline of manufacturing is poor public policies. Currently the public policies being advanced by President Barack Obama and Democrats continue to cause uncertainty over the economy, which is a significant cause of continual slow economic growth. The same is true for policies that impact manufacturing. Andrew O. Smith, a manufacturing executive, tells this important story in his recent book, Sand in the Gears: How Public Policy Has Crippled American Manufacturing. Although Smith does not discuss the issue of free trade, he does address the implications of tax, regulatory, labor, health care, among other policies that impact manufacturing.

For example, the United States has one of the highest corporate tax rates at 35 percent and the state of Iowa also has a high corporate tax rate of 12 percent. High tax rates, accompanied by high levels of regulations, tend to discourage manufacturing and provide more incentive for businesses to engage in outsourcing jobs to countries that have lower tax rates and fewer regulations. As Smith wrote:

We underestimate how heavily the hand of government currently weighs upon our economy. Regulations permeate every business decision and potentially obstruct every action a business might take.[12]

Lowering the corporate tax rate, at all levels, along with reforming regulations will result in an improved business climate within the United States. Other policies such as entitlement reform, health-care reform, and lowering federal spending would also prove to be beneficial.

Patrick J. Buchanan argues that eliminating the corporate tax and replacing it with a 10 percent tariff on imports would result in economic growth. Buchanan describes the impact:

  • First, every U.S. corporation that had moved abroad in search of lower taxes in recent years would start thinking about coming home and bringing its production and its jobs back to America.
  • Second, that $2 trillion in income U.S. companies have stashed abroad would come roaring back into U.S. institutions.
  • Third, foreign companies would begin to relocate and produce here in America, both to get around the tariff and pay no taxes.
  • Fourth, U.S. producers would see sales soar inside the $17 trillion U.S. market, at the expense of foreigners who would pay a 10-percent admission fee to get into this market, a fraction of what they used to pay in the 19th century.[13]

Defenders of free trade orthodoxy will often point out that a tariff is a tax, which is true, but the tariff is also a constitutional-recognized tax under Article 1, Sec. 8 of the Constitution. “From 1865 to 1914, America had 10 Republican Presidents. All believed in financing government by taxing imports, not the incomes of U.S. citizens or the U.S. companies that employed them,” argues Buchanan.[14] In fact Presidents Warren G. Harding and Calvin Coolidge, who are known for their sound economic policies, favored tariffs and their economic policies created one of the brightest periods in our economic history.

Reversing the decline of manufacturing will not be easy. The seeds of globalization have been sown very deep and both political parties embrace the doctrine of “free trade” without even thinking about its impact on our national economy or the fact that other countries do not reciprocate, but rather practice some form of protectionism. The most realistic hope comes in the growing bi-partisan consensus to lower the corporate tax rate, but even lowering the federal and Iowa’s corporate tax rate will be an uphill legislative challenge.

Other policy reforms such as spending reductions, entitlement reform, health-care reform, and labor reform will not be easy as both political parties have deep philosophical divides on these issues. Restoring manufacturing means that policymakers must enact conservative economic policies based upon limited government principles.

It is clear that manufacturing is a vital part of Iowa’s economy and the national economy. Restoring manufacturing will result in better middle-class jobs, a stronger economy, and a more secure nation. There is also a national security element to having a strong manufacturing base and investing in defense infrastructure will not only result in greater security, but also job creation and technological innovation. Dependence on any foreign entity for national security is poor policy.

The United States must reverse the current decline in manufacturing. In the near future the reality exists that China may surpass the United States as a leading manufacturer. As Buchanan noted:

A nation [United States] that used to export twice what it imported has been running huge trade deficits for decades. China now holds $1 trillion in U.S. debt…With 50,000 U.S. factories closing in this new century, the greatest manufacturing power in history has been hollowed out, as Beijing booms at our expense. Corporate America is building the new China that is pushing Uncle Sam out of the western Pacific.[15]

Manufacturing is important to the United States and it is the cornerstone for not only a strong economy, but also for a strong national defense. As the late Paul Weyrich wrote in The Next Conservatism:

We must restore American manufacturing. Unless we are willing quietly to become a Third World country, we need to make things. We must stop the movement of our manufacturing to China and other foreign countries. We must conserve and restore the well-paying jobs manufacturing offers to the blue-collar middle class, a class whose existence ought to be one of our proudest national achievements.[16]

As Patrick J. Buchanan wrote:

We need to bring manufacturing back and relearn the truths taught centuries ago by [Alexander] Hamilton. Manufacturing is the muscle of a nation, vital to its defense and the securing of sovereignty. It is the magnet for research and development. It is organic. It grows. Around the factory form other businesses. Towns develop. Manufacturing workers average twice the wage of service workers.[17]

An economic policy that is rooted in economic patriotism, which will consist of spending restraint, low taxation, decreased regulation, and responsible trade policies will result in the restoration of American manufacturing. As Buchanan stated it is time to rediscover economic philosophy that governed Hamilton, Washington, Harding, Coolidge, Reagan, among others — an economic philosophy that placed America first.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Alexander E. M. Hess, Michael B. Sauter, and Thomas C. Frohlich, “Ten states where manufacturing matters,” USA Today, August 10, 2013, <http://www.usatoday.com/story/money/business/2013/08/10/10-states-where-manufacturing-still-matters/2638363/> accessed on August 14, 2013.

[2] National Association of Manufacturers, “Facts About Manufacturing in the United States,” <http://www.nam.org/Statistics-And-Data/Facts-About-Manufacturing/Landing.aspx> accessed on August 16, 2013.

[3] Ibid.

[4] Ibid.

[5] Hess, Sauter, and Frohlich; and National Association of Manufacturers, “Iowa Manufacturing Facts,” <http://www.nam.org/~/media/B9C408AAECFF43DFBC11FA8149F74FFA.ashx> accessed on August 16, 2013.

[6] Ibid.

[7] Patrick J. Buchanan, “Why the Reagan Democrats Departed,” Human Events, July 2, 2013, <http://www.humanevents.com/2013/07/02/why-the-reagan-democrats-departed/> accessed on August 16, 2013.

[8] Ibid.

[9] Robert W. Patterson, “What’s good for America…,” National Review Online, July 1, 2013, <http://www.nationalreview.com/article/352429/whats-good-america-robert-w-patterson> accessed on August 16, 2013.

[10] Ibid.

[11] Ibid.

[12] Andrew O. Smith, Sand in the Gears: How Public Policy Has Crippled American Manufacturing, Potomac Books, Washington, D.C., 2013, p. 251.

[13] Patrick J. Buchanan, “Abolish the corporate income tax,” Creators Syndicate, May 31, 2013, <http://www.creators.com/conservative/pat-buchanan/abolish-the-corporate-income-tax.html> accessed on August 16, 2013.

[14] Ibid.

[15] Buchanan, “Why the Reagan Democrats Departed.”

[16] Paul M. Weyrich and William S. Lind, The Next Conservatism: Paul Weyrich’s Last Testament, South Bend, Indiana, St. Augustine’s Press, 2009, p. 113.

[17] Patrick J. Buchanan, Suicide of a Superpower: Will America Survive to 2025? New York, Thomas Dunne Books, 2011, p. 420.