Should American manufacturing policy embrace job restoration or recycling?

Heading into the 2024 election, Joe Biden and Donald Trump are targeting industrial states like Michigan, Pennsylvania and Wisconsin that played a key role in determining the outcome of the previous two elections.

Despite their many differences, both candidates have stressed the need to bring back jobs that were lost in the manufacturing industry. President Biden has maintained most of Trump’s tariff increases, and recently announced plans to more than triple the tariff on Chinese steel and aluminum to 25 percent from 7.5 percent. Donald Trump previously indicated he is considering tariffs of more than 60 percent on Chinese imports if he becomes president.

Partly as a result of their efforts, there are now about 600,000 more manufacturing jobs since 2017. This increase represents a tenth of the losses since 2001, when China joined the World Organization of Commerce.

These efforts could be seen as an attempt to reverse the decline in labor’s share of national income over the past 40 years. Data compiled by the Bureau of Labor Statistics, for example, indicate that the share has fallen from 64% in the mid-1980s to 58% recently, with most of the decline occurring in recent 25 years However, a study by the National Bureau of Economic Research finds no consensus among economists about the extent of the decline or the key factors.

In the midst of this, an important question is not resolved: that is, the focus on increasing jobs in the industry makes a good economic policy?

Former US Trade Representative and World Bank President Robert Zoellick spoke to this in a Wall Street Journal op-ed criticizing both Biden and Trump for wanting to “return the country to a fantasy of the mid-century past 20th century”. Zoellick argues that America’s economic success is largely due to its ability to shift from low-tech, less productive sectors to higher-value sectors.

Also, while manufacturing employs fewer workers than it used to, the manufacturing sector is much more productive today, with a recent Cato Institute study pointing out that US manufacturing accounts for a larger share of global output than Japan, Germany, South Africa and India together.

Zoellick also doubts that attempts to increase manufacturing jobs will lead to higher wages. The reason: Workers in manufacturing earn less than workers in other sectors, especially those in technology-related sectors, where productivity is considerably higher.

A counterargument of “fair trade” advocates is that free trade advocates are primarily concerned with economic efficiency rather than social justice. Nobel laureate Angus Deaton of Princeton writes in a recent commentary for the International Monetary Fund: “When efficiency comes with an upward redistribution of wealth, our (economists’) recommendations often become little more than license for looting.”

Deaton is more skeptical about the benefits of free trade for American workers than before in light of what has happened to blue-collar workers. Economic theory states that workers who lose their jobs or are adversely affected by foreign competition can be compensated by those who gain from lower prices of goods. But Deaton observes that this redistribution never happens in practice.

So how might the US strike a better balance in promoting economic efficiency and reducing income inequality?

One way is to recognize the role that technological change could play if properly managed.

So far, most of the benefits of technological change have accrued to firms and highly educated workers. For example, another NBER study found that the adoption of computers between 1970 and 1995 increased the demand for college graduates relative to workers without college degrees. As a result, the use of computers contributed to widening wage gaps between high-skilled and low-skilled workers during this period.

Looking ahead, there are some reasons to believe that artificial intelligence could help reduce income inequality. The main reason is that applying AI to routine processes can improve the efficiency of less skilled workers quite quickly.

To that end, professors Daron Acemoglu, David Autor, and Simon Johnson recently announced the launch of the MIT Shaping the Future of Work initiative. Its mission is to analyze the forces eroding job quality and labor market opportunities for non-college workers and move the economy on a more equitable path.

MIT program directors note that the prevailing view is that little can be done to maintain the well-being of workers without college degrees because of powerful forces such as globalization, technological change, and deunionization. They claim that this assumption is false.

In its inaugural policy memo titled “Can we have pro-worker artificial intelligence?” they argue that the best way forward is to develop AI tools to augment workers that allow less skilled or less skilled workers to perform more value-added tasks.

The bottom line is that there are legitimate reasons for policymakers to be concerned about the plight of working Americans who do not have a four-year college degree. Collectively, they make up nearly two-thirds of the US workforce.

But history also shows that countries that impose high tariffs to protect workers inevitably lag behind those that pursue export-oriented policies: witness the outperformance of economies in Asia relative to those in Latin America in it was after World War II.

Accordingly, my position is that higher tariffs cause poor economic policy. That said, I recognize that political considerations will likely win out over a strong economy, at least until after the outcome of this year’s election.

Nicholas Sargen, Ph.D., is an economic consultant with Fort Washington Investment Advisors and is affiliated with the Darden School of Business at the University of Virginia. He is the author of three books, including “Investing in the Trump Era: How Economic Policies Affect Financial Markets.”