President Joe Biden says his policies will lead to the creation of tens of thousands of good-paying manufacturing jobs. His claims are a fantasy.
Because of the comparative advantage in energy, the U.S. manufacturing sector, which tends to be energy intensive, has the potential to be an engine of growth for the U.S. economy. In the United States, manufacturing accounts for $2.3 trillion in GDP, about 10% of aggregate GDP. The manufacturing sector employs about 12 million people. The sector accounts for 20% of the nation’s capital investment, 35% of productivity growth, 60% of exports, and 70% of business R&D spending.
But business hesitates to invest when there is political or fiscal uncertainty. In 1983, Ben Bernanke, former Federal Reserve chairman and recent winner of the Nobel Prize for Economics, wrote a paper on investment. Bernanke introduced the concept of investment as an option. When uncertainty is introduced into the investment equation, business defers investment. Business waits. It defers capital spending until uncertainty wanes. When political risk is high, investment paralysis takes hold.
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During the Obama administration, risk was elevated. Then-President Barack Obama had an ambivalent attitude toward free markets. Obama believed “a market does not work by itself. It has to have a social and moral and ethical and community basis. Otherwise, it’s not stable.”
Like Biden, Obama was wrong. Free market capitalism is stable. Adam Smith’s “invisible hand” guides the market. Free individuals operating in a system where the rule of law is paramount will make informed investment decisions guided by the mechanism of market-determined prices. Under Obama, business hesitated to invest. During the 2008-2017 period, annual business investment spending was lower than the average for the previous six 10-year periods, going back to 1948. From 2010 to 2017, business investment grew by an average of just 4.5%. Business investment averaged about 6% from 1948 to 2007.
In contrast, under the Trump administration’s Tax Cuts and Jobs Act, business investment rose 9.4% compared to the pre-tax cuts trend. For corporations, real investment rose 14.2%. However, President Donald Trump’s quixotic trade policies derailed the investment boom sparked by the act. Researchers at the University of Chicago found that “an uncertain outlook for trade policy gives companies in all industries a reason to delay investments while they wait to see how trade-policy disputes unfold.”
Back to 2022. As shown in the chart below, data from the Federal Reserve Bank of St Louis shows that President Joe Biden’s anti-business sentiment and his war against fossil fuel energy are causing business to delay investment.
INVESTMENT CHART.pngThe CEOs of America’s largest businesses, who make the investment decisions, are pessimistic about the economy, not only because of rapidly rising interest rates but also because the Biden administration is interfering with the pricing mechanism through rhetoric and through anti-business actions by various administrative agencies. The chairwoman of the FTC rejects free market capitalism. The National Labor Relations Board is subverting the union voting process. Both the Securities and Exchange Commission and also the Treasury are ganging up on business with their climate change activism. CEO confidence is at its lowest level since the Great Recession.
The central concern returns: Free market capitalism, small government, and the rule of law are the signposts for national prosperity. The manufacturing renaissance that could be made possible by America’s comparative advantage with energy and through the country’s lead in advanced technology will not begin during the Biden administration. A manufacturing renaissance is a Biden fantasy.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
