Initial data from the Treasury Department suggests these policies have succeeded. Spending on the construction of manufacturing facilities has doubled since the end of 2021, mostly for computers, electronics and electrical goods. Nonresidential construction spending in general is up roughly 15 percent since the passage of Biden’s big infrastructure bill, and private sector spending is up by almost three times as much as public sector.
In other words, the government’s policies and expenditures have been a catalyst for the private sector. Other advanced economies are not showing such large increases in manufacturing construction; they are happening mostly in the United States.
These are impressive results. But the real test of these massive federal expenditures will become clear in the long run. In the short term, government spending and tax incentives create a boom, and the private sector will naturally jump in, eager not to miss out on the action. But does this create a sustainable set of companies and industries over time? What happens when the government money runs out (as it inevitably will)?
This is where the United Auto Workers strike becomes an important test case of Bidenomics. On the one hand, autoworkers deserve raises; car companies are doing well and management (of course) has given itself hefty bonuses. But a key component of Biden’s economic plan is to make the United States a leader in the electric vehicle industry, which it sees as the future of automobiles. To help make that happen, the federal government is showering the industry with benefits — from a huge (up to $7,500) tax credit for buyers of an EV to a slew of subsidies for batteries, minerals and charging stations.
All these supports make it possible for automakers to take on higher costs. Already, the Big Three spend far more on labor per hour than Tesla. U.S. factories pay their workers on average almost six times more than factories in Mexico and even 25 percent more than those in Japan.
But the real challenge will come from China, which is taking the EV market by storm. Nearly two-thirds of the world’s EVs are made in China. BYD, the biggest of Chinese companies, topped Tesla this year to become the world’s No. 1 seller of EVs.
American carmakers are shielded from Chinese competition. Donald Trump imposed a 27.5 percent tariff that American consumers must pay if they want to buy cars from China — building on protectionist policies that have meant higher costs and fewer jobs in America. But in the long run, tariffs keep American car companies in their high-cost bubble, shielded from the market. Chinese cars will soon dominate in large parts of the world, even in Europe, where tariffs are only 10 percent (so far).
As the Wall Street Journal’s Greg Ip has pointed out, the real story of American manufacturing is that productivity has been stagnant, with output per hour having grown only an average of 0.2 percent a year since 2009, well below Taiwan’s average of 4 percent a year but also well behind Britain, Germany, South Korea, France and Italy. Productivity in the auto sector has crashed, down 32 percent from 2012 through last year, though Ip notes this probably includes pandemic-related disruptions.
Biden’s economic team has hit many home runs. The massive increase in infrastructure spending was long overdue. Funding for research is now increasing in some areas (though it remains too low by historical standards). Helping computer chips, a critical industry, makes good sense.
But the broader effort to revive manufacturing will be a challenge. Countries such as Japan, Germany and France have all made such efforts and yet, over the past several decades, manufacturing as a percentage of gross domestic product has declined at a steady rate in all of them. In the United States, it is down to 11 percent of GDP and about 8 percent of employment.
Two scholars, Gary Hufbauer and Euijin Jung, studied 50 years of American industrial policy and concluded that the most successful efforts by far were those that funded basic research and development and opened foreign markets to American goods. Many of the efforts to promote particular industries or implement trade barriers proved to be costly failures. As the Biden administration implements these ambitious plans, it would do well to recall this history and make sure it is not condemned to repeat it.
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