The Problems with Obama's "Adversary Economics"

Over at the International Economic Law and Policy Blog, Simon Lester points out a recent speech by President Obama announcing billions in Stimulus* funding (read: targeted subsidies) for "green manufacturing" projects in the United States.  Here's Bloomberg reporting on the announcement:

The Obama administration today announced that 183 companies, including PPG Industries Inc. and Itron Inc., will get a total of $2.3 billion worth of tax credits for clean-energy manufacturing projects in 43 states.

The tax credits are part of the $787 billion stimulus President Barack Obama pushed through Congress last year, and announcement of the companies that got the credit coincides with a Labor Department report that the U.S. lost 85,000 jobs in December....

“Building a robust clean-energy sector is how we will create the jobs of the future -- jobs that pay well and can’t be outsourced,” Obama said in remarks today at the White House.

Obama said that, while the U.S. has “pioneered the use of clean energy,” it is being “outpaced” by countries including China, Germany and Japan.

“I don’t want the industries that yield the jobs of tomorrow to be built overseas,” he said. “I don’t want the technology that will transform the way we use energy to be invented abroad.”

The full text of the President's remarks are here, and they leave Lester wondering, to paraphrase, (i) whether a "competitive" approach to green manufacturing is the right one, or (ii) whether a better policy would be one focused on international cooperation and domestic consumption, rather than (assisted) production.

Well, please allow me to answer those questions with a resounding NO and YES.  Indeed, I see at least four big problems with the President's approach - all of which would be remedied by Lester's suggested alternative. 

(1) We stink at subsidizing green projects.  Leaving aside the fundamental issue of whether the federal government should (or may) force US taxpayers to subsidize certain industries, the US Government has proven itself completely incapable of picking winners and losers in the green energy field.  From President Carter's $20 billion (54 billion in 2009 dollars) boondoggle, the disbanded Synthetic Fuels Corporation, to more recent disasters with ethanol and other biofuels, the lesson is clear: we absolutely suck at trying to predict and subsidize the US energy market.  And despite blowing billions and billions of taxpayer dollars on "energy independence" and "green" policies, the only thing these programs have actually produced is fraud, corruption and immense lobbying bills.

(2) An "adversarial" approach to manufacturing and trade policy defies 21st century economic realities.  Even if the US government were able to "successfully" subsidize green industries without all the graft and excess, the President's "us versus them" approach ignores the modern realities of globalized supply chains and their immense benefits.  As Cato's Dan Ikenson recently wrote:

During the past few decades, a truly global division of labor has emerged, presenting opportunities for specialization, collaboration, and exchange on scales once unimaginable. The confluence of falling trade and investment barriers, revolutions in communications and transportation, the opening of China to the West, the collapse of communism, and the disintegration of Cold War political barriers has spawned a highly integrated global economy with vast potential to produce greater wealth and higher living standards.

The factory floor is no longer contained within four walls and one roof. Instead, it spans the globe through a continuum of production and supply chains, allowing lead firms to optimize investment and output decisions by matching production, assembly, and other functions to the locations best suited for those activities. Because of foreign direct investment, joint ventures, and other equity-sharing arrangements, quite often "we" are "they" and "they" are "we." And because of the proliferation of disaggregated, transnational production and supply chains, "we" and "they" often collaborate in the same endeavor. In the 21st century, competition is more likely to occur between entities that defy national identification because they are truly international in their operations, creating products and services from value-added activities in multiple countries. There is competition between supply chains, but only after there is cooperation and collaboration within supply chains.

Indeed, Lester's original blog post points out some of this cooperation, citing a new joint venture between California-based eSolar Inc. and China's Shandong Penglai Electric Power Equipment Manufacturing Co., in which eSolar will provide the technology and information for Shandong to build concentrated solar thermal power farms.  And I've noted a similar cooperative effort at a Texas wind farm that used German turbines assembled at a Chinese plant that was 75% owned by GE.  So a simplistic and archaic approach of tossing taxpayer cheese at "American" companies so they can beat "foreign" companies utterly ignores current market realities and their myriad benefits for global consumers (and in this case, the planet).

Finally, even when "their" successes aren't part of a cooperative effort, the idea that Americans won't benefit from other countries' advances reflects debunked ideas from a bygone era. As GMU economist Tyler Cowen recently noted:

To the extent that the rest of the world becomes wealthier, there’s more innovation, as my colleague and co-blogger Alex Tabarrok, professor of economics at George Mason University, argued recently. China, for instance, is moving toward the research frontier in areas such as solar power, scientific instruments, engineering and nanoscience, all of which can benefit the United States. Unlike the situation of just a few decades ago, a genius born in Mumbai now stands a good chance of becoming a notable scientist, whether at home or abroad.

It might be pleasant to boast that America is — or should be — a world leader in every area, but the practical reality is that if some other country solves the problem of green energy, so much the better for us.

The subtler point is that a wealthier China, India, Brazil and Indonesia will lead to more customers for new innovations, thereby producing greater rewards for successful entrepreneurs, no matter where they live. There are so many improvements in cellphones these days because there are so many cellphone customers in so many countries.

To put it bluntly, if the United States takes one step back and the rest of the world takes two steps forward, even in purely selfish terms we should consider accepting the trade-off, if only for the longer run. Most of us gain from the wealth and creativity of other countries, even if we can’t always feel like the top dog.

Unfortunately, it seems that President Obama, with his constant talk of "falling behind" and being "outpaced" or "outsourced," completely fails to grasp these most basic of modern economic concepts.  Instead, he wants to spike "our team's" Gatorade so it can beat the teams of China, Germany, Japan, Korea and elsewhere.  Yet it's silly to think that US government juice can outstrip the exponential benefits of global competition and collaboration, or that another country's successes won't benefit America too.  So while "adversary economics" might make for good soundbites, it has no place in serious economic policy.

(3) The President's approach unnecessarily exposes targeted products to remedial tariffs in key export markets.  Just like steroids can get a professional baseball player suspended, illegal government subsidies can stifle exports of subsidized products.  Under national "countervailing duty" (CVD) or WTO anti-subsidy rules, a "subsidy" is a "financial contribution" (including tax breaks) by a government that "benefits" the recipient of the financial contribution.  If the subsidy is "specific" to an enterprise or industry (or group of enterprises or industries) and it harms other countries' commercial interests, a country may impose tariffs on exports of the subsidized product.  (Note: this is a very simplistic explanation of the law, but it'll do for this blogpost.)  Although I certainly can't be sure from a speech and newspaper article, the tax credits described by Obama appear to be billions of dollars in "countervailable" (national laws) or "actionable" (WTO rules) subsidies to the listed companies.  Thus, even if Obama's new programs are actually successful in boosting US production and exports of green products, those exports could very well get hit with countervailing duties or WTO-sanctioned tariffs because they benefited from "illegal" US subsidies.  In other words, the President's new green program could actually negate targeted manufacturers' ability to compete in foreign markets.  Awesome, huh?

(4) The President's adversarial approach breeds protectionist sentiment at home and abroad.  When the President of the United States constantly describes US trade and economic policies as a competition between "our" companies versus "their"companies, he creates - intentionally or not - a political environment wholly conducive to protecting "our" guys at any cost (including by violating global trade rules).  Indeed, the difference between subsidizing US manufacturers to give their products a competitive advantage over similar Chinese goods and enacting tariffs on those Chinese goods to create a similar advantage is mere semantics.  Both involve distorting markets to unfairly benefit domestic manufacturers - with taxpayers/consumers footing the bill (of course!).  And when the President justifies subsidies by claiming that they are necessary to compete with foreign goods, he also justifies market-distorting tariffs to accomplish the same goal.

Moreover, this sentiment also can easily spill over to the general public.  Americans are generally split about free trade, and recent surveys indicate that public opinion is pretty pliable on the subject.  So when our leaders proudly pursue "us versus them" economic policies, it's not difficult to imagine such rhetoric infecting the general public.

The President's adversarial approach can also lead to reciprocal protectionism in foreign markets.  If the United States subsidizes its own industries as part of a race against foreign countries, those countries might feel pressured (or be lobbied) to subsidize their own industries in an attempt to keep up.  And any US efforts to curtail these and other foreign subsidies would be undermined by the United States' own rampant subsidization.  (Of course, US subsidization of favored industries also begs the question of how Democratic Senators and Congressmen can scream about unfair Chinese subsidies with a straight face, but that's a story for another time.)

In the alternative, the President's adversarial approach could make foreign countries more likely to challenge US subsidies at the WTO or to initiate CVD investigations of US exports.  A cooperative approach would eliminate such motivations, as their commercial interests would be co-mingled with ours.

So to recap: the President's adversarial approach to green manufacturing (i) repeats past failed experiments with green subsidies; (ii) ignores the realities modern global trade and economics; (iii) exposes US exporters of green products to anti-subsidy tariffs in key foreign markets; and (iv) condones and expands protectionist sentiment in the United States and elsewhere, while undermining US efforts to discipline global subsidy use.

But other than that...

(H/T Tom Welch)