Hidden Costs Vs. The Invisible Hand

With the United States losing manufacturing work to suppliers in other countries, some see government support as a means to halt the outflow.

Certainly government can play a role. It's too big not to. Effective support could come from measures that help all American businesses at once, such as tax relief and litigation reform. But any support that is specific to manufacturing—including subsidies, funded training for certain skills and/or "targeted" tax incentives—stands to do more harm than good.

The narrow support poses two basic problems. One is a problem of information. If funding is set aside for manufacturing, someone has to decide how those funds are distributed. This official should give the funding to the businesses and technologies most important to America's manufacturing health. Forecasting which businesses and technologies those will be, given continually changing market demands, would require the power to see the future.

And forecasting wrong could have destructive consequences. To properly allocate its own resources, the market relies on consumers to evaluate cost versus value for their own purchases. Adam Smith in 1776 called this mechanism the "invisible hand." Government support slaps back that hand by making certain products appear less expensive than they are. Promising companies and technologies may thus be smothered, as government props up their less efficient competitors.

The second problem relates to damage of a different sort. Federal subsidies, whether direct or indirect, require federal taxes. These are monies we take from our fellow citizens at the point of a gun. I mean not to be incendiary, only to describe taxation for what it is. A citizen who refuses to pay taxes is imprisoned, then shot if he or she tries to escape. What we fund through federal taxes should justify this offense.

For manufacturing, some may cite national defense as the justification. That argument would require evidence that we are in danger of lacking the production capacity to wage war. Our capacity, even reduced, remains huge.

Some may point exasperatedly to how much the government already subsidizes. The exasperation is warranted, but something commonplace can still be wrong.

Promising new developments that die unseen, along with armed robbery perpetrated through politely bureaucratic means, represent two costs of federal involvement that are well hidden. Manufacturers—a group that works to limit subtle drains on efficiency—recognize better than most how serious hidden costs can be.