Who Pays?

Government is too big not to play a role in U.S. manufacturing. An example of a constructive measure was the recent change in depreciation rules for machine tools. But in light of the competition from low-price foreign producers, some favor a more aggressive role than this. Various measures of direct intervention could give U.S. manufacturers a boost, including tariffs, buy-American provisions, dollar devaluation and direct subsidies.

But there's a problem. Each of these measures forces some specific category of Americans to pay the price. For those who are serious about a more heavy-handed role for government, the first question has to be: Who pays?

Tariffs raise prices for imported goods, allowing domestic producers to charge high prices, too. The group most threatened by this is the group that benefits most from access to the low-cost goods—those who earn a low income. More affluent consumers would not have to choose between an air conditioner and a television if the prices for both went up; they would just forgo some non-manufactured luxury. But the low-income household would have to make this choice, meaning its standard of living would decline.

Buy-American measures force the government—specifically the military—to choose domestic suppliers. With the number of suppliers reduced, the remaining suppliers charge more. The military’s purchasing power goes down. If military personnel are less well equipped as a result, they are among the ones who pay.

Devaluing the dollar means circulating more money. Prices rise through inflation, but not right away. Short term, two groups benefit: those who receive the new money early (such as government contractors) and the holders of foreign currency who can now buy more in dollar-priced goods. Those who suffer are the waitress, grounds-keeper and school teacher who see prices rise well before their wages do.

The least talked-about measure may actually spread the burden widest—subsidy payments for manufacturers. Roughly half of all Americans pay federal income tax. This group would share the cost.

But here a different danger presents itself. All of these measures, and the last one in particular, serve to shield manufacturers from competition. Even in today’s environment, U.S. manufacturers are adapting. They are specializing, automating and expanding their range of services to the customer. Would these same improvements occur if manufacturers were protected? With too much intervention, manufacturing itself may pay the price.