Author Archive
‘Professor Cornpone: Ethanol Lobbyist Newt Gingrich—and the Future of the GOP’
The title is from a Wall Street Journal editorial in January of 2011. I commented on Gingrich’s response to that editorial in the following excerpt from a chapter I wrote for a recently published book by Robert E. Looney, ed., Handbook of Oil Politics, Routledge (2012):
Even if draconian belt-tightening by U.S. motorists could significantly reduce the world price of oil (which is highly doubtful), the benefits of cheaper oil would by definition accrue to other countries. If the U.S. allowed its own industries and consumers to benefit from the supposed drop in world oil prices (as a result of breaking the oil cartel), that would undo the effort to cut imports. Most petroleum consumed in the U.S. is not used by passenger cars and demand for petroleum among commercial, industrial and non-auto transportation sectors would rise if any induced reduction in the world oil price was allowed to be matched by a lower domestic oil price (rather than being offset by taxes or rationing).
Consider the protectionists’ old idea that money spent on buying something useful from another country is just lost to the U.S. economy, so we would be much better off buying everything close to home (regardless what it costs, though they never say that).
Attempting to defend ethanol subsidies and mandates, for example, former Speaker of the House Newt Gingrich wrote, ‘It is in this country’s long-term best interest to stop the flow of $1 billion a day overseas. . . . Think of what $1 billion a day kept in the U.S. economy creating jobs, especially energy jobs which cannot be outsourced, could do.’ That is, of course, a totally false choice. Apologists for subsidies and mandates are not proposing to pay the same price for domestic fuel as we could otherwise pay for an energy-equivalent amount of imported oil – replacing $1 billion of imported fuel with $1 billion of domestic fuel. They are talking about paying much more for domestic fuel than we pay for imported oil. Why else would they be asking for subsidies, tariffs and mandates?
Paying much more for something as important as energy, whether directly or through taxes, makes an economy poorer, and being poorer is no way to create ‘green jobs.’ Money wasted on something like ethanol which politicians favor is money that could otherwise have been spent on something else that consumers favor.
The Growing Wealth Gap? Fortune Makes up the Numbers
The latest Fortune magazine contains a page on “The Growing Wealth Gap.” The author, Doris Burke, says, “here are some of the facts.” But they aren’t facts, or even official estimates.
The opening line is, “The top 1% owns 36% of all wealth” as of 2009. Yet the latest figure was 33.8 percent in the Arthur Kennickell’s report on the Federal Reserve’s triennial Survey of Consumer Finances (SCF) and that was for 2007, not 2009. There will never be an estimate for 2009 (the next one is for 2010), so something is obviously fishy.
Using actual SCF estimates instead of Fortune’s made-up numbers, the first column in my table shows that the top 1 percent’s share of household net worth briefly spurted to 34.6 percent in 1995, but subsequently stabilized at 33.9% in 1998, 32.7% in 2001, 33.4% in 2004 and 33.8% in 2007.
An alternative source − a study of estate tax data in June 2004 The National Tax Journal by Wojciech Kopczuk of Columbia University and Emmanuel Saez at UC Berkeley − found the top 1 percent’s wealth share has fallen over the years from 26 percent in 1939 to 24.4 percent in 1962, 22% in 1989 to 20.8% in 2000 (shown in the table as 2001). The press repeatedly cites Saez’s estimates of the top 1 percent’s average income up until 2007 (since top incomes fell by 19.7 percent in 2008 and by a similar amount in 2009), but nobody ever mentions Saez’s estimates about the top 1 percent’s share of wealth.
So where did Fortune’s estimate of 36% (actually 35.6%) come from? The author cites the left-of-center Economic Policy Institute (EPI), which turns out to mean a paper by Sylvia Allegretto. (Fortune’s more amateurish sources include Deloitte and somebody named Mark Kroll). The EPI estimates, shown in the second column of the table, purport to be from the SCF but are simply mysterious. The dates were supposedly “chosen based on the data available,” but there is no data for 2009 while there is data for the strangely missing years of 1992 and 1995. Ironically, these enigmatic EPI estimates show the top 1 percent’s share of wealth declining since 1989 or 1998, which is not the impression that the EPI or Fortune hope to convey.
To fabricate a number for 2009, Ms. Allegretto relies on her own “author’s analysis” of an “unpublished analysis” by Ed Wolff “prepared for” the EPI but not on the website of Wolff or the EPI. Allegretto’s inexplicable analysis of Wolff’’s invisible analysis supposedly “updates” the official figures “based on changes in asset prices between 2007 and 2009 using Federal Reserve Flow of Funds data.” But changes in the flow of funds estimates are also rough and incomparable with the SCF, partly because they combine households with nonprofit organizations and unincorporated businesses.
Financial assets of households and nonprofits were worth $78.6 trillion at the end of 2007, according to the flow of funds, while homes were worth only $20.9 trillion and half of that was mortgaged. Allegretto implies that the top 1 percent’s share rose in 2009 because the flow of funds’ estimated 18 percent drop in the value of homes from 2007 to 2009 supposedly exceeded the drop in the value of assets that dominate the top 1 percent’s assets in 2007 – such as unincorporated business (whose value fell by 28.7 percent) and stocks (down 23.5 percent). Even if the flow of funds data confirmed the allegedly greater drop in home values than in, say, stocks, Allegretto’s own figures (her Table 6) show that stocks accounted for 30.8 percent of the wealth of the bottom 95 percent, but only 19.2 percent for the top 1 percent. In any case, home equity is too modest fraction of total wealth to drive the top 1 percent’s share upward at a time when stocks and small businesses were crashing. There is ample evidence (e.g., my forthcoming Wall Street Journal article updating the “new” CBO estimates to 2009) that recessions always drive down the top 1 percent’s share of both wealth and income. For those who obsess over the top 1 percent’s share, including the CBO and the Occupy Wall Street crowd, deep recessions should properly be celebrated as a wonderful decline in “inequality” by their twisted definition.
Fortune does not know what the top 1 percent’s share of wealth was in 2009, and it never will (because the next SCF survey will be for 2010). When the 2010 results are released, however, the top 1 percent’s wealth share will surely be lower than it was in 2007, not higher.
President Obama’s $447 Billion Tax Increase
In his September 8 lecture to Congress, President Obama promised that “every proposal I’ve laid out tonight will be paid for.” How? By raising tax rates on “the wealthiest Americans and biggest corporations.” In other words, the President is proposing a $447 billion tax increase.
When the details are revealed on September 19, the President will be proposing large and permanent increases in the highest income tax rates − mainly to “pay for” a small and temporary cut in payroll taxes (which accounts for 54 percent of his $447 billion package). The plan is likely to contain elements of the September 7 proposal of Congressional Democrats to the super-committee — such as a draconian “super-Pease” phase-out and cap on itemized deductions, and a top marginal tax rate of 48.8 percent in 2013.
Temporary payroll tax cuts and extended unemployment benefits are bait the President set out to trap House Republicans with their own debt ceiling demands.
“The agreement we passed in July,” said the President, “will cut government spending by about $1 trillion over the next 10 years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I am asking you to increase that amount so that it covers the full cost of the American Jobs Act.” But the $447 billion budgetary hit can’t be spread over 10 years without triggering another debt ceiling calamity. Either the debt ceiling has to be promptly raised by an extra $447 billion or tax receipts somehow raised by that amount in fiscal 2012-2013. Any “modest adjustments to health care” will be too distant and nebulous to help.
Using permanently higher tax rates on income to pay for temporarily lower tax rates on payrolls is no “stimulus” under either Keynesian or empirical economics. Neither is a tax-financed extension of unemployment benefits, which clearly raises the unemployment rate by 0.8 to 1.8 percentage points. Yet the one-year extension of payroll tax cuts and 99-week unemployment benefits is being held out as irresistible bait to gullible legislators.
By inviting House Republicans to stumble into this trap, the president is also hoping to preempt the congressional super-committee’s option of reducing deficits by trimming tax loopholes. President Obama is trying to lay claim to any potential revenues from cutting loopholes (or legitimate deductions) for his own pet projects, which include grants to hire more state and local government workers and extended unemployment benefits for the private sector.
This is no “jobs plan.” It’s a tax-and-spend plan, and a bad one.
Kinks in Obama’s Home Refinancing Plans
In the president’s electioneering lecture to Congress, Mr. Obama said, “To help responsible homeowners, we’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. . . . I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.”
Unfortunately, it is not quite that simple. Because using the leverage of Fannie Mae, Freddie Mac, or the Federal Housing Administration to promote riskier standards for refinancing would benefit only those homeowners who stay put in houses they already own, the unintended effect on sales of new or existing homes could be negative. Moreover, gains to borrowers would be offset by potentially larger losses to investors in mortgage-backed securities (MBSs) — the “toxic assets” that provoked so much financial mischief in 2008.
As it happens, the Congressional Budget Office just released an “An Evaluation of Large-Scale Mortgage Refinancing Programs” by two CBO staffers and Deborah Lucas, a first-rate economist on loan from M.I.T.
Here are some key points:
We analyze a stylized large-scale mortgage refinancing program that would relax current income and loan-to-value restrictions for borrowers who wish to refinance and whose mortgages are currently insured by Fannie Mae, Freddie Mac, or the Federal Housing Administration. The analysis relies on an estimate of the volume of incremental refinancing that would occur and an estimate of how future default and prepayment behavior would be affected by such refinancing. Relative to the status quo, the specific program analyzed here is estimated to cause an additional 2.9 million mortgages to be refinanced, resulting in 111,000 fewer defaults on those loans and estimated savings for the GSEs and FHA of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis. Offsetting those savings, federal investors in MBSs, including the Federal Reserve, the GSEs, and the Treasury, would experience an estimated fair-value loss of $4.5 billion. . . .
We also discuss the impact of this program on various stakeholders, including homeowners, non-federal mortgage investors, mortgage lenders, mortgage service providers, private mortgage insurers, and subordinated mortgage holders. For example, non-federal investors would experience an estimated fair-value loss of $13 to $15 billion; most of that wealth would be transferred to borrowers. . . .
In aggregate, the fair-value loss to both federal and non-federal investors is equivalent to the gain experienced by borrowers from the decline in their interest payments. . . Nevertheless, because a significant share of investors is composed of foreigners and the U.S. government, and because private investors would be expected to reduce spending in response their losses by less than the increase in spending by borrowers in response to their lower interest payments as well as their lower mortgage principal payments, the net effect would be an economic stimulus . . . but it is likely to be small relative to GDP.
With respect to the housing market, the overall impact of the program is also small; the 111,000 homeowners saved from foreclosure by virtue of lower monthly mortgage payments will have a minor impact on the path of future home prices. Because this program is directed toward current homeowners, it would do little to alleviate the tighter underwriting standards and increased credit pricing for purchase loans. In addition, it would not create much demand for homes, because all of its participants would already have at least one property.
Note to Charles Krauthammer: Economic Growth Averaged 2.9% (not 5%) under Ike’s Military-Industrial Complex
In an effort to defend spending $1.3 trillion on wars in Iraq and Afghanistan, the Washington Post’s hawkish columnist Charles Krauthammer writes, “During the golden Eisenhower 1950s of robust economic growth averaging 5 percent annually, defense spending was 11 percent of GDP and 60 percent of the federal budget.”
In reality, economic growth averaged only 2.9 percent a year while Eisenhower was president from 1953 to 1961. Krauthammer is erroneously crediting Ike with the ephemeral Korean War boom of 1950-51 when defense spending was much smaller (7.6 percent of GDP), but consumers emptied the shelves due to fears that rationing would return.
Real GDP growth averaged 5.2 percent from 1962 to 1968, as President Kennedy’s plan to cut marginal tax rates by 23 percent was implemented. We then switched to a mix of high tax rates and easy money, starting with surtaxes in mid-1968, and annual growth slowed to 2.6 percent from 1969 to 1982. From 1983 to 1989, after President Reagan gradually cut marginal tax rates another 23 percent by mid-1983, economic growth averaged 4.3 percent a year.
A strong economy can afford a strong military, but foreign military adventures are nevertheless an economic burden.
Why Congressional Budget Office Estimates and Policy Options Are Taken Much Too Seriously
Coercive redistribution and diversity in the interests of its constituent groups are essential features of the modern welfare state. Disagreement over perceived consequences of social policy creates the demand for publicly justified “objective” evaluations. If there were no coercion, redistribution and intervention would be voluntary activities and there would be no need for public justification for voluntary trades.
−James J. Heckman (winner of the 2000 Nobel Prize in Economics), “Accounting for Heterogeneity, Diversity and General Equilibrium in Evaluating Social Programs,” National Bureau of Economic Research Working Paper No. 7230, July 1999.
More on the 40th Anniversary of Nixon’s Wage and Price Controls
It is hard to imagine, but some people actually thought it was perfectly reasonable (and Constitutional) for the government to dictate to business what they should charge for their products and dictate to workers what their time was worth. I was working at J.C. Penney in Sacramento and going to grad school at night, but I took time out to send “The Case against Wage and Price Controls” to National Review in July. It became the cover story on September 24, and Bill Buckley later hired me over lunch in San Francisco. If anyone is interested, it’s available at SCRIBD here.
Standard & Poor’s $2 Trillion Error Was Political Lobbying, Not an Innocent Mistake
The infamous $2 trillion error involved in the Standard and Poor’s downgrade was no mistake. It was largely the result of an unseemly urge to take sides in the partisan struggle over near-term tax policy, with no weight at all given to longer-term entitlement spending. “Our ratings,” the agency later explained, “are determined primarily using a 3-5 year time horizon,” and “the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth.” In other words, it’s all about taxes.
Amazingly, the S&P analysts adopted the Congressional Budget Office “alternative” scenario as their so-called baseline. In that scenario all Bush tax cuts remain in place until 2035 and (because bracket creep and cashed-out IRAs would nevertheless cause revenues to rise) “unspecified policy adjustments [i.e., tax cuts] will be made after 2021 to keep revenues constant as a share of GDP [18.4 percent].”
The reason for adopting that unlikely scenario as a the S&P baseline was to make an unsubtle political point. As the S&P analysts explained, “our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”
Standard and Poor’s completely disregard the same baseline Congress and the Administration used, which assumes that all of the 2001-2003 tax cuts expire in 2013 as current law requires. That would mean doing away with such genuine revenue losers as $648 billion from cutting the lowest tax rate to 10 percent, $316 billion for marriage penalty relief, $238 billion from the enlarged child credit. Instead, the S&P “upside scenario” adopted a wildly optimistic view of the revenue potential of President Obama’s hoped-for taxes on high earners: “Our revised upside scenario . . . incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”
In reality, the Obama health bill already imposes an extra 0.9 percent payroll tax on high earners and a 3.8 percent surtax on their investment income. The President’s proposed taxes on higher incomes go far beyond a mere lapse of the 2003 tax cuts for high earners. In addition to reverting to phasing-out exemptions and deductions, for example, Obama’s 2012 budget would have limited any remaining deductions to 28 percent, supposedly raising $293 billion.
There is no way to confirm or justify Standard & Poor’s unsourced estimate of “$950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse.” That $950 billion figure is an outright fabrication – indefensible even as matter of simplistic bookkeeping and quite absurd once tax avoidance (the elasticity of taxable income) is taken into account. Many have pointed to sloppy errors in the S&P analysis, but they neglect to mention that the alleged $950 billion revenue windfall from adopting the President’s tax plans is one of those sloppy errors.
As Ezra Klein pointed out, correcting the mistake “improved our deficit outlook by more than [the wildly exaggerated estimate of] letting the high-end tax cuts expire, which S&P had said would raise enough money to stabilize our rating. If the numbers mattered, then by S&P’s own logic, that should have changed their opinion of our finances.”
If the real point of this ill-timed S&P publicity stunt was to promote a rosy scenario for Obama’s tax plan, then the reputation of Standard & Poors has now been deeply downgraded.
Memo to Robert Reich: Rewrite Your Brief
Robert Reich posted a letter in June 20 Wall Street Journal responding to my article of June 16, “Why 70% Tax Rates Won’t Work.”
He argues that I distort his proposal (though I wasn’t talking about his proposal) and ignore his argument that, “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur [economic] growth.”
This strikes me as a futile effort to change the subject. Since I proved that past tax rates of 50-70% on relatively modest incomes raised less revenue than a top tax rate of 28%, how could Reich’s proposal of 50-70% rates at incomes above $500,000 raise more revenue? And if 50-70% tax rates would not raise more revenue, then how could he possibly promise “substantial rate reductions [actually a refundable tax credit] for people with incomes under $100,000”?
The original draft of my article was not focused on Reich, but included others − including two of his Berkeley colleagues (Brad DeLong and Emmanuel Saez) who recently suggested a tax rate of 70% would be “revenue-maximizing.” The details of Reich’s proposal were not in the blog I quoted, but such details have no relevance to any points I made.
Only after top tax rates came down, I noted, were we able to afford very substantial reductions in taxes for people with incomes under $100,000. Since President Reagan took office the average income tax rates have become negative for the bottom 40% and were cut in half for the “middle class.” In 1980, when top tax rates were 70% and nearly 40% on capital gains, such rates brought in so little revenue that the Feds were compelled to tax low and middle-income families quite heavily to bring revenues up to the normal 8% of GDP.
At his blog, Reich argues that, “Reynolds bends the facts to make his case. The most important variable explaining the rise and fall of tax revenues as a percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.”
For that to work as an explanation of why individual tax revenues were higher when the top tax rate was 28% than when it was 70-91%, Reich is logically obligated to argue that the economy was growing more briskly when the top tax rate was 28% than when the top tax rate was 70-91%. Contradicting his own logic, however, Reich instead claims that “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur growth.”
Reich is not proposing to add new tax rates to 50-70% on salaries, dividends and capital gains because he believes it will raise more revenue (my data show otherwise), but because he believes it will raise the growth of real GDP. This is breathtaking. Reich should be glad that I ignored his “central argument” about super-high tax rates boosting economic growth by taking income from those who earned and giving it to those more likely to squander it. I was just being too polite.
Within his hyper-Keynesian lawyer’s brief, Reich is logically required to argue that top tax rates of 70-91% (1) raised revenue, and that (2) this imaginary added revenue allowed imaginary tax reductions on poorer people with a lower propensity to save. He must then arrive at the logical conclusion, which is that (3) the average savings rate must have been much lower when top tax rates were 70-91% than since 1988 when to tax rates have frequently been 28-35% and as low as 15% on capital gains and dividends. A low savings rate, in Reichian theory, is what makes the economy grow.
My article proved the first two premises are false. High statutory tax rates on the rich generated less revenue, and the poor and middle classes paid much higher taxes as a result.
The third premise of Reich’s brief is key to the Keynesian fable about growth depending to incentives to consume rather than incentives to produce. Once again, the facts are the exact opposite of what Reich imagines. The personal savings rate was 9% from 1959 to 1981 when top tax rates were 70-91%, and 4.5% from 1988 to 2007 when top tax rates were 28-39.6%.
Reich’s comment that “the richest 1% of Americans got 10% of total [pretax, pretransfer] income in 1980, and get more than 20% now” refers to income reported on individual tax returns, assembled by Thomas Piketty and Emmanuel Saez. When top tax rates went way down, particularly in 1988, 1997 and 2003, the amount of reported income and capital gains went way up. As Saez explained in the 2004 issue of Tax Policy and The Economy (MIT Press, p.120): “Top income shares . . . show striking evidence of large and immediate responses to the tax cuts of 1980s, and the size of those responses is largest for the topmost income groups.” That is why revenues from high-income households went way up rather than down, and why it then became feasible to hand out refundable credits to the bottom 40% and cut tax bills in half for those earning less than $100,000.
Reich would apply his 50-70 % tax rates to reported capital gains and dividends, which is a surefire way to make taxable capital gains and dividends vanish from tax returns. No high-income taxpayer can be compelled to sell property or financial assets for the sheer joy of paying 50-70 % of the gain to the IRS. No investor can be compelled to hold dividend-paying stock rather than tax-free bonds.
With the enormous amount of revenues lost under the Reich tax proposal, we would have no choice but to revert to the pre-1986 stingy personal exemptions and standard deductions while also repealing the Bush child credit and the vastly expanded earned income tax credit.
President Obama’s Dubious Claims about Incomes of the Top 1% vs. the Bottom 90%
“In the last decade, the average income of the bottom 90 percent of all working Americans actually declined,” Obama said on April 13. “The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each.”
Politi-Fact, partly on the basis of my own research, generously rates the president’s claim as “Half True.”
The truth is that the President’s source, Thomas Piketty and Emmanuel Saez, refer only to pretax, pretransfer income reported on individual tax returns (as opposed to being sheltered inside a corporation or IRA or simply unreported), and they have no data on the bottom 90%. Worst of all, they leave out transfer payments, which amounted to $2.3 trillion last year — 44% as large as all private wages and salaries ($5.2 trillion). The data also excludes refundable tax credits, which added about $170 billion to low and middle incomes in 2009 according to the the Joint Committee on Taxation (the EITC, child credit and Obama’s “making work pay” credit). And the Bureau of Economic Analysis estimates that gross income reported on tax returns is about $1 trillion less than actual income.
As for the top 1%, my research shows that top investors report more capital gains and dividends when those tax rates go down, which is why they paid such a big share of income taxes (up to 40%) in 1997-2000 and 2003-2007. Raise the tax on dividends and capital gains to 23.8%, as Obama hopes to do by 2014, and somebody else would have to pay the taxes now paid by the top 1%. Using income reported to the IRS to measure actual living standards is foolhardy at best.
Correction: Charles Mahtesian at Politico Did NOT Agree with Chris Matthews
In my recent Wall Street Journal article, “The Myth of Corporate Cash Hoarding,” I quoted Chris Matthews of MSNBC’s Hardball asking Politico‘s Charles Mahtesian an apoplectic question about businesses “sitting on their money” just to keep the economy weak and hurt Obama’s reelection chance in 2012. Then I carelessly added an erroneous superfluity −writing that “Mr. Mahtesian concurred.”
My apologies to Charles Mahtesian (and congratulations for having had the good sense to disagree with Chris Matthews).
In reality, Mahtesian wisely dodged Chris Matthews’ bizarre interrogation about corporations willfully refusing to spend idle cash until after 2012 election. Mahtesian instead switched to talking about business going “whole hog” during the 2010 congressional election (this show aired September 27).
Here is the transcript:
MATTHEWS: You know, a great question, Charles, that wasn‘t on my list to ask, but I‘m going to ask you because you seem like a sophisticated guy of many parts. Do you think business can sit on those billions and trillions of dollars for two more years after they screw Obama this time? Are they going to keep sitting on their money so they don’t invest and help the economy for two long years just to get Mr. Excitement, Mitt Romney, elected president? Would they do that to the country?
MAHTESIAN: Well, I won’t touch the first question, Chris, but…
MATTHEWS: That was all one question, bro!
MAHTESIAN: Oh! I prefer splitting the two. I’d say that I think what you’re going to see the business community do is really go whole hog at this election right now because either way, you know, I think they can envision a scenario in which they lose … because, for example, number one, if the president has a Republican House, that’s probably going to be a rough scenario for them anyway because that’s what the White House wants if they want to get elected in 2012 — re-elected. So, probably the best-case scenario for them.
MATTHEWS: Yes.
MAHTESIAN: So you know, either way, I mean, I think they — they weigh the equities, and you know, see it as a 50-50 endeavor.
MATTHEWS: Anyway, I just hope business starts spending.
A Wall Street Journal Column Understates the Size of U.S. Manufacturing
The Wall Street Journal’s December 1 “Ahead of the Tape” column, by Kelly Evans, says “manufacturing is a relatively small part of the economy; It employs about 9% of the work force and accounts for about the same percentage of GDP.” Actually, manufacturing accounts for about 12 percent of nominal GDP. But that, too, is misleading.
Chicago Fed economist William Strauss explains why neither U.S. manufacturing’s share of employment nor its share of GDP captures the actual strength of manufacturing:
Between 1950 and 2007 (prior to the severe recession), manufacturing output was just over 600% higher while over the same period growth in real GDP of the U.S. was only a slightly lesser 560%. Yet, the manufacturing share of GDP declined markedly over this period as measured in current dollar value of output. In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP.
Those who imagine “we don’t make anything anymore,” as Donald Trump claims, don’t grasp the magnitude of America’s industrial productivity gains.
In reality, the U.S. is by far the world’s largest manufacturer, with China trailing by 22 percent according to U.N. data for 2008 and arguably much more when we’re not in recession.
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