Bringing manufacturing jobs back to the USA

National security -- both econmic and military --  requires that the U.S. have a world-class domestic computer chip industry.

Trump talked about it, but nothing got done. Biden got it started, with the "CHIPS" Act. Chip factories are being built right now all over the U.S., especially in red states and rural areas.

JD Vance gave it a name at the Republican convention: "workerism." 

College classmate Jim Stodder shares an economist's perspective on industrial policy. He teaches international economics and securities regulation at Boston University, with recent research on how carbon taxes and rebates can be both income equalizing and green. During and after college he knocked around as a roughneck in the oil fields. Then he returned to formal studies and received a Ph.D. from Yale in economics. His website: www.jimstodder.com

Jim Stodder: recent

Stodder at age 18

Guest Post by Jim Stodder

JD VANCE’S “WORKERISM”

A few days ago, I had lunch with old (liberal) classmates. We discussed Republicans inviting the Teamster Prez to their convention, and JD Vance's sympathy for the “working man, union and non-union alike". The consensus among my classmates was that this is mood music -- to accompany the picking of workers' pockets.

I’m liberal too, but also an economist. So let me explain why this new Republican “workerism” is more than that, but still has me worried.

The theory of Comparative Advantage was born in England 200 years ago in a fierce debate: the landed gentry (and their peasants), who hated cheap grain from America vs. the factory owners (and their workers), who loved cheaper bread and porridge.

The industrial interests won, and Comparative Advantage became gospel for a new subject called “economics”. It argued that every nation benefits by specializing in what it’s relatively good at, not just what it’s the absolute best at – which is usually nothing. That’s how division of labor usually works with people. Good thing, since otherwise most of us wouldn’t have a job in the first place.

Comparative Advantage was mostly correct up to the late 20th century, and highly beneficial for the poorer countries – with fastest growth going to those most open to trade, like China, Korea, India, Turkey, and Chile. But it also led to falling real wages within rich countries, and the rise of an “anti-globalist” right in the working and middle classes of the West.

Increasing inequality within the rich countries does not disprove Comparative Advantage. Its claim was that trade benefits the country – but not everyone in that country. The pro-trade consensus among liberals, therefore, was for free trade plus redistribution, so benefits can be shared.

But the late 20th century brought something to invalidate this theory. Comparative Advantage assumes – realistically, until recently – "constant (or diminishing) returns to scale”. This means that doubling your productive inputs gets you a doubling (or less) of your output.

But some newer technologies lead to increasing returns to scale, so doubling your inputs more than doubles your output. That means the biggest fish get bigger and swallow the smaller ones. So those smaller fish, the less productive countries, can do better by cutting trade or imposing tariffs on stronger ones, so they can get bigger.

Increasing returns can still lead to mutually improving trade if it's just product by product. Germany sells us BMWs, we sell them Teslas, and everybody’s happy.

But the more important form of increasing return is industry-wide, where competing firms within a network build each other up with overlapping webs of talent, suppliers, and customers, each one increasing the value of the network to all the others – positive network effects or PNEs. PNEs are why Silicon Valley, Hollywood, and NYC each dominate its key industry of software, movies, and finance. They are also why both Trump and Biden wanted Tariffs on Chinese EVs, no dual-use chips to China, and restrictions on AI.

PNEs kick in with the growth of new industries, so increasing returns last a while. But new tech like AI, robotics, bioengineering, precision medicine, MOOCS, and telecommunications make network effects not just more important, but longer lasting, likely to persist over many decades.

Like Verizon says, it’s all about the network. Imagine you’re choosing cell phones. One is crystal clear, but only connects you to two people. The other has static and cuts-out, but it’s connected to everyone else in the world. It’s obvious which one you buy.

Paul Krugman is an economist who writes about PNEs in international trade. He sees that they kill most of the old liberal arguments against tariffs. He's forced back onto non-economic arguments that tariffs aren’t nice – they cause retaliation!

Tariffs on China and not selling it dual-use chips can help build our networked industries, but they also have a military dimension. For JD Vance (with Republican Senators Hawley, Cotton, and Rubio) and their "working man" military-industrialism, that’s just fine. They hope to win over workers in protected industries, stress America First (forget Ukraine), increase military spending, and promote traditional masculinity. Never mind that women and gays also work in those industries.

A lot's baked into the technology but policy responses are not. There was talk with Joe Biden (and John McCain!) about an “Alliance of Democracies” – NATO writ large. We should stress the economics of PNEs as well as the military-diplomatic benefits. We can invite less-than-democratic countries and even our adversaries on a conditional basis, subject to monitoring. That way we can increase the power of a network and spread its benefits more widely.

A PNE can be beneficial for everyone since output is more valuable inside than out. It’s a “positive sum” game where cooperation can be rewarded. That same added value, however, can also be sucked off by a network center like Amazon, Walmart. or Uber, leaving their sub-partners with just a tad more than they could earn outside.

That’s what "America First" Republicans want. Keep those networks for U.S. companies. Where foreign partners are necessary, squeeze those network gains out of them, so they go mostly to U.S. companies. Plus, a bit more for their workers.

JD Vance and his new “Pro-Labor” Republicans are right that some trade protectionism makes sense for the US in networked industries. But they are wrong to think those networks can be kept for the US alone, or that foreign partners, if needed, should pay a tariff penalty.

These new Republicans are young enough to see the world has changed. What they don’t see is that America is strong because we have natural allies and citizens from every country in the world. To make those networks work, we have to know when to compete and when to cooperate. Republicans like JD Vance can see the first part are blind to that second part.

[Note: To get daily delivery of this blog to your emai go to: https://petersage.substack.com. Subscribe. Don't pay. The blog is free and always will be.] are blind to that second part.