Two Myths Surrounding American Economic Policy

The American President Donald Trump has been able to create mass hysteria. His victory in the 2016 election is itself a byproduct of this hysteria. However, ever since he took office, he has been taking erratic decisions. Many of his decisions are detrimental to American trade and economy. One moment he threatens to pull out of the North American Free Trade Agreement (NAFTA) whereas another moment he plans to slap tariffs on imports. All of his decisions are based on flawed economic reasoning. This reasoning is deeply influenced by two myths.

In this article, we will have a closer look at these two myths and the impact that they have on the economic policy of the biggest financial superpower in the world.

Myth #1: Manufacturing Jobs Are A Prerequisite For Economic Growth

Donald Trump feels a certain emotional connection with people from the Rust Belt. The reason given by him for introducing new tariffs is that they will lead to the creation of more manufacturing jobs. Trump believes that an increase in manufacturing jobs is necessary for economic growth.

The only problem is that facts and figures do not support this argument. For instance, the real median income of the American worker saw a marginal drop between the years 1945 to 1960. Yet, the American economy grew by leaps and bounds during the same period. Another statistic commonly quoted is the fact that manufacturing jobs were facing a speedy decline during the 1980’s and the 1990’s. Yet, the real incomes of the people in the United States were rising during that period.

There does not seem to be a direct correlation between manufacturing jobs and economic growth. However, there is a correlation between manufacturing output and economic growth. It is important to understand that manufacturing jobs and manufacturing output is not the same thing.

In fact, it is possible for manufacturing output to increase even though manufacturing jobs are declining during the same period. The American manufacturing output has been steadily rising for many years. This is because America does produce a lot of stuff. However, the production undertaken is of higher value items.

Since sophisticated technology is used for the production of these items, the value of the manufacturing output has been facing an upward trend even though the number of people employed has been decreasing. Also, the American wages appear to be constant from the year 2008. This is creating an illusion of economic slowdown even though there isn’t any.

Therefore the actions taken by the President are misguided to say the least. Productivity improvements happen when fewer inputs are used to produce maximum output. Employment is a byproduct of economic action. If it becomes the sole objective, economic policy becomes incoherent and causes damage instead of enabling gains.

Myth #2: American Companies Are Facing Unfair Competition

The whole underlying rhetoric of Trump’s policies has been that American companies face unfair trade competition abroad. Since Americans face unfair tariffs, it is only fair that Americans raise tariffs too so that the playing field is leveled out! However, this seems to be a figment of people’s imagination since this opinion is definitely not based on reality.

The United States is certainly competitive. It is the second largest exporter in the world after China. The fact that American companies are able to sell $109 billion worth goods and services abroad speaks volumes about their competitiveness. There are certain industries like computers, automobiles, etc. which are largely dominated by American companies.

Hence, the real threat to American competitiveness is not external aggression. Instead, it is the internal bureaucracy that is costing Americans dearly. Estimates suggest that American spend close to $2 trillion per annum on complying with regulations. It needs to be understood that regulations add very little economic value and they should be seen as being dead weight costs.

This amount needs to be put into perspective. If the American government were to raise $2 trillion via tax increases, they would have to increase the taxes on each tax payer by as much as 15%. However, since this tax is largely paid for by corporations, the tax hike would have to be more than 20%. This is in addition to the 25% tax that the corporations are already paying.

Hence, if Donald Trump really wants the US steel and aluminum industry to become competitive, he should try to reduce the regulation. Imposing tariffs only protect certain industries at the expense of others.

It is likely that foreign countries will also impose countervailing duties. This will affect the business of other corporations that export goods. Hence, in effect, Donald Trump is taking money from those corporations and giving it to the steel and aluminum industry.

Many critics believe that American companies will continue to import steel and aluminum. This is because even after the tariff imposition, importing goods will still be cheaper. Hence, the imposition of this tariff is being seen as a way to make money which the government desperately needs after it has drastically reduced the quantum of tax collection.

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