When President Biden laid out his vision for the U.S. economy before Congress on April 28th, he emphasized that rebuilding the U.S. economy should focus on “jobs, jobs, jobs.” The federal government should give preference to U.S.-made products as much as possible. To hammer home the point, Biden added: “there is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing—no reason, none.”
The president is absolutely right. Wind turbines, like solar panels and many other high-tech products, should be made here. Jobs are just one reason. Another reason is that these are exactly the sort of high-tech industries where the U.S. should lead the world. We should do the innovation here and we should build the products here, because the two processes, product development and manufacturing, are closely linked. Further, when you have large, important industries in a town or city, the economic benefits flow through to other businesses and workers in those regions, in the form of more jobs, higher wages, higher property prices, and an overall economic boom.
However, some commentators didn’t get the president’s message. Even some veteran Democratic advisors don’t seem to be on board with Biden’s pro-American “Build Back Better” philosophy. Jason Furman was chairman of the Council of Economic Advisors under Obama and is now a professor at Harvard. He got some attention last week when he tweeted: “Am I the only one who doesn’t care where the wind turbines are made? I just want us to use a lot of them and the best and cheapest ones.” It appears that Furman would be quite happy for the entire renewable energy industry to go to China.
As a professor, Furman teaches introductory economics, a course that is focused on very short-term “equilibrium.” This concept overlooks the most important ways that an industry like renewable energy equipment contributes to the U.S. economy. First of all, renewable energy equipment manufacturing creates good, steady, well-paid jobs with benefits in growth industries right here in the U.S. Secondly, the presence of a large manufacturing sector in renewables will lead to more investment in U.S. research and development, which will drive greater technological progress, leading to better, cheaper products in the future. Our renewable R&D sector is still recovering from the annihilation it suffered in the years after 2010 at the fate of cheap, Chinese dumped product. Today is its best opportunity to recover. Finally, a high-tech sector like renewable energy equipment will lead to spin-off technologies and new industries which will generate wealth and jobs in other sectors
By looking for the “cheapest” deal today, Furman would be shortchanging future generations of Americans. But he’s not the only one. Also last week, free-trade economists at the Peterson Institute criticized Biden’s pro-American slant. Citing a report from last August, the Peterson economists claimed that each U.S. job saved by federal Buy American policies would cost the U.S. taxpayer an estimated $250,000. The figure is based on an assumption that U.S. products are on average 26% more expensive than equivalent imports.
In reality, this flawed estimate is not based on the actual cost of any products at all. It is simply the result of plugging some general assumptions into a computerized econometric model to get some attention-getting results. Aside from ignoring all the benefits cited above of being a leading player in an important high-tech industry of today and tomorrow, the Peterson study relies on simplistic, bogus math. Maintaining, or launching an industry in a town or region doesn’t just create jobs in that industry. It leads to hundreds or thousands more jobs supplying the parts and meeting the needs of the workers in that industry. “Tentpole” industries support the local economy in a full range of goods and services. They contribute to rising wages and salaries as other employers are forced to get more competitive with the local high-tech manufacturing industry.
We illustrated the potential of manufacturing industries to raise U.S. incomes in a March 2020 Working Paper, which showed the earning power of pharmaceutical manufacturing. According to BLS data, medical equipment manufacturing jobs pay on average $57,380 a year, while jobs in pharmaceutical manufacturing pay $74,890 a year. Those figures are respectively 10% and 44% above the national all-industries average annual worker’s income of $51,960 (all data from the BLS 2018 Occupational Survey). Moving those jobs back to America would generate prosperity for those workers and throughout the communities where they located. Those are true “middle-class jobs,” to use one of Joe Biden’s favorite phrases.
The government’s key role in these and other industries should be as a lead customer, giving preference to U.S. producers to enable these industries to invest, begin building a business, and achieve the necessary scale to be cost-effective and profitable and then attract private-sector customers. Labor costs are such a small part of the cost of so many products today that in many industries, the additional cost of U.S. labor is a tiny factor in the final product price. If you adjust for the unfair advantages foreign producers enjoy, such as government subsidies and substandard working conditions and cleanliness standards, which have played a role in much of the pharmaceutical offshoring over the last two decades, the price differential between U.S. products and foreign competitors is small to nonexistent. If we produce these goods here, the benefits greatly outweigh the costs.