Manufacturing and the Tax Codes
In the years after World War II, American manufacturers were practically alone on the world market. The demands of helping to rebuild Japan and Europe, coupled with meeting American demand, kept the economy running strong and factories and workers busy. It was a time of amazing prosperity.
Throughout this time, wages paid to workers were increasing at a healthy pace. America was a prosperous country, and there was enough to go around for everybody. Given the prosperity of the times, manufacturers did not want to risk a strike which would shut down production, and so were agreeable to union demands for increased wages.
By the fifties, both Europe and Japan had largely rebuilt their factories. Their workers were hungry, and willing to work for less than their American counterparts. For this reason, they were able to produce goods less expensively. American manufacturers faced increasing competition, from goods which were less expensive. As a result, they began to lose their world markets, and faced increased competition in this country. The competitiveness of American made goods was further damaged by the inflation brought about by government irresponsibility, which further increased costs.
For the first time since World War II, parts of our economy began experiencing difficulties. In response, the economic role which had been created in the forties was finally put to use. The government would use fiscal policy, government spending and manipulation of the tax codes, to increase demand.
Primarily this attempt at fiscal policy concentrated on the tax codes. Most businesses were not in the position to receive a government contract, but all could benefit from the insertion of a favorable clause into pending legislation or a change in the definition of allowable costs which would decrease their tax burden. By the seventies, this constant manipulation of the tax codes had created a convoluted, confusing tax system which was both arbitrary and unequal.
All tax systems impose deadweight costs upon businesses. This is essentially money businesses do not actually pay in taxes but which they spend due to the process of tax collection. Most of these costs may be described as bureaucratic, money which must be spent on providing the documentation used to arrive at the business' tax burden. The government's constant manipulation of the tax laws had resulted in an extremely complicated and not necessarily equitable tax codes. Marginally different categories of spending were receiving drastically different treatment by the tax codes; businesses were allowed to write some categories off as expenses, and some they were not. Businesses, of course, wished to write off as many expenses as possible to reduce their tax burden. The complexity and irregularity of the tax codes increased the difficulty of finding allowable costs, and in doing so increased businesses' bureaucratic costs.
Higher bureaucratic costs meant higher prices for our businesses' products. While these higher costs affected all businesses operating in the United States, it was our manufacturers who suffered the most from them. Businesses operating in the other sectors, for example construction or services, were competing against other businesses based in the United States, all of which had to deal with the increased bureaucratic costs. Our manufacturers, however, were increasingly competing with manufacturers from around the world operating in different circumstances. Overseas manufacturers avoided much of the bureaucratic costs exacted by our tax system, which gave these foreign goods an even greater price advantage over domestic goods. By increasing bureaucratic costs, the government was further lessening the ability of our manufacturers to compete on the world market. It was making their products more expensive than those made overseas under less burdensome government requirements.
Although the complicated nature of the tax codes was making it more difficult for our manufacturers to compete, it was also allowing them to pay less attention to manufacturing. Theoretically, a businesses' profit depends entirely on its ability to sell its product. In this situation, businesses focus on keeping their goods as competitive as possible by attempting to make the best possible product at the best possible price. But because of the government's implementation of fiscal policy, the tax codes were now loaded with an amazing number of loopholes and special exemptions, providing an artificial path to profit; a business which was able to manipulate its spending to take advantage of tax loopholes was also able to greatly reduce its tax burden and thus greatly increase its after-tax profit. At the least, this introduced another factor which businesses were forced to take into account when making decisions; instead of focusing only on how a decision would affect competitiveness, they now had to consider its effect on competitiveness and their tax burden. By introducing another factor which businesses had to take into account, the government was causing our businesses to pay less attention to their products.
In the extreme, focus on bureaucracy can drive out focus on competitiveness altogether. While competitiveness and bureaucracy are not necessarily mutually exclusive, neither are they necessarily inherently compatible; a move that will increase the benefits a business derives from bureaucracy (i.e., lessen the tax burden) will not necessarily increase competitiveness, and vice-versa. Because businesses are finite, possessing only a limited amount of time and effort, they must often decide between attention to competition or attention to the possibility of bureaucratic profit. This decision can affect every level of business, from where money is spent to who will be hired; will it be another engineer or a new tax lawyer? These decisions are made according to where the greatest potential for profit lies. Because the benefits to be derived from government and the tax codes were growing so large, businesses were starting to focus less and less on production. The world market was increasingly crowded and competitive, but there was just as much money to be had from government, and it was easier to obtain. Unproductive activity, bureaucracy and lobbying, were detracting from productive activity, manufacturing. Businesses were still spending money, and still making a profit, but increasingly much of what they now produced was paperwork.
The increased costs brought by the government's attempts at fiscal policy had an especially hard effect on smaller businesses. Typically, smaller businesses require less bureaucracy than larger companies, which helps offset the cost advantage larger companies possess due to their ability to manufacture in mass quantities. The tax codes forced bureaucracy on all businesses, large and small. This bureaucratic burden is proportionally more expensive for smaller businesses, which cannot afford the manpower to manipulate their finances to adapt to the bureaucracy.
Despite their increased bureaucratic costs, smaller companies were receiving a disproportionately small share of the benefits to be had from government. Lobbying and studying the tax codes, the means to receive government benefits, required the commitment of time and manpower. Larger businesses were more likely to be able to make this commitment, to be able to hire the consultants and contribute to the right campaign, and so they received the bulk of the benefits from the government. These factors, the costs imposed on small businesses and the comparative lack of benefits received in return were directing the economy toward corporatization, toward larger businesses at the expense of smaller businesses.
The government's efforts to control the economy was laying the groundwork for future economic difficulties. Smaller companies which were more susceptible to competition and quicker to embrace technological change were being driven out of business. Larger companies were being protected from competition and encouraged to pay less attention to manufacturing. The tax system was working the way Keynes had intended it to, increasing the size of businesses and lessening the effects of competition.
The industrial growth of the twentieth century had been powered by oil. America, unlike most of the other industrialized regions of the world, had been blessed with large deposits of various kinds of fossil fuels. This was a factor in its rise to industrial dominance; U.S. industries had access to ready and inexpensive supplies of energy. However the phenomenal growth of the economy after World War II had quickly moved this country beyond self-sufficiency, and there was increased reliance on imported oil energy for requirements.
This dependence on imported oil was increased because energy prices were not subject to the forces of the free market, but rather were controlled by government. The government regulated the price of domestically produced oil at the wellhead, keeping it below world market prices. Not only did this limit exploration of new reserves, it also encouraged American businesses to use oil inefficiently.
Increased demand for oil was not limited to America, however. As the rest of the world industrialized, the world's consumption of natural resources increased drastically. Yet despite the emergence of world demand, oil prices had not drastically risen. The Arab countries, which controlled half of the world's proven reserves, were content simply to increase their revenues by pumping more oil; drastically increasing the price did not seem to occur to them. For this reason, oil was underpriced, being worth quite a bit more on the international market than was being paid for it.
When the Arabs embargoed oil as a protest to western support of Israel, this situation rapidly changed. The world price rapidly skyrocketed as countries, dependent on oil for their industries, were willing to pay whatever price the Arabs demanded. The embargo made the Arabs realize exactly how much the rest of the world needed their commodity and was willing to pay for it.
Once the Arabs realized the worth of oil, it was inevitable that prices would continue to rise; the whole world was hungry for oil, and supplies were limited. This changing energy market brought the beginning of a new consumer market with it. As the price of energy rose, people began to adjust their buying habits, moving to more energy efficient products.
Many American companies, however, ignored the changing market conditions. The country had grown to become the world's dominant industrial power over the years, and businessmen felt sure that after all of their success they knew what consumers wanted. When the oil embargo ended, they went back to business as usual, ignoring the fact that the market was undergoing drastic changes.
The government reinforced this complacency, effectively encouraging businesses not to adjust to new conditions. Even though oil prices had drastically risen, the government had not deregulated energy prices. In effect, it was shielding businesses from the realities of the world energy crunch. Further, the benefits worked into the tax code protected businesses from the negative effects of not adjusting to the new market situation. Businesses were able to insure a profit even while losing control of their markets.
The businesses knew that they were protected. The government was responsible for the economy, and the large companies were a major part of the economy. They knew that when problems arose, they would be able to turn to government for help. The government had become a crutch, protecting businesses from the real world.
There is, of course, a problem with this. Despite the government's intervention, it is still the market which ultimately decides the success of a business. The government was encouraging businesses to take a short-term perspective, focusing attention on immediate profits while paying less attention to their products and their increasing unsuitability for the world market. However the long range health (i.e., ability to make a profit) of a business does depend ultimately on its ability to sell its product. The government can protect businesses from the reality of the market for a period of time, but not forever. Eventually the uncompetitiveness of a business' products causes their market share to drop to the point where no amount of tax break can insure a profit, and it is forced to once again turn its attention to selling its product. The shakiness of many companies' market positions was brought out by the oil shock and the severe world recession at the beginning of the eighties. The Federal Reserve, intent on finally ending the spiral of inflation, clamped down on the money supply, sending the economy into a deep slump. Fiscal policy had created inflation by continually escalating the amount of money government spent. The only way to end this inflation was to contract the money supply using monetary policy, sending the economy into a recession.
U.S. manufacturers were caught by surprise by the suddenly increased oil prices and the suddenly contracted world market. Competition for the remaining market was suddenly much fiercer. After having neglected production throughout the seventies, many products were unsuited for this new, fiercely competitive world market. Businessmen were discovering the cost of inattention; they were not prepared to compete in the current situation, and so their market shares dropped. Eventually they discovered that the market share which was so easy to lose is much harder to regain.
This was the problem faced by the U.S. Auto Industry. In the late Sixties, U.S. Auto Manufacturers controlled over 90% of the domestic market. The competitive situation, however, was changing as people were moving to smaller cars. The auto industry ignored these changing market conditions. Yet even as their market share stagnated and shrank throughout the seventies, the auto industry remained profitable, due in part to benefits received from effective lobbying and knowledge of the tax codes. They were complacent. After the second oil shock at the start of the eighties, their sales dropped to the point where even the tax codes could not help them. They went through a number of unprofitable years. Only then did they try to adapt to the new situation. U.S. auto companies are once again profitable, but now they control less than 70% of the market, and seem unlikely to regain what they have lost.
There are a number of reasons for the decline of the U.S. auto industry and manufacturing sector in general, such as the rising competitiveness of Asian countries and the increase in energy prices. However the government's efforts to protect businesses using fiscal policy was definitely a factor contributing. Through the process of rewards and penalties, the government exercises a very subtle control over the shape of the economy; by rewarding certain activities and penalizing others, it affects which activities are undertaken. Our government had been penalizing businesses which focused on competition by increasing their costs and rewarding those who ignored competitiveness to focus on bureaucratic benefits. By directing businesses' focus away from the attempt to produce competitive goods, the government had laid the groundwork for a reduction in our manufacturing sector.
The need to update products and factories had become apparent. Yet businesses were discovering that the economy lacked the resources to allow them easily to do so. Manufacturing had become increasingly technological, and there was a shortage of people with the needed skills in the job market. Years of societalism in our schools had left the country unprepared for the new economic situation.
The early years of schooling are critical to the learning of math and science. A child who has an interest in science sparked at an early age, or who is given a good understanding of basic mathematics will not only be more interested in the subjects in later years but will also do better in them.
However the first years of schooling are also a critical stage in the task of helping children fit into society; children had to be made to feel happy with themselves, so they would not be unhappy in the group and would not cause problems. Because our schools were attempting to teach the practical skills of fitting into the group, math and science were forced to take a back seat to human interaction and personal awareness. These priorities continued throughout a child's schooling, and became progressively worse; the students who did not achieve an adequate understanding of basic multiplication had neither the skills nor interest to pursue physics.
By the time students were ready for college, the skills they had learned and not learned determined which degrees they would pursue. As a result, the country was turning out fewer and fewer scientists and engineers, but an increasing number of communications majors. America was becoming a country of people who could no longer produce what they consumed, but that was great at talking to each other.