Idea Exchange

Sept. 1, 2003
The threat of imports to our manufacturing base became more and more apparent in the 1970s, and most of the concern was focused on the automobile industry

What if we could rewind the tape and start over?

The threat of imports to our manufacturing base became more and more apparent in the 1970s, and most of the concern was focused on the automobile industry. At the time, however, economists assured us that imports were no threat to our economy. They said imports would improve our economic vitality and standard of living. As one put it: “We send the Japanese stacks of paper currency, and they send us shiny new cars. We get the better of the deal.”

That doctrine of faith was repeated so often that to suggest otherwise was heresy. When anyone proposed restrictions on automotive imports and higher tariffs, economists said such moves would evoke retaliatory tariffs leading to an all-out global trade war. That, in turn, would lead to a worldwide depression.

Well, I wonder. When it became obvious the U.S. was going to roll over and play dead in the global battle for automotive markets, Asian auto companies saw the U.S. as a goose waiting to be plucked. And pluck us they did, establishing a strategy to eat our proverbial lunch in the automotive market. Even domestic manufacturers got in on the action. Looking to protect their revenues, they bought into the foreign market. But just within the last decade, the word “bankruptcy” has been mentioned in connection with every major domestic producer. And U.S. auto firms continue to flop on and off various credit watches issued by firms that rate such things.

It’s too bad we can’t wind the tape back to the beginning and try a different trade policy. Would tariffs and trade barriers have been better than the open borders foreign automakers have enjoyed? This much is for certain: No matter what we would have done with our trade policy 30 years ago, no other option could have turned out worse than the one that now makes the U.S. the pot of gold at the end of the rainbow for foreign automakers.

Legislating the law of gravity

Some 15 years ago, our publishing company installed its first word-processing system. Like all capital equipment, we couldn’t charge the cost against income in the year we installed the system. The expense had to be amortized. But technology was moving so fast that our word processors were obsolete only a few months after installation. When we had to upgrade to a new system five years later, the amazing thing was the original word processors had absolutely zero resale value. Even schools wouldn’t take them as gifts. Literally, they were thrown out with the trash.

That scenario comes to mind when I hear talk about the government liberalizing depreciation schedules, which it did a few months ago, when new rules were established, varying depending on the size of a company. Those in the seven-year depreciation class can now write off 57% of new equipment costs in the first year, as opposed to only 40% under current law and 14% prior to 2002.

Technology in the manufacturing sector sometimes moves as fast as it has in word processing. So I’ll ask a naive question. If being allowed to write off a capital expense over a shorter time is good for the economy, wouldn’t it be better if manufacturers could write off the total cost of new equipment in the year it’s purchased?

With the present system, we have a situation that is more than a bit absurd. It’s one where the government “knows” the present value of equipment you purchased last year, or the year before that. Legislating depreciation is, in my mind, akin to legislating the law of gravity. What Congress says doesn’t make it so.

So why is it still done? The reason is a fear that wily manufacturers will cheat the government out of income taxes. The populist view is that charging off equipment in the year it’s bought would allow a company to make too much profit, and as we know, the public at large, along with many of the people they elect to office, hate any corporation that makes a profit.

Surprise! Manufacturing is important

Anew study commissioned by the Council of Manufacturing Associations, an independently-funded division of the National Association of Manufacturers, concludes that the continuing erosion of manufacturing is a threat to the nation’s long-term economic growth and standard of living. The study states that manufacturing is a critical component of U.S. economic activity, in large measure because of its pivotal role in innovation. But current economic and policy trends, along with three years of manufacturing recession, threaten to diminish the American manufacturing base, jeopardizing the nation’s global competitiveness and future prosperity.

Joe DiFranco, group publisher
[email protected]

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