Some well-known capitalists believe the U.S. should levy an extra tax on products produced offshore—even if it would spark a trade war. But we tried a similar approach in 1930 and wound up with the worst economic calamity in modern history.
If we can’t tax our way to prosperity and wall out our overseas competitors, how do we restore our manufacturing base? The framework of an answer may be found in the work of two unheralded geniuses: Angus Maddison, a Scottish economist who passed away this spring, and William Bernstein, an American neurologist turned investment advisor turned historian.
Maddison spent close to six decades looking at a single economic statistic: GDP per capita in every country and across all of human history. His work is distilled in the chart that appears nearby. You might call it the mother of all “hockey sticks.” Per-capita economic growth was essentially nonexistent for much of recorded history. Around 1000 A.D. you see a little improvement, but it was too gradual to be noticeable. About 1820, something amazing happened, coinciding with the Industrial Revolution. You get a remarkable growth trajectory, which works out to be about 2 percent of inflation-adjusted income growth per year. It continues to this day.
Maddison made a few attempts to explain what historical forces might be behind such an amazing change. But he was a better statistician than he was a historian. That’s where Dr. Bernstein entered the picture with his book, “The Birth of Plenty.” Bernstein presents a “hypothesis of wealth.” It’s based on four conditions. Each one has to be present to create real and sustainable economic growth. The conditions are: property rights, scientific rationalism, capital markets, and efficient transportation and communication. When you bring all four of those forces into play, you begin to manufacture products that improve people’s lives.
You need property rights because innovators and entrepreneurs have to feel secure that the fruits of their labors won’t be arbitrarily confiscated by the state, by criminals or by monopolists. You need scientific rationalism because economic progress depends a lot on scientific ideas. You need capital markets because the mass production of new goods and services calls for vast amounts of other people’s money. Finally, you need fast and efficient communications and transportation to get your innovations into the hands of consumers.
You could use Bernstein’s four forces of industrialization as a way to look at the decline of manufacturing here in America, where our own industrial revolution may have veered off track and how we can get it rolling again.
Property rights: The U.S. tax system has a chilling effect on property rights. America’s corporate tax rate, at 35 percent, is the second highest among the 30 OECD countries. Only Japan has a higher tax rate. Most countries are lowering corporate taxes. America is moving in the opposite direction.
Scientific rationalism: Our nation faces a growing shortfall of scientists and engineers. We need to change that through educational programs that advance science skills. Bayers Corporation’s Making Science Make Sense® program is one example.
Access to capital markets: The government should ensure a stable financial system, efficient capital markets and ethical business practices. The new financial reforms must be implemented carefully to give banks the certainty they need to begin taking prudent risks and lending in a way that grows our economy and creates jobs.
Transportation: America needs to invest in infrastructure to more efficiently move products and people. That will require capital budgeting, private investment bonding and environmental permit streamlining. A recent analysis by the nonpartisan Milken Institute estimates that an infrastructure investment of $225 billion over three years would create 6.2 million jobs, $238 billion in earnings and $775 billion in output.
History teaches us that prosperity is a choice. We can encourage the factors that give rise to economic growth. Or we can discourage them.
The decision is up to us.
Greg Babe is President and CEO of Bayer Corporation and Bayer MaterialScience LLC.