Biden says making more goods in the US, like cars and chips, will lower inflation. Can his plan work?

Inflation, which is at a 40-year high, is a top concern among Americans across the political spectrum and played a prominent role in President Joe Biden’s State of the Union address.  

After touting economic gains since he took office, Biden said that “too many families are struggling to keep up with the bills.” 

Among the main remedies he proposed: making more goods, from cars to semiconductors, in the United States in order to lower their production costs, which are then passed on to American shoppers. Doing so would also make U.S. consumers less vulnerable to supply chain bottlenecks abroad, Biden said in his speech Tuesday. 

FED WATCH:Powell says Fed is poised to hike interest rates to fight inflation despite Ukraine war, market sell-off

SOTU:4 charts explain Biden's State of the Union address

What is the most effective method to control inflation?

“One way to fight inflation is to drive down wages and make Americans poorer," Biden said. "I have a better plan to fight inflation. Lower your costs, not your wages.” 

But economists are skeptical. 

“It’s nonsense,” said Steven Blitz, chief U.S. economist at TS Lombard, a research and consulting firm. 

“Why did firms put their production in China? Because it’s cheaper. ," Blitz said. "And the beneficiary of these cheaper products has been the American consumer.”  

Cheaper to make goods otside U.S. 

Monthly pay for manufacturing workers in China – the top exporter of goods to the U.S.  – was around $531 in 2020, according to a survey of about 6,000 companies with operations in Asia and Oceania by the Japan External Trade Organization last year.  

In his State of the Union address on March 1, 2022, President Joe Biden says millions of new jobs were created in 2021.

In the U.S., manufacturing workers earned about six times as much, around $3,000 a month in 2020, according to Bureau of Labor Statistics data.  

Labor and environmental regulations are also much looser in countries like China compared with the U.S., keeping production costs lower.   

There are advantages to moving production to the U.S.  Manufacturers would benefit from a just-in-time production model where goods are made as orders are received and can be delivered to consumers more rapidly, said Harry Moser, founder of the Reshoring Initiative, an industry coalition advocating for making more goods in the U.S. That helps drive down the costs of holding and storing unsold inventory. Producers also would avoid hefty shipping fees, tariffs and value-added taxes on imports, he added. 

Some manufacturers also have moved operations to the U.S. to ensure higher quality products with fewer errors, another benefit that holds down expenses. 

Yet overall, the average cost of producing goods in China is still 40% lower than in the U.S., according to data from the Reshoring Initiative.

“There's a lot of very good reasons to reshore economic activity in the United States, but it's not inflation,” Blitz said. 

Worker shortage impact

There’s also a manufacturing worker shortage in the U.S.  

In December, there were 856,000 manufacturing job openings. The U.S. has lost more than 5 million manufacturing jobs in the past 25 years.

Those jobs have been offshored, particularly to China after it joined the World Trade Organization in 2001, which enabled Chinese producers to export goods to virtually any country in the world. 

HELP WANTED:Applying for a job now takes minutes as bosses use software to automate hiring, cut interviews

FUTURE WORKFORCE:Worker shortage should ease in 2022 as COVID wanes. But many people have permanently stopped working, depressing labor force participation

"If we don't have more toolmakers, welders, precision machinists, then we don't have the capacity to produce products (in the U.S.), and especially without wages going so high that they will drive up inflation,” Moser said.

How does inflation get lowered? Fed holds keys

“Inflation is almost entirely dependent on Fed policy and not supply-side issues over the longer term,” said Thomas Hogan, a senior researcher at the American Institute for Economic Research, a libertarian-leaning think tank. 

On Wednesday, Federal Reserve Chairman Jerome Powell signaled the central bank intended to raise its key interest rate by 25 basis points this month. 

“Inflation is too high – we understand that," Powell said in his testimony before the House Financial Services Committee meeting. "It'll take some time, but we're going to get it under control." 

Powell has also said that inflation stems from supply chain bottlenecks, which were triggered by the pandemic and are leading to product shortages. 

Bringing manufacturing back to the U.S. could help minimize future supply snarls, but it still wouldn't represent a long-term fix for inflation, Hogan said.