The National Manufacturing Strategy Debate

Dave Johnson

President Obama has been pushing policies to boost American manufacturing. Democrats in Congress are pushing a package of bills under the label “Make It In America.” The Obama administration’s Gene Sperling gave a big speech recently describing the vital importance of a healthy manufacturing sector to our economy. But others say promoting manufacturing is “the wrong target” and reviving manufacturing won’t help revive our economy. So what’s the story?

Gene Sperling, Director of the Obama administration’s National Economic Council gave a big speech at the recent Conference on the Renaissance of American Manufacturing. Sperling talked about how a manufacturing “commons” works, and why it is a good thing if government promotes this commons.

A manufacturing commons is an ecosystem, in which manufacturers, suppliers, designers, innovators and all the other manufacturers, suppliers, designers and innovators all complement each other, creating a “cluster” effect. When all of these components are working together it creates a “virtuous cycle” but when they don’t it creates a “vicious cycle.” So because the sum of these parts is greater than the whole, each component’s interests do not align with the interests of the whole — and “our” (We, the People’s) manufacturing capacity is degraded, which degrades our standard of living. So government (We, the People) must play a role in promoting the whole effort. From Spreling’s speech:

The ecosystems that grow up around these intersections of innovation and production tend to be complex. They are the result of evolutions that occur over periods of years and decades. Once the virtuous, reinforcing cycles are broken they are difficult to recreate, and they can turn to a vicious cycle. That’s why losing pieces of our manufacturing base should be such a serious concern.

… For any single firm, the decision to move production elsewhere may make economic sense. But that decision impacts suppliers and the local talent pool. This makes the decision even easier for the next firm to leave and even harder for the next firm considering coming there to say yes.

Job Loss Not Just Competition And Productivity

Sperling traces the history of our manufacturing and shows that we didn’t lose jobs when competing with Japan, and didn’t lose jobs during periods of high productivity growth. He shows that what happened between 2000 and 2009 (the Bush years, and China in the WTO) with the loss of 50,000 factories and millions of manufacturing jobs was different, saying “the dramatic loss of manufacturing employment in the past decade was a break from the past and cannot be explained by the conventional view of productivity and technology gains.”

Since 2000, the manufacturing sector lost nearly one-third of its workforce, a total of nearly 6 million jobs. Unlike the preceding decades, according to the Federal Reserve, manufacturing production, the measure of the physical amount of goods that we make, actually declined from 2000 to 2010 by five percent. This drop was not just a result of the recession. From 2000 to 2007, manufacturing production grew at only 1.3 percent per year, the worst peak-to-peak performance since World War II.

Sperling explains why this loss is so significant to our economy: manufacturing is special in that so many other jobs depend on manufacturing, extending “from the web of suppliers that support manufacturers to the communities where manufacturing plants often serve as an anchor employer.”

For those of you here from towns across the U.S. that rely on a major manufacturer, or states like Michigan where I come from, you understand the impact of manufacturing. In addition to the web of suppliers, the expansion of an auto plant brings other types of businesses to town including new restaurants, retailers, and service providers feeding off of this economic activity. If an auto plant opens up, a Wal-Mart can be expected to follow. But the converse does not necessarily hold – that a Wal-Mart opening definitely does not bring an auto plant with it.

So it is clear that this is not just about the back-and-forth of companies competing, we have a national interest in bolstering the manufacturing sector.

Finally, Sperling described some of the administrations manufacturing initiatives. He did not come out and advocate for a coordinated national industrial strategy — which every major competitor has and we don’t have. But his speech did advocate “policy to support manufacturing.” This is at least a start.

Criticisms And Agreements

Matthew Yglesias at Slate, in Forget the Factories writes that it is “foolish” and worries about the, “troubling possibility that these ideas will actually guide policy in a second term rather than simply serve as props in a re-election campaign.” Yglesias writes that.

it should be obvious that the path forward for America is to focus on our strengths in information technology and media, and not compete with the Chinese for manufacturing supremacy.

Yglesias writes that manufacturing areas are “poor” while high-tech areas are “richer” and “more prosperous” and we should “learn from the most prosperous parts of the country, not to imitate Chinese clusters that are even poorer than America’s industrial hubs.” Also, “creating new billion-dollar software startups has a lot more to do with the future of American prosperity.”

Yglasias concludes that we should “instead build and expand new industries that push living standards up and keep factory owners searching abroad for cheap labor.”

Ezra Klein, writing Is industrial policy back? at the Washington Post, writes that “cozy consensus against industrial policy is, at least when it comes to manufacturing, flawed.” Describing what Sperling’s argument, Kleinwrites,

There is, in other words, a building argument that the market is failing to appropriately price the benefits of manufacturing firms. They’re worth more to the economy than they are to individual firms. And that’s the key to this new argument: Sperling isn’t saying America should support the manufacturing sector because it delivers good jobs, or it’s been important to America’s middle class, or even because China is competing unfairly. He’s saying there’s a market failure. And even the most orthodox economists will tell you that it’s appropriate for the government to intervene to correct market failures.

Even so, he says the Obama administration isn’t really doing all that much,

For all this, the Obama administration’s strategy to promote high-tech manufacturing is modest: A couple of tax cuts, mostly. Some money for research into basic technologies and new techniques. And a sustained effort to talk up the industry’s importance and thus signal to investors that America intends to fight for its manufacturing base. None of these are gamechangers.

At least the consensus against doing anything is changing.

Economist Mark Thoma writes in Is Manufacturing the Answer?, “At one time I would have been opposed to industrial policy, but I have been reevaluating my position lately (I can’t say I’ve been convinced as of yet, but I want to stay open-minded on the question).” He links to EPI’s Lawrence Mischel, who writes in Robert Lawrence misleads the New York Times on manufacturing, saying that,

… closing the trade deficit would provide millions of jobs and boost the economy. For instance, my colleague Robert Scott has shown that growing trade deficits with China eliminated 2.8 million U.S. jobs between 2001 and 2010 alone, including 1.9 million jobs displaced from manufacturing. Similarly, correcting the currency imbalances with China, Hong Kong, Taiwan, Singapore, and Malaysia could add up to $285.7 billion (1.9 percent) to U.S. GDP, create up to 2.25 million jobs over the next 18 to 24 months (most in manufacturing), and reduce U.S. budget deficits by up to $71.4 billion per year.

… manufacturing employment will not return to 25 percent of employment. Nevertheless, we can gain a lot of manufacturing jobs by strengthening the recovery and through appropriate trade and currency policy. This would provide millions of good jobs, aid many communities, and be good for the nation.

At Financial Times, Edward Luce writes in America reassembles industrial policy that we do have an industrial policy, that favors oil and Wall Street,

Whether it is the schooner-rigging of tax incentives for Wall Street – and the federal tax system’s subsidies for debt over equity – or the panoply of write-offs for Big Oil, Washington never stopped promoting favoured sectors. Manufacturing was simply not among them.

Most are of long pedigree. Some might say it would be easier to pass through the eye of a needle than to separate the fossil fuel sector from its Washington subsidies, which date from the second world war. No presidential hopeful would dare to suggest scrapping Depression-era farm subsidies because they skew so heavily towards key states such as Iowa.

Luce points out that Facebook and Twitter might be glamorous, but making actual things is where innovation comes from,

Facebook and Twitter may bring disruptive social change. But the most valuable innovation still comes from making products such as semiconductors, batteries and robotics.

Just Look Around

I think a problem with economists (and a lot of big-city columnists and journalists) is that they somehow are unable to just look around them. All one has to do is drive around the midwest for a few days, Michigan, Ohio, etc. and you will see for yourself how important – and different – manufacturing is to the country, and what happens when factories close. It affects the entire community and those jobs are not replaced – and the ripple effect from the loss of a community’s jobs base is terrible. All the other jobs that manufacturing supports go away, too, when manufacturing goes away.

I live in Silicon Valley. Facebook, Google and Twitter employ relatively few people relative to manufacturing. Apple sends its manufacturing to China, because in China working people don’t have any say, so they can treat workers there worse than workers here in our democracy will allow. In fact Silicon Valley has high unemployment, in some areas here as much as 25% or more of the office and light industrial buildings are for lease, and our downtowns and commercial streets have plenty of empty stores. They’re just newer, so they don’t look as bad as the downtowns across the midwest. But it is as bad.

In February economist Christina Romer wrote in a NY Times op-ed, Do Manufacturers Need Special Treatment? that our government should not promote manufacturing. She wrote,

American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.

I responded, in Manufacturing On Planet Economus, and think it very much applies in response to this ongoing discussion:

Here is the difference: We can’t just keep servicing each other. This “service economy” thing hasn’t worked out so well here on Earth, and now we have a huge trade deficit. It is “better to produce real things” because that is what you sell to others to get the money to pay each other for haircuts (and scissors).

Manufacturing brings so much along with it that entire economies have been, are and will be supported. China isn’t making its living by cutting each others’ hair. Neither is Germany, or other countries that have realized the importance of manufacturing and manufacturing policy to an economy.

Manufacturing brings with it all the businesses in a supply chain, it brings the research and innovation that manufacturing requires, and it brings a lasting real infrastructure that requires enormous investment to duplicate elsewhere before competition is enabled. Today we have a tremendous current account imbalance that resulted from the terrible trade deficits suffered since we were invaded by this crowd from planet Economus, who told us we don’t need manufacturing – that we should transform ourselves into a “service economy.” And it will require enormous investment to restore the ecosystem that we allowed to escape to other countries in that period.
Once you’ve got it, it’s hard to lose it, and once you lose it, it’s hard to get it back. Not so much with services.

Once you’ve got it, it’s hard to lose it, and once you lose it, it’s hard to get it back. Not so much with services.

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