Manufacturing redux

March 29, 2012

Chalk one up for continental Europe’s economic architects. For the past several decades, the Anglo-Saxon consensus was that state interference in the private-sector economy was a mistake. Government bureaucrats were in no position to pick economic winners and losers – and if standing aside meant letting the forces of creative destruction sweep away entire industries, so be it.

The continental Europeans, most successfully the Germans, demurred. They were unconvinced that the shift from manufacturing to services was either good or inevitable, and they used the full might of the state to try to hang on to their industrial base. The financial crisis may have briefly felt like a vindication of this model – but the near collapse and continued frailty of the euro brought a quick end to that moment of schadenfreude.

When it comes to manufacturing, though, the European approach is being embraced in the White House. In a speech this week, Gene Sperling, director of the National Economic Council and assistant to the president for economic policy, laid out the economic rationale for the U.S. shift. When I spoke to him afterward, Sperling was careful to point out that the new approach did not amount to industrial policy, or an attempt by the government to pick winners and losers.

But the White House has come to believe, Sperling said, that manufacturers more broadly should be first among equals. Giving manufacturers slightly lower taxes and more support for their research and development is a good idea, Sperling argues, for two reasons. First, because manufacturing has a particularly powerful spillover effect on the rest of the economy.

The benign effect of manufacturing Sperling is most enthusiastic about is the connection with innovation. That link, he argues, has been drawn out in research by the Massachusetts Institute of Technology’s “Production in the Innovation Economy” initiative. Its premise, which Sperling embraces, is that in most new technologies, innovation happens most quickly and effectively when the inventors work close to the builders.

Apple is today the most beloved – and financially successful – U.S. manufacturer of physical stuff. But Sperling’s argument amounts to an assertion that the Apple approach – with designers and engineers in California and factories in China – works for the IT business, but not for much else. In most industries, Sperling contends, those who outsource manufacturing will soon find that they have outsourced their innovative edge, too.

The second pillar of the White House approach is to insist that the decline of U.S. manufacturing, and, by extension, manufacturing in the rich Western economies, is not inevitable. Manufacturing, Sperling argues, is not the agriculture of the 21st century, a sector fated to provide fewer and fewer jobs over time.

Instead, Sperling believes that the United States has a chance to bring jobs back home. “The degree that the U.S. is becoming more and more competitive in bringing manufacturing facilities and jobs back to our shores is very encouraging,” Sperling told me in an interview this week after he gave his speech. This is clearly one of the administration’s talking points this season – on Wednesday, Vice-President Joe Biden trumpeted the rise of “in-sourcing” in a campaign-flavored speech in Iowa.

This White House’s view that the government can – and must – support manufacturing relative to other businesses is a profound shift in the conventional wisdom of the English-speaking world. Since the days of Margaret Thatcher and Ronald Reagan, the received transatlantic wisdom has been that state intervention is an inevitable failure, that the decline of manufacturing is inevitable, too, and that service-sector jobs can be just as good anyway. The shiny towers of the City of London and the canyons of Wall Street are evidence of that last conviction and, at least for a while, seemed to be a vindication of it as well.

Sperling is an earnest technocrat, and his speech this week was a determined effort to document the intellectual foundations of the White House’s pro-manufacturing tilt. “Let me begin by acknowledging upfront that this is an area where otherwise like-minded economists disagree,” Sperling said at the start of his remarks. His goal is not so much to convince his listeners that he is right as it is to assure them that his approach is intellectually respectable.

But for all its nerdy leanings, the White House is not the Harvard faculty club, and an election is coming up. Manufacturing could be an area of strong contrast between President Barack Obama and his most likely challenger, Mitt Romney. Romney has more hands-on experience, but Obama may have a more deft popular touch.

Unless you have a doctorate in economics, your intuition probably accords with Sperling’s point that building things is essential to a country’s economic well-being. Romney, who opposed the bailout of the Detroit carmakers, often finds himself on the other side of that argument.

Inside the United States, the big political story this week is the Supreme Court’s deliberations on the legality of Obama’s healthcare overhaul. Elsewhere, that is a barely comprehensible local story – all other rich countries provide some version of universal coverage and spend less money and achieve better outcomes than the United States.

But from Berlin to Beijing, the debate about manufacturing and whether governments have a duty to support it is a live issue. That is one more reason this U.S. election campaign matters so much to the rest of the world.


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I agree with your statements that “Giving manufacturers slightly lower taxes and more support for their research and development is a good idea” … (and that the Germans) were unconvinced that the shift from manufacturing to services was either good or inevitable, and they used the full might of the state to try to hang on to their industrial base.”

However, “the European approach is (NOT) being embraced in the White House”, because the White House completely fails to understand the key point required for manufacturing to benefit our economy.

The key point is as you pointed out that Germany “used the full might of the state to try to hang on to their industrial base.”

Stated simply, giving manufacturing tax incentives works ONLY IF the manufacturing takes place within the nation that is giving those breaks.

Giving manufacturing tax breaks when they are free to invest the money in capital projects anywhere in the world will only make our economy worse.

THAT is main reason why the German economy is succeeding, and the US economy is failing.

Posted by PseudoTurtle | Report as abusive

Following the second world war, manufacturing gave millions of American workers an entry point into the middle class. Over time, high labor costs, government regulation and a host of other phenomenon have chipped away at this path to prosperity. It’s nice that the administration has seen fit to raise interest in a rebirth of manufacturing jobs, but this is more election year rhetoric than substantive policy.

The cost of manufacturing in the US is still far too high to be competitive in a global economy. An exception is in industries that have embraced technology and have become highly automated. Robotics has lagged behind the revolution in digital technology but that is changing. Our ability to compete in the global manufacturing environment is dependent on our minmizing unit labor costs. Automation is the key. There will be new jobs emerging to support this trend, but they will be highly skilled jobs and they will relatively few compared to the halcyon days of American manufacturing.

Posted by gordo53 | Report as abusive

I very much agree with Mr. Sperling, and I support the viewpoints expressed in this Op-Ed piece, but why the plug for Obamacare? In and of itself, that paragraph is a detraction to the article’s commentary on inducing a much-needed rise in manufacturing, as such, any desired support for President Obama has already been implied. The President has also commented to the fact that a lower corporate tax rate would help to even further this new trend of returning American companies from abroad. I am glad of any and all jobs returning to our ccountry.

Posted by armstrong137 | Report as abusive

Of course the US Government picks winners and losers. What nonsense! The mechanism is called “subsidies”.

The trucking industry survives as it is today solely because they do not pay for the damage they cause to public highways. That damage is almost entirely paid for by the gasoline tax on passenger vehicle fuel. This subsidy flows through to distant producers, domestic and foreign, and makes it economic to ship goods from far away. Or makes it look economic when it is not, because the Government takes money from commuters and gives it to truckers. This is just one example of economic distortion that makes an uncompetitive producer win over a lower cost, excluding the transportation subsidy, local producer.

The American economy is riddled with subsidies. It is rare to find a huge American fortune not centered on a subsidy.

It is nonsense to define our current labyrinth of subsidies as a “free market”. But it is true that the country would be better off without most of them.

Posted by txgadfly | Report as abusive

Great article, Chrystia Freeland, and timely.

The emprical data shows that a generation ago America, with American workers, was the greatest manufacturing and commercial power on Earth.

But then, the largest American corporations evolved, and, surprising as it may seem, lobbied successfully for congress to remove the American tariffs on imported goods.

Why would they do such a thing? Why would American corporations want to eliminate the very tariffs that had given them birth, and protected them in their infancy against the manufacturers of Europe, all during the 1800’s and 1900’s?

American corporations lobbied to drop the American Tariff because doing so would allow them increase profits by taking advantage of the gigantic pool of cheap labor abroad. In other words American corporations lowered their cost of labor by directing Congress to eliminate the American tariff.

Of course this would directly force down the wage rates of American workers, a simple case of supply and demand, as the empirical evidence shows so vividly.

Now, empirical evidence shows that,

1. The American tariff is so small as to be meaningless.

2. Almost every product in every store in America says “Made in China”

3. American corporate profits are at record high levels

4. The American congress is so much in the pocket of corporate America, that in Congress-speak, the very words “worker” or “labor”, which had an admirable flavor to the generation before us, now have villainous connotation.

5. The American engineering profession is being destroyed by a huge inflow of low-cost labor from India under the H1B visa program, another avenue by which big companies based in the US are driving down American wages to increase profit.

We should urge President Obama to call for the immediate reinstatement of an American Tariff of 50% on all imported goods.

If he did so, new companies and new jobs for Americans would spring up like grass after a rain.

Here is the Wikipedia schedule by year of the American tariff:

It also shows that the American tariff was first implemented by Alexander Hamilton and George Washington to protect American jobs from European competition.

Posted by AdamSmith | Report as abusive

“Creative destruction” occurred when the automobile replaced the buggy and whip. Allowing our entire manufacturing base to be plundered through a bone-headed devotion to flawed, 19th century trade theory by nations desperately over-dependent on manufacturing for export in order to employ their badly bloated labor forces is not “creative destruction.”

The United States was already infinitely more competitive than China when our manufacturing jobs left. How will competing harder bring them back home? And how will providing tax incentives for R&D help when the manufacturing of every product developed in this nation is immediately outsourced?

None of these are the real reasons for the decline in manufacturing in the U.S. The real reason is free trade policy that fails to account for the inverse relationship between population density and per capita consumption, and its role in driving global trade imbalances (a relationship that economists have yet to acknowledge). Check the data. In 2010, with the half of nations below the world’s median population density, the U.S. had a surplus of trade in manufactured products of $116 billion. But with the half of nations more densely populated (including the likes of China, Japan and Germany), the U.S. had a massive trade deficit of $493 billion. Same number of nations; starkly different results.

The only way to combat this population density effect is through a return to the use of tariffs to assure a balance of trade with nations so badly overpopulated and whose domestic consumption is so badly stunted that they’re incapable of consuming their own productive capacity.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

“Romney has more hands-on experience”…at what? Restructuring companies? Does he have any experience with what America needs…a business that grows the GDP, not just one venture capitalist’s bottom line?

Posted by JoeOvercoat | Report as abusive

there are a couple of very important facts being left out.

1. the US is the world’s number 1 or 2 manufacturer, depending on whose data you believe.
2. wage rates are too simplistic of a measure; we’re way ahead of China in terms of manufacturing productivity

They build toy airplanes and we build 777’s.

But, that stuff probably doesn’t matter, I’m sure we can ‘tariff’ our way to prosperity…

Posted by jambrytay | Report as abusive

tax offshore outsourcing.

Posted by robb1 | Report as abusive

Import tariffs are difficult to pass without opening a trade war that ultimately might backfire US ability to export.

Reducing tax deduction for offshore labor outsourcing can me much more effective.

Taxing offshore labor does not justify import tariff retaliation by developing countries, eager to export their manufactured goods to the US.

Posted by robb1 | Report as abusive

“Manufacturing, Sperling argues, is not the agriculture of the 21st century, a sector fated to provide fewer and fewer jobs over time.”

Oh dear. Oh dear oh dear.

Someone needs to point out to Mr. Sperling that manufacturing has been falling as a percentage of the global economy for decades. As has global manufacturing employment been falling for decades.

Manufacturing output (yes, even US manufacturing output) keeps rising at the same time.

Manufacturing is exactly the same as agriculture. Productivity is rising swiflty in the sectopr and the days of mass manufacturing employment are as dead and gone as mass agricultural employment.

Posted by TimWorstall | Report as abusive

“the shift from manufacturing to services was either good or inevitable”

Many Americans have believed that to be true all the way back to the 70’s when we were told we had to shift to a service economy. It was obvious that services are directed to those that have money. Your economy must be based on something!

Posted by SeaWa | Report as abusive