Wednesday, April 4, 2012

An Optimistic Take on U.S. Manufacturing's Future

Manufacturing Decline presents a fact based picture of U.S. manufacturing that's optimistic about the future. We'll review its various arguments.


"Manufacturing is not the basket case of political lore, and America really is still "making things." There's another, subtler myth too—that this industrial decline is inevitable, by economic determinism or business mistakes. That's some of it, but the truth is that America would probably be making many more things if not for bad but deliberate political choices.

The industry-in-crisis narrative usually begins in the aftermath of World War II, when manufacturing accounted for 25.6% of the U.S. economy. This is a less than ideal heyday to begin the time series, given that most of the developed world lay in ruins and their economies would recover. By 1970, America's global manufacturing market share stood at 22%—more than any other nation—where it has stood for four decades, despite the rise of Germany, Japan, Korea and now China. . . .

Manufacturing has retreated as a share of GDP and contributed 11.7% in 2010, according to the Bureau of Economic Analysis—about a 15 percentage-point decline relative to everything else over the last half-century. Services have jumped to about half from 24%. Yet manufacturing output grew 11.2% in 2011, following two years of decline. Taken alone, it would be the eighth-largest economy on Earth."


"The manufacturing crisis, if that's the word, has been jobs. Industry employed one of three workers after the war. Today, it's one of eight. Yet this, too, is largely a measure of economic progress—because it is the result of productivity gains. Productivity is the basic measure of how much we can do with our resources, human and monetary, and increasing it is what drives wage gains and higher standards of living.

Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000. Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy.

This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics."


"Which brings us to the real manufacturing tragedy, which is Washington's habit of misallocating scarce resources. There is only so much capital in the economy, and growth will be fastest if it is allowed to find its most productive uses. That is rarely the political calculus, however. ObamaCare and other entitlements will drive more resources into health care and the economy won't expand as fast it as it otherwise would.

Or take another sad case: For decades and especially the last 15 years, the government has been on an epic binge to push resources into housing.

The mortgage interest deduction ensures that a home is the largest investment most individuals make, while multiple home ownership programs compound the incentive. The Federal Reserve's monetary policy in the 2000s and today creates a subsidy for credit, which pushes more resources into finance and real estate in particular. Imagine how this era might have been different had investors in search of yield put their dollars into factories and exports, rather than mortgage-backed securities."


"The double tragedy is that the political class seems intent on reviving industrial policy with special subsidies and tax breaks. Mr. Obama's well-worn demand is for more government "investments," especially in faddish manufacturers a la Solyndra, while at the same time he wants to punish multinationals that do business overseas. GM is now his totem, with its $7.6 billion profit for 2011, the auto maker's highest ever. But all that proves is that companies really can turn around when the government gives them $50 billion and uses brute force to reduce their liabilities. . . ."


"U.S. manufacturing has problems, but it is strong enough to succeed both at home and abroad merely with reforms that all companies ought to enjoy: a corporate tax code with lower rates and fewer loopholes that is competitive with the rest of the world; fewer regulatory hobbles; an education system that better prepares the work force with 21st-century skills; an immigration policy that invites the world's brightest."


"This election-year debate (should be) less about how to help manufacturers and more about how to fix government."

But we won't hear much about that. At least nothing serious. That's too bad.

And it's too bad because fixing government would be a great topic for discussion and debate. My vote would be to start by making it smaller. Then the second step would be to make it even smaller than that. And then smaller again. Repeatedly.

I would also vote for a refresher course to be taken by all Americans on the relationship between individual liberty and personal responsibility. And why income inequality in a knowledge based society is both temporary and a good thing for society as a whole.

The conclusion is straightforward. More market based freedom and less government intrusion will be more advantageous for U.S. manufacturing than anything else our politicians could do.

Sadly, it's also unlikely to be the political path chosen. Unfortunately.

Thanks. Bob.

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