Why Manufacturing Matters

Obama is right to support American industry, not least because U.S. workers need good, well-paid jobs

President Barack Obama examines a lock as he tours the manufacturing facility at Master Lock, maker of security locks, alongside Bob Rice (R), Master Lock Senior Vice President
SAUL LOEB/AFP/Getty Images
President Barack Obama examines a lock as he tours the manufacturing facility at Master Lock, maker of security locks, alongside Bob Rice, Master Lock Senior Vice President.
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Ever since his State of the Union address, President Obama has been making good noise, IMHO, about how we need to support our manufacturers.  As he put it during visits to factories last week: "…manufacturing has a special place in America.  When we make stuff, and we're selling stuff, that creates jobs beyond just this plant. It raises standards of living for everybody …. Everybody benefits when manufacturing is going strong."

It’s true that as advanced economies progress, manufacturing accounts for a smaller share of output and employment. In the U.S. over the past 40 years, manufacturing output has fallen from about 25 percent of GDP to around 12 percent, while factory employment has shrunk from around 25 percent to 9 percent. Some of that trend is just economic evolution and globalization—advanced economies typically shift towards services while the emerging economies go through the industrialization we began a century ago.  But a lot of it has to do with bad policy.

That's why the president has proposed providing tax benefits to support domestic manufacturers, subsidizing training programs to ensure more people have what it takes to meet the skill demands of the contemporary factory, and getting rid of some upside-down tax incentives that make it cheaper for American firms to produce abroad.

Most economists don’t like policies that single out an area like this – to support one sector over another is free-market heresy, enlisting the public sector in picking private sector winners.  Even former top Obama economist (and personal friend) Christy Romer recently criticized the administration’s support for manufacturing, asking what economists always ask, as they should, to justify such interventions: Where’s the market failure? Why should manufacturing receive special treatment rather than be left to rise or fall by the forces of supply and demand? Others say that if countries like China want to subsidize cheap manufactured exports, all the better for our consumers. It doesn’t mean we have to.

Others point out, as I do below, that there are good reasons for the government to support American manufacturing, not least that consumers are also workers in need of good, well-paid jobs.

What you don’t hear enough about is how the government picks winners all the time. It’s just not very smart about it.

Each year we provide hundreds of billions of dollars in tax breaks for all sorts of industrial sectors, including manufacturing (e.g., tax credits for U.S. production alone will account for $80 billion between 2013 and 2017).   Then there’s billions in subsidies for the production of oil and gas, and far more, as noted, to incentivize firms to move production offshore.  There are big breaks for homebuilders, for debt financing, even for certain ways of managing your inventory. Sounds crazy, I know, but many of these policies are more a function of the skill and connectedness of an industry's lobbyists than of what’s best for domestic productivity, growth, and jobs.

And yet, each year politicians and economists wag fingers about how we must avoid an "industrial policy" that favors certain sectors and industries over others – as if we didn’t do that already – when they should be talking about how to improve the policy we already have, in a way that helps the American worker and the American economy. Meanwhile, other advanced and emerging economies, unburdened by this ideological parlor game, are crafting intelligent policies that coordinate R&D to efficiently move research from the labs to the factory floor, ensure stable financing, train workers, and plan ahead toward capture market share in areas where demand is clearly expanding, like, say, clean energy.

That’s what we should be doing, too. A new report from the Brookings institution illustrates why. It aruges that:

"... manufacturing does indeed matter to the U.S. economy and ... public policy can strengthen American manufacturing.  The nation need not and should not passively accept the decline or stagnation of manufacturing jobs, wages, or production.  American manufacturing matters because it makes crucial contributions to four important national goals.

• Manufacturing provides high-wage jobs, especially for workers who would otherwise earn the lowest wages.

• Manufacturing is the major source of commercial innovation and is essential for innovation in the service sector.

• Manufacturing can make a major contribution to reducing the nation’s trade deficit.

• Manufacturing makes a disproportionately large contribution to environmental sustainability.

The facts strongly support these claims.  Manufacturing jobs pay about 8 percent more than comparable jobs in non-manufacturing.  Our factory sector is responsible for 70 percent of private sector R&D.  The trade surplus in services is small relative to the deficit in manufactured goods (see figure here), and, as I told an audience in Portland, Oregon just last week, if we hope to be a player in growing global demand for clean energy – and we’d be foolish not to – manufacturing everything from advanced batteries to LED lights to solar, thermal, and wind equipment needs to be a important part of future production.

And yet, skepticism remains. Just last weekend, for instance, the Washington Post had a story telling how subsidies to one American manufacturer (Boeing) created a competitive disadvantage for another (Delta). Doesn’t this kind of thing weaken the case for manufacturing policy? Not necessarily.

First, you’ve got to know your history here.  There exist market barriers, unique to manufacturing, that no private firm can overcome by itself.  No single private firm can, say, coordinate a national smart grid, make or recoup the investment needed to move advanced battery technology from the university labs to the factory floor.

History also reveals – as documented in must-read detail in this book on the government’s role in innovation – there is no transformative investment that reshaped our economy, from railroads to the Internet, where the federal government did not partner with the private sector to overcome these barriers.  Not here, not in any other advanced economies, not even in emerging economies.   To ignore this reality in the name of "not picking winners" or out of a conviction that "government doesn’t create jobs" or whatever misguided ideology you want to plug in, is to concede global competition to those unburdened by such dangerously wrongheaded thinking.

So, down to specifics. What should government be doing to help manufacturing?  The answer follows from the market barriers noted above. We should

• push back against the mercantilists, like the Chinese, who manage currency to tilt the playing field to give their goods an unfair advantage over ours – and it’s not just currency; non-tariff barriers (North Korea used to have strict rules about the size of oranges allowed in to the country), abound.

• support Research & Development, particularly in clean energy, with special attention to bridging the "death valley" between discovery in the labs and production in the factories, where promising technologies can wither for lack of investment dollars.

• ensure that workers have the technological skills that contemporary production demands.

• we should pay a lot more attention to supply chains, as that’s where most of the jobs are (Sue Helper, an author of the Brookings study, is a big promoter of this insight); that might mean support for, say, a machine shop to transition from making gear boxes for a Chevy to making gear boxes for a wind turbine.

• carefully examine the kinds of union/management/government partnerships that Germany successfully implements in the interest of a stronger manufacturing presence, a point the Brookings folks also stress.  Each stakeholder brings something ("value-added" in econospeak) to the table: Unions train workers through apprenticeship programs, the federal government helps support R&D, stable financing, export market penetration, and management seeks cooperation with the workforce on "high-road" practices including union-management councils within firms, union membership on boards of directors, and comprehensive collective bargaining.

We could probably do all this for less than we’re spending now on credits, tax breaks, and subsidies that in some cases end up hurting American manufacturing and American workers.

We’ve already got a manufacturing policy.  Now let’s make it a smarter one.

You can email me at info@jaredbernsteinblog.com. I look forward to your feedback.

Jared Bernstein is a senior fellow at the Center on Budget and    Policy Priorities. From 2009 to 2011, he was the Chief Economist and    Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.

Also by Jared Bernstein
The Economy: What's Wrong and How to Fix It
How to Build a Fairer Economy
What Obama's State of the Union Got Right
Jobs Report: Good News, but a Long Way to Go
It's (Almost) Time to Raise the Minimum Wage
Reasons to Like Obama's Budget

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