Disinvesting in U.S. manufacturing

Austan Goulsbee, chairman of the Council of Economic Advisers under President Obama, and Greg Manikew, chairman of the council under President George W. Bush, deny that U.S. manufacturing industry is in decline.  They say the loss of manufacturing jobs simply reflects an improvement in productivity.   They say that U.S. manufacturing is following in the footsteps of U.S. agriculture several generations ago, when fewer and fewer people worked on the land because only a few farmers were needed to feed the nation.

But a report by an organization called the Information Technology and Innovation Foundation refutes this claim.  The authors point out that if workers were being replaced by machines, the decline in jobs would be paralleled by a rise in investment in machines.  This hasn’t happened.  Investment in manufacturing is declining, not increasing.  The decline in manufacturing is due to loss of American competitiveness, not automation.

Furthermore the industries that are attracting investment are the “extractive” industries, especially oil and gas production.

It is good to have natural resources and to use them, but a national economy based on using up natural resources is characteristic of Third World countries without a long-range future.

The authors of the report call for an industrial policy concerning (1) taxes, (2) trade, (3) talent and (4) technology.  They did not spell out what they meant, but after looking around on the Internet, I think it is fair to summarize the “four Ts” as follows:

  • Reductions in corporate taxes.  The United States has one of the highest official tax rates among industrial nations, although, because of various loopholes and exemptions, the effective corporate tax rate is low.  That doesn’t mean that the high rate is harmless, however.  To the extent that corporate managers adopt less-than-best policies in order to keep their taxes down, the efficiency of manufacturing industry is hurt.  The best thing would be a low rate with no loopholes.  Whatever the policy, it should treat everyone the same.  Special tax treatment and tax abatements for specific compnies are a bad idea.
  • Aggressive trade negotiations.  U.S. policy should not be free trade for its own sake, even if it means opening up U.S. markets to Asian sweatshop labor, but the protection of U.S. interests.  China, Japan and many other countries regard entry into their markets as a privilege, not a right.  They ask something in return, such as technology transfer or having some of the production in their countries.
  • Apprenticeship and training.  I remember years ago the head of the Rochester, N.Y., machinists associations telling me about a visit to Germany to see how factory apprentices there qualify as journeymen.  The German apprentice had to make a machine part from a blueprint, while detecting a flaw in the blueprint, and write a report on what he had done in grammatically correct German.  This kind of craftsmanship is not emphasized in the United States.  Instead we Americans promote college education for everyone, even though there are not enough jobs for current college graduates.
  • Visas for foreign scientists, engineers and other experts.  One of the great assets of the United States is that we attract educated, enterprising foreigners in search of opportunity.  Of late many of these foreigners find more opportunity in their home countries that before, but we still should welcome immigrants and visitors who contribute to our well-being.
  • Research and development.  Another great U.S. asset is our great research laboratories.  There is an important role for public-private partnerships, aimed at producing commercializable products, although this should not be at the expense of pure scientific research.

I don’t have any quarrel with this list, but it omits some important things.  One of the big reasons U.S. investment in manufacturing is in relative decline is the financialization of the U.S. economy.  The banking and finance industry have shifted away from investing in the real economy to investment in debt—subprime mortgages, credit card debt, student loan debt—and in financial instruments not backed by any asset.  I don’t have a good answer to this, but a good start would be to cease bailing out failing banks and investment companies, break up the “too big to fail”institutions, prosecute financial fraud and reinstate the Glass-Steagall Act which forbids insured bank deposits to be used in risky commercial investments.

We as a nation need to maintain basic government services, not just road maintenance, snowplowing and water and sewer service, but also public schools and public libraries.  Industry can’t flourish in a society with decaying infrastructure and declining public services.

The best way for the federal government to promote new industry would be to provide a market for new products rather than investing in specific companies.  In an earlier era, air mail contracts helped sustain the infant U.S. aviation industry, and military orders for electronic components fostered the semiconductor industry.  The best way to, for example, promote green industry is for the government to green itself, and buy sustainable energy and energy conservation services from the best bidder.

Reasonable people can differ on what specific policies will best help manufacturing industry.  The important thing is to stop denying the problem exists.  Britain was once the workshop of the world, and lost its position through complacency.  The same thing can happen to the United States.  In fact, it is happening.

Some relevant links are below.

Click on What Experts Are Missing for an article by Robert D. Atkinson, one of the authors of the report.

Click on Worse Than the Great Depression for the executive summary of the report.  Here are some highlights.

In the 2000s, U.S. manufacturing suffered its worst performance in American history in terms of jobs. Not only did America lose 5.7 million manufacturing jobs, but the decline as a share of total manufacturing jobs (33 percent) exceeded the rate of loss in the Great Depression.  Despite this unprecedented negative performance, most economists, pundits and elected officials are remarkably blasé about what has transpired.  Manufacturing, they argue, has simply become incredibly productive.  While tough on workers who are laid off, job losses indicate superior performance.  All that is needed, if anything, are better programs to help laid-off workers.

This report argues that this dominant view on the loss of manufacturing jobs is fundamentally mistaken.   Manufacturing lost jobs because manufacturing lost output, and it lost output because its ability to compete in global markets—some manipulated by egregious foreign mercantilist policies, others supported by better national competiveness policies, like lower corporate tax rates—declined significantly.  In 2010, 13 of the 19 U.S. manufacturing sectors (employing 55 percent of manufacturing workers) were producing less than they there were in 2000 in terms of inflation-adjusted output.  Moreover, we assert that the government’s official calculation of manufacturing output growth, and by definition productivity, is significantly overstated.


A more accurate measurement of U.S. manufacturing output suggests that superior productivity was not principally responsible for the loss of almost one-third of U.S. manufacturing jobs in the 2000s.  If it were, we would also expect to see a reasonable increase in the stock of manufacturing machinery and equipment, for it is difficult to generate superior gains in productivity without concomitant increases in capital stock.  Conversely, if loss of output due to declining U.S. competitiveness caused the decline of jobs, we would more likely see flat or declining capital stock.  In fact, we see the latter, which is more evidence for the competitiveness failure hypothesis.

U.S. Manufacturing Capital Stock is Stagnant

Over the past decade, as Figure 45 shows, the overall amount of fixed capital investment (defined as investment in structures, equipment, and software) made by manufacturers as a share of GDP was at its lowest rate since World War II, when the Department of Commerce started tracking these numbers. An analysis by year shows that the annual rate has generally declined in the 2000s, going under 1.5 percent for several years for the only time since 1950. (See Figures 45 and 46) This decline represents the decreasing amounts invested, on average, in new manufacturing plants and equipment every year.

via real economics.

Click on “Worse Than the Great Depression” for the full report in PDF form.

Click on U.S. Needs a Manufacturing Agenda for a comment by Jerry Jasinowski, former president of the National Association of Manufacturers and of the Manufacturing Institute.

Click on Neoliberalism, de-industrialization and the res publica for in-depth analysis from a left-wing point of view on the Naked Capitalism web log.

Click on The financialization of America for my review of Kevin Phillips’ Bad Money: Reckless Finance, Failed Politics and the Crisis of American Capitalism.  This account of the financialization and de-industrialization of the U.S. economy was written in 2007, published in 2008 and is, unfortunately, as relevant now as it was then.

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