A Solution In Search of a Problem

Does manufacturing need a government bodyguard? If you’ve been reading global business news of late, you might think it does. It’s something of a fad, both in America and abroad, to bemoan the industry’s supposed decline.

As evidence, many point to manufacturing’s falling share of GDP and employment. And some claim that by “value added,” China’s manufacturing sector is poised to overtake US output soon—with jobs flowing there as a result (highly similar to Japan fears in the 1980s). Ultimately, many believers feel government needs to actively do something to somehow boost manufacturing competitiveness.

Before we look at what adherents propose to fix this, let’s step back and see if there’s actually a sickness to cure. US manufacturing profits—a highly pertinent metric of global competitiveness—rose to an all-time high in 2011. And despite its relative share of GDP falling in recent years, US manufacturing’s absolute output has risen. So the perceived manufacturing decline isn’t really a decline at all. It’s a function of other industries rising faster—namely, services.

Some decry this fact. But isn’t that akin to selectively choosing which industries are good and which aren’t? Some posit financial services’ increased importance in recent decades is responsible for economic fragility. But regardless of how they’re produced, profits and revenues are the same thing across industries. And in addition, it’s not like we didn’t have big recessions when manufacturing represented a larger share of output. Or even when agriculture did. (Yet few claim greedy farmers led to an unstable economy.)

As for employment, yes, manufacturing jobs make up a far smaller share of our workforce than they once did. But that’s also a longstanding trend predating China’s opening to trade. The force primarily responsible for this isn’t offshoring or foreign competition but rather, productivity. To wit, economist Milton Friedman once proposed a solution: Government could ban machinery and shovels and mandate workers use only spoons. That would necessitate more workers to keep output steady—but is shunning productivity in this way a profitable enterprise economically?

Yet, some still look past rising productivity and the relative increase of service industries to argue for government subsidy to support manufacturing. And sure, subsidies could create winners (and losers). But subsidies can also be easily misallocated (an extreme example might include loan guarantees given to a certain failed solar firm currently undergoing an FBI investigation). Others seek mandates forcing government (local and federal) to purchase solely domestically produced goods. But either of these increase the probability of poor allocation of capital, crony capitalism and overspending on goods bought (i.e., Credit Mobilier in mid-19^th century America redux.)

Last, some argue for protective barriers to foreign competition—effectively suggesting the manufacturing sector would benefit from higher tariffs and other measures targeting reduced imports.

But trade barriers aren’t erected in a vacuum, meaning our trade partners’ reactions must be taken into account. (This indeed was a crucial lesson of the Great Depression.) If you don’t wish other nations to restrict our exports to them, don’t erect barriers to their goods coming here. Second, while many folks’ mental picture of imports consists of plastic knickknacks, cars or food, the reality is the majority are intermediate goods—goods used in the manufacture of other products. So if you boost tariffs, what you actually accomplish is raising costs for US businesses. That’s highly unlikely to actually protect manufacturing. In fact, the exact opposite is perhaps a far better idea.

It seems to us most talk surrounding potential protection of supposedly beleaguered manufacturing is a solution in search of a problem. That’s a terrible recipe for developing economic policy, and one we hope the government politely ignores.