Sense and Nonsense on the Decline of Manufacturing

Mon, 30 Jun 2008 16:05:05 +0000

The Washington Post ran an op-ed yesterday with the title, "5 Myths About the Death Of the American Factory," by Gilbert Kaplan, an international trade lawyer. He opens with a bad premise:

Sure, U.S. banking is in trouble, but the longer-term and possibly more damaging threat to the nation's prosperity is the decline of the manufacturing sector.

This is the sort of appeal to industrial policy that governments would be wise to avoid. Our prosperity is based on our ability to create value in the employment of factors of production that we own (i.e., land, labor, and all sorts of capital). It is not based on the success of any one sector of the economy, as long as value is being created in other sectors. To use Kaplan's (weak) line of reasoning against him, how can his statement about the critical role of manufacturing be true when manufacturing is now less than 12 percent of GDP? (See this table.)

Here's his list:

  1. It's all about cheap wages. American workers are just paid too much.
  2. U.S. manufacturers can save themselves by investing in innovation.
  3. Trade laws and trade agreements level the playing field for U.S. manufacturers.
  4. Good management can make U.S. manufacturers lean enough to fight in the international economy.
  5. We make high-tech goods here, so we're okay. It's only schlock items that come from abroad.

On #1, #2, and #4, I don't think there is any sense in arguing that the manufacturing sector wouldn't be doing better if wages were lower, if there were more investments in innovation, or if there were better management. So these parts are simply a matter of hitting some threshold Kaplan has in mind, whether to "save themselves" or "to fight in the international economy." Point #5 confounds what we produce with what we consume and so doesn't make much sense as written. As I noted above, we only need care about valuable deployment of our factors of production--schlock or high-tech doesn't matter nearly as much.

Point #3 gets more to the heart of his argument. Kaplan argues, correctly I think, that we don't use our trade laws primarily to advantage our producers. We use our trade laws to try to promote global trade, which in many cases means giving other countries open access to the U.S. consumer without insisting on corresponding advantages for domestic manufacturers. We could take a more aggressive posture. We would conclude fewer trade deals and we would raise prices to the U.S. consumer. And as a matter of policy, that is what we have been very reluctant to do. Consider the example of Airbus, which Kaplan cites as an example of succesful trade promotion by European governments. If those governments want to tax their citizens to provide cheap aircraft for U.S. citizens and others to use, why should we stop them?

This also helps explain why government officials continue to maintain their "strong dollar" rhetoric, even as the dollar is sliding. Historically, this rhetoric seems to translate into a policy of allowing other countries to intervene in foreign exchange markets to keep the value of the dollar high, advantaging their producers and our consumers and disadvantaging their consumers and our producers, while the U.S. government does not explicitly intervene. Like our hands off approach to trade policy, this is a policy choice that keeps the U.S. consumer more comfortable.

That policy outcome is coming under more pressure as macroeconomic prices like oil and foreign exchange become more expensive. The former will hurt manufacturing and the latter will help it, to the extent that it is export-oriented. But nothing about the current environment suggests the need to promote manufacturing per se, or any other sector of the economy above others.

See also Don Boudreaux at Cafe Hayek for a reaction to the op-ed.