If there is one economic topic that comes up again and again during an election year, it’s the status of the United States’ manufacturing industry. Politicians and news media outlets, on both sides of the isle, can’t seem to leave this topic alone. What’s interesting is, in opposition to most topics, there is a general consensus among liberals and conservatives. Time after time, Republican and Democratic politicians and news media pundits portray genuine concern for the future as well as stress the vital importance of the manufacturing industry. Both sides of the isle claim that changes need to be made to protect the manufacturing industry, all the while encouraging people to “buy American.” For examples one only needs to look back to President Obama’s State of the Union address. President Obama called for “more robust support for the manufacturing industry.” Soon after the State of the Union, the President released his “An America Built to Last” blueprint. The blueprint outlines a course for American prosperity through changes in the tax system and increased government investment. Obama is not the only politician with a plan. Former GOP candidate, Rick Santorum, released a plan to revitalize the U.S. economy that he called, “Made in America.” In his plan, Santorum stresses the need, “to reinvigorate our domestic manufacturing… by creating jobs in America again with a smarter and simpler tax code.”
The message is resonating with the people. A Gallup poll done in March of 2011 found that Americans are most likely to say that keeping manufacturing within the United States is the best way to create jobs. The Gallup poll also reported that one in four adults said ensuring that companies don’t ship jobs overseas is the top job-creating engine. The next two most popular choices were creating more infrastructure work and lowering taxes (Becker, 2011).
Despite well intentioned political plans and the concern of the people, the fact remains there are many questions about the status of the U.S. manufacturing industry that are unanswered. Among them are, what is the state of the U.S. manufacturing industry? Why is it moving this way? What would the potential impact be on the U.S. economy if proposed changes to the tax system were implemented? Why does manufacturing need special attention?
A recent Wall Street Journal article, entitled “Manufacturing Decline”, shed some light on the state of U.S. manufacturing. Contrary to what politicians and news media outlets are saying, the Wall Street Journal reported strength in the manufacturing sector. The article claimed that although as a percent of GDP U.S. manufacturing has been steadily declining since World War II, U.S. manufacturing output has grown by about sevenfold. This means that despite the news coming out of Washington and the media, the U.S. has never produced more “stuff” than it is now. The decline of manufacturing as a percent of GDP is a natural occurrence of growth in other sectors as well as the emergence of new sectors such as the internet. The U.S. manufacturing industry continues to be a strong sector of the economy. In fact, taken alone, the U.S. manufacturing industry would be the eighth largest economy in the world (Manufacturing Decline, 2012). Being eighth would rank U.S. manufacturing ahead of countries like Italy, India, Canada, Russia, Spain, Mexico, South Korea and Australia.
If truth be told, there are some signs that American manufacturing is strengthening. The Institute for Supply Management’s Purchasing Managers Index (PMI) measures the economic health of the manufacturing sector based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. According to the PMI, as of February 2012 the manufacturing sector expanded for the 31st consecutive month. Furthermore, data from the U.S. Department of Commerce reports that after-tax profits for manufacturing firms are up 90% since 2000.
President Obama has even recognized the recent performance. During a press conference on February 15th Obama said, “Here’s what I want everybody to remember. Manufacturing is coming back. The economy is getting stronger. The recovery is speeding up. We have to do everything in our power to keep our foot on the gas, and the last thing we can afford to do is go back to the same policies that got us into this mess.” Needless to say, reports of the death of the U.S. manufacturing sector are greatly exaggerated.
It would seem the data portrays a very different picture than that of politicians and the press. If the U.S. manufacturing industry is so strong, then what are politicians and the media talking about? The answer is simple. The current manufacturing “crisis” is all about employment. U.S. Bureau of Labor Statistics’ data clearly shows a down tread in the total number of manufacturing jobs over the last 25 years.
Taken as a percentage of the workforce, manufacturing employment is down. The manufacturing industry employed 33% of the workforce after the WWII. Today, that that rate is down to 13% (Manufacturing Decline, 2012).
If you look at the data over the last 25 years, what can explain the decline in manufacturing employment? One possible explanation points out the increase in “job-killing” manufacturing costs as a result of government intervention. Examples include increases in minimum wage, increases in payroll taxes, and healthcare reform. Many changes Congress makes have unintended consequences on employment because employers hire workers with future expectations of the market. When Congress changes the rules of the games, oftentimes they assume employment will be unaffected, when in reality Congress has altered the incentives and future expectations of the employer. For this reason, unemployed workers in the U.S. should be greatly concerned with any legislation that is intended to improve working conditions. In many ways, the actions of Congress have created the employment crisis in manufacturing because their policies have increased the cost to employ American workers. This in turn increases the attractiveness of international manufacturing.
The most intuitive answer to the decline in manufacturing employment would be the natural downtrend in workers required due to technologies and firms finding increased efficiencies. Over time fewer workers can produce more goods. Although Americans losing their jobs is heartbreaking, in a lot of ways it is largely a measure of economic progress. The U.S. has never produced more, and it is requiring less labor to accomplish this. Gains in productivity are a sign of economic progress because it is an indicator of how efficiently resources are being used. Labor is one of the most important resources in an economy. In fact, a 1995 World Bank study found that almost two-thirds, 64 percent, of the value of accumulated wealth in the world lies in human capital (World Bank). Efficient use of such a valuable resource can only lead to economic progress. According to the Wall Street Journal 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 (Manufacturing Decline, 2012). Despite the effects on employment, higher productivity is far from being a job killer. Productivity can lead to more competition, and lower prices. Therefore, productivity can lead to job creation and prosperity.
Productivity and prosperity is seemingly a good campaign slogan; however, politicians and news media outlets are not interested in the facts about productivity; instead, they have chosen to focus only on employment. The driving force behind the focus on manufacturing isn’t economics but politics. Both parties believe they have much to gain by emphasizing their concern for blue-collar middle-class jobs. Their reason may be simple. Preaching to blue-collar middle-class workers is a proven method for getting elected because they make up a significant portion of the electoral body. If politicians were really concerned about manufacturing employment, then they should examine larger macroeconomic factors that are compounding the problem. Joshua Green, a senior national correspondent for Bloomberg Businessweek, addresses this fact by writing…
New jobs are always imperative, especially during a prolonged economic slump. But few politicians show much enthusiasm for the ideas most often put forward to help America’s manufacturing sector: erecting trade barriers, investing directly in favored industries, or altering the tax code to privilege manufacturing over other sectors of the economy (Green, 2012).
Many politicians may recognize that attempting to eradicated some of these problems could have negative short-term effects that could negativity affect their electability. This is why they choose to promote employment over productivity and prosperity.
The plans put forth by elected politician often do not make economic sense. Let us examine the proposed plans of Obama and Santorum. Obama believes the manufacturing industry is something special and deserving of government support. That is why Obama’s plan involves picking winners. President Obama especially wants to grow high-technology U.S. manufacturing capacity and clean energy projects with American-made parts and equipment. Obama has provided tax incentives for companies that make investments in clean energy technologies such as wind turbines. Obama’s strategy is not good for at least two reasons. First, it is likely to create an unsustainable green energy bubble. Second, the Obama administration has a proven track record of picking losers in this field. Three years ago, under the guidance of President Obama, The Energy Department issued loans totaling $535 million to solar-panel maker Solyndra. Solyndra went bankrupt in about 3 years. When called about on his track record of picking losers, the Obama administration is quick to point to General Motors, who recently posted a record profit just two years after bankruptcy. G.M.’s success is a nice deflection; however, all that has proven thus far is that $50 billion in tax payer dollars can buy you some time. Not to mention the fact that G.M. fired about 20,000 workers (Muller, 2008).
Rick Santorum’s plan is not much better. The goal of the Santorum plan is to entice investment in manufacturing. Santorum would eliminate the corporate tax rate on manufacturers. Having zero taxes does not guarantee more employment. A zero percent tax may not make up for the difference in the cost of employing a U.S. worker over workers in other countries. In the end, many companies may find that it is cheaper for firms to produce products outside the U.S. Furthermore, many companies may see this deal as too good to be true. In all likelihood the zero percent tax would not last forever. Another factor to consider is who will be doing the investing? Many countries outside the U.S. are far worse off. All Santorum’s plan guarantees is that companies will spend millions of dollars lobbying to persuade Washington that their company qualifies as a “manufacturer.”
Political plans to “boost” manufacturing are highly rhetorical. Their purpose is more geared towards getting elected than addressing an economic issue. The fact is that no politician has offered an answer to the question, why do manufacturers need special treatment? That question become more difficult to answer when you consider the case that was laid out earlier. There are facts that show the U.S. manufacturing industry has never been stronger. Productivity is up and manufacturing is achieving record setting profit. So why should the manufacturing industry receive special treatment? Nobel economist Gary Becker recently wrote,
I do not see any more convincing case for subsidies to manufacturing than there was for the special treatment of agriculture during the long decline in farm employment. Most of the arguments made in support of privileges for manufacturing could be made for services and other sectors of the economy. For example, although certain manufacturing industries have had high rates of productivity advance, so too has mining, such as through the development of fracking techniques. The most important technological advance of the past several decades has been the computer and the Internet, for these gave birth to email, word processing, apps, online sales and social networks like Facebook and Twitter.
Becker presents an interesting point. A point that Congress should consider. If the manufacturing is so weak, then why is there so much focus on it? Perhaps Congress could better serve the American people by helping them excel at what they are already good at. It would be like a parent getting their kid a French tutor because is bad at French, when they should get their kid a math coach because you’re really good at math.
Another factor along the same lines that Congress should consider is when is the end game? If manufacturing is experiencing record high prices and they still need our help, then at what point do manufacturers not need our help? I do not think politicians nor the media have legitimate answers to those questions.
Overall reports of the death of the U.S. manufacturing sector are greatly exaggerated. There is evidence that shows U.S. manufacturing is doing quite well. Sooner or later politicians and the media will have to face the facts and start answering some tough questions.
Becker, B. (2011, April 1). Gallup: Keeping manufacturing best way to create jobs. TheHill.com. Retrieved April 16, 2012, from http://thehill.com/blogs/on-the-money/801-economy/153293-gallup-keeping-manufacturing-best-way-to-create-jobs
Becker, G. (2012, April 24). A farewell to U.S. factories. MarketWatch. Retrieved April 25, 2012, from http://www.marketwatch.com/story/a-farewell-to-us-factories-2012-04-24?dist=beforebell
Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development. (1995). The World Bank. Washington D.C.
Green, J. (2012, March 8). The Manufacturing Myth That Both Parties Cling To. Businessweek. Retrieved April 16, 2012, from http://www.businessweek.com/articles/2012-03-08/the-manufacturing-myth-that-both-parties-cling-to
Manufacturing Decline. (2012, February 17). The Wall Street Journal. Retrieved April 10, 2012, from http://online.wsj.com/article/SB10001424052970204792404577227152976758994.html
Muller, J. (2008, December 5). If GM Collapses, Don’t Blame The Union. Forbes.com. Retrieved April 23, 2012, from http://www.forbes.com/2008/12/04/detroit-labor-uaw-biz-manufacturing-cz_jm_1205union.html