June 13, 2016

The Importance of Restoring Manufacturing

Are the people concerned about revitalizing U.S. manufacturing obsessing needlessly over a sector that is declining in a manner that it completely natural given America's advanced state of economic development?  Isn't $100 of good food well served in a nice restaurant just as valuable to the consumer as $100 of nice electronic gear? 

From the perspective of each individual consumer, yes. But we must look at the manufacturing sector's broader contributions to the strength and well-being of the United States such as the following.

Goods-producing sectors such as manufacturing, agriculture, and resource extraction have a special place in the pantheon of "good things to do" because they provide large scale opportunities to create income and products of lasting value. At the same time, we should not over-value these transformative sectors. 

Many services are also highly valued by society. However, the unavoidable truth is that, by employing significant numbers of people in well-paying jobs, many of which do not require expensive four-year university degrees, manufacturing can provide many valuable benefits.

This is especially true because America has all of the basic resources needed for efficient manufacturing including:
·       A skilled labor force suitable for work on the factory floor, in management offices, and in labs doing the R&D needed to support innovation and productivity.
·       Good domestic supplies of raw materials (especially of those costly to ship over long distances).
·       Good infrastructure facilities.
·       A large domestic market so that producers can develop the economies of scale required to be competitive in global markets.
·       The rule of law.
·       An open, inclusive political process that allows problems to be resolved in a collegial manner for the common good.

Some improvements may be needed here and there, but America meets these criteria far better than most other countries. The fight to restore American manufacturing is very much worth while and, with good policies, has every chance of succeeding. Attaining balanced external trade through expanded goods production would bring major benefits to American society.

Manufacturing is Simply Best Source of Export Earnings to Pay for Imports

Those who argue that we should not obsess about making "things" seem to forget that if Americans were not consumers of German cars and machine tools, French wines and perfumes, and cheap household goods from China, America would have no trade deficits. Trade deficits are living proof that Americans want and need "things." Many of the foreign-produced things we like could be made here in America, but too many U.S. industries have been put out of business by an overvalued dollar and by unfair foreign trade practices.

Since the 1970s, the United States has increasingly paid for the excess of imports over exports by borrowing from foreigners or by selling American assets. Once the world's biggest creditor, today the United States is its biggest debtor. America's net debt to foreigners is now 15-20 percent of GDP, and its gross foreign debt is 160 percent. The nation is fast approaching the point where it can no longer depend on countries like China to lend the money it needs to pay its bills. In fact, China has already embarked on a program of investing abroad in hard assets, especially in mineral resources and resource extraction companies, and it has cut back its purchases of U.S. government bonds.
America today can choose among five strategies to solve its trade deficit problem. The pros and cons of these can be summarized as follows:

Steal from future generations. While borrowing from foreigners and letting future generations handle the repayments would be feasible for a while longer, this "beggar-thy-children" option is both short-sighted and morally indefensible.

Suppress domestic consumption. The austerity proponents recommend this strategy, which clearly could reduce trade deficits. However, depending only on this approach would risk a deflationary spiral that could lead to another 1930s-style depression. If anything, domestic (and foreign) consumption of America’s manufactured goods needs to be expanded, not contracted. Furthermore, America's problem is not excessive consumption. It is excessive consumption of foreign goods.

Export more services. Services exports could be expanded, but this strategy holds limited promise. Such exports only account for about 4 percent of GDP and less than 30 percent of all exports. Furthermore, because services are often labor intensive, low-wage countries are likely to out-compete the United States, especially as levels of education rise in these countries and telecommunications become even more advanced. In fact, increasingly the U.S. outsources services like call centers, tax return preparation, and software engineering to countries such as India.

Expand exports of non-manufactured goods. America’s vast, rich agricultural lands make this a viable option, but agriculture is a small part of the economy. Today, less than one percent of U.S. GDP comes from farming. Furthermore, farming is so highly mechanized that expanding agriculture exports would do little to relieve unemployment. Forestry and mining exports have limited potential for similar reasons.

Improved oil and natural gas extraction based on hydro-fracturing ("fracking"), and the discovery of large energy-bearing shale deposits throughout the lower forty-eight states mean that increased energy exports could reduce trade deficits. However, serious concerns remain about (a) the environmental impact of expanded domestic energy extraction and (b) the impact on future generations of selling non-renewable energy resources today to pay for otherwise excessive current consumption of imported goods that America could be manufacturing for itself.

Expand exports of manufactured products. This strategy clearly holds the greatest promise. Manufacturing plays to America’s comparative advantage in high-tech, high-value added products. Given an appropriate exchange rate, America already has virtually everything needed to be competitive in large areas of manufacturing, and with sufficient commitment of capital, it could restore its competitiveness in most remaining areas of manufacturing except perhaps those dominated by jobs at the low-wage end of the scale. Furthermore, the United States is far less likely to face demand constraints for top-quality manufactured goods than for its other goods and services.

Associated Benefits of Manufacturing

Manufacturing is worth protecting and developing, not only for its critically important economic benefits such as GDP growth and good jobs, but also because of additional benefits that are more difficult to put a price on:

·       Manufacturing maintains a solid, non-transient economic presence in communities, something that has traditionally made it a special part of the social fabric.

·       It provides employment for relatively large numbers of people, many of whom do not need an advanced education to be fully productive.

·       It allows for domestic production of relatively unique goods that are essential either for the smooth running of the economy or for national security. Because these goods are not standardized commodities, they cannot be sourced quickly from abroad in cases of emergency. Recall, for example, the supply chain interruptions and production problems that some American factories faced following the 2011 tsunami and earthquake in Japan.

In sum, although services, agriculture, and energy will continue to grow, the future of America’s economic strength and national security lies in restoring the manufacturing sector to the point that, overall, America can earn as much producing exports as it spends on exports. 

America Needs a Competitive Dollar - Now!

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