Sept. 8 (Bloomberg) -- In recent decades, U.S. presidents, especially those confronted with a lousy economy and looming election, have used Labor Day to talk about restoring American manufacturing to its former glory.
In 1993, President Bill Clinton touted the prospect of a five-year increase of 1 million new export-related higher-paying jobs to sell the North American Free Trade Agreement to skeptical manufacturers. In 2003, President George W. Bush announced the appointment of a jobs czar on Labor Day in an effort to make sure manufacturing is “strong and vibrant.” Monday, President Barack Obama talked about investing in clean energy and manufacturing at a Milwaukee Laborfest, part of his “Made in America” initiative to boost the recovery.
Are our leaders barking up the wrong tree? Asked whether it was important for the U.S. economy to have manufacturing jobs, former Federal Reserve Chairman Alan Greenspan said no. What was important, Greenspan said in response to a question during congressional testimony in July 2003, was “to create value.”
“If there is no concern about access to foreign producers of manufactured goods, then I think you can argue it does not really matter whether or not you produce them or not,” he said.
Who’s right? Does it matter if we manufacture goods in the U.S. if we can buy them cheaper overseas? Almost 200 years ago, British political economist David Ricardo introduced the idea of comparative advantage. There is a mutual benefit from trade, Ricardo wrote. Even if one country has an absolute advantage in producing all types of goods, it’s better for that country to focus on areas where it has a relative advantage and trade for the rest.
So why are U.S. presidents so dead set on increasing manufacturing output and jobs? In nominal terms, manufacturing output represented 11 percent of gross domestic product, or $1.57 trillion, in 2009, down from 15.1 percent, or $1.33 trillion, in 1998, according to the Commerce Department’s Bureau of Economic Analysis.
Manufacturing accounted for about 25 percent of GDP in the 1960s, although those data have yet to be updated to reflect recent revisions to industry statistics.
It’s a fantasy to think low-end manufacturing jobs -- sewing T-shirts and sneakers, for example -- are ever coming back. And I doubt that’s what Obama has in mind.
“We want to manufacture high value, low labor-content goods,” said Norbert Ore, chairman of the Institute for Supply Management’s Manufacturing Business Survey Committee.
If the labor content of a manufactured good is 10 percent or less, it makes sense to continue manufacturing it in the U.S. because of logistics and supply chain management, he said.
Create or Save
How do we create -- or save, as Obama might say -- these jobs? And does it really matter?
This isn’t an easy question to answer. In theory, comparative advantage should drive trade.
Economists don’t disagree with the theory. Many of them, however, think manufacturing is vital to America’s future.
“Manufacturing is the life blood of the economy,” said Joe Carson, director of economic research at AllianceBernstein LP in New York. “It drives innovation, investment and physical wealth creation, and it has stimulative influences on the service sector.”
As for the how, “government has to do it,” Carson says. “A competitive tax structure,” including a lower corporate tax rate and a more generous depreciation allowance, “would welcome capital back to produce,” he said.
Obama plans to announce a series of economic initiatives, including a 100 percent write-off for investment in plants and equipment good through the end of next year, in a speech today.
Manufacturing can also piggyback on government.
“Nobody in the private sector was working on going to the moon,” the ISM’s Ore said. “The government picked the objective, and winners and losers developed around it.”
For example, NASA’s moon objective supported a lot of basic research in areas such as high-tech plastics, Ore said.
More traditional ways of encouraging or retaining manufacturing jobs, such as subsidies or tax credits, are a bad idea. They’re inefficient, and they don’t benefit Americans, who end up paying higher taxes to offset the subsidy.
“One hundred years ago, increased agricultural productivity was going to be the ruin of America,” said Neal Soss, chief economist at Credit Suisse in New York.
Labor migrated from the countryside to the cities. “We put them to work in manufacturing, and we are richer for both of these processes,” he said.
Instead of fretting over the loss of manufacturing jobs and finding ways to defy the U.S.’s comparative advantage, why not focus on ways to promote the economy’s progression.
“Upgrading the power grid would contribute to the evolution of the U.S. into a high-wage, high service-content economy more reliant on electricity,” Soss said.
That evolution will continue, with or without government’s creative design.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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