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Manufacturing Revival Is Good Politics but Bad Policy

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Photographs by Getty Images, Bloomberg; Illustration by Bloomberg View

Sept. 5 (Bloomberg) -- Manufacturing has been declining as a share of the U.S. economy for three decades, but you wouldn’t know it from tuning into the campaign frequencies.

Both Republican presidential nominee Mitt Romney and President Barack Obama talk dreamily about a manufacturing revival, with Romney promising to roll back regulations and Obama offering tax breaks and other incentives that border on industrial policy.

Manufacturing matters, especially this year, when industrial Midwestern states are where a big part of the electoral battle is being fought. But globalization, productivity gains and advances in automation make it unlikely the sector will ever return to its place of prominence in the U.S. economy. Rather than promising to restore manufacturing to unachievable heights, Obama and Romney should focus on policies that can keep the U.S. competitive without wasting resources, awarding special treatment and undermining sound regulation.

Any discussion should be based on a realistic assessment of the state of U.S. manufacturing. It had been among the rosier spots in the U.S. economy, helping to power much of the early recovery. Its contribution to gross domestic product has increased 11 percent since 2009. Low natural gas prices have encouraged some companies to return to the U.S. However, the sector has lost steam in recent months as the global economic slowdown has weakened demand for U.S. goods. New data show manufacturing contracted for a third month in August, marking the longest decline since the recession ended.

Long Decline

The sector’s overall slide has been under way for decades. Over the past 12 years, manufacturers have cut 31 percent of their workforce, or nearly 6 million workers. Their contribution to GDP fell to 12.2 percent in 2011 from 22.7 percent in 1970.

Economists argue over the cause of the sector’s decline, but the culprits are many: Globalization encouraged employers to shift jobs overseas; productivity gains enabled companies to do more with fewer workers; and advancements in automation made many jobs obsolete.

Manufacturing is also no longer generating the kind of high-paying, benefit-rich jobs long associated with the sector as cheaper overseas labor and a steep drop in the number of unionized workers take their toll. Wages have failed to keep pace with inflation: Manufacturing workers now earn about what they did in 2000, according to the Bureau of Labor Statistics.

This is not to say the U.S. should give up on manufacturing, which remains important in large part because it helps reduce the trade gap. But as with agriculture, manufacturing is likely to keep shrinking as a share of national output. The key will be finding new industries to fill manufacturing’s void rather than chasing diminishing returns through distortive policies.

You might not know it, yet Romney and Obama do have some sound ideas to reboot manufacturing -- ideas that aren’t as far apart as their rhetoric suggests. Both support lowering the corporate income-tax rate from its current 35 percent to 25 percent (Romney) and 28 percent (Obama), a move that would help all industries, including manufacturing, compete overseas. Both candidates also call for a permanent research and development tax credit, which is used overwhelmingly by manufacturers. And both support expanded free-trade agreements, which provide access to new markets and are critical to manufacturers.

Unfortunately, both candidates have also thrown some ill-conceived ideas into the mix. Romney wants to roll back financial, environmental and transportation rules he says hinder manufacturers; Obama wants to spend more than $120 billion over the next decade on tax breaks for manufacturing (money he says will come from cutting oil and gas subsidies). Although some regulations can surely be made less burdensome, and some targeted tax breaks make sense, both men go overboard, albeit in opposite directions.

Tax Breaks

The soundest approach would be to start with the areas of common agreement, including lowering to 25 percent the corporate income tax, now among the highest in the world and consistently cited as a primary reason companies send jobs overseas. Lawmakers should also make permanent the R&D tax credit. Manufacturers claimed 42 percent of total credits in 2009, according to a Bloomberg Government analysis, yet a broad array of industries could benefit, too.

Expanding free-trade agreements and targeting money to improve labor-force skills are other ways Obama and Romney could ensure the U.S. remains competitive. China outpaces the U.S. in awarding doctoral degrees and has nearly doubled its number of engineering degrees over the past decade. Businesses can play a role, too, by investing more to retrain employees.

Reviving manufacturing will always be an easy campaign line; unfortunately, finding realistic solutions that don’t raise false hopes about a new manufacturing golden age is a little harder.

Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View columns, editorials and op-ed articles.

Today’s highlights: the editors on breaking South Africa’s circle of strife; Clive Crook on why Fed independence is essential and indefensible; Edward Glaeser on how Europeans might view the “who built it” debate; Ezra Klein on whether you’re better off than four years ago; Michael Kinsley on how Republicans don’t really care about jobs; Peter Orszag on moving health care from quantity to quality; Naomi Schaefer Riley on the roots of the Harvard cheating scandal; Arun Sundararajan on Facebook’s winning business model.

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