Picking Losers Isn't a Great Industrial Policy
Let us not begrudge President-elect Donald Trump his little triumph in Indianapolis, where he and Vice President-elect Mike Pence appear to have persuaded United Technologies Corp. subsidiary Carrier to keep about 1,000 furnace-plant jobs that were slated to be eliminated as production shifted to Mexico. Yes, we may learn as the details trickle out that we're really only talking about a few hundred jobs, or that the state of Indiana has given away too much in tax incentives. But this was a big issue for Trump (as well as for Democratic candidate Bernie Sanders) on the campaign trail, and he has found a way to at least partially deliver on his promises.
In general, it's probably not a bad thing to have a president jawboning corporations to keep and create manufacturing jobs in the U.S. For decades, companies have been under pressure from investors and competitors to cut costs by moving production to lower-cost overseas locales. Now, those cost differentials are a lot smaller than they used to be. Deloitte's global manufacturing competitiveness index ranks the U.S. as the second most competitive country for manufacturing in 2016, behind only China, and the executives polled for the index predicted that it would be No. 1 by 2020. This and other factors -- such as rising protectionist sentiment around the world and increased attention to the risks inherent in globe-spanning supply chains -- have led to talk of a "reshoring" wave that could bring manufacturing activity back to the U.S. in a big way. Nudges from political leaders might actually be helpful in making this happen.
And while the huge declines in U.S. manufacturing employment since 2000 are often dismissed as the inevitable consequence of technological and economic progress, with automation and trade displacing jobs but increased productivity and globalization making us all wealthier, those explanations haven't entirely cut it lately. For one thing, contrary to the frequently made claim that U.S. manufacturing is as healthy as ever, most manufacturing sectors have struggled over the past decade and a half, and the one sector that has truly boomed -- computer and electronics manufacturing -- is affected heavily by statistical adjustments for quality improvements that may overstate its growth. For another, recent research by economists David Autor, David Dorn and Gordon H. Hanson has shown that competition with China since 2000 really has left a lot of U.S. manufacturing workers and communities poorer.
So I think there is an argument to be made for promoting manufacturing in the U.S. and trying to reduce the country's largest-in-the-world trade deficits. But (and you knew there was going to be a but, didn't you?) there are some problems with the save-those-jobs-in-Indianapolis approach to doing so. One, as my Bloomberg View colleague Tyler Cowen explained Monday, is that taking the approach to its logical conclusion would probably mean prohibiting U.S. corporations from investing in factories overseas -- which would bring huge economic costs and maybe even increase the trade deficit.
Another is that such an approach risks being entirely backward-looking. Take Carrier's industry. Here's the revenue since 2005 (not adjusted for inflation) of the ventilation, heating, air-conditioning and commercial refrigeration equipment manufacturers located in the U.S., according to the Census Bureau's Annual Survey of Manufactures:
Not a lot of growth, but that at least looks better than employment. (Unlike the Census Bureau, the Bureau of Labor Statistics uses the standard industry acronym HVAC, for heating, ventilation and air conditioning.)
And finally there's pay:
With the recovery in residential and commercial construction, the market research firm Freedonia projects that U.S. HVAC sales will grow faster over the next few years than they have since 2009. So this is far from a dying industry. But as the charts above show, it's not exactly a growth dynamo either. To remain competitive with foreign manufacturers (not just in the U.S. market; about 20 percent of U.S. production is exported), U.S. makers of HVAC equipment need to keep watching costs and modernizing their production techniques. Just keeping existing jobs in HVAC manufacturing and similar established industries isn't going to bring U.S. manufacturing back to health. We need new manufacturers and new industries.
Countries playing economic catch-up, such as China in the 1990s and 2000s or Japan in the 1960s and 1970s, can sometimes successfully choose new industries to focus on by looking at what's already big and profitable in the world's most advanced economies. For the U.S., which remains one of the world's most advanced economies, picking winners like that is much harder. It may even be impossible. But focusing entirely on companies that are moving jobs out of the U.S. to cut costs seems like a pretty reliable way to pick losers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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