Sunday, February 5, 2012

How About Effective Treatment?

Christina Romer, former top Obama White House official and key figure for the planning and defense of Obama's stimulus package, pens an op-ed today arguing that manufacturing should not receive "special treatment."  I'm not sure what "special treatment" means here: US economic policy is full of provisions that target various economic sectors, so I don't know what "special" targeting would be.  Beyond that semantic ambiguity, let's look at the three categories Romer says defenses of manufacturing fall into: market failure, jobs, and income distribution.  I think there are more than a few problems with each of Romer's criticisms on each point.

On market failures:
Government intervention can be justified on efficiency grounds if the free market won’t work well. For example, when competition in a market is limited, antitrust laws that prevent monopoly can be helpful. 
Romer seems to deny that "market failure" is taking place, but nowhere does she acknowledge that one of the biggest reasons for the decline of manufacturing is that the "free market" has been subverted by many of the US's trading partners, which support native industries to the detriment of American ones.  It would be hard to call the relationship between the People's Republic of China and the USA one that lives up to the principles of the "free market": instead, the PRC funds its industries and throws up barriers to foreign products even as intellectual property rights are not respected.  One defense of a manufacturing policy would be that such a policy would correct the anti-market distortions of global neomercantilism.

On jobs:
A key argument for encouraging manufacturing is to create jobs and reduce unemployment. Unfortunately, those effects are probably small.
Unemployment today is high, but not because of a decline in manufacturing. That decline has been going on for 30 years — and for most of the 1990s and 2000s, the unemployment rate was less than 6 percent.
Today, we face a profound shortfall of demand. That truly is a terrible market failure, and it warrants government intervention. But we need actions that raise overall demand — like a tax cut for households so they have more take-home pay to spend, more aid to troubled state and local governments, and public investments in infrastructure. 
This analysis is partial at best.  It's true that manufacturing jobs alone will not turn around the nation's economic course.  But these jobs have traditionally been higher paying, and the "profound shortfall of demand" that Romer laments has been fed by the decline of jobs for the middle class.  By growing economic opportunities for the working and middle classes (which effective trade and manufacturing policies could do), we can inspire more demand and sustainable economic growth.  Romer's solutions of tax cuts and federal aid to state governments would seem to act more as band-aids than long-term investments for the renewal of the American economy.  Investments in infrastructure are a good longer-term measure, but they alone won't restore the economy.

On income distribution:
A final argument for supporting manufacturing is distributional. Manufacturing jobs are seen as one of the few sources of well-paying jobs for less-educated workers. Indeed, in the four decades after World War II, manufacturing jobs paid more than other jobs for given skills.
But that is much less true today. Increased international competition has forced American manufacturers to reduce costs. As a result, the pay premium for low-skilled workers in manufacturing is smaller than it once was.
Today, manufacturing wages are high largely because production is capital-intensive and technologically sophisticated. As a result, educational requirements have risen. Now, more than half of manufacturing workers have some college education, up from just over 20 percent in 1969.
There are sectors where workers with good educations could earn good wages if the economy were healthy. Why focus on manufacturing to create such jobs?
Romer's points about income distribution have a little more merit, but they still do not fully rebut the claim that manufacturing has traditionally offered more economic opportunity than many of the jobs in the "service" sector of the economy (many of which are now held by people with college degrees).  And, again, factory worker incomes have fallen in part due to foreign competition that is heavily subsidized and supported by foreign governments.

And why focus on such jobs in the first place?  One of the key reasons is that a productive manufacturing sector, rather than being a distraction from high-concept economic activity, actually plays a key role in the discovery of new innovations and new modes of economic growth.

Andy Grove, former CEO of Intel, has been hammering this point for a while: a vibrant manufacturing ecosystem benefits those attempting to create new things and solve old and new problems.  Grove suggests that, if you want to catch the next wave of development, you need to have an in-depth knowledge of manufacturing:
A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up. 
These manufacturing jobs play a crucial role in fostering new innovation and paths of economic growth.

There are plenty of reasons to be concerned about the decline of manufacturing.  This decline is not fated: it has been spurred on by decisions made by many in the US policy elite.  I'm not sure that manufacturing does need "special" treatment, but perhaps manufacturing could settle for effective treatment---which is much more than Romer's former boss has thus far provided.

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