Tuesday, February 21, 2012

Manufacturing and Politics

As near as I  can figure, all the candidates are bending over backwards to “do something” about manufacturing.

A February 21 opinion piece from The Wall Street Journal entitled “Manufacturing Decline” marshals some facts.

The industry-in-crisis narrative usually begins in the aftermath of World War II, when manufacturing accounted for 25.6% of the U.S. economy. This is a less than ideal heyday to begin the time series, given that most of the developed world lay in ruins and their economies would recover. …

The U.S. economy has grown by a little under sevenfold since 1947 …

Manufacturing has retreated as a share of GDP and contributed 11.7% in 2010 …

The manufacturing crisis, if that's the word, has been jobs. Industry employed one of three workers after the war. Today, it's one of eight. Yet this, too, is largely a measure of economic progress—because it is the result of productivity gains …

Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000. Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy.

This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics.

The big problem is that the political talk about helping manufacturing sounds like a substitute for helping housing and construction:

Which brings us to the real manufacturing tragedy, which is Washington's habit of misallocating scarce resources. There is only so much capital in the economy, and growth will be fastest if it is allowed to find its most productive uses. That is rarely the political calculus … Or take another sad case: For decades and especially the last 15 years, the government has been on an epic binge to push resources into housing.

The mortgage interest deduction ensures that a home is the largest investment most individuals make, while multiple home ownership programs compound the incentive. The Federal Reserve's monetary policy in the 2000s and today creates a subsidy for credit, which pushes more resources into finance and real estate in particular. Imagine how this era might have been different had investors in search of yield put their dollars into factories and exports, rather than mortgage-backed securities.

The double tragedy is that the political class seems intent on reviving industrial policy with special subsidies and tax breaks. Mr. Obama's well-worn demand is for more government "investments," especially in faddish manufacturers a la Solyndra, while at the same time he wants to punish multinationals that do business overseas. GM is now his totem, with its $7.6 billion profit for 2011, the auto maker's highest ever. But all that proves is that companies really can turn around when the government gives them $50 billion and uses brute force to reduce their liabilities.

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