Friday, February 17, 2012

anti-mankiw links - or, the defense of manufactures

The other day Professor Mankiw linked to a piece by Christina Romer in the New York Times on why manufacturing should not be subsidized by government policy.

On one hand we can see why this might be a smart policy: manufacturing is past us, isn't it? The U.S. has increasingly moved into smarter, faster sectors of growth like technology, finance, and higher education. The last thing we would need, argue economists such as Romer and Mankiw, is a return to 60s-era economics.

On the other hand, as Jeff Madrick observes in the NewDeal 2.0 blog, manufacturing is only seen as dead because we don't necessarily know what a smarter, leaner, and more efficient manufacturing sector might look like. What is the contradiction between smart technology and good manufacturing jobs? Once upon a time, there wasn't any such clash. But as competition for cheap labor and a variety of factors overwhelmed businesses in the 1970s, "low road" policies were inevitably taken which compromised quality for productivity and low wages. Finance, Madrick notes, took manufacturing's place as the key driver of growth -- and what has that gotten us in the last 40 years? High inequality and relatively stagnant growth and living standards.

Manufacturing -- potentially with a focus on green technologies at the frontier of certain frontiers of economics growth -- can itself become a hotbed of innovation. As Madrick notes, "Isn’t [manufacturing] where the scientists and engineers are? Don’t we learn and innovate by doing? One commentator recently said that those innovations are exploited by others, so it doesn’t matter. Really? Then maybe we should stop promoting R&D altogether." Research and development is key to a vibrant economy. There is no reason to halt our attempts at strengthening them.

A similar point regarding the potential dynamism and value added of the manufacturing sector can be found in the debate which took place in the Economist last summer between Ha-Joon Chang and Jagdish Bhagwati over this same issue. (Chang won the debate). Chang makes an interesting point in his rebuttal to Bhagwati's scepticism about "manufacturing fetishism" which we will end on, here:
Take the case of the Netherlands. Unbeknown to most people, it is world's third largest agricultural exporter, despite having little land (it has the world's fifth highest population density). This has been possible because the Dutch have "industrialised" agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world's most advanced chemical and electronics industries. In contrast, despite being the world's second most high-tech exporter (measured by the share of high-tech products in manufactured exports), the Philippines has only $2,000 per person income because it makes those products with other people's technologies.
Overall, we at Anti-Mankiw definitely think that the promotion of manufacturing could be an excellent way to revitalize the economy. How the government (or other branches of the state) does so is a different point -- but let's not relegate such an important source of a country's material wealth to the trashbin too quickly!


  1. «But as competition for cheap labor and a variety of factors overwhelmed businesses in the 1970s, "low road" policies were inevitably taken which compromised quality for productivity and low wages. Finance, Madrick notes, took manufacturing's place as the key driver of growth»

    My impression is that in a number of countries there was a unionization bubble in the 1960s and 1970s.

    This led the governments of those countries (in particular the USA and the UK) to a deliberate policy of reducing the power of unions by offshoring union jobs in highly unionized sectors like manufacturing, and subsidizing and protecting non-union sectors like finance.

    I think that has been the implicit industrial policy in the USA and the UK for 30 years.

    The only unionized sector that has been protected has been defence, and indeed defence manufacturing still exists, but that's because defence corporations are largely the retirement funds of government officials.

  2. Hi Blissex,

    Thanks for your comment! However, I'm not sure what you are thinking in terms of how it relates to the central argument of our article.

    We are trying to argue that the strength of manufacturing was something that American society has always valued. But then due to a confluence of forces starting in the 80s, finance became favored (and also, obviously, grew on its own terms). So manufacturing was not a "bubble" that popped.

    But I'm not really sure what you're trying to say in your comment otherwise. Could you clarify?

  3. If you want to stump Mankiw in class then bring up Alex Gheg's video that exposes the dirty little secret of neoclassical economics. A former PhD student at the U. of Rochester, he left when he discovered this problem, that has been covered up until now. There's a master equation that makes a foundation for another framework, it's not just a critique. Quantity, quality, variety and convenience. A scale for utility? This will stump him in class

  4. My point is that UNIONS were the bubble that popped, and because in several countries the most unionized sector was manufacturing, the governments of those countries have had a 30 year policy of offshoring manufacturing to weaken unions.

    Finance has been favored in large part because it is non-unionized.

    For manufacturing to come back to the USA the process of de-unionization of USA private industry must be complete. Or else public opinions must turn again towards backing unions.

  5. I think I may be in the minority with my fellow anti-Mankiw contributors on this (they can speak for themselves) but I actually agree with you to a degree (not about your bubble idea, but about the relationship between manufacturing and unionization). I think there is some evidence that in some industries, what started out as unions seeking power to put a balance against corporate power has ended up going too far the other direction. Now we have an education union that in some instances does not seem to be promoting the education system or its members. Also, I work for my State's Economic Development Corporation and I know for a fact that many foreign manufacturers in particular, when looking for a place to expand operations, won't even give an area a second look if they are heavy union - the Japanese automakers for example absolutely refuse to locate in areas that are heavily unionized. I think certain anti-union folk take these arguments too far, but I think there is kernal of truth there.