“The world is in the grip of a manufacturing delusion,” says the Economist. If you’ve ever listened to an American politician talk about the economy for longer than 30 seconds, you’re likely to hear romantic talk of “good-paying manufacturing jobs” or “reshoring manufacturing.” The Biden administration has made it a priority of its economic agenda, and red states have gotten in on the action as well. For Capital Matters today, John Mozena wrote about Ohio’s failed efforts from Republicans and Democrats to support manufacturing in Lordstown.
The idea that manufacturing is in need of special attention from the government is mostly based on assumptions that are not true.
For example, it is well known that manufacturing has been declining as a share of the U.S. economy for decades. It is less well known that that has been happening around the world. “As a share of global economic output, manufacturing has dropped from 19% in 1997 to 16% today,” the Economist says. As a share of China’s economic output, manufacturing has been declining consistently since about 2010. That decline is coincident with the government’s “Made in China” strategy that is supposed to boost manufacturing. Since 2010 in the U.S., by contrast, manufacturing’s share of GDP is basically flat, and the number of jobs has been gradually increasing.
The gradual increase in U.S. manufacturing jobs largely mirrors the economy’s gradual overall recovery from the Great Recession. Manufacturing employment was hit hard in 2008–2009. It was hit hard again by the brief pandemic recession. Like the Biden administration’s other fanciful “job creation” claims, its bragging about manufacturing’s rebound is more a return to trend after the pandemic than it is anything new or exceptional.
For overall economic performance, there is little apparent reason to prefer manufacturing to other sectors. The Economist looks at the countries in the OECD and compares their overall GDP growth rates to the percentage of value added from manufacturing over the period of 2002 to 2022. There’s basically no correlation. For example, the U.S. had about 12 percent of value added from manufacturing and saw GDP growth of 2 percent. Germany, much more manufacturing-dependent at 22 percent of value added, grew at only 1 percent. Australia, less manufacturing-dependent at about 8 percent of value added, grew at almost 3 percent.
The massive growth in East Asian economies was probably not driven by focusing on manufacturing, as is commonly assumed, the Economist says:
At the very least, productivity growth in services and the removal of protectionism was also crucial. Even if industrial policy was perfectly designed by a clear-sighted government, which used tax and subsidies to shift labour to industries with the greatest economies of scale, it would only bring a one-off 1-3% boost to gdp, according to a paper by Dominick Bartelme of the University of Michigan and co-authors.
The idea of the need to “reshore” to make the economy more “resilient” is backward. The Economist says, “Research published last year by the IMF suggests that greater self-sufficiency is likely to leave countries more vulnerable to future shocks, rather than less.” You shouldn’t need IMF research to confirm what should be common sense. Depending on a global network of suppliers rather than only domestic ones means more competition and less reliance on any single supplier, making the system more flexible and responsive to shocks that inevitably arise. The 98-percent-domestic baby-formula market isn’t very resilient.
Increasing manufacturing’s share of the economy would also be unlikely to re-create the old manufacturing jobs that politicians claim to want. The Economist gives the example of a Ford electric-vehicle facility in Cologne, Germany:
The chassis and bodies of vehicles are coated in chemicals to prepare for painting and to prevent corrosion. This happens across multiple storeys; the number of workers involved in the work on site is precisely zero (two keep tabs remotely). Shiny yellow assembly robots further down the production line are sufficiently advanced as to be able to mostly monitor themselves. Although workers are required for assembly—about as many as for traditional petrol-powered vehicles—the activity requires a lot more training. This matches the national picture: according to a study by Wolfgang Dauth of the Institute for Employment Research and co-authors, industrial robots have made available work more complex.
I wrote “claim to want” because I don’t think most politicians really want to return to an economy with lower labor productivity, lower levels of education, lower real household income, lower GDP per capita, higher hours worked per worker, higher workplace-injury rates, higher poverty rates, and higher pollution than today. (Each of those facts is true whether you think the “good old days” were in 1955, 1985, or anywhere in between.) Designing government policy to encourage less productive employment — which is what the “manufacturing delusion” can mean in practice — is no way to do economic policy.