The Real Reason Why Washington Should Care About Manufacturing

Manufacturing has been the focus of much attention lately — a key theme of President Barack Obama’s Inauguration and State of the Union addresses and the subject of numerous recent books and articles. But why does manufacturing matter? Why should Washington in particular care? Most commentators miss the real reason.

And getting the answer right is imperative because many economists, like Nobel Laureate Gary Beckerand Columbia’s Jadish Bhagwati, persist in trying to convince policy makers that America can thrive without manufacturing, and in fact would be better off without it.

Here are some reasons that don’t really matter.

Manufacturing is inherently better than services.

The notion that making a widget is better and more ennobling than selling it or marketing it is simply wrong. Both produce income and output.

Manufacturing jobs pay more.

Sure, but manufacturing jobs pay just $2.50 more per hour than the average of $30.44 for all U.S. jobs. And despite the much-ballyhooed creation of some 500,000 manufacturing jobs over the past two years, many of the new jobs are on tiered wage scales and pay around $15 per hour. If we tie the importance of manufacturing to higher wages, does this mean that if manufacturing wages fall to average that we should no longer care about manufacturing?

Manufacturing is a key source of technology and innovation.

It is, but as long as we can purchase technology from other nations we should be just fine. The problem is that we can’t, as noted next.

So here’s the real reason.  Manufacturing matters because it’s simply impossible to have a vibrant national economy without a healthy globally traded sector, and manufacturing is America’s most important traded sector. Traded sector enterprises, which comprise about one-third of the U.S. economy, are those that compete in international marketplaces and whose output is sold, at least in part, to non-residents of the nation. But because these industries face intense global competition in a way that non-traded, local-serving industries do not their success is by no means assured.

For example, while we may not know whether Safeway, Giant, or Walmart will gain market share in the U.S. grocery store industry, we do know the industry produces as much output as U.S. consumers demand.

In contrast, while we may not know whether Boeing or Airbus is going to gain market share in the global aircraft industry, we also don’t know whether we will be producing jets in America, as this depends on Boeing’s global competitiveness and America’s attractiveness as a place to build high value-added, complex products.

In other words, if a local grocer goes out of business, another will emerge to take its place to serve local demand, but if a traded sector enterprise such as a semiconductor, automobile, or aerospace manufacturer closes due to global competition, the business and jobs that take its place may well be located in another country.

Manufacturing is Economic Engine

Ultimately, enterprises competing in globally traded sectors are the engines that create the demand that supports many other non-traded sector domestic jobs. Manufacturers draw in large numbers of workers who require grocery stores, barber shops, and hundreds of other businesses to meet their needs.

These establishments also support local parts suppliers, transportation companies, and design firms that then hire more workers and expand their businesses, driving yet more consumer spending.

As Gene Sperling, Chairman of the White House National Economic Council, explained last year, “If an auto plant opens up, a Walmart can be expected to follow. But the converse does not necessarily hold.” Moreover, if the auto plant closes, the Walmart will likely downsize or close as well. This is why studies have shown that every lost manufacturing job means the loss of two and a half additional jobs throughout the economy.

Indeed, the anemic overall performance of the U.S. economy over the last decade can be tied directly to the loss of U.S. traded sector, and particularly, manufacturing competitiveness. Since 1990, the United States has created virtually no new net traded sector jobs. Worse, the United States lost 5.8 million, or 32%, of its manufacturing jobs in the 2000s, a rate of loss more severe than during the Great Depression.

Now, imagine that U.S. manufacturing output in the 2000s had grown at the same rate as the private business sector as a whole, instead of declining by an estimated 11 percent. As we show in our report, Worse than the Great Depression: What Experts Are Missing About American Manufacturing Decline, 12.7 million jobs could have been saved—a figure very close to the number of unemployed Americans today. The U.S. economy didn’t need super-low interest rates for a decade; it needed policies to enable manufacturing to expand in America. Then the overall economy would have mostly taken care of itself.

U.S. states, and virtually all other nations, recognize the vital importance of traded sectors. They understand that if they can’t compete in markets and sell products beyond their borders, their citizens won’t have the jobs and incomes to trade for cars, electronics, furniture, oil, etc. and their economies would shrivel. This is the real reason manufacturing matters, and more advocates for manufacturing policy need to be making this argument.