jonrynn's blog

Why Manufacturing is Central to the Economy

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Originally posted on New Deal 2.0

Paul Krugman recently argued that “manufacturing is one of the bright spots of a generally disappointing recovery, and there are signs — preliminary, but hopeful, nonetheless — that a sustained comeback may be under way.” He points out that the gap between what we sell and what we buy has been improving. This must be set against a background of a manufacturing decline in the United States of historic dimensions; even without adjusting for inflation, the trade deficit in goods for the United States between 2000 and 2010 was 7 trillion dollars. A turnaround in the attention of more perceptive economists and a turnaround in manufacturing may be in the works. But before that, the crucial question is: Why is manufacturing so important?

1. Manufacturing has been the path to development

It has been the strategic achievement of rich nations over the last several hundred years to create a high-quality manufacturing sector in order to develop national wealth and power, as Erik Reinert shows in his book “How Rich Countries Got Rich…and Why Poor Countries Stay Poor.” From the rise of England in the 19th century, to the rise of the US, Germany, Japan and the USSR in the 20th, to the newly industrializing countries like Korea, Taiwan, and now China, manufacturing has been the key to prosperity.

Preventing green vs. blue

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This was originally posted on Grist.org

The N.Y. Times, in an article entitled "Geography is dividing Democrats over energy", makes much of an alleged split between those on the coasts, east and west, vs. those in the middle, as in the Midwest and Plains states. Somehow coal and manufacturing are grouped together, against a concern for global warming:

"There's a bias in our Congress and government against manufacturing, or at least indifference to us, especially on the coasts," said Senator Sherrod Brown, Democrat of Ohio. "It's up to those of us in the Midwest to show how important manufacturing is. If we pass a climate bill the wrong way, it will hurt American jobs and the American economy, as more and more production jobs go to places like China, where it's cheaper."

The de-industrialization of the U.S.

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So this is how it worked: instead of greening our manufacturing base, amping up our recycling system and competing on the basis of better production technology, we shipped our production to China, which is busy polluting themselves and spewing carbon dioxide. In return, the Chinese took the hundreds of billions from sales to the U.S. and reinvested the money here, helping to make our sprawl even spawlier and our military even more wasteful.

A green industrial policy?

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Back in the 1980s, writers such as Robert Reich were advocating what was called an "industrial policy", that is, the government should intervene in the economy and explicitly help a particular industry or set of industries in order to make them more competitive. Yes, I know this sounds like "picking winners", except that governments have been doing this successfully for hundreds of years. Think of it as the equivalent of the Park Service being stewards of a national park, intervening when necessary to keep the ecosystem healthy. Now, think of the economy as an ecosystem, and think of industrial policy as a way to keep the economy healthy.

Is this a capital goods depression?

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My intellectual mentor, the late Professor Seymour Melman of Columbia University, was very enamored of a small booklet written in 1935 called “The Chief Cause Of This And Other Depressions.” The author was Leonard P. Ayres, Vice President of the Cleveland Trust Company. This is the gist of what Ayres said, at least the way I interpret it:

A recession, or a long one, would benefit from a short-term stimulus, or if you consider two years to be medium-term, a medium-term stimulus. However, if this is a depression, you have a different animal.

The Melman/Ayres view of depressions is that they are partly or significantly caused by a collapse in the capital goods industries. That is, the machinery and such that is used to make other stuff loses their markets. When these industries start to collapse, the unemployment there causes a greater lack of demand among the consumer goods industries, starting a snowballing effect in the wider economy.

The U.S. can't survive on services alone

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This post is taken from my post at Grist.org that I put up a few months ago.

Rebuilding the manufacturing sector would not only provide millions of direct jobs, it would transform the entire economy, because manufacturing is the foundation of an economy.

No large nation, not even the U.S., can survive by only producing services. The vast majority of services consist of the economic activity that surrounds manufactured goods. In order to see why this is so, we need to take a stroll through the main sectors of the service economy; consider this an exercise in economic natural history.

What comes around goes around?

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This is a cross-post from Grist.org. I thought that the Economic Populist readers might be interested in the intersection between manufacturing and the environment -- please tell me what you think

How to save Detroit

Irony of ironies, the one set of products that could save G.M. is the one that G.M. destroyed -- the electric trolley systems of America. According to the well-known research of Bradford Snell, G.M. killed the electric trolley, because in 1922 they decided that the only way to increase car sales was to eliminate the competition, decent public transit. So they bought systems, pressured railroads and banks, bought public officials, did whatever they could to replace electric -- I'll repeat that, electric -- transportation with oil-based transportation.