The Idea of a 'Manufacturing Delusion' Is Delusional Itself

OPINION

In the past two years, Congress has passed several major pieces of pro-manufacturing legislation, including the Chips Act (CHIPS) and the Inflation Reduction Act (IRA). Some journalists have criticized this as evidence the world is now in the grip of a "manufacturing delusion." They’re wrong. On the contrary, it is delusional to believe that a 21st century nation can achieve sustained economic growth and a thriving middle-class without manufacturing.

In the 21st century, manufacturing is still key to economic growth because it generates a steady rise in incomes. In fact, manufacturing has two unique features, scalability and reach. 

Scalability means that an expanding manufacturing sector benefits from economies of scale. As output rises, so too do profit, investment and labor productivity. That enables wages to rise. 

Manufacturing also has “reach.” It can provide jobs across a significant part of the population for millions of workers. That includes the 62% of the U.S. workforce without a four-year college degree. In the 1950s and 1960s, manufacturing workers comprised some 30% of the U.S. labor force. Today, that figure is down to an all-time low of 8.3%. 

Decades ago, the U.S. led the world in numerous technologies—with foreign trade only a very minor factor in the economy. Today, whether we like it or not, there is global competition for the best industries. Those are the sectors that invest the most, pay the best wages, and will enjoy the greatest growth over time. 

The best industries are the ones that pay the most today. At the Coalition for a Prosperous America, we recently compared employee incomes in six major manufacturing sectors—including metals, autos, and chemicals—with employee incomes in the leading service industries. We found that the average income for the six selected manufacturing sectors was 39% higher than the U.S. average. 

Last year, the average U.S. private sector employee earned $58,024. By contrast, the average employee in aerospace manufacturing earned $109,000—almost double. Similarly, a computer/electronics employee earned $83,773; that’s 44% more than the average. If we grow these industries over time, Americans’ incomes will rise. 

The East Asian so-called “tiger economies” are the best examples of this type of successful industrial strategy—a combination of government identifying key industries, and private firms managing them and competing vigorously. 

Singapore now has a higher GDP per person than the U.S., largely due to a manufacturing sector with a relative size double that of the United States. Similarly, South Korea is a world leader in televisions, smartphones and other electronics. And from a poor island 50 years ago, Taiwan today manufactures more microchips than the U.S. and Europe combined. 

Manufacturing also matters for national security. Today, the U.S. is in a dangerous position, dependent on distant nations—particularly a hostile China—for so many military and civilian imports.

There are two major shortcomings in current U.S. industrial strategy. Congress has enacted policies without a clear statement of goals. China has the capacity to make roughly 40 million electric vehicles—but only home demand for some 20-25 million EVs. This gives China the potential to wipe out America’s entire auto industry, even with tax credits for U.S. manufacturers. Congress should insist that recipients of IRA tax credits commit to target numbers for production or market share—or else give the money back. That would create a healthy dialogue about what’s required for a profitable path to achieve U.S. strength in a particular industry.

Secondly, Washington could be manipulated by the very companies that receive federal subsidies. The CHIPS and IRA efforts are effectively locked in for very large companies, including Intel, Micron and General Motors. Some may deliver the products and jobs expected. But others may turn out to be dinosaurs. The government should design plans that include alternatives. If one company doesn’t deliver, the government can transfer support to another.  

Industrial strategies must focus as smartly as possible on supporting the industries of tomorrow while leaving it to the private sector to achieve these goals. In the end, all employees will benefit

Jeff Ferry is chief economist at the Coalition for a Prosperous America. Follow him at @menloferry.

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