The Coming Manufacturing Boom?

Can American manufacturing be saved? The death of our blue-collar economy is a recurring anxiety, one that's been with us for at least 30 years. Just as rising agricultural productivity means we have a far smaller share of the American workforce working on farms, the technological transformation of manufacturing means industrial workers are vanishing from the landscape.

One irony is that the same factory jobs that were once condemned as a dehumanizing departure from America's pastoral ideal are now celebrated as far more dignified than, say, jobs in retail sales. From Henry Ford's decision to pay his workers a handsome $5 per day wage in 1914 to the oil shocks of the 1970s, manufacturing work went from dirty and dangerous to desirable, particularly for the large majority of workers who never finished college.

The American manufacturing sector has remained large and robust in the decades since, holding steady at 15% of gross domestic product since the end of the second World War. But over the same period, manufacturing employment has gone from roughly a third to roughly a tenth of the workforce. The workers who remain are either highly skilled or they are an increasingly dispensable factor of production. The same dynamic is at work in Germany, Japan and even China.

During the 1980s and 1990s, a number of writers and thinkers called for an American industrial policy designed to meet the supposed challenge of revitalized economies in Europe and Asia. Most of these arguments were based on flawed historical analogies and confirmation bias, in which successful industrial policies were highlighted while failures were blithely ignored. As Jim Manzi has argued in National Review, "almost all industrial policy ends up protecting existing institutions." And while the jobs created or preserved by industrial policy are easy to see, the jobs that are not created thanks to high taxes and burdensome regulations are invisible.

Granted, today's industrial policy advocates are shrewder and more sophisticated than the Japan-bashers of the past. They tend to base their arguments on the spillover benefits of promoting economic agglomerations, like Silicon Valley. Pete Engardio, an international senior writer for BusinessWeek, has been forcefully making the case for industrial policy in a wide-ranging series of articles. Having spent several years in Asia, Engardio has been struck by the scale and aggressiveness of industrial policy efforts outside of the U.S., particularly in East Asia. And he's clearly a sophisticated analyst who recognizes that propping up dying industries is a fool's errand. His main concern seems to be that while America continues to produce technological breakthroughs, "unless the U.S. can magically resurrect its manufacturing base, the good-paying jobs from these breakthroughs will be offshore." As supply chains grow tougher to manage, as quality concerns become more important and as labor and raw material costs become a smaller slice of total costs, Engardio sees a new opportunity for high-tech American manufacturing. To that end, he wants the federal government to mimic governments in Europe and East Asia that offer generous subsidies and fast-track regulatory approval to manufacturing plants.

My sense is that industrial policy has been far less successful in Europe and East Asia than Engardio allows, and that the real danger is that vast sums of taxpayer dollars will flow to politically well-connected insiders. But Engardio does have a point: It is possible that American tax and regulatory policies are stymieing an industrial comeback, and that a few reforms that apply to all-comers can help revitalize our manufacturing base. One of his suggestions is that firms be allowed to write the entire cost of a new manufacturing plant off in one year, rather than depreciate it over a decade or more.