A promising future for US manufacturing

Reuters

A view of employees working at the General Motors assembly plant in Wentzville, Missouri February 7, 2012.

Article Highlights

  • The manufacturing sector’s perceived resurgence supposedly signals that the country is on the comeback trail.

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  • U.S. manufacturing never went away. Output rose more or less steadily until the Great Recession hit.

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  • What has disappeared is about 5 million jobs since 2000, nearly 1/3 of total manufacturing payroll. @JimPethokoukis

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  • What can public policy do to help manufacturing? @JimPethokoukis has the answer.

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  • With smart policies from taxes to trade, the U.S. manufacturing renaissance won’t be going away anytime soon.

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In the first of our Point-Counterpoint series, James Pethokoukis of the American Enterprise Institute takes on the question of the future of manufacturing in the U.S.

Musician and songwriter Paul Simon was once having dinner at an Italian restaurant when he noticed Yankee great Joe DiMaggio was eating with some friends at a nearby table. Now recall Simon’s big hit “Mrs. Robinson” contains the famous lines: “Where have you gone, Joe DiMaggio, our nation turns its lonely eyes to you. What’s that you say, Mrs. Robinson, Jolting Joe has left and gone away? Hey hey hey.”

Even though Simon had heard DiMaggio disliked the song — and perhaps even considered filing a lawsuit — he couldn’t resist the opportunity to say hello to the baseball legend. Despite Simon’s trepidation, the chat went fine — though DiMaggio still seemed befuddled by the song. “What I don’t understand,” he asked Simon, ”is why you ask where I’ve gone. I just did a Mr. Coffee commercial, I’m a spokesman for the Bowery Savings Bank, and I haven’t gone anywhere.”

Of course, Simon didn’t literally mean Joltin’ Joe had disappeared, just that, as he wrote in the New York Times in 1999, “I thought of him as an American hero, and that genuine heroes were in short supply.” Simon was using the DiMaggio myth to make a broader point about 1960s America.

Likewise, U.S. politicians have for years bemoaned the supposed decline of American manufacturing as shorthand to describe an economy whose foundation was crumbling. More recently, the manufacturing sector’s perceived resurgence supposedly signals that the country is on the comeback trail.

But like the Yankee Clipper, U.S. manufacturing never went away. Output rose more or less steadily throughout the 1980s, 1990s and even 2000s until the Great Recession hit. And while that historic downturn took a big bite out of manufacturing, the sector has recovered most of its lost output during the three-year-old recovery.

What has disappeared, however, is about five million jobs since 2000, nearly one-third of total manufacturing payroll. Now to many Americans — including, of course, all those assembly line workers who headed to the unemployment line — those jobs losses mean “America doesn’t make anything any more.”

Not true, as JPMorgan economist Jim Glassman explains: “The loss of US factory jobs .. because they were the result mostly of technological innovation and to a lesser degree of some shifting of assembly operations to developing economies where costs were significantly lower, were not the death knell of US manufacturing. These developments were very disruptive for workers. Nonetheless, they transformed the US manufacturing sector, making it even more robust and profitable than it was before.”

And the future looks promising, too. Certainly for output, but maybe jobs as well. All those years of massive trade deficits with China and the rest of Asia have served as kind of an unintentional Marshall Plan, helping the region develop and eventually “return the favor,” as Glassman puts it, by “creating new markets for American businesses and those in the developed economies more broadly. In other words, the trends that were contributing to the phenomenon many thought of as ‘outsourcing’ are reversing.”

Then you have America’s near-miraculous energy boom. While consumers may hate oil prices and the high gasoline prices they bring, they’ve led to a surge in oil and natural gas exploration and production.  Citigroup predicts producing these resources will turn what at the moment seems like a $90 a barrel floor for oil into a $90 ceiling. Moreover,  U.S. natural gas prices are “likely remain significantly lower than global prices for decades to come.”

And cheap energy has big implications for U.S. manufacturing. Again, Citigroup: “That spells investment opportunities in energy intensive industries, from petrochemicals and fertilizers to cement and metal fabrication, including steel and aluminum. An industrial renaissance built on the energy renaissance could add a significant amount of jobs to the US economy. It could also mean lower import requirements and in all likelihood produce a surge in exports. It means significantly cleaner oil and gas-based energy replacing dirtier coal power. It means an accelerated move to natural gas-driven cars and trucks.”

So what can public policy do to help manufacturing? Rather than direct subsidies or industrial policy, consultancy McKinsey stresses that government should focus on creating a fertile, pro-manufacturing environment. That means everything from improved infrastructure to streamlined government regulation to an education system that creates a skilled workforce.

Another huge item that should be on Washington’s “to do” list:  Slashing America’s sky-high corporate tax rate and moving toward a territorial tax system. Researchers at the Organisation for Economic Co-operation and Development have found corporate taxes to be “most harmful for growth, followed by personal income taxes, and then consumption taxes.”  Indeed, economists at the American Enterprise Institute have determined U.S. corporate tax rates are so off the map that the best way to maximize revenue would be to flat out cut the top corporate rate by 8.6 percentage points to 26.4 percent from 35 percent currently.

With smart policies from taxes to trade, the U.S. manufacturing renaissance won’t be going away anytime soon.

To read Michael Lind’s counter-point, click here.

James Pethokoukis is the Money & Politics columnist-blogger for the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews. Pethokoukis has written for many publications including USNews & World Report, The New York Times, The Weekly Standard, Commentary, USA Today, and Investor’s Business Daily. Pethokoukis is also an official CNBC contributor.

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