How we keep manufacturing that remains in U.S.

Like so many other fiscal cliff-dwellers in our economy, manufacturing is proceeding cautiously while the gears of government clank and clash their way to a decision.

With so many other things to worry about, why should we pay attention to what’s happening in U.S. manufacturing? We’ve been told that we are a “service economy,” which is emblematic of the more advanced economies of the world.

We’re told that as the ubermost of these uber-economies, we no longer have to make things. We can concentrate on our creativity; designing new products and services to sell to each other and letting someone else actually produce them. Our education system is so superior that we can stay ahead of global competition and preserve our economic growth and prosperity.

This view has dominated our economic policy for decades, supported by economic theory that free trade was in the best interests of American consumers and of economic growth.

There was an economic theory problem with this policy long before the cracks in it became visible to our now opening eyes.

The consumer benefits were mostly as advertised. That win was straight out of 19th-century economist, David Ricardo’s playbook, and our trade policies delivered the lower prices and higher quality his theory promised.

The economic and human costs that accumulated as industry after industry fell to foreign competition were probably higher than policy makers had anticipated, but remained largely unseen. The Rust Belt of abandoned manufacturing plants, and the towns without purpose strung across America like lost pearls, were all quite distant from Washington, D.C., and the media centers.

The benefits, though, were very visible. Consumers had inexpensive new clothes, new electronics and affordable cars they could drive for ten years if they wanted to. What was wrong with that?

In terms of economic theory, two things were wrong or, at best, questionable. First was that Ricardo’s theory was based on marginal producers of what was a critical, but low-technology, easy entry industry: agriculture. There was no dependence on a pool of skilled labor or on academic research and development.

As a result, U.S. policy makers did not anticipate that entire manufacturing industries would disappear and that the skilled labor force could diminish to the point of scarcity.

The second flaw was that Keynesian economics was rooted in an economy comprised of sectors in which manufacturing played a significant role. How this theory might work in a service economy was not, and still is not, clear.

There were many reasons why the misbegotten $870 billion Keynesian Stimulus I, for example, was ineffective. Still, the fractional role of manufacturing, the dominance of the service sector, and the inflated role of the government sector were certainly major factors in its futility.

Theoretical considerations aside, “done is done” as far as our past economic policies go. We cannot restore our manufacturing sector to what it was thirty or forty years ago. The economic policy decision before us is whether we should take steps to strengthen American manufacturing now and for the future.

If we do take those steps, it should not be because it will create lots of jobs. Manufacturing is no longer the job-creating machine it once was. Between 1975 and 2009, for example real U.S. manufacturing output quadrupled, while its workforce was reduced by over 38 percent. It’s the price of productivity.

Instead of job creation we should look at manufacturing as a public health issue. We need a healthy manufacturing sector to preserve our technological edge in economic competition and in national security. Traditional government meddling and “picking winners,” though, won’t make that happen.

Our most important economic policy move would be to speed up our reactions and countermeasures when illegally subsidized products, pirated copies, illegal knockoffs, and other patent and copyright violating imports are uncovered. The legal and diplomatic red tape is now so thick that seeking redress or remedy is a process that can easily exceed the normal human life span.

Global labor costs are rising in some areas, including China, where productivity-weighted wages are approaching U.S. levels. This will make competition possible for U.S. manufacturers, but the key to winning head-to-head contests will be in quality assurance, flexibility and delivery.

These qualities are highly dependent on an educated, motivated workforce, and our education system is having trouble providing it. The federal government needs to fix the problem or else outsource it to someone who can, so that manufacturing and other key sectors are assured the workforce they need.

In addition to its technology and national security benefits, we need a healthy manufacturing sector to offset the feelings of dependence that come from being confronted daily with a consumer product world that others, strangers, have made for us.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.

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