An Urban's Rural View

Economists, Please: Give the President Constructive Suggestions on Manufacturing

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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When Ford Motor announced a $1.2 billion investment in Michigan factories recently (http://tiny.cc/…), President Donald Trump was quick to claim credit. "Car companies coming back to U.S.," he tweeted. "JOBS. JOBS. JOBS." (http://tiny.cc/…).

Media reports on the announcement were equally quick to point out that the auto maker had disclosed most of this investment in 2015, as part of a labor agreement with the United Auto Workers (http://tiny.cc/…). Still, the media accounts seemed to agree that Ford had given a president who says he's committed to bringing back manufacturing jobs a useful talking point.

The president might as well take ownership of good economic news. He'll certainly be blamed when things go wrong. Presidents own everything that happens to the economy on their watch.

The question many economists would ask is whether the president's emphasis on manufacturing is misplaced. What's so special, in other words, about manufacturing jobs?

As long as the economy is creating good jobs, some economists say there's nothing magic about them being in factory work. Many American tech companies don't make their products in America but pay generous salaries to the employees who design and market and otherwise support those products. If the job pays well, who cares whether it's in manufacturing, services or even agriculture?

Noah Smith is one economist who thinks we ought to care. Smith left academia last year to write opinion pieces for Bloomberg full-time. In his March 28 piece (http://tiny.cc/…) he argues that without a healthy manufacturing sector a nation cannot be wealthy.

That's a proposition many would be inclined to agree with. Unfortunately, Smith's argument in support of it is disappointingly thin. He falls back on the work of another economist, Harvard professor Ricardo Hausmann, whose research focuses on how developing countries can best develop. Smith summarizes Hausmann's main point this way: "If a country makes complex products that are linked to many other industries -- such as computers, cars and chemicals -- it will be rich. But if it makes simple products that don't have much of a supply chain -- soybeans or oil -- it will stay poor."

As beguiling as that thought is, it raises nagging questions. What about Australia, a rich country that relies on mining and agriculture for its exports and economic growth? What about Saudi Arabia, a rich country that relies on oil? And what is so "simple" about soybeans and oil, both products that are in their own ways technologically complex?

Hausmann addresses that last question. Comparing a country that exports microwave ovens to a country that exports farm-raised salmon (http://tiny.cc/…), Hausmann concedes it's "difficult to say which is more advanced or sophisticated," the microwave or the salmon. He acknowledges raising salmon on a farm "requires a lot of knowledge of biology and animal health."

But it is easier, Hausmann says his research shows, to "redeploy" from microwaves to other electronic products than to redeploy from salmon to other farm products. Microwaves, Hausmann says, are more likely to occupy a "product space" -- to be connected to other products that provide an easy segue into further economic opportunities.

Alas, this doesn't really answer the question Smith is addressing about the importance of manufacturing. For even assuming Hausmann is right, what the Harvard professor is talking about is developing economies. His microwave maker is Malaysia, his salmon farmer Chile. Smith is talking about the United States. What lesson should we draw from Hausmann's research on developing economies for a developed economy that has both a strong agricultural sector and a diminished but still mighty manufacturing sector?

Despite Smith's suggestions to the contrary, the U.S. remains a manufacturing powerhouse. China surpassed the U.S. in 2010, but a January 2017 Congressional Research Study cites statistics indicating that in 2015 America's value added in manufacturing exceeded that of Japan, Germany and South Korea -- combined (http://tiny.cc/…). Smith insists American industrial output is declining, but the charts running with his commentary show it basically flat for the last couple of years after several years of growth -- and flat at record or near-record levels.

The questions economists like Smith need to address are how much manufacturing, and what kind of manufacturing, a rich country like the U.S. needs to retain to continue to be rich -- and what's the best way to go about the retention.

President Trump could use some constructive suggestions. Claiming credit for previously announced manufacturing investments won't take him, or the country, very far in the pursuit of manufacturing jobs.

Urban Lehner can be reached at urbanize@gmail.com

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Urban Lehner
4/4/2017 | 12:14 PM CDT
Excellent points. Entrepreneurial innovation and a social structure that values the development of human capital are critical. The U.S. needs entrepreneurial innovation in all sectors--natural resources, manufacturing and services. It doesn't have to choose between a manufacturing economy and a natural-resources economy, it's got strengths in both.
wgf@walnutgrovefarms.com
4/3/2017 | 3:00 PM CDT
While some countries with few people and a large base of natural resources have great wealth that may not be the road to a prosperous middle class. To a large extent natural resource ownership moves into the hands of a few , around the world. Oil, gold ,,,copper , coal ,, and even Iowa corn ground. Entrepreneurial innovation on a continuous basis is a much more likely path to an increasing GDP /capita. A social strucxture , including taxes, that values the development of human capital in a competitive economy has a lot of merit