From article Industrial Policy: A Bad Idea Is Back. Manufacturing jobs cannot justify industrial policy. Scott Lincicome, Cato. August 1, 2021. Section 2.
Finally, there is the small issue the most common “problems” industrial policies are supposedly needed to solve aren’t problems at all.
As I explained in a recent Cato policy analysis widespread claims of American “deindustrialization” are mistaken.
Both U.S. MANUFACTURING JOB LOSSES AND THE SECTOR’S SHRINKING SHARE OF GROSS DOMESTIC PRODUCT PRIMARILY REFLECT LONG‐TERM GLOBAL TRENDS SHARED BY MOST INDUSTRIALIZED NATIONS and disconnected from specific federal economic policies, whether free market or interventionist.
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At the same time, the U.S. manufacturing sector remains among the most productive in the world and has expanded since the 1990s — continuing earlier trends in output, investment, and financial performance.
Between 1997 and 2018, real value‐added for U.S. MANUFACTURING OUTPUT OVERALL AND THE DURABLE GOODS SECTOR IN PARTICULAR INCREASED BY 53 PERCENT AND 109 PERCENT, RESPECTIVELY.
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INVESTMENT IN THE MANUFACTURING SECTOR HAS BEEN CONSISTENT AND STRONG OVER ROUGHLY THE SAME PERIOD — including capital expenditures, R&D, and foreign direct investment.
Indeed, real R&D expenditures more than doubled between 1999 and 2018, from around $127 billion to $274 billion.
Pre‐pandemic data and more recent news reports, moreover, show particularly strong investment in motor vehicles (especially electric vehicles and batteries), semiconductors, pharmaceuticals, and renewable energy products (i.e., the very industries that industrial policy fans in the White House and Congress now want to subsidize or protect).
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Manufacturing jobs cannot justify a new U.S. industrial policy push.
DECLINES IN MANUFACTURING JOBS ARE DRIVEN BY TRENDS SHARED BY COUNTRIES AROUND THE WORLD, regardless of their industrial or labor policies.
And as a 2013 Congressional Research Service report put it, “Although Congress has established a wide variety of tax preferences, direct subsidies, import restraints, and other federal programs with the goal of retaining or recapturing manufacturing jobs, only a small proportion of U.S. workers is now employed in factories.”
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U.S. policy could in theory produce a onetime increase in overall manufacturing employment, but there is little reason to believe such jobs would be sufficiently special or economically beneficial as to warrant government intervention, even assuming that such policies would be successful.
For example, Cato’s Ryan Bourne showed in 2019 U.S. manufacturing jobs are not significantly more stable or secure than jobs in other sectors, especially for low skilled workers whose jobs have been disappearing for decades and are most exposed to automation and trade.
Any ADDITIONAL INCREASES IN INDUSTRIAL PRODUCTIVITY WOULD LIKELY MEAN FEWER MANUFACTURING JOBS, a dynamic demonstrated by the last few years of increasing U.S. manufacturing jobs and sagging productivity.
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The evidence manufacturing provides “good jobs,” as President Biden and other politicians claim, is also thin.
THE MANUFACTURING JOBS’ “WAGE PREMIUM” TODAY IS SMALL IF IT EXISTS AT ALL.
According to a December 2019 report by the Bureau of Labor Statistics, for example, by the end of 2018, “average hourly earnings of production and nonsupervisory workers in the total private sector had surpassed those of their counterparts in the relatively high‐paying durable goods portion of manufacturing,” nondurables pay was even lower.
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Fortunately, MIDDLE‐CLASS COMPENSATION OVERALL HAS NOT BEEN STAGNANT, driven in large part by gains in services like warehousing and transportation.
Median production and supervisory wages have increased by more than 30 percent since the early 1990s, and total personal compensation is up 61 percent.
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American living standards cannot justify new U.S. industrial policies either.
In terms of basic necessities like food, clothing, and home goods, AMERICANS TODAY ARE ABSURDLY RICH AS COMPARED TO ONLY A FEW DECADES AGO.
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Cato’s Marian Tupy has shown the average time an unskilled American worker had to work to earn enough money to buy a long list of everyday items, TIME PRICES, DECLINED BY 72 PERCENT SINCE THE LATE 1970S, WHEN MANUFACTURING JOBS WERE AT THEIR ZENITH.
That means that for the same amount of work that allowed an unskilled worker to purchase one item in 1979, he or she could buy 3.56 items in 2019 on average.
Tupy has found similarly impressive gains for food, helping to explain why food insecurity reached an all‐time low before the pandemic hit.
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Finally, there is little reason to believe the industrial policy experiences of other countries, particular China, justify U.S. industrial policy.
For one thing, most experts agree differences in nations’ culture, economies, and political systems limit the extent to which perceived industrial policy successes can inform whether similar results are possible in the United States.
In any event, THE “SUCCESSES” OF COUNTRIES LIKE JAPAN, TAIWAN, SINGAPORE, AND SOUTH KOREA ARE ROUTINELY EXAGGERATED, with studies showing the nations’ impressive economic growth was, at best, mostly disconnected from industrial policy and, at worst, actually slowed by it. Meanwhile, any legitimate successes in these and other countries are more than offset by countless failures in Latin America, the UK, Europe, India, and — of course — the United States.
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CHINA’S RAPID GROWTH IS PRIMARILY OWED TO MARKET BASED POLICY REFORMS (including World Trade Organization accession) following decades of self‐imposed poverty, not industrial policy.
Despite this “catch‐up growth,” China still lags the United States in many important industries (e.g., semiconductors) and is struggling to advance.
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Chinese industrial policy may have helped some other industries, perhaps even overtaking the United States in the process, but the cost of doing so was enormous, and THOSE SAME POLICIES HAVE INTRODUCED DISTORTIONS THAT LIKELY WILL HAMPER CHINA’S FUTURE GROWTH.
China also faces several other challenges — an aging population, declining productivity, prioritization of moribund state‐owned enterprises over private businesses and entrepreneurs, and increasing bureaucratization — that further undermine the all‐too‐common perception in the United States of China as an unstoppable economic juggernaut that, fueled by industrial policy, will inevitably overtake the United States.
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In sum, government planned industrial policy has an extensive and underwhelming history in the United States, featuring high costs, failed objectives, and political manipulation.
Not every U.S. industrial policy effort has ended in disaster, but FACTS HERE AND ABROAD DEMAND WE RIGOROUSLY QUESTION ANY NEW GOVERNMENT EFFORTS TO BOOST “CRITICAL” INDUSTRIES and workers and thereby fix alleged market failures.
Unfortunately, such skepticism is rarely applied.
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The United States undoubtedly faces real economic and geopolitical challenges, but the solution lies not in copying China’s top down economic planning on the grounds that the U.S. system is failing and that China is an inevitable economic power.
Instead, AMERICAN POLICYMAKERS SHOULD LEAN INTO THE THINGS THAT MADE THE UNITED STATES A GLOBAL LEADER TO BEGIN WITH:
-openness to foreign trade, workers, and investment
-low taxes
-flexible labor markets
-stable monetary policy…
and most notably, a lack of any grand industrial policy.
(end of section 2 and article)
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“American policymakers should lean into the things that made the United States a global leader to begin with, including openness to foreign trade and low taxes.”
The more government regulates and taxes
-the more government is strengthened in the short run and weakened in the long run
-the more We are weakened in both the short run and in the long run
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“Both U.S. manufacturing job losses and the sector’s shrinking share of gross domestic product primarily reflect long‐term global trends shared by most industrialized nations and disconnected from specific federal economic policies, whether free market or interventionist.”
See Figure 1.
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