Trump Can Do a Lot More to Help Manufacturing

(Bloomberg Opinion) -- Why should the U.S. government try to help the manufacturing? Although factory work used to offer a pay premium, this has disappeared in recent years:

Trump Can Do a Lot More to Help Manufacturing

Manufacturing workers also tend to work long, grueling hours.

But because of automation and global supply chains, mass manufacturing employment isn’t poised for a comeback in the U.S.; either things will be made by low-wage workers in developing countries, or they’ll be made in rich countries by robots and machine tools.

This doesn’t mean the U.S. should give up on manufacturing, as some have recommended. Traditionally, manufacturing has had faster productivity growth than other sectors (though the gap has narrowed in recent years). And although some industries like software, finance and biotech are likely to cluster into a few big metropolises, manufacturing can provide an anchor for the local economy of a midsized or small city. Maintaining a healthy manufacturing industry is important for ensuring a diversified economy, which tends to be associated with higher levels of national wealth. There is evidence that manufacturing is less subject to monopoly power, meaning that it gives smaller companies more of a chance to grow and thrive. And retaining manufacturing supply chains may help to support high-value industries -- for example, China’s strength in battery manufacturing is probably one reason that country is gaining strength in the electric vehicle industry.

So promoting manufacturing is probably a good idea. But how can this be done? So far, President Donald Trump’s mix of tariffs and bluster hasn’t done much to change the long-term trend:

Trump Can Do a Lot More to Help Manufacturing

And even a very modest upturn, which some credited to Trump, now seems to be fading.

While Trump has yet to produce concrete results, researchers are trying to figure out strategies that really work. One of these is economist Timothy Bartik of the Upjohn Institute, a think tank. His recent report on supporting manufacturing-intensive communities is a must-read. Analyzing the existing research and drawing on his own years of work in the area, Bartik identifies three policies that work -- infrastructure, education and extension services.

The benefit of the first two should be obvious. Roads and ports are needed to move goods from place to place, stable electricity and plumbing are necessary for any factory, and a skilled blue-collar labor pool is a requirement for any factory to set up shop in a town. These are things that any one manufacturer is unlikely to create by itself, meaning that government needs to step in. Bartik also argues that general education isn’t enough, and that governments should provide training services specific to manufacturing jobs.

Extension services are a little less well-known. These are government-provided consulting services for manufacturers, with a focus on helping smaller enterprises improve their technology, design better products and find markets for their goods. Extension services don’t solve any obvious market failure -- for example, big companies can often do these things on their own. But they seem to work.

Beyond this timeless recipe, are there things governments can do to promote specific manufacturing industries? Research into this question has long been taboo in the economics profession thanks to free-market ideology, but that may be changing. The International Monetary Fund, a traditional bastion of orthodoxy, recently released a working paper entitled “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.” Studying the success of East Asian countries such as South Korea and Taiwan in manufacturing, it argues that by pushing private companies to increase exports of sophisticated products -- semiconductors and aircraft instead of soybeans and oil -- governments can stimulate productivity gains. The authors also argue that countries should promote ruthless competition among manufacturers in the home market, and expose them to plenty of international competition too, to ensure that the best manufacturers prosper and thrive while the laggards are weeded out. This formula, which the paper’s authors label “true industrial policy,” is strikingly similar to the approach described by author Joe Studwell in his book “How Asia Works.”

The question is whether this kind of strategy is appropriate for mature economies as well as developing ones. A few economists, such as Nobel prize winner Joe Stiglitz, are starting to suggest that it might be. Intuitively, the emergence of new technologies -- additive manufacturing, artificial intelligence and robotics -- puts even rich nations in a position somewhat similar to that of developing nations. Faced with new paradigms, countries like the U.S. probably shouldn’t just rest on their laurels and protect their existing industry clusters. To venture into these uncharted waters may require copying the formula used by East Asia.

So there are both simple and obvious steps the U.S. can take to boost manufacturing, and more experimental industrial-policy approaches. It’s not time to give up on manufacturing just yet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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