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Are calls to promote manufacturing justified?

Many people in the United States lament the decline of manufacturing activity. The recent financial crisis that affected much of the Western world has served only to strengthen the thinking of those who believe that "pushing paper" is a less desirable activity than producing, say, bicycles or shoes. As noted in a recent Financial Times article, the claim that real wealth can be achieved only by making things appears plausible to many. Subscribers to this line of thinking believe that we cannot become and remain wealthy by focusing primarily on services.

Contemporary studies support the contention that manufacturing is in decline. An article in The Economist notes that from 1991 to 2009, manufacturing output, as a percentage of gross domestic product, declined in the United States, Britain, Germany and Japan.

This seemingly saturnine state of affairs has given rise to calls for policies that will promote manufacturing. For instance, a new Council on Foreign Relations working paper by Michael Spence and Sandile Hlatshwayo argues that if the U.S. economy is to prosper in the future, it must find ways to increase employment in the tradable sector, which tends to be dominated more by manufacturing and less by services. This study notes that almost all of the 27.3 million jobs created in the U.S. economy from 1990 to 2008 were in non-tradable services such as education and health care.
 
There are two concerns here. The first is that relative to manufacturing, services are, in the words of the noted economist Jagdish Bhagwati, "technologically stagnant." The second is that the demand for non-tradable services may not grow at robust rates and hence retailing, health care and government services in particular and services generally cannot be relied upon to be effective job creators. These concerns have led to calls for enacting legislation that will provide protection to increase manufacturing’s share of GDP. They also have led to calls for targeting some public investment toward technologies that will enhance the scope and hence the job-creating abilities of the tradable (mainly manufacturing) sector.
 
Calls for granting special status to manufacturing are misguided. To understand why, note that this country continues to be the world’s largest manufacturer. Further, as noted by The Economist, both the United States and Japan roughly doubled their manufacturing output from 1980 to 2009, and nowhere in the G7 group of nations has output declined in absolute terms. It is true that a lot of lower-end manufacturing has moved to nations with abundant labor such as China, but this reflects a changing pattern of comparative advantage that ought not to be resisted with activist policy. In addition, technological stagnation certainly does not characterize the workings of logistics companies, major retailers and mobile telecommunications.
 
Bhagwati and others have rightly pointed out that increasing the demand for non-tradable services is as likely to produce jobs as is the more opaque task of altering the composition of output to favor manufacturing. In addition, as developing nations become richer, they will demand more services of the sort where the United States has a comparative advantage. In this regard, it is helpful to comprehend that rich nations tend to export more services than they import.
 
Given these observations, we now ought to move beyond what the economist and writer John Kay calls "manufacturing fetishism" and recognize that attempts to free up trade in services are likely to bring more benefits than calls to promote manufacturing.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.

4/29/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail rbj@rbj.net.

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