The Prospects for U.S Manufacturing Growth

MIT’s Susan Hockfield makes a number of excellent points here but she doesn’t discuss the incentives for real world manufacturing plants to locate in the USA.   In the absence of heavy industrial policy subsidies, does the United States offer the cost minimizing location for a specific manufacturing plant?   Given that our workers are paid more in salary and benefits than international locations, when will a self interested firm locate here rather than where labor is cheap?  

 

If U.S workers earn twice as much as foreign counterparts, then we will need to be at least twice as productive.  This is why she discusses our educational system.  If transportation costs are high for production inputs or final outputs and if final customers or input suppliers are located in the United States, then this will provide firms with a cost incentive to locate here.   An alternative mechanism is that there are synergies between our research universities and production facilities. If face to face meetings are required to continue to improve the product, then I can imagine that production would be more likely to take place here. 

Erin Mansur and I have worked on the geography of U.S manufacturing  jobs and how such employment responds to electricity prices, labor regulations and air quality regulation. See this.

 

Author: Matthew E. Kahn

Professor of Economics at UCLA.

12 thoughts on “The Prospects for U.S Manufacturing Growth”

  1. What is such an intelligent post doing on RBC? It’s about time someone considered the inputs to the investment question from management’s perspective.

    Can the progressive mindset make the leap to the necessary policy prescriptions given its assumptions about environmental primacy, redistribution of income, etc? While acknowledging that’s too much to ask, maybe we can agree on starting with a rethink of the educational approach in this nation and reinstitute basic skill learning, discipline, and preparation for work, management, and entrepreneurship.

  2. Except wages are as high in Japan and Germany and yet they manage to have much more manufacturing per capita than the United States. Do we need industrial subsidies to achieve similar results? Yes, but then such subsidies are a component of most successful industrialization’s.

  3. Wavey,

    Well this whole post neatly elides the fact that China pegs its currency low. The resultant ‘high dollar’ crushes our exports. Then our trade policies reinforce this, pitting our manufacturing jobs against low Asian wages. Of course, doctors, lawyers, and investment bankers are not subject to those kinds of competitive pressures. To make things worse, our janitors compete with immigrant labor for their lowly jobs. Then we smash unions and rig the rules to ensure that income is inexorably redistributed upward and cut taxes on the rich…just for a bonus. Democrats gleefully assist with this effort, having bought into the whole ‘market as god’ concept.

    But by all means, it is vital to that we agree to “rethink of the educational approach in this nation and reinstitute basic skill learning, discipline, and preparation for work, management, and entrepreneurship.” Ezra Klein couldn’t have written it better.

    Ummmm….count me skeptical.

  4. “reinstitute basic skill learning, discipline, and preparation for work, management, and entrepreneurship.”

    This post makes me wonder whether you know very much about the nature of American education today, or historically. Unfortunately, it is just the sort of blithe, throwaway sentiment that all too many people find unremarkable sensible. Aside from whether it has much to do with American manufacturing growth, it’s demonstrably false, incredibly simplistic and naive.

    Leaving that mess, it seems the sad reality is that the American people are essentially competing with people used to 3rd world living standards. Why pay someone a middle class “American” standard of living when you can pay someone else to do the same thing for a Burmese standard of living? When I’m at the store, I can pay double for a product whose employees are safe, well-fed, children housed, clothed – maybe read to at night, have benefits, watch cable TV and take vacations. Or I can pay a fraction as much for a reasonably well-built product made by people whose lives are marginally better-than-starvation. Of course, that’s a moral calculation worthy of Ghandian purity – bearded 20-somethings I salute you – but it feels a bit like pissing into a tidal wave.

  5. The effect of China pegging its currency low shows up in lower cost of capital, as well as nominally lower wage rates, and the former is the more important factor for the dynamics of the situation.

    The wages and benefits of blue-collar workers are not an important factor in the cost of much manufacturing anymore. There’s just not much direct factory labor involved. There are heavy, sunk cost investments in design, in dedicated captial equipment, in social organization, in marketing.

    The U.S. would be well advised to intensify government regulation, eliminating pathological and predatory business practice, while increasing the returns on genuine quality and value-added. Quality is key, and the key to quality is government aggressively policing the marketplace, making it possible for the earnest pursuit of excellence to be recognized and to triumph over the chicanery of the marketplace. The U.S. lost out in auto manufacturing to Germany and Japan, in large part due to having inferior, under-funded regulatory regimes. FDA regulation of pharmaceuticals was once a key to building an international powerhouse in U.S. pharma; ditto for FAA regulation of aircraft manufacturing.

    Strong regulation could be a strategic advantage, if the country would wake up to the global warming / peak oil threat, and act to move to an energy-efficient future.

    Strong regulation could also be a key to un-winding the predatory and dysfunction U.S. financial system, which has monopolized the talents of so many of the brightest and most educated Americans. We should free these resources for productive use.

    America cannot afford to pay top executives of dubious ethics or intelligence tens of millions, or hundreds of millions a year in “compensation” for what often turns out to be negative productivity. To discourage wasteful rivalries and tournaments, that escalate pay rates for the top, we should immediately adopt a top marginal tax rate of 70% on personal income and couple it with a 50% corporate income tax rate, with severe limits on the deductibility as an expense, wages or bonuses in excess of six figures.

    Susan Hockfield, as a director of General Electric, could play a leadership role in reducing executive pay at GE, and insisting on a corporate income tax, which G.E. might actually pay.

    Also, I think we should fire the economists.

  6. Hockfield’s association between innovation and hands-on manufacturing looks suspiciously romantic to me. How often does Steve Jobs, a great manufacturing innovator, visit the Chinese factories where his iPads and iPods and iPhones and Macbooks are assembled? I bet he delegates this to mid-level engineers and quality controllers. If the Chinese have a problem meeting the specs, they will talk it through. But basically they carry out instructions from California.

    The categories “services” and “manufacturing” are pretty misleading in this situation. Some services, like accountancy, law, and teaching just process information. Some, like restaurants and stores, process stuff. They may be passive transmitters of it, like stores selling TVs. They may control it absolutely; IKEA say is just as dictatorial over its furniture suppliers as Apple is over its contract assemblers. IKEA is completely responsible for the design. By a curious twist, the manufacturing of IKEA furniture is completed by the customer! It’s a mistake to think that innovation in “stuff” always or even predominantly lies at the widget-hammering stage. It looks as if the long-term trend is towards separation of design and implementation.

    A better analysis would look at the supply chain, or, better, the Leontief input-output supply matrix. I’ve no idea how to do this, as the basic i/o analysis assumes rigid coefficients and innovation is about changing them.

  7. James might want to consider the implications of the following article, before he dismisses the “hands-on” aspect as mere romanticism.
    http://www.nytimes.com/2009/04/28/technology/28cell.html

    Since Watt and his steam engine, innovation in design and manufacturing have met in the tinkerer’s shop. It’s the product of many, small, incremental, experimental changes, meeting a fine discrimination.

    It is a spirit that does take advantage of opportunity.
    http://www.wired.com/epicenter/2011/08/big-diy/

  8. What Ranjit Suresh and bobbyp say. And then some. If you start with garbage in — the assumption that US workers are necessarily more expensive on a productivity-weighted basis — you’re going to get garbage out. Even more when you ignore transport costs for both information and product.

  9. Bruce Wilder: Where’s the innovation in Chinese knockoffs (your first link)? And if DIY open-source hardware is taking off (claimed by the second link), that shifts making stuff from the factory (manufacturing sector) to the home or garage (household sector). Neither are relevant to Hockfield’s sspecial pleading that innovation happens because of factories rather than because of, for instance, the institution she leads.

  10. Expensive labor works well with capital-intensive industries. And capital-intensive industries work well with good capital markets and stable rule of law. Not only that, but “capital-intensive” usually means “technology intensive.” AFAIK, the US isn’t exactly shabby in capital markets, legal stability, and technological prowess.

    Heck, this is just the Swedish model, which works pretty well, considering that Sweden is a socialist hellhole.

    So why is America doing so poorly in manufacturing? Well, maybe it isn’t. And if it is, maybe it is because of union-busting. By the same reasoning as top-quality American management needs all kinds of goodies to incentivize it, maybe top-quality American workers need some goodies of their own. Note that OCAW does pretty well in Texas, not exactly a union hotbed. A union helps preserve the loyalty of high-paid workers.

  11. JW: “Where’s the innovation in Chinese knockoffs?”

    In all the little “improvements” made by tinkerers, who put these things together in a garage somewhere, and sell them to enthusiasts, who enthuse over every tiny incremental improvement. Steve Jobs started off assembling computers in somebody’s garage, something he could do because he lived in Silicon Valley, where he could find parts and partners, who worked at Hewlett-Packard, Intel and other offspring of Fairchild, and sell them into a ready market of enthusiasts.

    Now, the people with access to the parts, the manufacturing services and understanding how to put them together are there, not here. For Apple, it is the erosion of economic rents, due to violations of their IP — something they can prosecute in the U.S., but in China, not so easily.

  12. One reason why a manufacturing base is important: all innovation starts with somebody muttering “There has got to be a better way to do this.” You are more likely to invent a pneumatic nail gun if you have grown sick and tired of pounding nails, than if you sit in an ivory tower asking yourself “I wonder what needs inventing today?”

    It may be that it takes a professional thinker, not a professional carpenter, to design a reliable, mass-producible nail gun, but the thinker is not likely to perceive the need for it unless he runs into a carpenter once in a while.

    –TP

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