Is American Manufacturing Dead?

The conventional wisdom is that U.S. manufacturing is dead. And, while advocates for this point of view offer few solutions to the supposed “problem” aside from the admonition to “Buy American,” a hard look at the data shows that, to paraphrase Mark Twain, “reports of the death of U.S. manufacturing are greatly exaggerated.”

True, the U.S. economy as a whole continues to suffer. But manufacturing in this country is no more “dead” than the rest of the economy. The taxes, regulations, and over-spending hindering our economic recovery are driven by Washington. Solving those problems would help the entire economy, including manufacturing, without the folly of adopting protectionist policies that inevitably raise prices and reduce economic growth.

First, the data: According to the Federal Reserve, the dollar value of U.S. manufacturing output in May was $2.5 trillion. According economist and prolific writer on the subject of manufacturing, Mark Perry, in 2009, America produced more manufacturing output than the manufacturing output of the countries of Germany, Italy, France, U.K., Brazil and S. Korea combined. Perry further notes that at $2.155 trillion, total U.S. manufacturing output is 45% higher than China’s

In 2010, manufacturing output per worker increased to almost $149,000 from $135,000 per worker in 2009, for a 10.3 percent increase. That’s the largest annual increase in U.S. manufacturing worker productivity going back to at least 1947, and follows a 7.85 percent increase in 2009. The “problem” then is that manufacturing employment is way down in this country. Increased productivity is generally not a problem in other sectors of the economy, but with a limited ability to consume physical goods, manufacturing is bound to take a hit in employment.

Sure, fewer Americans work in manufacturing and that most consumer products are indeed manufactured overseas in places like China. We don’t produce the products we see and use on a regular basis. It obviously doesn’t follow that American manufacturing is dead.

These facts buttress, but by no means prove the case for free trade. Nonetheless, if a trade made in the marketplace is not expected to benefit both parties, then it won’t happen. In a complex economy, the actual facts may be muddied, but if I am a farmer with 100 bushels of wheat and you own a herd of dairy cattle, it likely makes sense for us to trade. Despite currency manipulation, regulatory differences, and the presence of organizations like the World Trade Organization and other inter-governmental trade agreements, it really is that simple.

This is not to say that all is well in the U.S. economy. While trade deficits don’t matter, the federal deficit is extremely important and must be addressed, largely through budget cuts and entitlement reforms. That’s because the problem was largely driven by a doubling of federal spending over the past decade, but also because there is limited wiggle room in terms of raising taxes.

Nations have been lowering corporate income taxes in order to become more competitive. The U.S. now has the highest corporate income tax in the world. This led to even liberal Rep. Martin Heinrich to call for halving the US rate recently.

There are, of course, a variety of tax and regulatory policies including ObamaCare and the new financial regulations – to name just two – that are stifling economic (and therefore manufacturing) growth. This slow economic growth has exacerbated the budget deficit situation and could, in the long-run, do real harm to domestic manufacturing by eliminating a major market.

The good news is that America is still a dominant economic player when it comes to high-tech, high-value manufacturing. The bad news is that our policymakers are standing still and our government is going further into debt while other nations are cutting taxes and attempting to become more competitive. Restricting trade won’t solve a non-existent decline in manufacturing. Indeed, expanding free trade will allow America’s manufacturers to continue leading the world.

 

Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.