Sunday 22 Jul 2018 | 11:26 | SYDNEY
Sunday 22 Jul 2018 | 11:26 | SYDNEY

Must America make things?


Sam Roggeveen


31 August 2011 16:24

Earlier this month Hugh White published an op-ed in the SMH pointing out that America is fast shedding its labour-heavy manufacturing sector. The growing 'knowledge' industries, such as finance and IT, are lucrative but don't create enough well-paid jobs:

This raises some rather unsettling questions. Can America's post-industrial knowledge economy support its global power? Can it create millions of well-paid jobs to replace those lost in manufacturing? Indeed, how can the US maintain a high-wage economy without rebuilding manufacturing? And how could America rebuild manufacturing in the face of China's competition?

Hugh seems to be arguing that the US is in a bind. You can't maintain the American standard of living (and its global power) without manufacturing, yet policies designed to revive manufacturing (like industry policy or protectionism) are either unlikely to work or self-defeating.

But I'm genuinely uncertain about the premise; I'd love to hear what economists think about the proposition that manufacturing is critical to maintaining American global power.

Meanwhile, a NY Times piece popped up today pointing out the same thing Hugh did: jobs lost in manufacturing are not being found in other growth industries. The piece then makes what strikes me as a pretty thin case for picking winners (in this case, the electric-car battery industry), and leaves its most intriguing ideas for the end.

It suggests that the nature of manufacturing may have changed, meaning the globalisation of the production chain that we have seen in the last few decades may have peaked. It goes on to argue that, to encourage this re-localisation of manufacturing, what the US needs is not industry policy but some systemic reforms that encourage long-term investment over quick returns:

“All of the great new American companies of the past few decades,” says Suzanne Berger, a chairwoman of M.I.T.’s panel on the future of American manufacturing, “have focused on research and development and product definition — Apple, Qualcomm, Cisco.” These were technology companies that could take full advantage of what she calls the “modularity” of the global economy. Their genius resided in the design of their gadgets and information systems; offshoring the industrial work did not leave them at a disadvantage. It did the opposite, greatly reducing costs and raising profits. “Now I think we’re at a really different moment,” Berger says. “We’re seeing a wave of new technologies, in energy, biotechnology, batteries, where there has to be a closer integration between research, development, design, product definition and production.”

One challenge to moving in this direction may be that our banks, hedge funds and venture capitalists are geared toward investing in financial instruments and software companies. In such endeavors, even modest investments can yield extraordinarily quick and large returns. Financing brick-and-mortar factories, by contrast, is expensive and painstaking and offers far less potential for speedy returns. Berger maintains that for the economy to get “full value” from our laboratories’ ideas in energy or biotech — not just new company headquarters but industrial jobs too — we must aspire to a different business model than the one we have come to admire.

Photo by Flickr user Atomische Tom Giebel.