Government Manufacturing Policy and American Competitiveness

A recent New York Times article by Christina Romer denounced government policy that specifically favors the manufacturing industry. Romer stated that policies such as “special tax breaks and support” or “direct government investment in promising industries” are inefficiently allocating resources. The government should not be caught up in manufacturing favoritism, and should instead focus on increasing American productivity across the board by improving education and infrastructure.

Proponents of manufacturing policy believe that government intervention is necessary in cases of market inefficiency; positive externalities in manufacturing, such as the benefits of clustered businesses. Manufacturing also helps create well-paying jobs.

Romer addressed the three main reasons for policies aimed at boosting manufacturing. She countered the idea of positive externalities with a study suggesting that the benefits are often small. She also asserted that the main cause of unemployment is a “profound shortfall in demand,” rather than a decline in manufacturing. Finally, Romer added that “manufacturing wages are high because production is capital-intensive and technologically sophisticated,” and thus the government is better off putting money into education and infrastructure.

Foreign Policy blogger Clyde Prestowitz made a rebuttal against Romer’s article, arguing that she understates the benefits manufacturing confers on to the economy. Unlike manufacturing, the service industry does not have “economies of scale, falling costs, rising productivity, or investment in R&D.” He also noted studies that show the benefits of “innovation and production ecology.” Next, he contended that the problem is not a lack of demand, but rather that “much of our demand is supplied by imports” – the U.S. is simply not producing enough manufactured goods. Finally, Prestowitz conceded that today’s manufacturing wages are not much higher than the general average wage, but that it still makes sense to generate more jobs in this sector because of the benefits described earlier.

Although both authors contributed good points, several readers have pointed out in their comments issues unaddressed by Romer and Prestowitz. Some of the issues mentioned include foreign subsidies, currency manipulation, the high added values of middlemen driving up costs, and the desire of Americans for cheap products and high wages. Ultimately, government manufacturing policy is one of several possible solutions to a multi-faceted problem with many root causes.

 

Posted by: Pokyee Yu

Sources: The New York Times, Foreign Policy

Photo Credit: Man and gear courtesy of flickr user internetsense

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