Manufacturing, an Economic Myth

Neither Santorum nor Obama seems to grasp the realities of manufacturing in 21st-century America

By Steve Chapman

Barack Obama and Rick Santorum probably couldn't agree that August falls in summer, but on one important issue they are closer than the Winklevoss twins. Both regard manufacturing as precious beyond words, and both think the federal government should be making special efforts to promote it.

Obama favors an array of tax breaks to induce manufacturers to keep jobs in the United States, and Santorum wants to completely scrap the corporate income tax on companies in this particular sector.

"Everybody benefits when manufacturing is going strong," said the president. Santorum recently lamented, "We have the manufacturing sector of the economy when I was growing up that was 21 percent of the workforce. It's now nine."

These are not exactly new sentiments. Walter Mondale, the 1984 Democratic presidential nominee, demanded, "What do we want our kids to do? Sweep up around the Japanese computers?"

In 1992, independent presidential candidate Ross Perot, railing against the North American Free Trade Agreement, forecast "a giant sucking sound" caused by jobs going to Mexico. Pundits galore have long warned that we are "losing our manufacturing base."

But if nostalgia were a sound guide to economic policy, we should be building Studebakers and rotary telephones. Neither Santorum nor Obama seems to grasp the realities of manufacturing in 21st-century America.

The first is that it's not declining in the ways that matter. Compared to1990, the total value of U.S. manufacturing output, adjusted for inflation, was up by 75 percent in 2010 -- despite a drop caused by the Great Recession.

It has declined as a share of gross domestic product only because other industries have expanded even more rapidly. Economist Mark J. Perry of the University of Michigan-Flint points out that in 2009, the total value of America's manufacturing output was nearly 46 percent greater than China's. Over the past two decades, our share of the world's manufacturing has been pretty stable.

The decline in the number of manufacturing jobs is taken as evidence that the sector is sick or uncompetitive or the victim of unfair trade practices. In reality, the change indicates sound health. Our manufacturing workers have become so much more productive that they can churn out more goods with a far smaller workforce.

The same pattern, by the way, is evident in American agriculture. In 1900, 39 percent of all Americans lived on farms. Today it's 1 percent. It's a good thing, not a bad thing, that we need fewer people to produce our food. Likewise with manufactured products.

Manufacturing accounts for a shrinking slice of the total economy mainly because as we grow wealthier, we spend a smaller portion of our income on physical products, like cars and appliances, and a bigger one on services, from health care to cellphone contracts to restaurant meals. That phenomenon holds across the developed world.

It's the result of the free market at work, endlessly shifting resources to accommodate changes in consumer demand. Politicians don't think they should tell Americans to eat at Burger King instead of Chipotle, or buy baseball bats instead of soccer balls. They didn't insist we keep our typewriters when personal computers came along.

For the most part, our leaders take it as normal and sensible to defer to consumer demand, rather than try to dictate it. Given that, why do they think they ought to rig the tax code to push consumption dollars from services, which Americans want, to goods, which they don't want quite so much? Why should they divert investment from more popular businesses to less popular ones?

That's what the measures offered by Santorum and Obama would do. The point is to ease the tax burden of manufacturers at the expense of other companies, on the superstition that the former are more valuable than the latter.

It's hard to see the fairness or the economic logic. When the president unveiled his proposal, Jade West of the National Association of Wholesaler-Distributors complained to The New York Times, "My guys are totally freaked out by manufacturing getting a different tax rate than we do. They're not more important in the economy than retail or distribution or anything else."

In fact, manufacturing is bound to be a diminishing share of any advanced economy. Obama and Santorum can fling money into the teeth of that trend. But anytime politicians want to resist powerful and beneficial economic forces, bet on the economic forces.