Manufacturing On Planet Economus
Economist Christina Romer had an op-ed in the NY Times this weekend, Do Manufacturers Need Special Treatment? The question that keep coming back to me is why did she feel the need to write an op-ed to diss manufacturing? Is it just an economist thing? Or is she, like so many economists, from another planet?
In her op-ed Romer claims those of us who argue for a national manufacturing policy do so out of “the feeling that it’s better to produce “real things” than services.” But, she says,
American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.
Here is the difference: We can’t just keep servicing each other. This “service economy” thing hasn’t worked out so well here on Earth, and now we have a huge trade deficit. It is “better to produce real things” because that is what you sell to others to get the money to pay each other for haircuts (and scissors).
Once You’ve Got It It’s Hard To Lose It, Once You Lose It It’s Hard To Get It Back
Manufacturing brings so much along with it that entire economies have been, are and will be supported. China isn’t making its living by cutting each others’ hair. Neither is Germany, or other countries that have realized the importance of manufacturing and manufacturing policy to an economy.
Manufacturing brings with it all the businesses in a supply chain, it brings the research and innovation that manufacturing requires, and it brings a lasting real infrastructure that requires enormous investment to duplicate elsewhere before competition is enabled. Today we have a tremendous current account imbalance that resulted from the terrible trade deficits suffered since we were invaded by this crowd from planet Economus, who told us we don’t need manufacturing – that we should transform ourselves into a “service economy.” And it will require enormous investment to restore the ecosystem that we allowed to escape to other countries in that period.
Once you’ve got it, it’s hard to lose it, and once you lose it, it’s hard to get it back. Not so much with services.
Romer’s Three Straw Arguments
Romer sets up three arguments made of straw for helping manufacturing, only to knock them down:
One: Market Failure. Romer says “government intervention” is only justified when you can demonstrate “market failure.” In essence she says markets must make our decisions, not We, the People. “For example, when competition in a market is limited, antitrust laws that prevent monopoly can be helpful.”
Romer writes that another “market failure” comes when it can be shown that there is a benefit to having clusters of businesses. When benefits leak beyond where a company is putting their money then tax breaks and other government help may be due.
Romer knocks down this justification for government “intervention” with two arguments. She says, “large clustering effects have been hard to find.”
Perhaps cluster effects don’t have benefits on planet Economus, where Romer apparently resides, but on earth all you have to do is look from the development of the auto industry in Detroit to the development of the semiconductor industry in Silicon Valley to understand that yes, clustering effects matter.
Romer also says if clustering does brings benefits why single out manufacturing for government benefits when other sectors also benefit from clustering? Well, of course we shouldn’t just help our manufacturing if it can be shown that government involvement boosts the businesses of We, the People in other sectors.
Romer also says there is market failure if a learning period means that future companies benefit form work done by early companies. Romer says, “ a study of the semiconductor industry found that although learning by doing was substantial, most of the rewards went to companies doing the early investing.”
The Silicon Valley Romer talks about is located on that planet Economus. The Terran Silicon Valley I live in has seen many, many startups fail, only to see later companies take up their ideas and succeed.
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