Manufacturing miscalculations

The Washington Times

Having failed miserably in its effort to shore up U.S. manufacturing with trade protection, it now appears the Bush administration is preparing to use direct government subsidies instead. Like the ill-fated steel tariffs, this effort, too, is doomed to failure.

As is so often the case, the Bush administration is approaching the alleged problem of manufacturing's decline as if no one had ever noticed it before. This results from the fact administration initiatives never are studied or analyzed carefully before being announced. This is one area where former Treasury Secretary Paul O'Neill's criticism of the Bush administration is right on target.

If anyone had bothered to check, they would have found the federal government has been issuing detailed reports on the demise of manufacturing for more than 20 years. In September 1980, the Carter administration put out a 2-inch thick report on the decline of U.S. competitiveness. In 1985, the Reagan administration followed up with a two-volume report of its own.

In addition, extensive studies have been done by the U.S. International Trade Commission, the National Research Council, the U.S. General Accounting Office, the Office of Technology Assessment, the Congressional Budget Office and others. I have a whole shelf of congressional hearings and committee reports as well.

And then there are all the books. Some of the more notable are "The Deindustrialization of America" by Barry Bluestone and Bennett Harrison (1982), "Manufacturing Matters" by Stephen S. Cohen and John Zysman (1987), and "In Praise of Hard Industries" by Eamon Fingleton (1999). The books by Laura Tyson and Robert Reich even got them Cabinet appointments in the Clinton administration.

The point is that the ground was already well plowed before the Bush administration decided to turn its attention to the decline of manufacturing, which it did in a new report from the Commerce Department last week. Yet at the end of this exercise, the Bush administration could do no better than propose more taxpayer money to help private businesses do their jobs. According to press reports, the 2005 budget will propose substantially increasing spending for the Manufacturing Extension Partnership — a program it proposed phasing out just last year.

Back when people first started complaining about the imminent disappearance of manufacturing, the proposed solution — especially popular among Democrats — was an "industrial policy." The idea was that some government agency, modeled after Japan 's Ministry of International Trade and Industry, would pick industrial winners and losers, nurturing the former with subsidies and trade protection, while humanely killing off the latter.

While popular on Capitol Hill for a time — a big supporter was Democratic presidential candidate Dick Gephardt — it died when liberal economists at the Brookings Institution took it apart. Among the leading opponents was Charles Schultze, chairman of the Council of Economic Advisers under President Carter. Indeed, he injected one of the most effective critiques of industrial policy ever written into the 1981 Economic Report of the President.

Said the Economic Report, "It is presumptuous to assume that successful identification of winning and losing industrial sectors is possible. … Even within so-called 'losing' sectors, individual firms often outperform many of the firms in 'winning' sectors."

The effect of adopting an industrial policy would be to further politicize the economy and reduce economic efficiency, the Economic Report concluded. The net effect would be to reduce the competitiveness of the manufacturing sector, not increase it. The recent history of Japan is ample illustration of the wisdom of this analysis. Its economy has been in the tank for a decade and many economists blame MITI for the failure of Japanese companies to adapt and adjust to changing market conditions.

The irony is the new Commerce report presents ample evidence U.S. manufacturing is quite healthy. U.S. manufacturing productivity is rising relative to Germany , France and the U.K. , after falling for many years. Manufacturing output is strong and retains its historical share of private economic growth. It is true employment is down, but manufacturing's share of total employment has fallen by a similar percentage in every industrialized country — including those with active industrial policies.

Echoing a recent report from the National Association of Manufacturers, the Commerce Department study concludes manufacturing's problems, such as they are, stem mainly from two factors. First is the general macroeconomic environment. When the economy as a whole grows faster, so does manufacturing. Hence, the economic recovery will powerfully aid manufacturing.

Second are the burdens disproportionately imposed on manufacturing by an out-of-control tort liability system, government regulations and a woefully outdated international tax system. These are not problems that trade protection or government subsidies can fix.

The new Bush industrial policy may be nothing more than minor election year politicking. But it's still a bad idea.