America’s economy won’t boom again unless the manufacturing sector does. Period.
Let’s stipulate that when it comes to the dignity of work, all jobs matter — whether coding in San Jose, construction work in Cincinnati, or urgent-care nursing in Queens. But the big question on the table is whether America can restore the boom days of 3-percent-per-year growth. And here manufacturing jobs are key.
However, there is an idea in circulation — especially popular in corners of Silicon Valley — that future workers face a tech-driven gig economy disconnected from “dirty” old factories. In that worldview, it’s futile to try and revive “disappearing industries like mining and manufacturing;” the focus should be on “emerging, fast-growing industries” instead.
Set aside what constitutes “emerging” and “fast-growing,” and consider the inconvenient truth that not all jobs are equal, economically speaking. When it comes to creating wealth for all of society, there’s no substitute for manufacturing jobs.
A dollar added to the GDP by a factory generates a spillover economic benefit some three-fold greater than a dollar added by a car or food service. This well-established phenomenon is what economists call a “multiplier effect.” It means that policies directed at boosting manufacturing’s 12 percent of the economy are as impactful as an equal boost to 40 percent of the rest of the economy.
Of course, none of that matters if we have, in fact, entered a post-industrial era wherein making “stuff” is yesterday’s news. The Internet and now the “gig” economy have emboldened a worldview that has been fashionable ever since 1973, when Harvard sociologist Daniel Bell published “The Coming of Post-Industrial Society.” According to the post-industrialists, the denouement has finally arrived. In response, policymakers, they argue, shouldn’t try to rescue American factories but, instead, think in hospice terms: offer those displaced by the new high-tech economy handouts, whether in the form of welfare or a guaranteed minimum income — packaged of course with counseling.
But this would be a particularly silly time to cede the field of manufacturing to other nations. In the coming years, billions of people will come closer to, or achieve middle-class affluence; what follows will be more spending on products of all kinds, from cars and air conditioners to pharmaceuticals and smartphones. Most forecasts see the global GDP growing by at least $40 trillion in the coming two decades — nearly twice the total added in the past two decades. That means we are on the precipice of the biggest rise in demand for manufactured goods in history.
Of course, demand for bytes and data-centric services will rise too, and faster. But here’s the rub. Social media, software services in the Cloud, streaming entertainment, online advertising, artificial intelligence, the Internet of Things, and the systems that undergird the Uberification of everything all reside inside a massive global infrastructure of hardware. The world is already purchasing nearly $2,000 billion of new information-centric hardware annually. Add to that the five-fold greater quantity of everything else that’s being manufactured.
All things told, it’s indisputable that the world will need more manufacturers. It’s also indisputable that in addition to the emergence of new manufacturers who will fabricate yet-to-be-imagined technologies, “old” manufacturing will become increasingly tech-centric. It’s already happening. At issue is where, not if, the high-tech factories — and the jobs — will be located, and, more parochially, whether America can grab a bigger rather than shrinking share of these growing world markets.
You can hear the chorus, though. “America is a service economy now. Get over it!” But, properly disaggregated, Bureau of Economic Analysis (BEA) data show that manufacturing is the biggest part of our economy — nearly twice as big as all professional services and twice as big as the government (thank goodness) and nearly triple the size of healthcare services. (See below.)
By reducing the U.S. economy to just three activities — manufacturing, agriculture, and services — one gets the simplistic and useless conclusion that “services” dominate. If we categorize everything except farms and factories as a service, the data show that more people have been employed in “services” than in manufacturing for every year since America was founded. In short, the label “services” conflates far too many diverse activities, including health care, clothing retail, Department of Motor Vehicles services, and data analytics. But these are as different from one another as each is from agriculture.
There is no “new normal” in which manufacturing doesn’t matter. The sheer scale of prospective consumption of goods gives the lie to the de-industrialization canard. But it is true that over the past two decades, America’s share of global manufacturing exports has been shrinking. Can policymakers do anything to reverse this trend?
Automation, foreign competition, and even “unfair” trade practices are sometimes blamed for this trend. But none of these poses a new economic challenge. In fact, the single biggest change to the manufacturing sector in recent years has been the staggering expansion of the regulatory state. Since 2008, the number of federal employees assigned to create, track, and enforce regulations has grown by about 50 percent to today’s 300,000 bureaucrats, while the annual budget for this has ballooned to $60 billion.
So it shouldn’t be surprising to learn that manufacturers spend, on average, $20,000 per year per employee trying to comply with regulations. That’s far more than they pay in taxes, and at least double the compliance costs non-manufacturers experience. For small manufacturers, regulatory compliance costs nearly $35,000 per year per employee.
America is not losing manufacturing because of inevitable, macroeconomic trends. In reality, it’s the regulatory state that is chasing manufacturing out of existence — or, more likely, out of the country. To try to reverse this trend is not to fight history, but, rather, to fight the bloated regulatory status quo.
Mark P. Mills is a Manhattan Institute Senior Fellow and Faculty Fellow at Northwestern University's McCormick School of Engineering. He is the author of Prometheus Bound: How Regulations Stifle a U.S. Manufacturing Renaissance.