Economists Just Don’t Seem to Understand Manufacturing

Once again Clyde Prestowitz nails it in his blog over at Foreign Policy.

On Monday, Clyde’s post titled “Why don’t economists get it on manufacturing?” did what I’ve been wanting to do for a very long time: put the former Economic Advisers to President Obama in their place for not understanding economics.

Here is an excerpt, but please go read the whole thing, you’ll be much better off for it:

Writing in yesterday’s New York Times, Romer debunks the present wide concern over the decline of American manufacturing and the call by many, including the president in his State of the Union address, for tax breaks and other policies to help shore up manufacturing. She first notes that services industries are as valuable to the U.S. economy as manufacturing, emphasizing that consumers value haircuts as much as hair dryers and that earnings from exporting architectural plans to Shanghai are as real as those from exporting cars to Canada.

This sounds good because all industries have their value and no one wants to denigrate a particular industry or type of respectable work. But it’s just not true. Consumers may not value haircuts less than hair dryers but economists should. Production of hair dryers can be done in large factories that produce economies of scale. Such scale economies lead to lower prices, lower inflation, higher productivity and thus higher wealth creation for the whole economy. In addition, producers of hair dryers invest in research and development to foster innovation of new, more efficient, less energy using, and easier to produce dryers.

Now don’t get me wrong. I love my barber and want to be sure she stays in business, but her work doesn’t yield any of these benefits to the economy. It doesn’t have economies of scale, falling costs, rising productivity, or investment in R&D. So while I don’t want to lose my barber, I also don’t want to lose my hair dryer production unless it can be replaced with something that contributes equally or more to wealth creation. And I don’t see retraining the hair dryer workers to be hair dressers as a gain for the economy.

Clyde then goes on to point out several points about manufacturing that I have been blogging about over on the BlueGreen Blog, as have my colleagues Dr. Chris Busch and Michael Williams. He also does a great job of pointing out what the folks over at the Alliance for American Manufacturing have been saying all along:

U.S. proponents of manufacturing are not asking for special treatment or support that discriminates against services industries. They are merely urging that steps be taken to offset the market distortions being caused by the foreign industrial policies.

It’s no surprise that with people like Christina Romer and Larry Summers as economic advisers that it took President Obama until 2012 to get the message right.  It also makes me rue all the time this administration wasted following their bad advice.

In closing Clyde puts it best, and all economists need to realize this:

The point is that we should not have to make some false choice between manufacturing and services. We should be able to have both in those industries in which America can be competitive on the basis of prevailing market forces.

Now go read his whole blog.

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