Forget the Factories? Forget Long Term Sustainable Growth

Matt Yglesias over at Slate wrote a blog post today bemoaning President Obamas seeming ‘obsession’ with manufacturing jobs, while simultaneously extolling the ridiculous $1 billion valuation placed on Instagram by Facebook. In a completely backwards view of what makes a nation wealthy and how to return to prosperity from where we are, he declares that:

…the path forward for America is to focus on our strengths in information technology and media, and not compete with the Chinese for manufacturing supremacy.

His main point is that the information technology and media sectors of the country are the areas that have made significant advances over the last few decades, and thus government policy should be focused on enhancing that strength, while leaving the comparably worse performing manufacturing sector for other nations to handle. He states:

…if you look at America’s metropolitan areas, it’s clear that manufacturing-oriented places are relatively poor. The wealthy clusters in the United States are built around things like software, biotechnology and medical devices, higher education, finance, and business services. Places like California, Minneapolis, Seattle, and the Northeast corridor are far richer than the factory-oriented rust belt and Southeast.

There is truth in what he is saying. However, he derives the wrong meaning, and thus the wrong policy prescriptions. The industries he refers to as being the wealthiest clusters in domestic industry have one thing in common, with the exception of internet and software based businesses: Government Involvement. Patent laws, direct subsidies, guaranteed student loans, and even the nature of the money system itself direct money into these parts of American industry, enabling firms to strike it rich and incentivizing workers to focus their efforts on gaining employment in these areas. By contrast, the factory oriented parts of the country have been losing jobs, mainly because of the lack of competitiveness that increased regulations and taxes create. Of course, underlying this problem is the monetary system itself, with the constant inflation of the money supply over the last four decades leading to constantly rising prices and input costs, meaning that the high wages manufacturing jobs once paid would be catastrophic to firms’ chances of maintaining profitability.

There is nothing intrinsic about the ‘wealthy’ industries Yglesias mentions that makes them somehow superior to manufacturing. They have risen to prominence as a consequence of the rise in the service sector. Let me note here that I do not particularly love the common separation of ‘service sector vs manufacturing/productive sector.’ I prefer to separate the types of jobs into two categories: Jobs that produce tangible goods, and jobs that produce intangible goods. Jobs at an assembly line producing cars are the former, while a job waiting tables is more of an intangible good. Both are important in their own way. But the crucial point is that a nation cannot get by simply by producing intangible goods. Eschewing manufacturing jobs for information based jobs is equivalent to eschewing tangible goods for intangible goods. Of course, should strive for both types of jobs to be created, but the post implicates an abandonment of the former to appease the latter. My point is that you need the production of tangible goods to support the production of intangible goods.

The scary thing about the factory-driven view of the American future is that it’s not totally implausible. The “insourcing” trend where firms move production back to North America is real enough. The drivers are rising Chinese wages and falling “unit labor costs” in the United States. But that’s just a way of saying that America can regain factory parity with China by eliminating the prosperity gap between our two countries—a very strange policy aspiration. Most likely there’s nothing we can do to prevent some narrowing of the gap, which will have the consequence of bringing some jobs back. But we should measure our success by the extent to which this doesn’t happen, and we instead build and expand new industries that push living standards up and keep factory owners searching abroad for cheap labor.

This is the most bizarre part of Yglesias’ post, given that he, a leftist is exhibiting a scornful view of creating jobs, and actually advocating that pushing manufacturing labor overseas is a net positive for the country. He doesn’t understand that the manufacturing of tangible goods and services is the driving force behind increased living standards. The United States became the dominant power in the world due to industrialization and consolidated its position by improving its manufacturing base, while paying the highest wages in the world. The benefits from this were seemingly endless, and the end result was the United States being a country in which anyone with virtually any skill set could earn a comfortable living if one applied oneself.

That is not the case today, and it is largely because the manufacturing jobs have dwindled. The concern that manufacturing jobs are only returning seemingly because unit labor costs have fallen shows that Yglesias is concerned because he fears that the jobs that will be created in this sector are low paying and unlivable. I would suggest to him that they are low paying relative to the high costs of living imposed on them via the monetary and fiscal policy of the US, which promotes constant inflation. If we had sound monetary policy, the productivity of American workers would translate to lower prices, which would enable the American worker to live comfortably, even in an environment when wages fell slightly. That is how to increase living standards, and in fact, that is how living standards used to be increased. The US produced goods, which increased supply, which drove prices down, which enabled more Americans to afford the new products that were created. It’s a simple model, and it would behoove the US to return to it in short order.

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