February 5, 2017 Boosting US Manufacturing Requires a Scalpel

If one thing should be clear in the wake of the election, it is that President Trump is serious about growing U.S. manufacturing. But while he has dominated the economic news with his comments warning companies about offshoring jobs and his involvement in the deal that led Carrier to retain about 800 manufacturing jobs that were previously headed to Mexico, his words and actions have largely elicited derision from economic commentators and analysts. Their dismissive responses have ranged from “this is totally trivial” to “it will never work,” “picking winners only reduces economic welfare,” and “we shouldn’t care about manufacturing, anyway.” Emblematic of this widespread pundit opinion that the president’s pronouncements have been nonsense, or worse, business school professor Stephen Kobrin writes, “What happens when people realize they’ve been taken?” In other words, the consensus among elites is that the president is pulling a fast one on ignorant and gullible voters.

But the carping has provided little substantive guidance for the incoming administration on what a practical and effective U.S. manufacturing strategy should look like. On one level this shouldn’t be surprising; the Washington establishment and the broader community of neoclassical economists have no real idea what to do other than fall back on general framework measures such as reforming the tax code, training workers, and building physical infrastructure. Nor do they even offer an analysis of what has happened to U.S. manufacturing and why. Asking conventional economists to shape a national manufacturing policy would be like asking lawyers to design a bridge. This lack of sector-specific knowledge explains why they scoff at Trump’s efforts and at anyone supporting them.

But the question of what an intelligent U.S. manufacturing strategy should entail is central to the future of the U.S. economy, so getting it right is critical. The Trump administration has a real opportunity to do that by ignoring both supercilious criticism and tired laissez-faire thinking, but it also runs the risk of overreacting and thereby making things worse, not better. Therefore, to help guide the new administration’s manufacturing policy efforts, this briefing paper first unpacks four key policy debates on manufacturing (why jobs were lost; why jobs went offshore; what’s the right amount of manufacturing for America; and whether manufacturing can return) and shows how the conventional economics position that the media reflectively recycles is wrong on each of them. The paper then presents 10 strategic principles that should guide the administration’s efforts to restore U.S. manufacturing:

1. Focus on traded sectors, not just manufacturing;
2. Focus on high-value-added, defensible sectors and segments;
3. Focus on the trade deficit, not jobs per se;
4. Recognize what should stay and what shouldn’t;
5. Understand that when U.S. companies succeed in overseas markets it can help U.S. employment;
6. Focus on attraction rather than compulsion;
7. Move beyond one-off deals and a low-cost business climate;
8. Change the playing field through technology;
9. Support the defense industrial base; and
10. Pay attention to where advanced production is located in the United States.

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