Bringing Manufacturing Back: Boon or Disaster?

There has been a lot of talk and excitement recently about manufacturing jobs returning to the U.S. from China and other developing nations that hold a natural cheap-labor advantage.  Both parties talk about it as the solution to our economic woes.  Most recently, President Obama made it clear during his State of the Union speech that he supports major tax breaks for manufacturers who come back to or remain in the states.  The implication of this is that regaining these jobs would spur economic growth, and tax advantages should be used to encourage it. 

Last night, NBC’s Rock Center did a story about a furniture manufacturer that just recently re-opened for business here after several years of operations overseas.  The owner explained that he felt guilty for originally shutting its doors in the states, laying off all of the people, and letting cheaper labor do the work.  The owner felt he had to do his part to help the economy grow by putting people back to work again.  As much as I admire the man’s empathy and commitment to his community, I have a bit of an issue with the reasoning behind this whole movement because it ignores how economies actually grow.

There is a very good reason why a good portion of American manufacturing has gone elsewhere: it is how economies naturally develop.  As Americans became richer and housing and other living costs increased, it no longer made sense for manufacturers to remain here.  Instead, they found cheaper labor in countries where cost of living and wages were lower.  I’m sure the high corporate taxes also had something to do with it, but in the end, labor costs are far more important to a company’s bottomline than tax burden.  It just so happened that the manufacturers in foreign lands were not only getting cheaper labor but also lower taxes.

This, in and of itself, is not really something that Americans should be mourning the loss of.  If an economy is healthy, new export activities will spring up to replace the old exports that are no longer able to compete.  It is not often, though, that those older export activities die altogether; they simply go somewhere else where the conditions are more favorable.  But in a healthy economy, there are no tears shed at the loss of the old, because the new is always much more lucrative.  This is a sign of an economy that is positively developing and growing.  People get richer in these types of economies.  In fact, this is exactly what is happening today in places like India and China, where our economic rejects are their big breaks.

The risk of becoming a rich economy – and especially the richest economy in the world – is that there are no opportunities for hand-me-downs.  We cannot benefit from the rejects of someone else’s economy.  Instead, we must either be constantly developing our own new technologies and in-demand products (exports) or spend our capital on getting it from elsewhere (imports).  We have been doing plenty of the importing in the past 30 years and not much exporting, and this is a bigger issue than that we are simply running a trade deficit.  What it really means is that we are in a prolonged period of stagnation that finally caught up to us a few years ago.

So, in order to bring the import/export ratio into a better balance, and therefore start developing positively again, we have decided that we need to go back to exporting what we previously exported.  This sounds like a good idea, and it might seem to work for a time, but you can only force a profound disadvantage to hide itself for so long, and eventually we’ll see what we should be noticing right now: developing backward to a manufacturing economy is not the same as economic growth.  In fact, if we succeed to any extent, it will because we will have actually become poorer, not richer.  An economy cannot go backward and hope to be going forward at the same time.

The part that should concern us most is what this back-to-manufacturing movement says about our economy.  Some might proclaim that we need jobs so desperately that any jobs will do.  Others might say that it is the patriotic duty of an American company to make its products in America.  But what it really says is that we have neglected our natural capital so much in past decades that we have nowhere to go but down.  We have let our once tops-in-the-world education system decay to the point that a large chunk of our kids don’t even graduate, and those who do aren’t prepared to know what innovations need to be made nor how to accomplish them. To be clear, I’m not just talking about today’s kids: it has been going on since the 1970s.  We could also rely on immigrants to carry some of the innovation burden, as we have for so much of our history, but our immigration laws, by and large, no longer allow it.

So, what do we do about it?  Fortunately, we can do quite a bit to remedy the situation.  The not-so-silver lining, however, is that we’re not going to see results as quickly as we want to.  If we want to become an even richer country and get back to positive development, we need to make education funding and results a national priority.  This doesn’t mean testing students to make sure they know how to take a multiple-choice test.  It means figuring out what Sweden, Japan, and other education juggernauts are doing that is working, adapting those strategies to our culture, improving on them the best we can, and funding it adequately.  Any attempt to dismiss studying another country’s successes as unpatriotic or unAmerican is simply xenophobic foolishness.

We also need to create public and private panels that are solely focused on identifying and funding possible advancements in technologies and their applications.  I have written before about how economies boom when former imports are replaced by local companies figuring out how to produce those products locally, which has ripple effects throughout the economy as other businesses spring up to serve the original business.  If these panels were involved in trying to find local producers who could efficiently make quality alternatives to current imports, it could go a long way toward helping the economy to positively develop and grow.  Of course, some imports, such as basic manufacturing, cannot be efficiently replaced by most American local economies.  We have advanced too far past this activity; the problem is, we just haven’t developed other sectors enough to fully replace it with other economic activities.

No matter how much we want results now, positive development cannot happen overnight.  We did not become a super-power overnight, and stagnation does not happen overnight either.  Economic progress and decline occur over long periods of time in which economies are either diversifying and casting off old industries or they are specializing and neglecting investment.  We specialized and neglected to the point that when we starting letting industries go elsewhere, we did not have enough other jobs that our citizens qualified for.  The long-term solution isn’t to try to bring those jobs back – which will simply assure that the economy will continue to stagnate and likely decline – but to invest in ourselves so that we are able to innovate and ready to compete when new innovations and opportunities come.