In Praise Of Hard Industries

Dec. 21, 2004
A prominent economic commentator tells why manufacturing, not the information economy, is the key to the future prosperity of the U.S.
From the bookIn Praise of Hard Industriesby Eamonn Fingleton. Reprinted by permission of Houghton Mifflin Co. All rights reserved. You can hardly pick up a newspaper these days without reading yet another glowing account of the golden prospects supposedly in store for the United States in the so-called postindustrial era. If media comment is any guide, almost everyone these days is convinced that new information-based businesses and other postindustrial activities have superseded manufacturing as the font of prosperity. This euphoric cast on America's so-called New Economy has been subjected to remarkably little reality checking. But the truth is that America's steady retreat from manufacturing cries out for close scrutiny. For there are major holes in the case for postindustrialism. Not only do those who advocate postindustrialism overestimate the prospects for postindustrial services, but they greatly underestimate the prospects for manufacturing. A major problem with the argument of postindustrialists is that they do not understand how sophisticated modern manufacturing truly is. The economic merits of postindustrial activities must be weighed against those of what might be called hard industries. This term is intended to denote capital-intensive, technically sophisticated forms of manufacturing. This distinction needs to be emphasized because postindustrialists implicitly define manufacturing as merely labor-intensive work of the assembly type. In so doing, they set up a straw man, for there is no question that, in an increasingly integrated world economy, many kinds of consumer products can no longer be assembled economically in high-wage nations. What the postindustrialists overlook, however, is that assembly is only the final, and generally by far the least sophisticated, step in the making of modern consumer goods. Earlier steps such as the making of components and materials are typically highly sophisticated. Advanced nations clearly need a judicious balance of manufacturing and services. Apart from anything else, many postindustrial services are necessary to support and enhance a nation's manufacturing base. The point, however, is that postindustrialism should not be embraced blindly just because it is fashionable. Nor should nations lightly allow their manufacturing prowess to drain away. Postindustrialism entails many hidden drawbacks. Of these the most important are:
  • An unbalanced mix of jobs.
  • Slow income growth.
  • Poor export prospects.
These drawbacks constitute -- in baseball terms -- three strikes against the New Economy. Strike One: A bad job mix The most obvious problem with the New Economy is that it creates an unbalanced mix of jobs. Whether we are talking about financial, engineering, legal services, computer software, movie making, health care, broadcasting, database management, consulting, scientific research, or telecommunications, most postindustrial jobs are for people of considerably higher than average intelligence -- typically people whose IQs rank in the top 20% on IQ tests, if not in the top 5% or even 1%. In this regard, postindustrialism contrasts sharply with manufacturing, which, of course, generally creates a well-balanced range of jobs. For workers who lack the rarefied talents needed to succeed in postindustrial services, America's shift to the New Economy is little short of disaster. As estimated by the postindustrial economic commentator Michael Rothschild, up to 20% of the American workforce will be marginalized by the move to an information-based economy. Yet Rothschild and his cohorts see the sacrifice of so large a share of the workforce as not only inevitable but even acceptable -- because the collateral advantages of postindustrialism for the rest of the economy are supposedly so large. Strike Two: Slow income growth That the drift in the United States into postindustrialism results in weak income growth is one of the most serious, albeit one of the least recognized, drawbacks of the New Economy. Yet the evidence is undeniable. Nearly two decades after the United States began its fateful drift into full-scale postindustrialism, international economic comparisons consistently show that Americans have lagged in income growth in the interim. The ultimate authority on this is OECD in Figures, a yearbook published by the Paris-based Organization for Economic Cooperation and Development. For those who believe in the superiority of the U.S. postindustrial strategy, the 1998 edition of this yearbook makes distinctly chastening reading. Take the 16-year period from 1980 to 1996. In that time the United States boosted its per capita income at current prices -- that is, before adjustment for inflation -- by a total of 134%. Although at first sight this growth seems impressive, it was bested by no less than 12 other OECD nations. In order of income growth, these were South Korea, Japan, Portugal, Ireland, Luxembourg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland. And with the single exception of Luxembourg, all these nations boasted a greater commitment to manufacturing employment than the United States. Strike Three: A dearth of exports The third big drawback of postindustrialism is that it weakens a nation's prowess in overseas trade. Virtually all postindustrial activities are handicapped in export markets by fundamental cultural differences. Take the much-hyped new American information businesses that have mushroomed with the rise of the Internet. Almost all their revenues come from within the United States because in overseas markets their sales are hindered by several cultural and regulatory factors, of which the most obvious is language. Similar cultural problems are also much in evidence in curtailing the American computer software industry's export prospects. These problems are perhaps most obvious in the case of personal computer programs, which must, of course, be comprehensively altered for other nations' writing systems and customs. The costs involved cut deeply into U.S. export revenues. Other key impediments to trade in postindustrial services are regulation in foreign markets, which is generally a much bigger problem for exporters of services than for exporters of manufactured goods, and inadequate protection of intellectual property rights. In particular, piracy in foreign markets severely depletes the flow of foreign revenues to many important post industrial businesses, most notably computer software, movies, and music. The Future: A historic challenge We have seen that manufacturing industries are highly effective in boosting the prosperity of many major economies today. But can manufacturing continue to deliver a superior economic performance in the decades ahead? The postindustrialists, of course, think not. Insisting that the world economy is already suffering from an acute excess of manufacturing capacity, they predict that this excess will only worsen in the decades ahead. It is a frightening picture -- but one based on a wholly mistaken reading of how the world economy works. In reality, the long-term outlook for manufacturing demand is for expansion almost right across the industrial waterfront. Perhaps the easiest way to understand the truly bright future of manufacturing is to remember that about 90% of the world's population is poor. As the world's developing nations bootstrap themselves out of poverty, how will they spend their money? Do they ache to acquire such postindustrial products as Wall Street's latest portfolio hedging services, personal home-page software, or databases of American newspaper clippings? Probably not. More than anything, what developing economies want is, of course, material goods. Thus, manufacturers face an enormous and highly exciting challenge. As in the past, they must aim to create even more goods, but now they must strive, in the process, to use fewer of the earth's scarce resources. They must create ever greater abundance by developing more inexpensive materials and more efficient production technologies. The extent of the challenge can be summed up in one sentence: If the rest of the world is ever to enjoy an American-style standard of living, the world's output of material goods will have to increase at least fivefold. Taking Action What should American policymakers do to reverse the postindustrial trend? Any effective strategy would have to be drastic. But in its basic principles, it would be quite simple:
  • Boost the nation's savings.
  • Channel a larger portion of those savings into industrial investment, particularly productivity-enhancing production engineering.
  • Ensure that manufacturers earn a reasonable return on their investment.
  • Upgrade workers' skills.
  • Stem the leakage of world-beating production technologies abroad.
Many practical measures are available to facilitate most of this agenda. Tax incentives, for instance, can be readily devised to ensure that as much as possible of the nation's savings is channeled into manufacturing. The quality of management in manufacturing industries can be bolstered by ensuring that the nation's educational system places a stronger emphasis on technical subjects. Such a focus would help attract more of the nation's best brains into engineering, and particularly production engineering. To deliver an adequate return on manufacturing investment, the United States would have to make sure -- really sure -- that its exporters compete in world trade on terms at least as favorable as those enjoyed by foreign rivals. As a first step, the U.S. would have to dramatically beef up its notably half-hearted trade diplomacy. It might also be necessary to relax antitrust rules to ensure that the nation's manufacturers could agree on product standards and avoid wasteful duplication of effort by cooperating in research and development. All this would undoubtedly boost the profitability of manufacturing industries. But higher profits are not enough. If U.S. competitiveness is to be boosted, profits must be plowed back into raising worker productivity, rather than siphoned off in large compensation packages for a wealthy elite. Among other things, executive stock options would have to be reengineered to force managers to focus on boosting their corporations' long-term prospects. The task of reviving U.S. manufacturing prowess is of vital historic importance and clearly demands exceptional measures. By a process of elimination, only one policy option remains to be considered -- an option that has so far been regarded as second only to nuclear war in unthinkability. That option is tariffs. After nearly 14 years studying East-West relations from a vantage point in Tokyo, this writer has no illusions about the practical difficulties that face Western leaders who want to "teach the world to sing in perfect harmony." Certainly in the absence of major breakthroughs in trade diplomacy in the very near future, the tariff option must be included in any serious consideration of how U.S. manufacturing prowess can be revived. Otherwise, American manufacturers will be condemned to a perpetually unequal struggle in trying to compete with foreign manufacturers that enjoy the enormous advantage of a protected home market. Tariffs powerfully counter the effect of other nations' industrial policies in undermining the profitability of American manufacturing industries. Competing with one another behind a modest but adequate wall of tariffs, American companies would be provided with a generally appropriate level of profitability. Tariffs could go a long way toward end-running the savings shortages and poor returns on investment that have discouraged so many American manufacturers from creating the world-beating production technologies that the American worker needs to stay at the leading edge in world productivity. A former editor forForbesandFinancial Times, Eamonn Fingleton is an economics commentator who has lived in Tokyo since 1985. His business commentaries have appeared inThe Atlantic, Foreign Affairs, The New York Times, and other publications.

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