Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. This research finds that increased competition from low-wage countries causes unemployment to go up, labor force participation to fall, and wages to decline leading to “a steep drop in the average earnings of households” throughout the community.
Foreign competition also has large effects on social insurance programs. In particular, while use of Trade Adjustment Assistance – the program intended to help workers displaced by foreign competition – goes up and there is some impact on other social programs, the biggest impact on social insurance programs comes through increases in long-term disability insurance payments.
Workers who go on disability who might have remained employed if their jobs had not disappeared represent a permanent loss of productive capacity. The costs of this idled labor come in addition to the direct monetary costs of the program. And it’s worth noting that if children are negatively affected, as they are likely to be, the effects in these communities can last beyond the current generation.
The case for free trade is based upon the idea that the gains from trade have the potential to make us all better off. There are distributional consequences, some industries will go under as foreign competition intensifies and some workers will lose their jobs. But so long as the gains exceed the losses, as most economists believe they do, it’s possible to fully compensate the losers and still make everyone better off than before.