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.
However, when it comes to actually compensating those who pay the costs, the research by Autor, Dorn, and Hanson shows there’s a problem. If the outcome of recent changes in the pattern of global production had been to lift all boats – if income had grown equally across the entire distribution – then the case for trade would be clear. But what’s the case for continuing to impose the costs of globalization and technological change on those at the bottom of the income distribution while giving all the gains to those at the top?
We must do more to make sure that the gains from growth are equitably distributed. The usual list of solutions such as better education, improved job retraining programs, and increased trade adjustment assistance have not worked, and talk of “New, New Deals“ just brings more of the same. Something else is needed. For this reason, in addition to redistribution to ensure that gains are distributed equitably, I am coming around to the idea of using industrial policy to target regions hurt by the impacts of globalization or technological change.
As Autor says, “People like to think that workers flow freely across sectors, but in reality, they don’t.” Even if there is a chance of better opportunities elsewhere, people are reluctant to leave family, friends, and put their children into unfamiliar surroundings and unfamiliar schools for a chance that may not pan out, and perhaps we shouldn’t expect them to.
To the extent that it’s possible – and it isn’t always – we need to bring the jobs to them. If we can entice an industry to develop in a particular area through tax breaks and other means, then we can help to avoid the problems that come with the economic stagnation these areas suffer when they lose manufacturing jobs to foreign completion or to technological change.
We are going to pay the costs one way or the other, and we have an obligation to help the people who are hurt as the economy responds to changing economic conditions. But instead of paying the costs through higher social service payments and through other social problems, why not invest in new opportunity by attracting new business to the region?
We must do a better job of protecting workers and their families from the short- and long-term consequences of globalization and technological change. I can’t say that targeted industrial policy is the answer, and it’s not something I can endorse without recognizing the dangers of too much government involvement in private sector investment. What I can say is that what we’ve done so far hasn’t worked, and it’s definitely time to try something new.