Suddenly, Americans are building factories again. In May, spending on manufacturing construction rose 77% from a year earlier, to US$194 million.
Only one other of the 40 categories of construction spending in the government report showed a year-to-year increase even a third as large. Thank Uncle Sam for igniting this boom.
Two laws enacted last year, the Chips Act and the Inflation Reduction Act, offer big federal subsidies for domestic manufacturing of semiconductors and electric vehicles.
The latest construction-spending statistics indicate these industrial policy forays are having the desired effect. For a country that has been de-industrializing for many years, the boom is good news.
De-industrialization gave consumers lower prices for many goods but it had significant downsides. It drove formerly middle-class workers into poverty, turned vibrant communities into rust buckets and denuded the labor force of important skills.
It also left the country dependent on supply chains that could prove unreliable in a crisis, as they did for medical protective equipment in the pandemic.
A de-industrialized US armaments industry has been unable to keep up with the needs of the Pentagon, the Taiwanese and Ukraine.
Building new factories, then, seems like a step in the right direction. But it’s only one step, and there are many questions about it that need answers, certainly before we take further steps.
It’s one thing to build a factory, another to operate it profitably. If jobs are the measure of success, the high-tech factories the government is encouraging won’t be as labor-intensive as the metal-bending factories that fled overseas.
Semiconductor and electric-vehicle factories are great, but they’re a small sliver of the economy. California Democratic Congressman Ro Khanna says Americans need to bring back the production of auto parts, of textiles, of steel, of aluminum among others.
But it’s questionable how much support there is in Congress for the kind of wide-ranging industrial policy Khanna advocates.
It’s not as if the USA were currently manufacturing nothing; de-industrialization was only partial.
According to the National Institutes of Science and Technology, the USA is the world’s second-largest manufacturing power, behind China, and ranks first in seven manufacturing categories and second in another six.
NIST doesn’t list agricultural equipment as a separate sector but much of that is still made in the USA.
A few decades ago, the USA manufactured practically everything. Some may want to return to that, but recreating it would be nearly impossible. For which products, then, must the country have domestic supply chains? Are those mostly related to national security?
The USA is a high-wage country; can we really bring low-wage, labor-intensive manufacturing like textiles back? New high-wage, high-tech factories will be competing for a limited pool of skilled, educated workers.
It could take decades to rebuild the domestic supplier networks that were dismantled during de-industrialization.
Government subsidies may suffice to get factories built, but if the overseas competitors of those factories have labor-cost advantages, Washington may have to raise tariffs to keep the factories running.
Retaliatory tariffs against American products could follow. For a USA exporting sector like agriculture, a far more protectionist world would prove problematic.
Some of the government’s biggest industrial-policy successes in the past were achieved by funding research. In one of the longest-running of Uncle Sam’s industrial policies – for agriculture – knowledge creation and dissemination have always played a major role.
Economists differ on the industrial policy. Critics argue that industrial policy defies the law of comparative advantage, which says everyone benefits when countries focus on what they’re relatively good at rather than trying to manufacture everything.
Supporters counter that, by supporting infant industries with subsidies and tariff walls, governments can create comparative advantage. East Asian countries have done that; their subsidies are one reason they can make semiconductors cheaper than the USA can.
Many roll their eyes at the mention of bipartisan commissions – all they produce is paper for the dustbin, the rap goes.
But industrial policy is an issue that warrants a commission. National security is at stake; we need a national consensus about whether to take the next steps in industrial policy and, if so, how.
Questions abound. Let’s assemble a bipartisan group of smart minds from a variety of worlds – manufacturing, labor, finance, academia, government and the military – and get some answers.
Asia Times / ABC Flash Point News 2023.