06 February 2012

Romer on Manufacturing Policy

Writing in the NYT, Christina Romer (professor at UC-Berkeley and former chair of President Obama’s Council of Economic Advisers) finds the justification for a "manufacturing policy" to be wanting:
As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.
Where is she wrong?


  1. ===========
    Where is she wrong?

    What did she say if anything? Did she say that a manufacturing policy should be well thought out? Did she say that she doubted that such a policy be effective? The former part would seem to be something with which everyone would agree while the latter may be a matter of debate.

    Now if the phrase "...persuasive case... many other economic policies is well established" is code for free trade and globalization then one must consider that such a case must include the effect that new technology is having on the structure of our society. If economic efficiency in the form of free trade and globalization is eliminating the middle class and increasing income inequality, then one could well argue that the standard case for free trade and globalization is not well established. One could well be quite concerned that economic efficiency, or "Max U" in the current phrase, is producing effects that are undesirable and that the basis on which cases are argued currently in economic policy is no longer useful.

    One thing that should be mentioned is that many professors of economics favor offshoring but then the jobs of professors of economics will not be offshored.

  2. There is no evidence to support "market failure". There is evidence to support that our economy and society has been harmed by trade with nations without regulatory and labor parity.

    There is evidence that most people neither desire nor pursue academic or other principally intellectual vocations.

    There is evidence that economic development begins with resource recovery and development, which would suggest that a robust and sustainable economy needs to be comprehensive and diverse.

  3. I ascribe to the Greg Mankiw's dictum that all economists within government are Keynesians regardless of their pre-government leanings. It is refreshing to hear Mrs. Romer's less than Keynesian words in this one portion of her piece.

    I love when markets fail and the earlier the better. The whale oil market failure was a travesty to the workers in that industry but allowed the poor to educate themselves after the sun went down. So Mrs. Romer is not wrong about the reality of market failure and the rich evidentiary history to which she alludes.

    Public policy is the bane of all our existence and Mrs. Romer is only slightly cautionary here. Obviously she is citing the vast array of unintended consequences of well meaning public policy that in reality ends up being harmful to the very workers that it claims to protect. Think of the very harmful tariff on the importation of Chinese tires.

    Income inequality, oh brother. You link to David Leonhardt's and he first cites the difference between the 1920s and today. Remember Godfather II when the young Don Corleone brings his wife a pear and how she bill and cooed? Outside their two-room walk-up, horse manure and urine runs freely, and tuberculosis and polio are common scourges. That was the world of the 1920s. In the 2010s we study aggregates and never consider the mobility that exists within the quintiles, both upward and downward. While around us an immigrant clerks at 7-11 drive a cars that no rich man in the 1920s could have ever afforded. Entertainment and education is a mouse-click away and, until recently, the poor consumer could buy low cost tires.

    Income inequality? I don't know why she said that from the paragraph you cited but the rest of her piece spoke Keynesian and statist volumes.

    I admire Mrs. Romer's education and style. Some of the work she has produced is amazing and insightful. This article however is a jumbled mass of inconsistency tied in a pretty pedantic bow.

    The entire article needs to be broken apart and examined bit by bit. An egregious example is at the same time supporting anti-trust legislation and supporting the "early-entrant." Positive externalities cause a market to malfunction?

    I guess it's easy to become a Keynesian in government when you are one prior to government service.

  4. re 3 WisdomKurk

    In regard to 19th century poverty and pears, it should be remembered that the rise of an affluent middle calls was not an economic necessity brought on by capitalism. It was a contingent outcome of public policy and the technology mix of the mid-20th century.

    Technology is changing and there are indications that those changes are working against an affluent middle class. The affluence that bought about the improved life and environmental conditions is now being lost in a new degree of inequality.

    Capitalism was in force when affluence came to the middle class but we should not be confused that is was the only cause. An educated stable middle class was needed in the mid-20th century economy and it was created. The 21st century has technology that does not require it. Supporting middle class wages is a cost that enterprises can eliminate by use of technology. Capitalism dictates that they do so. They are doing so. Where this leaves society and the overall economy is something that we will all have 5o deal with and this is going to be a problem of much greater import and immediacy than AGW.

  5. I'm not sure how she's wrong.

    But I'm not sure how she's addressing a problem that I think is important.

    Along with a drop in manufacturing employment, we have seen a growth in investment in the financial sector that returns relatively greater returns to large-scale investors on a relatively short-term time horizon.

    This, effectively, discourages investment in the manufacturing sector that I believe could still be profitable, albeit less so, and employ more people at better paying jobs than the investments we've seen in the financial sector (and in financial engineering as opposed to long-term businesses that produce quality products at a good price).

    I would think that we could substitute economic growth in the manufacturing sector in a way that creates less income inequality than what we have seen in recent decades - economic growth sustained by disproportionate growth in the economic sectors that lead to increased income inequality.

    She does suggest investment that will employ people at more high-skilled jobs in other market sectors. I don't think that in itself will address the parasitic effect of growth in the financial and service sectors, and I think that finding ways to differentially stimulate investors to move from the financial sector to the manufacturing sector would be beneficial.

  6. Like and agree with WisdomKurk on letting businesses and/or markets fail... and that any intervention by government is negative except perhaps I would add in the case of incentives for resource industries in developing countries if it supports a developing country growth and development (and of course jobs) ... but not in advanced countries where meddling is always inefficient at best and likely subject to corruption. As for Romer's position on jobs, I prefer Steve Job's retort to President when he asked the Apple man"...why not bring those jobs back home" -- Jobs -> "honestly won't happen." Why? As a result of globalization and acceptance / expansion of international trade the supply chains are totally global same for Apple, Boeing Dreamliner and thousands of others. The value added proposition and deepening of capital vs. developing economies and transition to more and more services grows the intangible component of corporate valuations which support higher paying jobs to a greater extent than low paying jobs which then obviously should be done in the lesser developed lower income economies. The key to jobs is more and better education and training and innovation to begat and spur future innovation which is the source of our competitive advantage in the past, present and future. Just stop the meddling distortion in the US econonmy.

  7. Where is she wrong?

    Read her comments on the loss of manufacturing jobs. Her answer is to find some way to encourage construction jobs or to initiate tax transfers to the former manufacturing workers. She seems oblivious to the structural changes being made to the economy by technology in the form of automation and globalization. People sued to be valued by employers because of their intelligence and adaptability. Now computerization has allowed robots to attain the skill levels formerly supplied by human manufacturing workers. Lower skill jobs can be filled by foreign workers at very low wages. There is a major structural change going on in society and she seems completely unaware of its implications

  8. "Today, we face a profound shortfall of demand. That truly is a terrible market failure, and it warrants government intervention. But we need actions that raise overall demand — like a tax cut for households so they have more take-home pay to spend, more aid to troubled state and local governments, and public investments in infrastructure."

    The above does not ring true to me. Roger, do families today have less disposable income then they did in the past?

    Income inequality is less of a concern to me than the constant lifting of the standard of living.

    Clustering was an important concept presented in the article and one that has been incorporated into some of the business initiatives enacted by Mayor Bloomberg in NYC with some remarkable results.

  9. 8 - Paul -

    "Roger, do families today have less disposable income then they did in the past?"

    Probably depends on which families you're talking about. My guess is that discretionary income has increasingly been concentrated at the top end of the income (and wealth) spectrum.

    If I'm right, it would seem a bit of a dilemma for you to deal with the answer to that question and then say that income is less of an issue than lifting standards of living. The point is that standards of living (as measured by discretionary income levels)are increasing dramatically for a small % of the population while decreasing for the majority.

  10. Where is the evidence that standards of living are decreasing for the majority? What a crock.

  11. - 10 - Stan -

    I assume that was directed at my comment?

    Paul asked the question whether families had more or less disposable income relative to the past.

    My guess is that maybe disposable personal income for Americans as a whole has increased, but that aggregated figures hide that it has increased disproportionately for the rich.

    I suspect that the % of Americans with discretionary income has decreased (certainly since the recession, but I suspect over long time frames as well), and that the ratio of discretionary to non-discretionary income has decreased for the average American (which explains more borrowing) as opposed to the wealthy.

    I don't know for sure. I do know that people are working longer hours to pay the rent.

    I haven't been able to find the data. If you have some info that shows my guesses to be wrong, I'd love to see it.

  12. Hi Roger,

    Yes, she is wrong. Here are my disagreements:


    The short version:

    1. She fails to mention the importance of manufacturing to innovation.

    2. She understates the impact of manufacturing on jobs and output throughout the economy.

    3. She dodges the trade deficit question, but the arithmetic shows that while trade in services is becoming increasingly important trade in manufactured goods is still where its at if we want to close the trade deficit.



  13. -12-Devon

    Thanks ... a quick reply:

    1 and 2 could be said about agriculture, how come you are not arguing for special treatment for ag?

    3, can you quantify the role of manufacturing in closing the trade deficit? I am skeptical. You'll also need to explain why the trade deficit is a problem and address the role of the nonfloating RNB;-)

    We'll have a chance to engage this more next week, as I have several posts lined up ... Thanks!

  14. Roger -

    Given your interests - I'd think you might want to listen to this interview that touches on connections between employment, economic problems, inequality, the "war on drugs," and the prison industry.

    Hundreds of billions spent at local, state, and federal levels, 400,000 employed at prisons, many more employed in law enforcement. All those resources devoted to an unneeded and essentially non-productive industry.


  15. http://www.opednews.com/articles/Economics-Lesson-1-by-Paul-Craig-Roberts-120131-946.html
    [Safety Status: Low Risk]
    A Neoclassical Kaldor Model of Real Wage Declines

    Adobe PDF
    Lawrence F. Katzand David H. Autor (1999, p. 1476) also show real wage declines from 1971 to 1995 ... Since only balanced growth equilibria are compared, deficits or surpluses ...

  16. Roger,


    1. No, it can't. Two data points: two-thirds of private sector R&D is performed in manufacturing industries along with a similar proportion of scientists and engineers. From 2006 to 2008, 22 percent of all manufacturers introduced new products or services, as compared to 8 percent of non-manufacturing firms.

    2. No, it can't. Manufacturing has the highest output multiplier of any industry, including agriculture, at 1.4. Agriculture is third highest, at around 1.1. Romer focuses only on manufacturing employment and ignores the fact that output and employment multipliers are larger in manufacturing than in any other sector, thus presenting a skewed interpretation of the impact of manufacturing on U.S. job growth.

    3. I'm confused by what you mean. We can look at the magnitude of the trade deficit and the different levers available to close it (i.e. expanding exports in goods or services, reducing imports in goods or services). The statistics are that manufacturing comprises 57% of exports, and while services account for a growing share (around 30% in 2010), it's still dwarfed by manufacturing. It took 11 years for service exports to double to their current level. If we were to keep the current trade balance in goods constant, service exports would need to quadruple to close the overall deficit. All of which is to say, expanding manufactured exports is key to closing the trade deficit for the foreseeable future.

    There's more on this in a report I wrote here: http://thebreakthrough.org/blog/2011/10/manufacturing_growth_advanced.shtml

    I'm looking forward to your future posts on the subject.



  17. Roger - are you going to respond to post #15?

  18. -17-Joshua

    Yes, thanks ... been offline for a bit, back now, Thx.

  19. - Roger -

    Sorry, I meant #16. I'm not that interested in a response to #15.

  20. -16-Devon

    1. You are switching arguments -- first innovation and now R&D (R&D is not innovation). Is your argument that special treatment of the manufacturing sector helps to stimulate private sector R&D?

    If so, why not just focus on policies that directly support all private sector R&D regardless of sector? Why just manufacturing?

    I would argue that productivity gains in agriculture over decades are at least as important as in manufacturing -- so innovation is incredibly important there as well.

    2. Check your data. Latest I-O tables from don't support these numbers (can you provide a reference?) ... manufacturing is closer to 1.3 and Ag 1.2 (see http://www.bea.gov/industry/io_annual.htm) -- manufacturing has a larger multiplier, yes, but so what? Does that mean that it should get special treatment?

    More to the point, I think that you are misinterpreting these tables ... they show the economic effects of $1 in demand, they do not show the economic effects of gov't policies to prop up specific industries.

    Also, these are not employment multipliers but economic multipliers. Manufacturing is and has been an important part of national GDP, but employment numbers have been decreasing (as well documented). The biggest part of that economic multiplier for manufacturing is ... manufacturing, so in addition to double counting of jobs in interpreting such a multiplier (i.e., first as manufacturing jobs, then again as part of the multiplier) the sector is still facing labor productivity gains, and commensurate impacts on labor numbers.

    I am sympathetic to arguments for policies that support innovation and the economy generally, but do not understand why such policies should be limited to manufacturing in any way. Perhaps you can address this point.

    Can you explain why you think that such economic policies should not be applied more broadly than just to manufacturing?

    Finally and briefly, the trade deficit is far more complicated than just manufacturing:


    I'll have a post or several up early next week on these issues. Thanks!

  21. - 20 - Roger

    Excuse my budding in to a conversation between two people who know what they're talking about, but it's the only way I can learn.

    Roger says: "If so, why not just focus on policies that directly support all private sector R&D regardless of sector? Why just manufacturing?"

    I'm not sure Devon was suggesting focusing on one sector to the exclusion of the other. But...

    If you spend X dollars or Y energy in a focus on the manufacturing sector, do you get a better return than spending the same money or energy in a focus on the service sector (as they are typically defined).

    Do you get more, better paid jobs in return in the manufacturing sector? Do you get more R&D, with a higher multiplier in terms of employment and in terms of economic stimulation and new products?

    I would say yes. How is the benefit (economic growth, employment, % of GDP) apportioned differently in the service and manufacturing sectors? I would say focus in the service sector (the financial sector in particular) brings disproportionate benefit to those at the high end of the income/wealth scale - which in turn stimulates less employment, less employment at higher paying jobs, etc.

    Recent economic growth has been disproportionately in the service and financial sectors. That has consequences. It has occurred coincidentally with flat wages and greater income disparity. Talent moves into the financial sector because it brings a better return than the manufacturing sector for that talent. But that talent is a small percentage of the overall workforce.

  22. -21-Joshua

    Thanks, these are fine questions focused on policy evaluation, but really should be answered by Devon as he is the one arguing that manufacturing needs to be treated special. I don't, for instance, see his report saying anything about the importance of other sectors of the economy (other than to dismiss them as unimportant) which comprise ~90% of GDP and 95% of jobs.

    I'll point out that the IO numbers that he uses in that report are 5 years old and the employment multipliers are 10 years old. Not good ;-)

    More soon ...

  23. The question asked is about the possibility that Romer, a distinguished economist, is wrong and where would that be. On PBS as I am writing this, there is an documentary on the cost of US health care. Why is it so expensive. The economists are very confident and have had the support of twenty years of reports that is because there are too many doctors. What their research indicates, and has indicated for over twenty years, is that the number of patient treatments is directly correlated with the number of doctors. That is supply drives demand and not the other way round. The technical term used for this is "supplier induced demand". Doctors need patients and treatments to support their income so they prescribe more treatments to more patients.

    As the economists on PBS said,. this has been know for over twenty years. As a matter of fact, it has been known for over forty years. Research in Canada in the 1970s demonstrated the same thing. Now the obvious implication of this for a policy perspective to conserve health care expense would be to limit the number of doctors. Doctors could support their income by prescribing fewer treatments because they could see more patents. And that is the magic solution of the spiraling cost of health care. Restrict the number of doctors and much unnecessary treatment and the costs entailed by them will been eliminated. A difficult problem solved by the insight of per reviewed research in economics. The science is settled. Consensus has been reached.

    The case is so compelling and the requirement so urgent that this policy was adopted in the health care system in Canada. Medical school admissions were restricted and then cut. The problem of the cost of health care had been solved. Easy.

    Now what is the result of this learned policy which is the result of rigorous peer reviewed research by economists. The number of doctors has decreased as planned. The result is a massive shortage of doctors. Five million (out of 33 million) people cannot find a GP. People are terrified of their doctor retiring and many doctors are retiring because of the aging of the baby boomers. The policy worked. There are now fewer doctors. What happens is that doctors interview prospective patients and if they have chronic diseases that are difficult to treat then they are refused.. If someone indicates to a doctor that they want a second opinion, they are told that if they do that they will be dropped as a patient. The policy worked in reducing the numbers of doctors. It very much worked. It is just that the economists theories aren't worth a plugged hat.

    So why would an economist be wrong? They might be wrong because economics is not a predictive science or perhaps because it is just not a science at all. In the PBS documentary the finding of supplier induced demand is being presented as the absolute truth. Economists are emphatic in their statements that it is an established fact. There is no mention of the effects of their policies in Canada.

    I wonder if other economic theories, supported by rigorous peer reviewed research, are to the same quality. large rigorous economic reports on climate science spring to mind.