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Wednesday, May 22, 2024

The Decline of Efficiency in American Manufacturing

Manufacturing — are its powers on the wane? Oren Cass’s claims are challenged.

Advocates of industrial policy have for long touted the special powers that manufacturing possesses. They argue that Industry fuels technological advancements and propels up efficiency to gain global market access. And yet they go even further. According to a column in the Wall Street Journal by Oren Cass, who oversees American Compass, a think-tank at the forefront of the Republican Party’s newfound protectionism, the shift of manufacturing overseas justifies tariffs and subsidies for protecting manufacturing and encouraging economic growth.

However, recent figures published on October 26th have shown that nearly 80% of America’s GDP is now constituted by services, signaling the rapid growth of the services sector. This exponential growth would lead one to assume that manufacturing, too, would have some substantial role to play, given its presumed powers. But in reality, productivity in manufacturing fell by 0.2% at an annualized rate, with the service sector driving the growth. The decline in productivity in the manufacturing sector has been in place since 2011, which is the first decade-long downward trend in available data.

But what has brought about this reversal in fortunes? Despite naysayers pointing to trade policies as a contributing factor, the declining productivity growth is present within sub-sectors driven by the domestic market rather than global trade, such as cement and concrete production.

During the 1990s and 2000s, the American manufacturing sector witnessed a soaring productivity, especially in the production of computers and electronics, with semiconductor chips at the forefront. However, by the early 2010s, productivity growth stalled. To that end, more than a third of the overall slowdown in manufacturing since 2011 was accounted for by computers and electronics.

Yet, the decline in productivity isn’t limited to technology, as it has seeped into both durable and non-durable manufacturing. It is noted that 14 out of 19 manufacturing sub-sectors, including machinery and textiles, experienced declines in the 2010s.

However, technological superiority isn’t the only challenge faced by manufacturing in America. While it may be a technology superpower, the country lags behind others when it comes to the adoption of robots per worker, with South Korea, the world leader, using over three times more robots per worker.

Despite this, according to a scholar from the University of Chicago, the ratio of capital to labor has grown slightly faster in manufacturing than in the private sector as a whole, indicating that investment has not plummeted.

So, could things change? Industrial-policy advocates believe so, stating that subsidies for chip production and green tech could pave the way for a manufacturing renaissance. A breakthrough in robotics or artificial intelligence could also potentially transform the landscape. For now, it seems like America’s manufacturing sector needs all the help it can get.

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