Restoring US Manufacturing: A Blueprint
Henry Ford debuted an early icon of American industrial preeminence, the Model T, in 1908. At Shanghai’s annual auto show in April, China’s BYD Motors presented what might become the Model T of the 21st century, a full-featured electric vehicle dubbed the Seagull. Its $11,300 price tag is a third of what consumers have to shell out for the Chevy Bolt and roughly equal to China’s $12,500 per-capita gross domestic product, just as the Model T’s price was about equal to US per-capita GDP at its launch.
The Seagull, then, might just become the emblem of Chinese industrial preeminence in our century. The Middle Kingdom can produce it cheaply, because a new kind of automation, popularly dubbed the Fourth Industrial Revolution, powers its most advanced factories. Two new technologies—artificial intelligence and 5G broadband—link the digital world and the machines that make things. Manufacturing, mining, transport, warehousing: Everything to do with the production and movement of physical goods is on the cusp of a transformation comparable to the digital revolution of a generation ago.
This portends a winner-take-all market. In 2019, China exported just half a million cars a year, while Japan exported 4.5 million. Today, both Japan and China export 3 million cars a year—the Chinese have grabbed market share from Japan, Germany, and South Korea. BYD alone says it will increase car exports sixfold in 2023. China makes 27 million cars a year, compared to 10 million in the United States. With its vast domestic market and enormous economies of scale, China can do what Henry Ford did a century ago.
That leaves America with a stark choice. Either we lead this revolution, or we will be left behind, the way Britain was after World War II. America has already paid a steep price for allowing its manufacturing sector to decay. Countless American communities were ruined as manufacturing employment fell to barely 13 million today, down from a 1979 peak of 20 million. The erosion of industry is an important cause of the weakening of family ties and other social pathologies. It is about to get much worse—unless we take decisive action.
American workers are caught in a vicious cycle. Low investment in manufacturing has kept productivity growth low and wages stagnant. A lot of manufacturing jobs are unattractive. A near-record number of factory jobs listed are unfilled—700,000 as of March 2023.
The biggest complaint of manufacturers, meanwhile, is a shortage of skilled labor. Our manufacturing culture and communities are so eroded that corporations won’t invest because of lack of skilled labor, and workers won’t take jobs offered because they are badly paid. The average wage of factory workers in 1947 was $1 an hour. That rose to the equivalent of $2 in 1947 dollars by 1979. Since then, real manufacturing wages haven’t moved.
To break the cycle, we need to attack both ends of the problem: investment and skills. In short, we need a Moonshot for manufacturing. I don’t propose to have bureaucrats allocate capital to favored industries along the failed model of European social democracies, but rather a reversal of our present industrial policy, which stacks the deck against manufacturing.
America already has a massive, pervasive, and comprehensive industrial policy, but a policy so perverse that it has hollowed out America’s industrial economy and suppressed the incomes and capabilities of American workers. The federal government has an enormous influence on the allocation of capital among different sectors of the economy. Consider just a few examples:
The American tax code favors “capital-light” Big Tech firms and penalizes capital-intensive manufacturing. Factory investors wait years to write off their investment against taxes, while inflation erodes the value of tax credits for equipment depreciation. Meanwhile, Big Tech companies park intellectual property in low-tax venues overseas to cut their tax bills. The 2017 Trump tax reform cut the top corporate tax rate but paid for the cut in part by shrinking depreciation allowances. The next year, corporate stock buybacks exceeded capital investment. Big Tech lobbyists stacked the deck against manufacturing.
American regulation, including environmental and worker safety rules, favors companies with a preponderance of white-collar employees at the expense of manufacturing, mining, chemical, and refining industries. The regulations in question may have worthy objectives, but they too often entail arbitrary and unnecessarily disruptive administrative measures. The industrial revolution now underway, moreover, promises enormous improvements in safety by delegating dangerous tasks such as underground drilling to industrial robots, as well as enhanced environmental controls through AI monitoring of systems.
The United States provides enormous subsidies to universities through tax-exempt status and direct grants, favoring elite universities with large endowments and research facilities, taxing average Americans to fund the education of elite professionals. Other countries subsidize apprenticeship programs for less-affluent citizens to train a highly-skilled and highly-paid industrial workforce.
The United States spends just 0.55 percent of GDP annually on infrastructure, about the same level as Greece, compared to 0.8 percent in Germany, 0.9 percent in France, 1.1 percent in Japan and 5.8 percent in China. Public improvements are a subsidy to goods-producing industry and mining, and America’s level of spending is among the lowest in the industrial world.
Federal subsidies for R&D have historically supported innovative, entrepreneurial industries, but is now lagging. During the 1970s and ’80s, the federal R&D budget was about 1 percent of GDP, and federal funding supported every invention of the digital age, helping to make America the world’s undisputed leader in advanced technology. Today, the federal R&D budget is only 0.3 percent of GDP.
The largest discretionary component of federal spending, the $1.75 trillion Department of Defense allocation, includes vast payments to industries. At the peak of the Cold War, during the late-1970s and through the ’80s, defense policy demanded a wide range of innovations in weapons systems that required the discovery of new technologies. These new technologies were adopted by entrepreneurs who created new industries in computation, communications, materials science, and other fields. Today, by contrast, the defense-acquisitions budget supports a small group of giant contractors that have little incentive to innovate.
In short, we have an industrial policy that discourages capital-intensive investment through taxation and regulation, subsidizes the education of white-collar professionals rather than skilled workers and engineers, neglects infrastructure, and skimps on the kind of scientific research that translates into industrial productivity.
We have to cut seven Gordian Knots. This means:
- establishing tax and regulatory conditions that foster manufacturing, as opposed to the present regime that favors capital-light industries;
- shifting the defense budget away from costly, obsolete weapons systems to support for innovative weapons that push the frontier of physics and computation;
- subsidizing a very few critical industries (for example, semiconductors) whose onshore operation is vital to national defense and economic security;
- fostering innovation at the frontier of science, first of all in the service of national defense but, by extension, in the interest of long-term productivity and growth;
- protecting industry from harmful monopolies, especially Big Tech, that stifle innovation and divert capital away from essential industries;
- shifting educational subsidies away from elite institutions that train financiers and functionaries and toward an apprenticeship system that trains skilled workers for high-tech industry; and
- requiring a school curriculum that emphasizes literacy and numeracy in preparation for skilled jobs and engineering studies.
That may sound complicated. But we should remember H. L. Mencken’s quip: “For every complex problem, there is an answer that is clear, simple, and wrong.” Former President Donald Trump’s tariff policy is a case in point. We are importing more from China now than we did in July 2018, when the tariffs first came into effect.
Recently, I mentioned this to one of Trump’s former top economic officials, who replied: “What do you want to do instead?” I listed the points above. The former official said, “What you’re saying is that we should just sit on our hands and do nothing! You’ll never get all those things passed by Congress. But I was able to get the tariffs.”
I disagree. If we only do what the national mood makes easy, our decay will continue. The world is changing. In the past, we Americans got in front of change and led it. Now we risk being left behind.