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Summer 2014
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Books and Culture

Mark P. Mills
Not Dead Yet
America’s manufacturing sector shows signs of life.
3 November 2013

Made in the U.S.A.: The Rise and Retreat of American Manufacturing, by Vaclav Smil (MIT Press, 256 pp., 27.95)

Conventional wisdom holds that America’s transition from a manufacturing to a service-based economy is nearly complete. Mining and making stuff are out; surgery and software development are in. The U.S. has entered a post-industrial era. Not so fast, says Vaclav Smil. In his new book, Made in the U.S.A.: The Rise and Retreat of American Manufacturing, Smil argues persuasively that manufacturing matters as much in the current century as it did in the last—and that a revitalized manufacturing sector is vital for restoring growth, jobs, and American social dynamism.

Technology creates efficiency, Smil writes. But, as he shows, efficiency confuses pundits and policymakers into thinking that demand will shrink. It hasn’t and it won’t. Efficiency makes stuff cheaper, which, combined with rising wealth, has always boosted demand. Growth in global demand for manufactured goods is poised to “reach new heights” in the twenty-first century. And while Smil shys away from prediction, the evidence he presents leads me to conclude that American manufacturing is far from dead. (More on my manufacturing thesis in my current Forbes column here.)

Smil traces in dense detail the growth of manufacturing in America. Rejecting the common story line, he writes that World War II “actually had a depressing effect on the country’s productivity growth and, with a few notable exceptions, was not a remarkable engine of innovation.” Nearly all the innovation happened before the war—surprisingly, much of it during the Great Depression. And yet, as Smil points out, while the United States dominated global manufacturing throughout the twentieth century, it has now lost that dominance in just two short decades. For Smil, there is plenty of blame to go around. America’s manufacturing decline, he writes, “has not been an inevitable outcome of either unstoppable economic forces or an equally unstoppable mechanization and robotization of modern manufacturing but a matter of deliberate choices.” He blames outsourcing by profit-maximizing corporations. He blames consumers for chasing ever-cheaper goods (the iPhone, he notes, could have been assembled domestically with only a tiny impact on Apple’s gross profits). He points to the intransigence of American labor unions. In Germany, he notes, unions are much more open to constructive engagement with employers. The growth of government, too, has played an important role. Smil observes that since 1981, government has employed more Americans than the manufacturing sector—40 percent more today.

Others have chronicled the sclerosis of U.S. manufacturing, but Smil has little patience for the argument that “serving potato chips is as good as making microchips.” The potato-chip-serving school argues that the U.S. and the world are dematerializing—that is, shifting from products to services. In fact, the U.S. manufactures both potato chips and microchips, but the word “manufacture” has become misleading and anachronistic. For many, it conjures visions of smokestacks and hardhats, or perhaps the iconic Rosie the Riveter poster that symbolized the role of American manufacturing in winning World War II.

Manufacturing means much more than that today, though you wouldn’t know it from consulting the North American Industry Classification System, which, as Smil points out, categorizes custom assembly of computers as “retail.” I would add electricity production to the miscategorization list. NAICS categorizes it as a “service,” but electricity is manufactured. Similarly, while a century ago you might reasonably have classified the oil and gas industry as “extractive mining,” today’s tech-centric oil and gas businesses manufacture hydrocarbons from rock. But perhaps more importantly, Smil notes that much of what NAICS sweeps into “services” really belongs in the manufacturing sector. Fully 30 percent of the value of manufactured goods, Smil shows, is found in “services” integral to manufacturing. The NAICS’s faulty categories contribute to the impression that a service-centric economy can prosper without manufacturing much of anything.

Manufacturing “translates” inventions and innovation “into all the material riches [and] convenient services that are the hallmarks of modern societies,” Smil writes. He reminds us that, given the world’s current state of “material deprivation,” durable goods will continue to see enormous future demand. The European Union quantifies material deprivation as a household lacking two or more basic manufactured goods; television, telephone, car, shower, toilet, and a sound dwelling. By this standard, deprivation remains about 15 percent in the U.S., runs from 20 to 40 percent in poorer EU states such as Spain, Portugal, and Greece, and reaches 80 percent to 95 percent in developing nations. In short, far more people lack stuff than have it. The demand implications for manufactured goods should be obvious.

Economists selling the myth of the modern service-driven economy typically cite “FedEx, faxes, mobile phones, and the Internet.” Counters Smil, “all of these innovations in communications—next-day package deliveries, the instant transmission of printed matter, and rapid access to information—had to be preceded by fundamental innovations in manufacturing, the construction of jetliners and gas turbines, the development of xerography, and the design and mass production of ever more powerful microprocessors and higher-resolution screens.” Services and manufacturing are inseparable, except in the minds of post-industrialists.

Important as it is, Smil’s book does not explore the biggest near-term driver of American manufacturing growth. The U.S. is now the world’s Number One producer of oil and natural gas and a net exporter of refined hydrocarbons (“manufactured” gasoline and diesel). The Energy Information Administration forecasts some $2 trillion in private investment in this sector in the next decade. This dramatic growth has not resulted from new discoveries or the opening up of federal lands, but from the emergence of new technologies and techniques that enable the manufacturing of liquid and gaseous hydrocarbons from solid shale rock. The energy-intensive manufacturing ecosystem’s expansion will catalyze other manufacturing, both upstream and downstream; that’s how industrial and economic ecosystems work. Already, the new energy boom is driving a massive resurgence of investment into everything from plastics to fertilizers. The American Chemical Council has catalogued nearly 100 chemical-industry investments valued at over $70 billion due to come on line by 2017, generating over 1 million jobs and adding over $300 billion to GDP.

The manufacturing revival is happening faster and more broadly in the energy sector than in any other. Will America seize the opportunity to capitalize on its energy abundance and prime the pump for a broad manufacturing renewal? Smil is noncommittal: “I will not answer the question of whether American manufacturing will experience a true renaissance, as its dwindling proponents hope, or whether it will, in employment terms if not in total output value, become an ever more marginal economic sector.” But he offers an answer of sorts in his final chapter, where he briefly explores the debate between pessimists—such as economic historian Niall Ferguson—and optimists (of which I’m one). Ferguson believes that fundamental innovation has stalled out, but Smil rightly suspects that he and his fellow pessimists underestimate American adaptability. “As a lifelong critical observer of American society,” Smil declares, “I am well aware how it has repeatedly demonstrated its impressive capacity for renewal.”

Smil’s book, the latest in his impressive canon, comes at a critical juncture in American economic history. Every member of Congress should read it. If America is to rebound, we can’t afford to be defeatist about manufacturing, which remains essential to our economic vibrancy. The right policies—i.e., not subsidies or “stimulus”—can help set the stage for an American economy that once again dominates global manufacturing. These would include resolving our excessive federal debt, reforming an uncompetitive tax system, and reining in a legal system hostile to business formation and profit-making. As famed management guru Peter Drucker once said: “The best way to predict the future is to create it.”

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