Six Reasons Manufacturing is Central to the Economy

Without a robust revival in the manufacturing sector, we can kiss our status as a great economic power goodbye.

Paul Krugman recently argued that “manufacturing is one of the bright spots of a generally disappointing recovery, and there are signs — preliminary, but hopeful, nonetheless — that a sustained comeback may be under way.” He points out that the gap between what we sell and what we buy has been improving. This must be set against a background of a manufacturing decline in the United States of historic dimensions; even without adjusting for inflation, the trade deficit in goods for the United States between 2000 and 2010 was 7 trillion dollars. A turnaround in the attention of more perceptive economists and a turnaround in manufacturing may be in the works. But before that, the crucial question is: Why is manufacturing so important?

1. Manufacturing has been the path to development

It has been the strategic achievement of rich nations over the last several hundred years to create a high-quality manufacturing sector in order to develop national wealth and power, as Erik Reinert shows in his book “How Rich Countries Got Rich…and Why Poor Countries Stay Poor.” From the rise of England in the 19th century, to the rise of the US, Germany, Japan and the USSR in the 20th, to the newly industrializing countries like Korea, Taiwan, and now China, manufacturing has been the key to prosperity.

2. Manufacturing is the foundation of global “Great Power”

The most powerful nations in the world — the “Great Powers” — are those that control the bulk of the global production of manufacturing technology. That is, it isn’t enough simply to have factories and produce more goods, you have to know how to make the machinery that makes the goods. The key to power, then, is to make the “means of production.”

As the machinery industries go, so goes Great Power. My own research shows that about 80% of the world’s production of factory machinery has been controlled by what we would consider the “Great Powers.” Until the 1950s, the US had produced about 50%; we now produce less than China’s 16%.

3. Manufacturing is the most important cause of economic growth

The growth of manufacturing machinery output, and technological improvements in that machinery, are the main drivers of economic growth. No machinery industries, no sustained, long-term economic growth. Just consider the explosion of the Internet, iPhones, and the like — all made possible by a small subset of production machinery called semiconductor-making equipment (SME), which itself is dependent on other forms of production machinery, such as the machine tools that grind the lenses they use or the alloys of metal the metal-making industries output. These technologies reproduce themselves, as when an SME makes the semiconductors that then go to make more SMEs, or when a machine tool makes the metal components that not only go into other pieces of machinery, such as cars, but are used to produce yet more machine tools. The technological and productive potential of machine tools and SMEs affect each other as well, leading to the explosive economic growth of the last two hundred years.

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4. Global trade is based on goods, not services

A country can’t trade services for most of its goods. According to the WTO, 80% of world trade among regions is merchandise trade — that is, only 20% of world trade is in services. This closely matches the trade percentages that even the US, allegedly becoming “post-industrial,” achieves. If in the extreme case an economy was composed only of services, then it would be very poor, because it couldn’t trade for goods; its currency would be worth very little. The dollar is also vulnerable in the long-term. A “post-industrial” economy is really a pre-industrial economy — that is, poor.

5. Services are dependent on manufactured goods

Services are mostly the act of using manufactured goods. You can’t export the experience of using something. Retail and wholesale, which make up about 11% of the economy, are the act of buying and selling manufactured goods. The same goes for real estate, another 13%, which is the act of buying and selling a “real” or physical asset, a building. Even health, which makes up about 8% of the economy, is the act of using medical equipment and drugs (all figures from 2010, value-added).

Finance involves the redirection of surplus resources that the nonfinancial sector of the economy produces, which means that indirectly, even finance is dependent on manufacturing. The cycle of rise and decline usually runs like this: some clever society figures out how to take advantage of the current technologies of production, thus generating huge surpluses, which either the financial forces, the very wealthy, or the military then appropriate for their own wealth and power; they kill the goose that is laying the golden eggs. To sum up: the health of the economy is critically dependent on the health of the manufacturing sector.

6. Manufacturing creates jobs

Most jobs, directly or indirectly, depend on manufacturing — and reviving the sector could provide tens of millions of new jobs, eradicating the Great Recession. In 2005, the Japanese manufacturing sector was 20.2% of its economy, in Germany it was 23.2%, and in the US manufacturing accounted for 13.4%, according to the the OECD. Using 2005 figures, if the US had the same percentage as Japan, we would have 7 million more high-quality, long-term, well paying jobs. If we were equal with Germany, we would have 10 million more. And according to the Economic Policy Institute, each manufacturing job supports almost three other jobs in the economy. That makes sense, considering the other five reasons that manufacturing is central to the economy.

Thus, there are six solid reasons that we need to rebuild the manufacturing sector of the United States. It’s time for the United States to wake up before it’s too late and rebuild the foundation of a strong, prosperous, middle class economy.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.