Scott Lincicome busts myths about manufacturing in America

From Cafe Hayek.

"Scott Lincicome busts myths about manufacturing in America. Two slices:

On a historical basis, meanwhile, the U.S. manufacturing sector is also doing fine, with both gross output and value-added (basically, output minus costs) hovering around their all-time highs. Previous decades’ increases in these topline numbers did stall out in recent years, but beyond the aforementioned global rankings that trend is no reason for concern, regardless of how you measure it. As we discussed a few years ago (and see this paper for more), some of this manufacturing “stagnation” is because significant expansions in higher-value U.S. production like energy, chemicals, transportation, pharmaceuticals, and aerospace were offset by historical declines in dying or less-advanced (and lower-paying) U.S. industries like tobacco, paper, textiles and apparel, footwear, and furniture. Perhaps more importantly, there’s just no good economic reason to expect total U.S. manufacturing output to expand forever. By contrast, there are plenty of reasons why it shouldn’t: Among them are the continued “dematerialization” of production in wealthier economies (we make more stuff with fewer materials), the natural development of poorer countries away from agriculture and into manufacturing (or away from self-defeating communism), and the long-term trend in all nations to consume relatively more services (and fewer goods) as they get richer—a trend closely linked to manufacturing output.

Other U.S. manufacturing metrics—foreign investment, exports, capital expenditures, etc.—show similar things. In short, if you’re worried about the United States “making things,” then you can stop worrying.

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Second, and speaking of services, the formal delineation between industries and workers that “make things” and those that don’t “make things” has become increasingly meaningless (or, at least, artificial). Most obviously, tens of millions of Americans make “things”—buildings, transmission lines, solar panel installations, software, mRNA platforms, etc.—that are real and economically important but not considered a “manufactured good” and thus not counted among the “things” we make. (Humorously, baked goods and tortillas are, while accountants treat software as a tangible or intangible asset depending on how it’s used.)

Making houses or lines of code matters too, especially today, but a myopic focus on the production of physical goods not only ignores these industries but can, through tariffs and other policies that raise the domestic price of manufactured goods (e.g. computers) on which these other industries rely, actually hurt them. Digging into some of these bright lines can also produce absurd results. Cutting down a tree isn’t manufacturing; turning the log into lumber is manufacturing; driving the lumber to a homesite and then turning it into a house—nope, not manufacturing! (And, of course, tariffs on that lumber hurt all the non-manufacturing folks involved in making those houses.) Why the government should prioritize the second step here is unclear, at best.

Just as importantly, many services are often connected or integral to “actual” manufacturing—and increasingly so. Consider  the rise of “factoryless” goods producers in the United States, which we discussed last year. Big, innovative U.S. companies like Nike or Nvidia are expressly in the business of “making things” like shoes or semiconductors, and they handle everything—design, R&D, marketing, etc.—except the final stage of production, which they’ve outsourced to other companies in the United States or abroad. These firms still employ lots of people, still make huge investments, still generate tons of economic output, and in many cases are important for national security. And their success is in large part based on their factoryless model. They matter too.

Meanwhile, many of the American companies that still own and operate factories are also increasingly incorporating services into core businesses. This “servitization of manufacturing,” Middlebury’s Gary Winslett explained in 2022, includes both the services that have traditionally complemented manufacturing—transportation, R&D, maintenance/repair, etc.—and relatively new ones like cloud computing, software, and 3D printing. At the same time, traditional manufacturers are increasingly reliant on both pre-production services inputs and post-production services bundled with their products (customer support, training, security, entertainment, upgrades, etc.)"