The "Right" Amount of Manufacturing
By David Henderson
Free-trade critic Ian Fletcher argues that the United States has too little manufacturing. Even if manufacturing output is at an all-time high, he argues, it’s still too low. So clearly he has in mind some amount of manufacturing that is right or, at least, some criterion by which we can judge whether the amount of manufacturing is the right amount. Here’s his criterion:
Unfortunately, the only rational standard for how much America should produce is how much Americans wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it. (italics in original)
If we take this literally, we are producing enough. The reason: what we produce–in manufacturing, raw materials, services, and investment opportunities–is enough to allow us to consume what we do consume. But that’s not what Fletcher means. Instead he tells what he means with his next paragraph:
And this is where American manufacturing is clearly falling short, because America is running a huge trade deficit in manufactured goods, and we don’t produce enough of anything else (raw materials, services) to cover the gap. So instead we borrow and sell off existing assets to pay for imports.
In other words, what he really means is that the amount the United States spends on manufactured goods (plus, although he doesn’t say it, I think he means it, raw materials and services) should just equal the amount foreigners spend on our manufactured goods, services, and raw materials.
But why is this the right criterion? Fletcher doesn’t say. Economists believe (see Kling, Stein, and Ott) that at times, the United States, just like other countries, will import more than they export and that the difference is made up by increased investments by foreigners in U.S. assets, whether bonds, stocks, land, or direct investments, plus increased foreign holdings of U.S. currency. Fletcher sees this but for some reason that he doesn’t tell us in the referenced article above, he thinks there’s something wrong with that. But there’s nothing wrong with that. And had the United States not run a merchandise trade deficit in the 19th century, we wouldn’t have had all the British investment that helped build the railroads.
Fletcher also proposes another criterion for the right amount of manufacturing when he writes:
If Americans were willing to consume less, our manufacturing output would be just fine. But I don’t know a lot of people eagerly volunteering to accept a lower living standard.
What Fletcher seems to assume is that if U.S. consumers cut consumption by $X, then imports would fall by $X. That is almost certainly incorrect. If U.S. consumers cut consumption, the merchandise trade deficit would probably fall but it would not fall close to $ for $.
HT to Don (aka Ron) Boudreaux.