Archives: May, 2013

The Myth of a Manufacturing Renaissance

By
Daniel J. Ikenson

Have you heard all the banter about a U.S. manufacturing renaissance? Numerous media reports in recent months have breathlessly described a return of manufacturing investment from foreign shores, mostly attributing the trend to rising wages in China and the natural gas boom in the United States, both of which have rendered manufacturing state-side more competitive. Today’s Washington Post includes a whole feature section titled “U.S. Manufacturing: A Special Report,” devoted entirely to the proposition that the manufacturing sector is back!

The myth of manufacturing decline begets the myth of manufacturing renaissance. This new mantra raises a question: How can there be a manufacturing renaissance if there was never a manufacturing “Dark Ages”?

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

The myth of U.S. manufacturing decline has long been advanced by policymakers and interested parties as a predicate for industrial policy or trade barriers.  “Because U.S. manufacturing has fallen behind,” the argument goes, “we need to match the efforts of other governments in supporting our factories,” or “because U.S. manufacturing has been hobbled by predatory foreigners we need to erect tariffs to level the playing field,” or “because our industrial base is in ruins, U.S. national security is threatened without subsidies to rebuild manufacturing.”

The assertion that “U.S. manufacturing is in decline” is usually presented as holy writ, without allowance for examination or dissent, before those dubious policy solutions are pitched as our only salvation. Fortunately, the more open-minded and genuinely inquisitive insist upon closely evaluating premises before considering the “therefore-we-musts.” 

As the nearby chart confirms, U.S. manufacturing value-added (the metric most comparable to GDP, which equals the value of manufactured output minus the cost of intermediate goods), in both nominal and real terms, has been trending upward since the end of the World War II. Nominal manufacturing value-added declined on a year-to-year basis only eight times in the past 64 years. Manufacturing value-added took a hit during the Great Recession, as did the rest of the economy, but it plainly defies the data to suggest that U.S. manufacturing is – or has been at anytime – in decline.

As a share of the U.S. economy (the green bars on the chart), manufacturing has declined from a 1953 peak of 28 percent to 11.5 percent in 2011. But that is testament to the growth of U.S. services sectors, not to a decline in manufacturing, which (as you see) has been growing nearly continuously in absolute terms.

Yet some insist that these particular figures don’t tell the real story, which can be found in the manufacturing employment figures. Ah, well. Manufacturing employment has certainly been on a downward trajectory for three decades, after peaking at 19.4 million workers in 1979. Despite increases of about 500,000 workers over the past couple of years, manufacturing employment stands at about 11.8 million today. But manufacturing employment is not a barometer of the health of the sector. If the objective of economics is to make the best use of scarce resources, U.S. manufacturing – with its historic productivity gains in recent decades – has done an excellent job. It is not a reflection of manufacturing weakness that those scarce resources (apparently not so scarce) have not been redeployed elsewhere in the economy. Nevertheless, most of the “manufacturing-in-decline” narrative is the result of conflating the meanings of manufacturing value-added and manufacturing employment.

What the media are today characterizing as a manufacturing renaissance is better understood as a surge. Things aren’t being turned around; they are accelerating in the same direction.

Plenty of manufacturing and manufacturing-related activities have been occurring and growing in the United States for several years. Rising wages in China and the domestic gas boom change the mix of relatively viable manufacturing activities, but they are just two of dozens of considerations that factor into thousands upon thousands of decisions about where to develop, test, manufacture, assemble, package, sell, and perform every other function in a products supply chain from its conception to its consumption. A confluence of considerations from worker skills, total labor costs, degree of risk aversion, desire to produce within a tariff wall, interest in influencing political decisions, infrastructure quality, proximity to lucrative markets, proximity to supply chain locations, the stability of the political and business climates, corruption, the rule of law, access to capital, taxes, regulations, and dozens more all factor into the ultimate decision about where to perform a specific manufacturing activity.

The implication that the shrinking disparity in U.S. and Chinese wages or the growing disparity between U.S. and world natural gas prices recently have surpassed magic benchmarks that will open the flood gates to foreign and returning domestic investment is an oversimplification that erroneously homogenizes manufacturing. In fact, the sector is diverse in its requirements, and thus in the weighting of factors that affect its location decisions. Every business – even in the same industry – considers different factors and weights them differently.

What matters, though, is that direct investment in the U.S. economy – whether from foreign or domestic companies – is something to celebrate. Attracting investment in manufacturing and in other sectors is essential for economic growth. Unlike previous decades when the United States was easily the destination of choice for direct investment, nowadays there is much greater competition, particularly from emerging economies. In fact, the U.S. share of the world’s foreign direct investment stock has dropped significantly from 41 percent in 1999 to 17 percent in 2011.

So rather than observe the migration of some activities back to the United States and assume that a trend is in the making, a better use of the media’s resources would be to take inventory of the factors that encourage direct investment in the United States and spotlight for the public how U.S. policies can encourage, and not deter, an investment renaissance in United States.

Topics: 
Regulatory Studies, Trade and Immigration

Oregon Study Throws a Stop Sign in Front of ObamaCare’s Medicaid Expansion

By
Michael F. Cannon

Today, the nation’s top health economists released a study that throws a huge “STOP” sign in front of ObamaCare’s Medicaid expansion.

The Oregon Health Insurance Experiment, or OHIE, may be the most important study ever conducted on health insurance. Oregon officials randomly assigned thousands of low-income Medicaid applicants – basically, the most vulnerable portion of the group that would receive coverage under ObamaCare’s Medicaid expansion – either to receive Medicaid coverage, or nothing. Health economists then compared the people who got Medicaid to the people who didn’t. The OHIE is the only randomized, controlled study ever conducted on the effects of having health insurance versus no health insurance. Randomized, controlled studies are the gold standard of such research.

Consistent with lackluster results from the first year, the OHIE’s second-year results found no evidence that Medicaid improves the physical health of enrollees. There were some modest improvements in depression and financial strain–but it is likely those gains could be achieved at a much lower cost than through an extremely expensive program like Medicaid. Here are the study’s results and conclusions:

We found no significant effect of Medicaid coverage on the prevalence or diagnosis of hypertension or high cholesterol levels or on the use of medication for these conditions. Medicaid coverage significantly increased the probability of a diagnosis of diabetes and the use of diabetes medication, but we observed no significant effect on average glycated hemoglobin levels or on the percentage of participants with levels of 6.5% or higher. Medicaid coverage decreased the probability of a positive screening for depression [by 30 percent], increased the use of many preventive services, and nearly eliminated catastrophic out-of-pocket medical expenditures…

This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

As one of the study’s authors explained to me, it did not find any effect on mortality because the sample size is too small. Mortality rates among the targeted population – able-bodied adults 19-64 below 100 percent of poverty who aren’t already eligible for government health insurance programs – are already very low. So even if expanding Medicaid reduces mortality among this group, and there is ample room for doubt, the effect would be so small that this study would be unable to detect it. That too is reason not to implement the Medicaid expansion. This is not a population that is going to start dying in droves if states decline to participate.

There is no way to spin these results as anything but a rebuke to those who are pushing states to expand Medicaid. The Obama administration has been trying to convince states to throw more than a trillion additional taxpayer dollars at Medicaid by participating in the expansion, when the best-designed research available cannot find any evidence that it improves the physical health of enrollees. The OHIE even studied the most vulnerable part of the Medicaid-expansion population – those below 100 percent of the federal poverty level – yet still found no improvements in physical health.

If Medicaid partisans are still determined to do something, the only responsible route is to launch similar experiments in other states, with an even larger sample size, to determine if there is anything the OHIE might have missed. Or they could design smaller, lower-cost, more targeted efforts to reduce depression and financial strain among the poor. (I propose deregulating health care.) This study shows there is absolutely no warrant to expand Medicaid at all.

Topics: 
General, Government and Politics, Health Care

Industrial Catastrophe in Post-Soviet Russia

By
Andrei Illarionov

It is challenging to calculate the industrial output for post-socialist transition economies. However, through meticulous work based on internationally recognized statistical standards over two decades, two Russian economists currently associated with the Higher School of Economics in Moscow, Eduard Baranov and Vladimir Bessonov, were able to produce a statistical time-series for the main branches of Russian industry and for the industrial sector as a whole.

The table below summarizes their findings on the physical volume of industrial output in Russia from January 1990 until March 2013. January 1990 marked the end of economic growth in the territory of contemporary Russia (when Russia was still part of the former USSR) as well as the beginning of the late Soviet Union’s economic crisis. March 2013 is the most recent month for which data is available.

Branches of Industry Changes in Industrial Output as %

(March 2013 - January 1990)
Industry as a whole -22.5
Power -6.3
Fuel -4.8
Oil extraction -6.2
Gas 17.1
Coal -3.4
Metallurgy -7.2
Chemical -50.3
Machine building -16.4
Food -12.4
Light industry -84.6

Source: Eduard Baranov and Vladimir Bessonov, 2013

No word describes these numbers better than “catastrophe”. As the data shows, the current level of Russian industrial output is still almost a quarter lower than it was in the time of the Soviet Union.

Read the rest of this post »

Topics: 
International Economics and Development

Good, Market-Based Privacy Advocacy

By
Jim Harper

Too much privacy advocacy is done by a self-appointed expert class who, believing their own preferences to be universal, beseech legislators and regulators to mold or even remake the information economy. I have nothing against self-appointed experts—I am one, and some of you have been falling for my schtick for a decade. But the hubris of claiming to know how things should come out? That’s too much.

So the Electronic Frontier Foundation’s “Who Has Your Back?” report is real stand-out. Using a clear, six-star grid, they assess how well major Internet companies and ISPs do when it comes to key dimensions of privacy protection.

This puts you, the consumer, in a position to choose with whom you want to do business. As importantly, it puts business decision-makers on notice: If they don’t satisfy actual consumer demand for privacy, they are more likely than before to lose money.

If consumers care about privacy, they will act on what’s in this report—and specifically on the dimensions of privacy protection that matter to them. If they don’t, they won’t, because they prioritize other things, and businesses can do the same. It’s an elegant system—a market-based system—for discovering and delivering what consumers want.

The alternative is a foggy war (politics being war by other means) in which the “consumer advocate” and “industry” use every artifice to persuade various authorities whether or not, and how, to intervene. The actual desire of the consumer is an afterthought in this regulatory battle.

So, Who Has Your Back?

The report is worth checking out. You might learn that a provider you trust is not so trustworthy. You might learn of services that you should try because they are good actors. You might disagree with the methodology, and that’s fine, too. The responses of businesses and consumers to this report will be far more finely tuned to actual consumer demand for privacy than the gaudy privacy show that runs ‘round the clock these days in Washington, D.C., state capitols, and Brussels.

Congratulations and thanks to the Electronic Frontier Foundation for some good, market-based privacy advocacy!

Topics: 
Telecom, Internet & Information Policy