Commentary

Fear and Mythology

In his National Review Online piece yesterday, Dow Chemical’s Andrew Liveris paints a near-tipping-point picture of the U.S. manufacturing sector to support his call for Carteresque restraints on energy consumption. But there are two problems with Mr. Liveris’s argument: the predicate and the proposition.

Liveris claims that today’s energy “crisis” has “ballooned into a manufacturing crisis.” He asserts that the chemical-products industry has “suffered woefully,” and that manufacturing’s decline is “in large part because we don’t have a coherent national energy policy.” He urges action soon “if we hope to have any chance of saving our once mighty manufacturing economy.”

Here we go again. Liveris is neither the first nor will he be the last rent seeker to construct his scheme on the myth of U.S. manufacturing decline. Politicians acting on behalf of particular industries or unions routinely cite the erosion of U.S. manufacturing primacy as justification for trade barriers. In May, Sen. Carl Levin (D., Mich.) opined that “the Bush administration has not lifted a finger to support manufacturing in America while we have lost three million manufacturing jobs on its watch.” Rep. John Dingell (D., Mich.) went a step further to say “manufacturers are hurting in large part due to this administration’s lax attitude toward unfair trade practices.” In the summer, Sen. Hillary Rodham Clinton (D., N.Y.) proclaimed, “If we don’t have a strong manufacturing base in our economy, it won’t be long until we don’t have a strong economy.”

But here’s the kicker. U.S. manufacturing is not in decline — not by any stretch. Manufacturing is thriving by historic standards and relative to other countries’ manufacturing sectors. In 2006, the sector achieved record output, record sales revenue, record profits, record profit rates, record return on investment, and record exports. U.S. factories continued to be the world’s most prolific in 2006, accounting for just over 20 percent of the world’s manufacturing value-added. By contrast, Chinese factories accounted for just 8 percent.

And 2006 was not an aberration. Since the nadir of the manufacturing recession in 2002, all of those indicators have been trending upward. The most recent quarterly Census data show that the trends have continued into 2007, where second quarter sales, profits and output are at all time highs.

Liveris’s industry isn’t fairing too poorly either. Between 2002 and 2006, output in the U.S. chemical industry increased by 12.3 percent, productivity (measured as value-added per worker) rose 17.5 percent, real revenues jumped by 18.9 percent, and real profits surged by 28.7 percent. Despite a 17.8-percent increase in chemical manufacturing costs (which includes the cost of energy), the profit picture tells us that producers are finding customers willing to pay more than enough to cover those rising costs. The same is true of most industries within the manufacturing sector, and for U.S. manufacturing as a whole.

But Liveris rests his case for some grand national energy policy on the fallacy of U.S. manufacturing decline. Expanding U.S. energy supplies is probably a worthy objective, and regulatory impediments to that process should be reviewed, and in some cases reversed. But companies that rely heavily on energy, like Dow Chemical, should consider investing in technologies and infrastructure to develop new energy supplies rather than ask government to do it for them. If it’s as worth pursuing as Liveris claims, it will be done in the private sector without further inducement.

Liveris also wants consumers to be “encouraged — and rewarded — for reducing demand” by government. Why? Are they not already “encouraged and rewarded for reducing [energy] demand” by the market?

Hypocritical is the businessman who calls on government to “encourage” a reduction in energy consumption so that his own production costs decline. I suspect Liveris would not take too kindly to his industrial customers, motivated thusly, seeking government’s help in discouraging the consumption of chemical products. At the very least, it would inspire yet another opinion piece.

Daniel Ikenson is associate director of the Cato Institute’s Center for Trade Policy Studies and author of the recent Cato study, “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade.”