America’s Industrial Revival

This Labor Day America stands on the brink of an industrial revival. During the next decade millions of Americans will be re-employed in manufacturing. Tens of millions more will be newly employed in jobs supporting manufacturing and serving the needs of manufacturing employees. The financial sector will shrink and the industrial sector will grow. Balance of payments problems will disappear; tax revenues will increase while tax rates go down.

Why? you ask. How?

Six reasons for the successful reindustrialization of America:

1. Energy. We are energy rich; most of the world is energy poor. As the relative labor content of manufacturing goes down, the cost of the non-human energy used is more and more important. Robots needs their watts or they won't work. With new techniques for extracting it, we are rich in natural gas. We are very rich in coal – rich enough to sequester the CO2 created when it is burned if that is needed. We have massive reserves of oil and can extract it safely. We are just south of huge untapped hydro resources in Canada. And we can build a new fleet of nuclear plants (although not in time to help this decade). At some point solar technology will improve so that electricity generated in our deserts reduces rather than increases our overall energy cost. It's hopeful that the Obama administration recognized the importance of energy cost and supply to job creation with two actions this week: State Department approval of a pipeline from Canada and suspension of overly-strict rules ozone rules promulgated by the EPA.
2. Improving standards of living in the third world. Japan used to have huge cost advantage over the US in manufacturing costs because their labor was cheap. As Japanese laborers moved into the middleclass – just as our workers had already done, that advantage disappeared. Those jobs moved to China and Taiwan and Thailand. But workers in all those places are leaving poverty, joining the middleclass, and demanding better wages and safer working conditions. They are also consuming more themselves. There will no longer be an imbalance between what countries like China produce and what they consume. As wealth and aspirations equalize around the world, we will no longer be at a disadvantage when we pay a decent wage and provide decent working conditions (so long as we are efficient and have cheap energy).
3. Rare earths. China tipped its hand too early when it began restricting export of rare earths needed for many of today's products to force manufacturers to locate factories in China in order to get needed supplies. Those same rare earths are found in America – mainly in shut-in mines. The mines are being reopened. Once we move to effective and speedy environmental review, we'll lead the world in production of those needed materials. We'll export some; factories will also be built here to take advantage of needed supplies.
4. We're a huge country. That means we have a supply of almost anything somewhere. It also means that, when one part of the country suffers a disaster (as we are in Vermont right now), the rest of the country is likely to be unaffected by that particular event and can lend a crucial helping hand. Like climbers tied together by a rope, we're all safer and stronger for the connections. We will become shovel ready once again and improve the various kinds of infrastructure which link us together.
5. The government is running out of money for pursuing an "industrial" policy. Government money targeted at favored people and industries has the effect of suppressing much more diverse private investment. It's not that government bureaucrats are always wrong or private investors always right; but private investors cut the losers and support the winners. Government focuses on just a few areas and then supports its investment decisions with more subsidies, mandates, or bans on competition. In corny ethanol, for example, we are not only incented to turn food crops inefficiently into fuel; competing imports are banned; and refiners are required to blend ethanol into their gasoline. Removing tax breaks and direct subsidies will "stimulate" more jobs than leaving them in place.
6. Cheaper housing. Many people have been hurt by plummeting house prices. But these prices were artificially high driven there by cheap (and unwise) credit. In many ways the housing market was a Ponzi scheme run by financial institutions (and government). Sure, those who got out early made a lot of money; the rest of us just got caught when the music stopped. As the price of homes outstripped incomes, a bigger and bigger part of all of our budgets went to pay interest on bigger and bigger loans and the financial industry mushroomed as it transferred the capital (minus lots of overhead) from "investors" buying strange mortgage instruments to the sellers of houses. With housing much more affordable now, the next generation of workers won't need to borrow as much to own a home and more capital will be available for reindustrialization. With luck, the financial sector will shrink when it loses the lucrative task of financing housing inflation.

Could we screw up this opportunity to reindustrialize? Sure. We could let Luddites trap us into energy poverty and block the mining of rare earths. We could make our employment costs unrealistically high. We can refuse to build or permit the infrastructure we need to take advantage of our great size and diversity of resources. We could continue a crazy quilt of subsidies and tax breaks even though we can't afford them. And we can continue to bail out the banks while pretending to help homeowners.

But we won't. We will flourish.

Related posts:

Jobs Rx: Make America Shovel Ready

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What Government CAN do to Create Jobs

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The End of the Age of Incentives

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