June 27, 2012
How to Grow Out of the Decline
By Michael Shellenberger and Ted Nordhaus
Monday's dismal manufacturing report and Tuesday's deal to slash spending have spooked the markets, which fear lower growth. While Obama and the Democrats say they will now focus on increasing jobs, the question is what can actually be done to grow the economy?
For Vaclav Smil, the famously pessimistic polymath, the answer is clear: the U.S. must manufacture its way out of decline.
Smil, virtually unknown in the United States, is no armchair pundit. The author of 32 books on risks, catastrophes and much else, Smil is a legend to energy wonks like Bill Gates and was the first non-American to win an AAAS Award for Public Understanding of Science and Technology.
In a detailed piece for Breakthrough Journal on "The Manufacturing of Decline" Smil argues that:
"the most practical and proven way to reduce America's huge trade imbalance is to export more manufactured goods in well-established sectors. Consider that from 2000 to 2008, America's exports of medicinal and pharmaceutical products expanded nearly threefold, industrial chemicals grew 2.4-fold, primary plastics 2.2-fold, and sales of power-generating machinery equipment rose by 70 percent. These accomplishments point the way: we cannot boost manufacturing by trying to repatriate millions of lost apparel, furniture, or electronics jobs. These losses cannot be reversed rapidly and most of those jobs would not come back even if Chinese exports suddenly ceased, as other countries would fill that vacuum. Rather, the solution is to expand those manufacturing sectors that are already outstanding exporters."
Smil attacks the optimism of those who wish for the service economy and dot coms to save America, noting "Facebook is valued by Goldman Sachs at $50 billion, nearly as much as Boeing, but Boeing employs some 160,000 people, whereas Facebook only employs 2,000."
Manufacturing is critical because it produces "economic benefits that finance and service sectors do not. The higher outputs from manufacturing create important backward-forward linkages that include many traditional jobs (from accounting to job training) as well as entirely new labor opportunities (in e-sales, global representation). As a result, sales of every dollar of manufactured products support $1.40 of additional activity, while the retail sector generates less than 60 cents for every dollar of final sales. In terms of job creation there is no comparison."
It's a self-destructive myth to believe the U.S. can't compete with China, whose "comparative advantages were created through government policies, not granted by nature." Smil, who is a professor at the University of Manitoba, adds, "There is no reason the United States could not reverse the fortunes of its manufacturing sector as it did in the 1980s with semiconductors and as Germany did more recently with its high-end consumer and industrial products."
What specifically should be done? Read Smil's full piece here and find out.