On manufacturing

Two quick stories in today's papers on manufacturing. First this from leading venture capitalist John Doerr and GE head Jeff Immelt in the Washington Post - U.S. Needs to Lead in Clean-Energy Future:

We are clearly not in the lead today. That position is held by China, which understands the importance of controlling its energy future. China's commitment to developing clean energy technologies and markets is breathtaking.

Their answer, more innovation. While they reject "massive government intervention", their policy solutions sound like a green industrial policy to me (which I agree with): "a price on carbon and a cap on carbon emissions"; "driving efficiency through incentives, a renewable electricity standard and a national unified smart grid"; "energy standards that grow steadily stronger"; "funding research, development and deployment, at scale"; "open markets abroad -- including the Chinese market -- for U.S. clean-energy products." They specifically endorse the Clean Energy Deployment Administration idea of my old boss, Senator Jeff Bingaman.

Then there is this in today's Wall Street Journal - China's Gains in Manufacturing Stir Friction Across the Pacific:

China is on its way to surpassing the U.S. as the world's largest manufacturer far sooner than expected. The question is, does that matter? In terms of actual size, the answer is, no. But if size is a proxy for relative health of each nation's sector, the answer is yes.

The article goes on to give an overview of the new debate on manufacturing:

Many economists argue that the shrinking of U.S. manufacturing -- both in terms of jobs and share of gross domestic product -- is a normal economic evolution that started long before China emerged as a manufacturing powerhouse. From their point of view, the shrinking would happen regardless and is actually a sign of health that the sector doesn't need to be big to be productive and is shedding low-skill jobs and creating select higher-skill ones.
Global Insight's Mr. Behravesh is one of those who views China's rise as normal, even healthy. "In the natural course, countries go from agriculture to manufacturing to services," he says. "To subsidize manufacturing pushes [the U.S.] backwards down that curve."
But another school of thought -- one known by the somewhat backhanded label of "manufacturing fundamentalists" -- contends the U.S. decline isn't natural and must be reversed to retain America's economic power. From their perspective, that necessitates fighting Chinese policies that fuel low-cost exports, swamping a variety of industries from textiles to tires.
"The notion that we can be a nonmanufacturing society is folly," says Peter Morici, an economist at the University of Maryland. "It's pseudo-science that gives rise to the collapse of civilizations."

I have to say that both sides of this debate worry me. On the one hand, the "good old days" of manufacturing where workers could enjoy above average wages based on low skills is gone forever. Attempts to return to that economy are doomed to failure. The manufacturing of tomorrow will look less and less like the manufacturing of yesterday - or even today.

What worries me more, however, is the old idea that an economy the size of the US can survive without manufacturing. That notion is simply is ludicrous. If there was a "nature" progression from agriculture to manufacturing to services, then the US would not be a leading agricultural nation.

The shift in agriculture is a good case study to look at. Agriculture did not disappear from the US, to be shifted to some other nation that continued to do things the way it had always been done. Agriculture was transformed; it mechanized (industrialized, if you prefer). Likewise, manufacturing is in the process of being transformed into a much more knowledge-intensive activity.

In other words, the key is not the output ("agriculture," "manufacturing," "service"). It is the production process that is important. Knowledge has become the key input (factor of production).

Thus, what worries me is not that China is taking over low-skilled, low-wage manufacturing. That form of manufacturing is slowly dying (whether the industry and economists understand this or not). What worries me is the China is quickly ramping up to lead in the transformed manufacturing environment. Our concern should not simply be green technologies; all technologies and the overall production process are at risk.

The proposals outlined by Doerr and Immelt are important. But more, much more, needs to be done. Now.