Andrew Coyne has an excellent piece in the National Post
dealing with why there are no good reasons for corporate handouts in the wake
of yet another round of assistance to the automobile sector. He asks what the economic rationale for this assistance is – that is, what is the economic value? He argues that what passes for economic
arguments in support of corporate assistance and bailouts really are but
“pseudo-arguments”. For example,
we must subsidize the auto industry because we must be in the automobile
business – in essence, the auto industry is special. Or, other countries are assisting their manufacturing
sectors with subsidies so we need to do so to compete.
Yet, the question remains. What are the benefits and costs of subsidizing the
manufacturing sector? What is the
value to the economy of directing public funds and resources into subsidizing
manufacturing in general and automobile production in particular? This is perhaps all the more galling
because it is a supposedly market-oriented Conservative federal government that
is providing this latest round of financial assistance and support. Whatever happened to the federal finance minister's lament of
corporate dead money? If there are
stockpiles of cash in the private sector that can finance investment and
innovation, why are we subsidizing?
And what about other types of manufacturing? Why for example was assistance on the
scale provided to automobile production not also provided to pulp mills to help
them innovate and compete? How did government reach the decision that decided one form of manufacturing was more important in economic terms than the
other? Sure, we can say that the
decision was really based on politics and there are more votes in southern Ontario auto
production than rural resource mill towns but again that is not an economic argument.
Is there a special economic value or role to manufacturing
that makes it special? Coyne
feels: “If it’s about anything, it’s
about aesthetics, or a sort of sectoral snobbery, the kind that finds the
prospect of being “hewers of wood and drawers of water” so unspeakably vulgar.
And yet it is presented as if it were an economic argument.” My gut feeling
is that this tendency to put manufacturing on a pedestal is rooted in an almost
1930s Soviet-style view of economic development with heavy industry and manufacturing
being the high ground of the economy.
Industrialization is seen as a sort of “higher-level” of economic
activity after agriculture and resource extractio – a logical higher-order
stage. A classic exposition is
in the work of Walter Rostow and his “Stages of Growth” approach to economic development – I am not calling it a
model. Interestingly enough, his
work was presented in the 1950s as a market driven alternative to Soviet style
economic planning to the road to industrialization and development by presenting economic
development as a set of natural stages.
Rostow chronicles five stages to economic growth – the third
of which is the “Take-off” stage in which manufacturing begins to grow and
leading sectors in steel, coal and heavy industry develop leading the economy
away from the “Traditional society” which was characterized as pre-modern, low
tech and in essence backwards. Of
course, Rostow’s traditional society was a primary sector economy of hunting,
fishing and agriculture. For
Canada, substitute natural resource extraction for those primary industries,
and you get a pretty good idea of how the resource sector is viewed by many
Canadians. Dutch Disease is obviously all the more traumatic when viewed as an economic infection that causes regression to a traditional society.
What is also interesting
in all of this is why in a similar vein we do not view manufacturing as
backward in relation to the post-industrial knowledge economy of high end
financial, medical and knowledge services? Surely, if our society is imbued with a tendency
to view economic development as a series of sequential progressive higher-level
stages, why not also consign manufacturing – and specifically automobile production – to the dustbin of history? Is not the highest stage of economic development one in which we effortlessly glide from one shopping and dining experience to another while not having to produce anything that is physically tangible all the while powered by friendly and renewable green energy and green transport modes? I repeat the question raised by Coyne,
why is manufacturing special?
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Imagine an economy where nothing of substance is produced… Hmmm.
Maybe manufacturing is special. What would all those post-industrialists think about, or with, in the absence of a substantive economy?
The fact is the rest of the economy lives off, feeds off, the manufacturing (and extractive) economies. The rest of the economy is a burden on these sectors. These sectors carry the rest of the economy. If that burden is too great, then in a market economy, these sectors cannot operate at a profit, and in the absence of intervention, would collapse. So then, in order to sustain these sectors, they must then be subsidized.
But this ‘subsidy’ is a fiction. This is because all of the real, substantive, resources involved in the subsidy already come from the manufacturing and extractive sectors. If you take too much from the manufacturing, or extractive, sector, however, you must give some back, if you want to maintain that sector. But these resources cannot come from, say, Finance. Finance produces nothing of substance. But when Finance is too powerful, it extracts too much from manufacturing, and this must be compensated for by government action.
The necessity for government intervention, then, in the form of ‘subsidy,’ is a sign of institutional imbalance, not a sign of the undesirability or disposability of manufacturing.
More fundamentally, is this
Sure, we can say that the decision was really based on politics and there are more votes in southern Ontario auto production than rural resource mill towns but again that is not an economic argument.
not an enormous, glaring, deep, fundamental flaw in the very concept of “economic argument”?
Re Livio’ reply – I don’t agree that all sectors can generate the same degree of surplus or are in the same position when it comes to reliably capturing the surplus. I was not characterising all jobs outside manufacturing as serf jobs, but a serf economy has a predominance of sectors characterised by a small number of high-paying jobs and a large number of low-paying jobs, with not much middle and no paths between (plantation agriculture is a good example). Sure all sectors can produce some good jobs, but not all sectors can produce both a lot of middling jobs, clear paths upwards and a corresponding social structure that diminishes social tensions. Inequality makes it more difficult, not less, to redistribute (the rich have more power to resist, the poor less power to insist, the state less leverage against the rich and so on), so saying the rich can compensate the poor is a non-starter.
Bingo! In a single sentence: different ways of creating wealth imply different social structures. Different social and political structures produce different distributions of wealth. Different distributions of wealth bias society in different ways towards particular ways of creating wealth…
“Maybe manufacturing is special. What would all those post-industrialists think about, or with, in the absence of a substantive economy?
The fact is the rest of the economy lives off, feeds off, the manufacturing (and extractive) economies. The rest of the economy is a burden on these sectors. These sectors carry the rest of the economy. If that burden is too great, then in a market economy, these sectors cannot operate at a profit, and in the absence of intervention, would collapse. So then, in order to sustain these sectors, they must then be subsidized.”
What a strange way of thinking about the world. First, it’s not accurate. The service sector is not “parasitic” to the “substance” sector, they work togeter to create wealth (after all, what good does the ability to manufacture products do anyone, if no one can transport them to the market?). Second, no one is arguing that we can have an economy without “substance”, just as we can’t have an economy without food. The question is, why do we have to make the “substance” (with the help of subsidies) if others can do it cheaper? Similarly, why do we worry about the “decline” of manufacturing if it arises from increasing productivity which allows us to make more with less. The analogy with food was intentional – a century ago, roughly 50% of Canadians (and Americans) worked in the agricultural sector (so much for the claim that our wealth arose from manufacturing), now that number is probably less than 3%. We haven’t starved.
Does an advanced country need manufacturing? Since 90% of trade is in goods, and only about 10% in services, it would seem, in order to balance its trade, an advanced economy must produce goods. In fact, if we consider the trade in services to be roughly balanced, it must produce about as much in goods for export as it does for import. Thus in total, on the balance, a modern economy, in quantity, must manufacture, itself, goods in value equal to everything it consumes. With a higher proportion of extractive industry, maybe a country like Canada can get by with a little less proportion of manufacturing, but not much.
So like food, a modern country can’t live without manufacturing. The exceptions are those that have the resources and are able to depend on an extractive economy, as long as those resources last.
With increases in manufacturing productivity, can that proportion of the economy devoted to manufacturing decrease, even as agriculture did during the 20th century? Of course, but the process can be carried too far. Competition and policy can drive producers to under-capitalize, to their eventual unprofitability. And where a nation is subject to the mercantile policies of foreign nations, this can affect an entire industry. And from above, a modern economy must maintain a certain amount of industry, and with out alternative, can ill afford to allow the destruction of one of its major ones.
“Since 90% of trade is in goods, and only about 10% in services, it would seem, in order to balance its trade, an advanced economy must produce goods.”
What is the basis for that assertion? In 2008, for example, total US exports were $1.8 trillion, of which services accounted for $551 billion – I’m no math wiz, but that strikes me as being a heck of a lot more than 10%. (http://www.trade.gov/press/press_releases/2009/export-factsheet_021109.pdf)
“if we consider the trade in services to be roughly balanced, it must produce about as much in goods for export as it does for import.”
Yes, but only if your assumption that trade in services is roughly balanced. But it isn’t, as the US example makes clear, and there’s no reason why it should be. The US has a rather hefty surplus in the trade in services (which somewhat offsets its overall trade deficit). I believe the same is true of the UK. It helps to ground these discussions on the basis of facts rather than on convenient (and incorrect) assertions.
“Competition and policy can drive producers to under-capitalize, to their eventual unprofitability.”
That seems to be a problem that resolves itself, doesn’t it. Unsuccessful manufacturers go under, and the survivors return to profitability. Subsidizing the losers only aggravates the situation.
Then the cheaper people have their revolution, and you are up the creek without a paddle.
All right. Teach me to trust my memory!
BEA
Table 1. U.S. International Transactions
2008 2009 2010 2011
72 Balance on goods (lines 3 and 20) -830,109 -505,758 -645,124 -738,413
73 Balance on services (lines 4 and 21) 131,770 126,603 150,387 178,533
So in the balance (2011) services make up about 25% of the deficit in goods. Not good enough.
Especially when you propose to allow the destruction of even more domestic industry, thus a worsening in the balance of trade in goods.
Bob Smith:”That seems to be a problem that resolves itself, doesn’t it. Unsuccessful manufacturers go under, and the survivors return to profitability. ”
Yes, but the survivors where? China? Where they will be subsidized until more of our manufactures are destroyed by unfair competition?
My argument is that our manufacturers, (and agriculture and mining, etc.) support us in the style to which we have been accustomed, and this is reflected in the costs they bear, and thus on their international competitiveness. Our manufacturers are less competitive because we live so well. Sure, we can cut our manufacturers’ costs back, and make them more competitive, but to compete with the Chinese, most of us would have to live like Chinese peasants. I claim that much of the economic malaise we have been experiencing is because of the trade deficit, globalization and international competition leading to the ‘equalization of factor prices,’ which for an average individual is econo-speak for equalization of standards of living.
Indeed, with tradeable services disconnected from the domestic economy, and there would be no reason for them to remain connected in the absence of a domestic manufacturing base, in the absence of manufacturing, most of us would be destitute, much worse off than a Chinese peasant.
[…] Matteo raises more questions than he answers in this post, but all are extremely pertinent to public policy today and moving forward. Previous posts on this blog have highlighted the ongoing bailouts and subsidies provided by the U.S. government to auto manufacturers (see here and here). In contrast to my views and seemingly those of Matteo, the mainstream media frequently depicts declining employment within the manufacturing sector (seen below) as a major concern. […]