Why the United States Needs a National Manufacturing Strategy

A fierce debate has erupted in academic and policymaking circles over whether manufacturing matters distinctively to an economy and, by extension, whether the United States needs a national manufacturing strategy. On one side are the manufacturing skeptics who believe that manufacturing is no more important than any other sector and therefore deserves no special policy emphasis. Such skeptics include Christina Romer, President Obama’s first White House Council of Economic Advisors chair, who has argued that “none of the economic rationales for policy aimed specifically at shoring up manufacturing are completely convincing,”¹ and former National Economic Council (NEC) director Larry Summers, who contends that “America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff.”²

The manufacturing skeptics are countered by a growing chorus of policymakers, academics, and business leaders who understand that the health of U.S. manufacturing remains vitally important to the strength of the U.S. economy, and thus should be supported by a robust national manufacturing strategy. This community includes both President Barack Obama, who spoke extensively about manufacturing in his 2012 State of the Union address, and Gene Sperling, current chair of the NEC, who, in contrast to his predecessors, holds that manufacturing “punches above its weight” and is therefore “worthy of a special emphasis” in U.S. economic strategy.³

This essay sides with the latter community and makes the case for a comprehensive U.S. national manufacturing strategy. It explains first why manufacturing, and all traded sectors more broadly, matters distinctively to the U.S. economy and then articulates the key elements and goals a national manufacturing strategy should include.

Why Manufacturing Matters to the U.S. Economy

A robust manufacturing sector is indispensable to the health of the U.S. economy for at least four critical reasons:⁴

• • Manufacturing produces economies of scale and productivity gains that spill over to other industries, in part because manufacturing is the principal source of research and development (R&D) and innovation activity in the U.S. economy.

• • Manufacturing is a key source of high-paying jobs and a driver of employment growth.

• • The contributions made by the manufacturing sector are essential to enabling the United States to balance its terms of trade.

• • Most importantly, manufacturing is the key source of an economy’s traded sector strength. The macro economy will face stiff headwinds in its efforts to grow if it lacks a healthy manufacturing sector.

Those who argue that manufacturing is no more important to the economy than any other sector invoke the conventional neoclassical economic wisdom that “what a country makes doesn’t matter,” a viewpoint memorably captured by Michael Boskin, head of former president George H. W. Bush’s Council of Economic Advisors, in his famous quip, “Potato chips, computer chips, what’s the difference? $100 of one or $100 of the other is still $100.”⁵ Or, as Christina Romer framed it, “American consumers value health care and haircuts as much as washing machines and hair dryers.”⁶ But there is a difference, and it is profound. Many manufacturing industries, such as those making semiconductor microprocessors (that is, computer chips), experience very rapid growth and reductions in cost, spark the development of related industries, and increase the productivity of all other sectors of the economy. In essence, the spillover effects from the sale of computer chips make potato chip manufacturers more efficient, but the converse is not true. In other words, manufacturing distinctively engenders economies of scale, which leads to lower prices, lower inflation, higher productivity, and greater wealth creation for the whole economy. Manufacturing also stimulates broader economic output: each dollar in final sales of manufactured goods supports $1.35 in output from other sectors of the economy, giving manufacturing the largest multiplier of any sector of the U.S. economy.⁷

One reason manufacturing produces such high spillover effects is that it is the principal source of R&D and innovation in the U.S. economy. Manufacturing firms account for 72 percent of all private-sector R&D spending, despite the fact...