The only secure
ground for the government’s subsidizing a producer
is that the goods or services that he sells are
likely to confer external benefits, which is to
say benefits that, because they are not paid for
by the buyers, do not contribute to covering the
producer’s costs. The total social benefits,
private as well as public, that his production
creates may exceed his costs, but he will not
produce if the private benefits (the payment he
receives from customers) do not cover those
costs.
Some manufactured
products, vaccines for example, confer external
benefits: when most of the population is
vaccinated against some disease, the risk to the
rest of the population may be so slight that they
stop buying the vaccine: they are benefiting from
it but not paying for it. Another example is
intellectual property that, in the absence of
patent or copyright protection, could easily be
copied: the original producer of the intellectual
property would be conferring benefits on the
copiers for which he would not be paid.
External benefits
are actually rather pervasive in manufacturing as
in other sectors of the economy. For example,
consumers who value a product much more than its
market value derive an external benefit, because
(by definition) the manufacturer does not capture
this “consumer surplus [value].” But there is no
reason to think that manufacturing confers greater
external benefits than other sectors.
There is a general
anxiety about becoming dependent on foreign
nations for products that are vital to our nation.
That is a legitimate concern when one is talking
about products that are essential for national
security or economic welfare, such as military
aircraft; and obviously our military production is
heavily and justifiably paid for largely by the
government, although some is paid for by foreign
buyers. The foreign “products” that might be
thought essential to our security and welfare are
not manufactured goods at all, but commodities
such as oil and rare earth metals. The United
States is still the world’s largest manufacturing
country, accounting for a fifth of total world
industrial output.
Becker points to
the analogy of agriculture. Employment in
agriculture has plummeted, leading to anxieties
spurred by agricultural companies about the
decline of the “family farm” and the loss of the
imagined virtues of the independent farmer, to
combat which agriculture continues to be heavily
subsidized. The subsidies are widely recognized to
be a pure social waste, and the same would be true
of subsidizing manufacturing. Like manufacturing,
American agriculture is thriving with its
historically small labor force.
The decline in
agricultural employment is a product of
technological advance, and likewise the decline in
manufacturing employment. Subsidizing
manufacturing will no more increase employment in
manufacturing than subsidizing agriculture has
prevented the precipitous decline of agricultural
employment, for a manufacturing subsidy will be
used to speed the automation of manufacturing
tasks and so accelerate the decline of
manufacturing employment—unless the subsidy is
conditioned on increased employment, which would
mean diverting workers from more to less
productive work. We would not be better off if 40
percent of the labor force were in farming rather
than 2.5 percent, or if 28 percent of the labor
force were in manufacturing rather than 9
percent.
Some concern has
been expressed that we need to boost manufacturing
in order to reduce our trade imbalance, because
many manufactured goods are exported. But a recent
article in the New York Times (April 10)
points out that the United States is the world’s
largest exporter of services—and would be larger
still if we took steps, such as loosening visa
restrictions that impede international provisions
of services and making the same efforts to pry
open foreign markets to American services as we do
to pry open foreign markets to American goods.
The politicians
know all these things. The push to promote
manufacturing is political in origin and may (one
hopes will) be abandoned after the election. Its
political appeal is related partly to the fact
that unions still have a foothold in
manufacturing, and partly to the fact that
America’s prowess in manufacturing (think of the
vast output of munitions in World War II) is
associated in the public mind with the epoch of
greatest American world power.
I have no
objection to efforts to negotiate with foreign
countries trade agreements that facilitate U.S.
exports (they also of course facilitate
imports—and that’s fine too). Such efforts are the
centerpiece of the Administration’s program of
stimulating employment in manufacturing. But the
efforts should be extended to services. I can
think of no rational basis for putting
manufacturing ahead of services.
