Despite heightened partisan squabbling, politicians from all parties have found a surprising area of agreement: industrial policy. While President Joe Biden attempts to bring back semiconductor manufacturing from Asia, Sen. Marco Rubio is allying with a bipartisan group of senators to subsidize 5G telecommunication chips and other U.S. industries. They’ve been joined by state and local politicians who’ve long complained about the decline of manufacturing and who are now trying to create new technology industries in their own backyards.
Yet government efforts to spark new industries are counterproductive. The emergence of industry in one place and not another is often due to happenstance or to long-standing historical ties not understood by contemporary politicians. To understand the peculiar problems of U.S. manufacturing, we need to recognize the entrepreneurial culture that made it thrive and help it revive.
The birth of what is known as an “industrial cluster,” or a local group of related industries, can often be attributed to a single individual. For instance, in the 1890s, a bright young teenager named Catherine Evans created a new type of quilt-and-carpet weaving in Dalton, Georgia. Her weaving company, and its many imitators, made Dalton a global center of carpet manufacturing. Similarly, after helping to invent the transistor at Bell Labs in New Jersey, William Shockley moved to the San Francisco Bay Area in 1955 to care for his ailing mother. He founded Shockley Semiconductor and thus birthed Silicon Valley.
Industrial clusters have also evolved from the residue left by previous industries. New York City was the entrepot for European books and magazines, which helped it to become the center of domestic publishing, which in turn birthed the advertising industry and Madison Avenue, which eventually helped the city become the center of modern media. Likewise, the dominance of Standard Oil in New Jersey allowed the state to specialize in petrochemicals, and then chemicals in general, and soon attached industries, such as fragrances and flavors. Today, chemicals and their byproducts remain New Jersey’s largest manufacturing sector.
The unpredictable nature of new industries, and the sticky nature of old ones, means that government has little control of what types of businesses it oversees. Thus politicians’ mantra should be the same as doctors’: First, do no harm.
Yet governments keep trying to plan the next big thing. Both the federal government and almost every state have tried to fund biotech clusters. These projects have inevitably ended with weeds growing through parking-lot pavements and trails of corrupt bargains. An economist who studied more than 700 industrial clusters across the globe found only a single government-inspired success: the Hinshu semiconductor center in Taiwan. And Hinshu’s flourishing had more to do with the dogged work of Morris Chang and his TSMC semiconductor company than any government effort.
Another thing we know doesn’t work in a world of global supply chains is tariffs. Today, more than 20% of U.S. manufacturing is composed of parts from foreign countries, and almost half of U.S. manufacturing is exported. That’s why the Trump administration’s tariffs wound up costing more manufacturing jobs than they saved. And that’s why the largest industrial lobbying group, the National Association of Manufacturers, opposes any effort to reinstate them.
Politicians can still do positive things to encourage manufacturing. One concerns labor law. Studies show that states with right-to-work laws attracted more industrial plants, especially in their border counties, than nearby unionized states. This helps explain the industrial success of states such as Indiana and Wisconsin, both of which passed right-to-work laws in recent years.
Lower taxes are also a big help — especially reductions on things such as the personal property of businesses, since those levies tend to inhibit the physical investments necessary for industrial production. Both Ohio and Michigan got rid of such personal property taxes a few years ago and have reaped the benefits.
America can also look beyond manufacturing for its technological future. For decades, industrial-policy proponents have argued that without a manufacturing base, the high-tech and service industries that relied on factories would leave, too. They’ve been proven wrong.
New York City’s fashion industry has survived and thrived despite the flight of 98% of the sewing jobs that once powered its Garment District, once the nation’s largest manufacturing cluster. The same could be said for New York’s still dominant publishing industry, which no longer relies on rolls of newsprint unspooled in skyscraper basements.
As late as the 1990s, the majority of Silicon Valley technology jobs were still in hardware, and the region was surrounded by “fab” plants building the silicon semiconductors that gave the region its name. Today, Silicon Valley now has only about half a dozen small fab plants, but it remains the dynamic global center of the technology industry. Nationwide, computer manufacturing employment has dropped to a third of its previous level, while software workers have increased fivefold. Subsidizing a few semiconductor jobs will do nothing for the true sources of U.S. technological leadership.
Politicians who care about manufacturing can encourage flexible labor laws, reform property taxes, and ease mobility for businesses and workers. Most importantly, they can get out of the way of change. They need to allow the next Catherine Evans to emerge on her own terms.
This piece originally appeared at the Washington Examiner
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Judge Glock is the senior policy analyst at the Cicero Institute, a nonpartisan think tank. Adapted from City Journal.
This piece originally appeared in Washington Examiner