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 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.