Monday, February 6, 2012

In Defense of Manufacturing—Again: Industrial Clusters

Christina D. Romer produced an opinion piece for the New York Times: Do Manufacturers Need Special Treatment? She argues that the answer is "no." Her conclusion is that effort placed on general benefits to the economy would be a better investment. Some of the statements made about manufacturing in the US demand a response. For now we will focus on her conclusion that clustering of manufacturing resources is not of sufficient benefit to be worth a policy initiative.

Romer admits that synergistic effects are possible.

"In manufacturing, the market can malfunction if there are positive externalities across companies. That means that some benefits of a manufacturing plant go to companies other than the one deciding whether to build it. Clusters of manufacturing businesses can be more productive than an individual one. As a result, when an entrepreneur sets up a plant, some of the benefits accrue to other businesses in the area."

She then uses this argument to shoot down the possibility.

"This argument could justify government subsidies or tax breaks. But large clustering effects have been hard to find. A study by Professors Glenn Ellison of M.I.T. and Edward Glaeser of Harvard showed that in many industries, businesses were only modestly more clustered than if they were allocated randomly — suggesting that the benefits, while real, may often be small."

She has not really addressed the issue. To state that there is little evidence of clustering, does not allow one to conclude that clustering is not of significant value.

Perhaps Romer should spend more time reading the New York Times. A recent pair of articles devoted to Apple and its manufacturing methods were discussed here in Apple and Manufacturing. This NYT article explains why Apple chose to center its manufacturing in China. It was because policy makers in China decided to encourage the type of capability clustering that Romer concludes is unimportant. And what does Apple think about their situation in China?

"’The entire supply chain is in China now,’ said another former high-ranking Apple executive. ‘You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours’."

Paul Krugman, renowned economist, points out, on his New York Times blog, the benefits of clustering in Chinese Manufacturing and the Auto Bailout. In referring to yet another NYT report on Chinese manufacturing, he provides these comments:

"A lot of what that report is saying amounts to the fact that the classic logic of industrial clusters still applies very strongly — which is music to my professional ears, since that’s the sort of thing that was a central theme of my own research for many years. Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on."
"This, in turn, makes a case for policy to promote or preserve such clusters."

Krugman then goes on to provide us with a relevant US example.

"But can we think of a recent example in the United States where helping to preserve an industrial cluster was an important policy consideration? Indeed we can: the auto bailout. A key argument for the bailout was that if the major US firms were allowed to go bankrupt, a whole industrial ecology would be lost with them. And the auto bailout has been a huge success, not least because it did preserve that ecology."

Krugman refers to the dramatic improvements in unemployment in Michigan as evidence that this "industrial ecology" is real and it is important. This source provides a plot over time of unemployment rate in Michigan. Michigan went from a peak of 14.1% in August 2009 to 9.3% in December 2011, a fall of 4.8%.

Not all economists are created equal. Chose wisely when you decide to pay attention to one.

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