The editors write in the Wall Street Journal, Manufacturing Decline- Obama, Santorum and the political allocation of capital,  Feb 17, 2012.


Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000. Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy.

This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics.

Which brings us to the real manufacturing tragedy, which is Washington’s habit of misallocating scarce resources. There is only so much capital in the economy, and growth will be fastest if it is allowed to find its most productive uses. That is rarely the political calculus, however. ObamaCare and other entitlements will drive more resources into health care and the economy won’t expand as fast it as it otherwise would.

Or take another sad case: For decades and especially the last 15 years, the government has been on an epic binge to push resources into housing.

The mortgage interest deduction ensures that a home is the largest investment most individuals make, while multiple home ownership programs compound the incentive. The Federal Reserve’s monetary policy in the 2000s and today creates a subsidy for credit, which pushes more resources into finance and real estate in particular. Imagine how this era might have been different had investors in search of yield put their dollars into factories and exports, rather than mortgage-backed securities.

HKO comments:

This piece is well worth reading in full.  Our government consistently ignores a fundamental principle of economics- that at any point we have limited resources that must be allocated. Government policies that incentivize the deployment of capital to one segment of the economy must come at the cost of capital to another.  The consequences of these policies only become apparent after the fools who voted for it are long out of office.

As manufacturers became much more efficient, possibly as a consequence of needing to get more profit out of less capital, but most likely as a consequence of progress and foreign competition, they also became more vulnerable to slowdowns and layoffs.  As Nassim Taleb has pointed out, efficiency is a form of leverage.  The closer you are to maximum efficiency, the less wiggle room you have during a crisis.