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thomas davison

The insanity of subsidising manufacturing
By Tim Worstall Economics Last updated: April 19th, 2012

Like it or not, this is the future

I see there's yet another group of industrialist porkers hoping to get their snouts into the tax subsidy trough. As The Telegraph reports:

Graduates from top universities would get financial incentives to opt for careers in engineering and manufacturing instead of the City, under plans being considered by Vince Cable � The MTA said the Government should offer tax credits for companies who run the scheme, to help offset the cost.

I realise that this is going somewhat against the grain, but there is no valid argument for subsidising engineering or manufacturing in any manner whatsoever. Further, just about everything we're generally told about the sector is wrong.

Firstly, manufacturing output in the UK is not falling. Have a look at the chart here:

That is the value of manufacturing output and yes, it is adjusted for inflation. There's been a wobble in the recent recession, but we do produce over twice what we did in 1945 when everyone was gainfully employed making whippet flanges. There hasn't actually been a decline in UK manufacturing: output was higher when Maggie left office than when she entered. So much for the idea that she crucified manufacturing.

Manufacturing employment has fallen, yes, this is true. That is a result of rising productivity and is thus a good thing. It means we can have more value from manufacturing � and also people going off and nursing the sick in the NHS. We don't need those people doing the manufacturing any more, because productivity has risen.

Manufacturing has also fallen as a percentage of the economy, but this is because the non-manufacturing parts of the economy have grown faster than the manufacturing parts. This must be true: as above, manufacturing output hasn't fallen, so it's a question of relative growth rates, not manufacturing shrinking. Now look at the chart here:

Manufacturing has fallen as a percentage of the world economy and also as a part of each economy individually. It isn't that all UK manufacturing has gone to China (see above, manufacturing output has increased), nor that finance throttles it, nor that what is happening here is any different to what is happening everywhere else.

As it happens, manufacturing is currently about 12% of the UK economy, around the same as it is in France. And that's only a point or two off what manufacturing is as a share of the global economy. Whatever's been happening isn't a result of domestic politics � not if it's happening everywhere.

What's really happening to manufacturing is what happened to agriculture over the past couple of centuries. Time was when we needed 80% of the people standing in fields to feed the 20% who did not. Now we only need 2% in the mud to feed the 98% who aren't. We used to need tens of millions of workers to make half the value of the manufactured product we now make with three million odd. This is the world getting better, not the world getting worse. It frees people up from flanging whippets to do other more interesting things.

This process isn't going to change, either. That mass employment in manufacturing is just never going to come back. It's a stage of economic development that is dead and gone. As I've written elsewhere, I estimate global manufacturing employment to have been between 150 million and 200 million workers in 2002, with those numbers reflecting a global decline of 20-30 million manufacturing employees in 2002 compared to 1995.

The world is losing manufacturing jobs. Yes, even China is losing manufacturing jobs. Given that we don't trade with Mars, this means that it's not trade or offshoring causing the losses. It's purely that rising productivity. We can make more things with less labour now. Excellent � as I said, this frees up labour to go and do something else.

Which brings us back to subsidising engineering or manufacturing here at home in the UK. We're going through s a global, structural change: those jobs are being consigned to the dustbin of history, just as reaping or sowing by hand have gone, thankfully never to return. We've a big enough deficit as it is. We really don't want to be splurging tax money on encouraging people to go into a sector that will soon only be employing two men and a dog.

Better by far to leave the money fructifying in our own pockets, where it will encourage the new industries and jobs of the future rather than prop up the failing paradigm. You know, those new jobs and industries that by definition cannot be planned or politicianed or subsidised � because no one has a clue what they're going to be.

The question is if British factories (and eventually businesses) can be operated by two men and their dog, who in the UK is going to be able to afford what they produce or supply?

An unconvincing piece from a member of the Adam Smith Institute.

Since the end of the second world war, much of Britain's industrial might has withered away; the older industries of cotton, wool, iron, coal, steel, heavy and light-engineering and ship-building have declined to the point we cannot or no longer compete with the emerging far eastern nations where labour is much cheaper. But, allowing our industrial and manufacturing base, including all forms of engineering, to disappear was the height of stupidity and an indication of the confused economic behaviour of successive governments, ministers, administrators and liberal elite thinking.

The rot started in the 1950�s, with an industrial and manufacturing base that had been decimated during World War Two, much of which had concentrated on munitions work, but was not resurrected during the 1960�s. However, and unlike
Germany and Japan the nation and companies failed to invest in people, products and plant to improve productivity, competitiveness and output and gradually fell by the wayside; during the 1980�s the process increased because some politicians suggested manufacturing is not important and, regrettably,
universities began to concentrate on softer subjects such as media studies, social studies, marketing and accountancy rather than on electrical, electronic, aeronautical and mechanical engineering. This concentration of effort on the service sector, especially banking and finance, continued during the 1990�s and the noughties and the nation finds itself, yet again, in a
recessionary period with rising levels of unemployment, increasing imports and an increasing balance of trade deficit and rising costs for commodities.

But, the manufacturing base in Britain has not been replaced by
sufficient new industries to create jobs to enable successive generations to enter the workplace and allow the nation to compete in world markets. In the Global 500 largest corporations in 2011, Britain has 30 companies mostly in banking and finance, and a few others in pharmaceuticals and retail sector but only 2, BAe and BT, in the engineering industries; France has 35 covering the engineering, cosmetics, electronic and utility sectors; Germany has 34 but all, mostly, in the electrical, electronic and mechanical engineering and manufacturing sector providing money to the German treasury from exports and stabilizing their economy. So, whose economy is the soundest?

2Anne · Joined: 04 May 2008 Posts: 399 Location: Norfolk

There is no need to subsidize engineers. They are sought after all over the UK and world. Because of the degenerate Comprehensive schools they are becoming a rare breed with the emphasis on Maths and Physics.
The best way to stimulate manufacturing would be to put a sales tax on foreign imports-in particular stuff from China. This would give our manufacturers a fair chance to sell their goods at realistic prices.
We have been very foolish to allow Japan and then China to close down our manufacturing industries with their heavily subsidised rubbish.