Episode 31: Why American Deindustrialization is a Myth
Adam Honig: I have your title as research fellow.
Colin Grabow: That’s it.
Adam Honig: Do they have research ladies, too? I was trying to figure out how to work that in, but I couldn’t quite figure out how to make it sound PC.
Colin Grabow: No, all my female colleagues, they also take the title of fellow.
Adam Honig: Hello and welcome to Make it. Move it. Sell it. On this podcast, I talk with company leaders about how they’re modernizing the business of making, moving, and selling products, and of course, having fun along the way. I’m your host, Adam Honig, the CEO of Spiro.ai. We make amazing AI software for companies in the supply chain, but we are not talking about that today.
Instead, today we’re joined with Colin Grabow, research fellow at the Cato Institute. Welcome to the podcast, Colin.
Colin Grabow: Well, Adam, thanks for having me on. It’s a pleasure to be here.
Adam Honig: I really enjoyed reading your articles, and so it’s such a great opportunity to have you on the podcast. But maybe you can start by telling us a little bit about the Cato Institute and your role there.
Colin Grabow: The Cato Institute is a libertarian think tank here in Washington. We advocate for policies that are based on principles of limited government, free markets, peace, so things in that vein. Given the direction of policy these days, we’re pretty busy because we think a lot of things are going in the wrong direction. More specifically, I work in the Herbert Stiefel Center for Trade Policy Studies where, as the name implies, I focus on US trade policy with a more specific focus on domestic forms of trade protectionism, self-inflicted wounds, things like the US sugar program, which, for those unfamiliar, is a program that increases the price of sugar and keeps out imports, which makes sugar more expensive in this country, and also another thing called the Jones Act, which is a form of maritime protectionism. There are also other maritime laws that I focus on. That’s some of what I do at Cato.
Adam Honig: I want to get into those two topics, but I also want to talk about what you called the myth of American deindustrialization because I feel like you can’t pick up a newspaper or listen to the radio without hearing about manufacturing leaving the United States; we don’t make anything anymore. We work with manufacturing companies, and it’s really just not true. It seems to be so strange that all this conversation is happening.
Colin Grabow: Exactly. I think, especially as we get into presidential campaign season, we’re going to hear a lot more rhetoric about the need to bring back manufacturing in this country, talk about the lack of factory jobs and so on and so forth. The truth is that manufacturing never left. If you look at the statistics, it paints a picture of a pretty impressive manufacturing sector. The US manufacturing industry is something like $2 trillion. If it was its own economy, I believe it would be the eighth largest economy in the world. As a share of world output, United States has more manufacturing than Germany, Japan, and South Korea, all of countries you associate with manufacturing prowess combined.
It’s an impressive story that there is to tell, but I think a lot of this gets lost because fewer Americans work in manufacturing. How do you reconcile these two facts? In fact, we have a large manufacturing sector with a decreasing share of Americans working in it. It’s a tribute to productivity in this country. Americans are incredibly productive, so we can do more with less. It basically requires fewer people to produce more stuff.
Then we’ve seen a swing towards services. We’re increasingly services oriented. People want to consume services, especially as they get rich. The amount of income they devote to material goods and manufactured things, after you have a couple of cars in your driveway, you don’t need a third or fourth. People start turn to things like vacations and going out to eat and things of that nature. I think that helps explain where we’re at in manufacturing in this country.
Adam Honig: It’s super interesting because we obviously must make a lot of things. I mean, I’m in factories all the time talking to people. But sometimes, it does feel a little strange. I was in Toledo, Ohio a couple of weeks back, and the downtown felt pretty emptied out. There’s a lot of these so-called rust belt cities that have that post-industrial feel to them. But what you’re saying is that just less people are working in manufacturing than they used to. That’s what is really driving this headline about the decline.
Colin Grabow: Exactly. The goal of manufacturing is producing stuff. It’s not employing people; it’s making things, and we do a lot of that. US manufacturing, slightly off its all-time high, it’s pretty impressive. Like I said, $2 trillion. Yes, the classic case of deindustrialization, there’s inevitably references to the rust belt and this bygone era of manufacturing prowess. But even then, if you drill down, because I think a story a lot of people have in their heads or the common narrative is that there used to be these great jobs, and they left for China, or they went to Mexico. But the reality is the vast majority of them, they were lost, if anything, to automation, to robots, or they went not to another country, but to another state.
If you look at the auto industry, for example, all that has shifted southwards; the Auto Alley, a place like Spartanburg, South Carolina and Alabama, places like this, you never would have associated with auto prowess or even manufacturing maybe 30 years ago, but it’s definitely here and I think has an increasing share of domestic manufacturing. There’s just a reconfiguration that’s going on.
Adam Honig: The crazy thing is every manufacturing executive I speak with, they say we can’t hire enough people. We’re having trouble hiring. They really want to hire more people. On the other hand, we have politicians saying, oh, we need to have more manufacturing employment in the US. It’s just super weird. I’ve been talking to a lot of people because I feel like people don’t feel like manufacturing is a cool industry to work in. It doesn’t have the cachet of tech or banking or something like that. I feel like maybe these politicians are actually hurting it because they’re making it sound bad as opposed to making it sound good. Maybe we need more of a PR campaign for it.
Colin Grabow: I think you bring up an excellent point. Something the National Association of Manufacturers has complained about is lack of people to fill the jobs that are out there. I want to say last I checked, there was something like 900,000 open positions.
You’ll notice this is not a uniquely American thing either. Other countries have also seen their share of workers employed in manufacturing. Other advanced peer countries have seen their share of population of workers employed in manufacturing go down. You think, oh, well, the jobs went to Asia. A couple of months ago, the Wall Street Journal had a great article about places like Vietnam struggling to find workers because they say, I want to be an influencer, or I want to work at Starbucks or something like this. These factories are loud and dirty, and I don’t like them so much. The manufacturers, they’re having to raise their pay. They’re struggling to find the workers.
I think there’s this perception, at least among politicians, that manufacturing is automatically this great thing everyone wants to do. It turns out a lot of people– maybe it’s a lack of awareness about them, but it’s not obvious that people are clamoring for a lot of these jobs, and that’s a real problem for manufacturers.
Adam Honig: It also strikes me that the mix of manufacturing companies is an important part of the equation. We have a lot more high-tech chip manufacturing, high-end electronics and less garment manufacturing or something like that in the United States. It’s a little bit lower on the production side.
Colin Grabow: Because manufacturing, it runs the gamut. People think manufacturing, I suspect, a lot of them think, making cars, making steel in steel factories, something like that. But it also includes things like beverages and food manufacturing. That’s a whole sector of manufacturing. But if we just narrow it down to high-tech manufacturing, the US is something like the third biggest exporter in the world of high-tech products. We’re a major tech manufacturer, something like 20% of our manufacturing is in high technology. There’s a whole range of difference between, like you said, the garment factory and one of these factories producing chips. They’re both labeled manufacturing, but different in so many ways.
Adam Honig: Right, and I think that the human resources needed for something like the chip side is just a lot less. But that’s probably a good thing because those jobs are probably way better paying anyway.
Colin Grabow: Yeah, absolutely.
Adam Honig: Maybe the issue is more that when politicians are thinking about Toledo or Scranton, Pennsylvania, or these post-industrial places, they’re saying manufacturing, but they’re really just talking about employment in general in these places, or population density or something else that they’re using manufacturing as a proxy for.
Colin Grabow: I suspect you’re right. It may speak to something else. I suspect that there’s also a fair amount of nostalgia associated with this. It harkens back the good old days. People tend to look at the past through rose-tinted glasses and the days when dad used to work in a factory, and everyone got by on one income and things like this. The notion is that we bring back factories and all these other good things that come with it, and I think it’s both a misinterpretation of the reality of say the 1950s or ‘60s maybe when people associate the United States with being more a manufacturing power. I think it’s a mistake to make some of these linkages, and there’s a misperception of what’s going on. But, to your point, yes, I think manufacturing is perhaps a proxy for other things.
Adam Honig: Yeah, no doubt. Well, it seems from taking a look at your research, there are definitely other ways that the government can help manufacturing instead of just complaining about lack of jobs. I know that the Jones Act is one of your areas that you focus on. Maybe just tell the folks at home here a little bit about the Jones Act.
Colin Grabow: The Jones Act, for those unfamiliar, it’s section 27 of the Merchant Marine Act of 1920, and what it says–
Adam Honig: Wait a minute. Let me get my book out to look that one up. Okay, good.
Colin Grabow: What it essentially says is if you want to move something, goods, within the United States by water, you have to use a vessel that meets four conditions. That vessel has to be flagged and registered in the United States as opposed to a foreign country. It has to be built here in the United States. It has to be crewed by Americans. It has to be at least 75% owned by Americans. I think a lot of people would hear that and go, well, that sounds pretty great. American manufactured, American crewed, what kind of person could be against a law like that? Well, the problem is that these vessels are incredibly expensive to use, which increases the cost of transportation, which is a big deal in a country as big as the United States. A US ship has about three times the operating costs of one that’s internationally flagged, and they cost about four to five times more to build.
To give you a real-life example, a tanker in this country is estimated to cost over $200 million, whereas over in Asia, you can build one for about $50 million. That’s extra $150 million per ship, and someone has to pay the piper for that. So basically, it increases the cost of transportation, and transportation touches everything in our economy, and so those effects reverberate throughout the US economy.
Adam Honig: For manufacturers in particular, this means that it makes it much more expensive to get a– let’s say we’re building something in Texas. We want to get it to Boston where I live. It’s just way more expensive to ship it than it would be to put it on a truck or something like that.
Colin Grabow: Exactly. Manufacturers have complained about this before. I know, in particular, some of the steel producers. Back in the ‘90s, there were some hearings about the Jones Act in which one member of a steel association, I can’t remember the name of the association, but it had to do with steel and metals, and he said, look, it’s cheaper for me to load a scrap metal in East Coast and send to Turkey than to send it to other parts of the United States because the shipping is so expensive. There was a government report back in the ‘80s or ‘90s from the US International Trade Commission looking at why the West Coast was importing so much foreign steel. One of the reasons explicitly mentioned by the report was the Jones Act and said, look, it makes shipping so expensive that when you factor that into the total cost of getting the steel, it makes more sense to get it all the way from, say, Japan or somewhere else in Asia than the Eastern United States.
That’s the story more broadly. It tilts the playing field against US products because if something comes internationally, it can use much more efficient international shipping, whereas if it comes domestically, it has to use very expensive Jones Act shipping. It’s a tax on domestic products and interferes with Americans buying things from other Americans. This impacts the supply chain, again, tilts the playing field in favor of imports over exports.
The last thing I’ll add is in my job, I traditionally advocate for free trade. Hey, there’s nothing wrong with buying imports, and there’s not. But I also don’t think the US government should be in the business tilting the playing field against Americans.
Adam Honig: Well, it sounds like this probably aided in the development of a big US shipbuilding industry then, one that I hadn’t run across.
Colin Grabow: You would think. I mean, obviously, it’s a law that says you have to use a US built ship, so then people would think, okay, well, maybe things are more expensive, but on the other hand, we get all these US built ships. The trouble is, we don’t because again, they’re so expensive. No one really wants to buy them. This entire year, there has been one Jones Act container ship delivered. It’s the only large, commercial ship delivered this year. Last year, there was also just one. That ship, by the way, cost over $225 million while a similar sized ship we’ve built over in South Korea, one was ordered a couple of years ago for $41 million.
We made things really expensive. No one wants to buy them. We have low single digits produced every year. To put that in context, a single shipyard in South Korea, this year, Hyundai, I think it was on target to build 47 ships versus all US shipyards combined building one. Now I’m not mentioning tugboats and ferries and smaller things here, but I think it’s very difficult to make the argument that this produced a vibrant commercial shipbuilding industry.
Adam Honig: The knock-on effect that I’m concerned about too is also the environmental issues. We had a guest on who was talking about the difference in the environment for shipping things via rail versus trucks. It seems like it should be the same thing for boats as well.
Colin Grabow: A hundred percent. If you just look at it in terms of CO2 emissions, shipping is generally considered far and away the most CO2-friendly means of moving goods from point A to point B. We should try to encourage more of that to get our CO2 emissions down. But instead, we have a policy that deters waterborne commerce. When we do have things transported by water, the vessels used tend to be older and less efficient because we’ve made the purchase of new vessels, new equipment so expensive that has other effects too by distorting trade patterns. For example, Texas, the Gulf Coast, they export lots of oil and refined products, and most of the vast majority of it goes internationally. Oil will be exported to China, to Singapore, to South America, same thing with fuel.
But the East coast refineries, they get something like 80% of their oil comes in from abroad. It’ll come from Nigeria. It’ll come from Libya. Fuel will come over from refineries in the Netherlands instead of the shorter distance from the Gulf Coast. This isn’t just economically inefficient, but it means more emissions because these ships are at sea for longer and polluting more. So strictly from an environmental perspective, this is absolutely harmful.
You can take it one step further. We make shipping more expensive, so that means we have say, more trucks on our highways going up and down I-95 near here in Washington. That means more congestion, more people spending time in traffic, spitting out fumes. There’s a lot of underappreciated environmental costs here as well.
Adam Honig: It’s simply cheaper to ship stuff out of the US and reimport it back in. It gives me this idea that we should just set up a company in Bermuda, ship the oil there, and then we’ll put it on a different tanker and send it up to Boston or New York, wherever it needs to go. We can make a little money that way maybe.
Colin Grabow: Yeah, you would think. In fact, people have had similar thoughts in the past. Now I mentioned the Jones Act as part of the Merchant Marine Act of 1920, but we’ve had laws very similar to the Jones Act going back almost to the founding of the country. Back then, shipping was much more efficient. This is the age of wooden and sail ships. Of course, the United States original colonies were along the water. We had plentiful forests, raw materials to make ships, so we were pretty good at it, and there was no big cost to using US vessels.
But as time went on, we moved to ships of iron and steam. That changed, and people started looking for workarounds like the one you just mentioned. In fact, there was a case in 1891 of someone trying to ship 250 kegs of nails from New York to California. The way they did this is they sent it through Belgium. They used a Belgian ship to go to Antwerp. They offloaded the goods, transferred to a British ship, then sent it from Antwerp all the way to Los Angeles. Obviously, they did the math on this and figured out they still came out ahead. It was more profitable than using an American ship. Two years later, Congress caught wind of this. There was actually a court case over this, and they changed the law and said, no, you can’t do that. If it starts and finishes in the US, you have to use an American vessel. So that particular option is unfortunately off the table.
Adam Honig: Well, I’m always looking for new ideas for new businesses, but I guess we’ll just scratch that one off the list. Politically, is there momentum behind repealing the Jones Act?
Colin Grabow: There have been any number of bills introduced in recent Congresses that have addressed the Jones Act in some way, and it runs the spectrum. For example, Senator Mike Lee of Utah and Representative Tom McClintock of California introduced a bill that just would have repealed the Jones Act.
Other people have taken more nuanced approaches. For example, Representative Scott Perry of Pennsylvania, he introduced legislation that would have exempted the shipment of liquefied natural gas from the Jones Act. One bizarre situation we find ourselves in, the United States is one of the world’s leading exporters of LNG, and we ship it to 30 something countries all over the world. We can’t send it to other parts of the United States because there are no ships that comply with the Jones Act to transport it. So New England in the winter, they import LNG from Trinidad and Tobago mostly. If you look down Puerto Rico, they import 100%, and it comes from Nigeria and Trinidad and Tobago. When Russia was invading Ukraine in February of last year, they were importing Russian LNG because they can’t get access to American LNG because there are no ships that comply with this law to transport it. The legislative fixes that were proposed run the spectrum.
Adam Honig: Well, we’ll have to keep our eyes open for improvements to that. It seems very damaging to the environment and to people in the supply chain, except for those one ship builder who made that one ship. I’m sure that they really enjoy that $250 million contract that they got.
Colin Grabow: Well, the funny thing is about that ship is that if you look at the inputs, of course, they are dependent on supply chain as well, and they require so many things, and most of it’s imported. You look at all the major components; the engine, the propeller, a lot of this stuff, all the major components are foreign and even including the propellers from the People’s Republic of China. Even then, a lot of this money ultimately goes abroad because the value add of the US shipyard is pretty small in the overall scheme.
Adam Honig: Probably the costs for the ship are raised up because of the Jones Act itself, too.
Colin Grabow: Of course, yes.
Adam Honig: It’s a big circle. Colin, this is fascinating. How can people learn more about your work and the Cato Institute?
Colin Grabow: I would invite them to go to visit Cato at cato.org. If you want to follow me, if you’re active on social media, Twitter or X, I guess, is my social media drug of choice. I’m there at @cpgrabow, C-P-G-R-A-B-O-W. That’s the best way to follow my work.
Adam Honig: Speaking about X, I guess we should let Elon Musk know about this shipbuilding issue. I’m about halfway through the Walter Isaacson bio, and he just loves to take costs out of things. I’m sure he can get the cost of that ship down by half, no doubt.
Colin Grabow: If I can get him and Jeff Bezos on board, yeah, I think that’ll go a long way to fixing this problem.
Adam Honig: Excellent. Well, Colin, thank you so much for joining the Make it. Move it. Sell it. podcast; really great to have you here.
Colin Grabow: Adam, I really appreciate the opportunity to talk to you and all your listeners.
Adam Honig: Thanks, everybody for tuning in. We’re looking forward to speaking to you on the next episode.