President Joe Biden has toured the US touting a manufacturing revival that he no doubt hopes will boost his re-election chances. Unfortunately, this “Biden boom” has much less substance than the White House would like Americans to believe. Even with the brightest forecasts, the programs signed by the government will do little to increase employment in the manufacturing sector – much less to stimulate the overall economy.
Construction spending on manufacturing facilities has more than doubled from an annual rate of $81 billion this time last year to an all-time high of nearly $200 billion in August. Part of this increase is due to the stimulus provided by the Inflation Reduction Act and the CHIPS Act, both of which were endorsed by the President.
But there are even more relevant factors. COVID-induced shortages, backlogs at major ports in 2021, and a three-year (and sustained) increase in retail sales made a compelling case for shifting production even without these incentives. Spending on consumer goods is now 30% higher than at the start of the pandemic and global supply chains have yet to fully recover. Therefore, a short-term expansion of domestic production was almost inevitable.
Another reason the recent rise in manufacturing investment isn’t as impressive as it seems: when adjusted for inflation, the numbers are overshadowed by a decline in investment in the rest of the economy.
The U.S. Bureau of Economic Analysis estimates that inflation-adjusted investment in manufacturing assets was a more modest $125 billion (annualized) in the second quarter. Outside manufacturing, investment in non-residential buildings was $480 billion last quarter, down $90 billion from the peak in Q3 2019 (again, figures are annualized).
The long-term impact of Biden’s industrial policy is even less impressive. An analysis by the Labor Energy Partnership, a strong supporter of Biden’s policies, said 150,000 additional manufacturing jobs would be created by 2030. This represents an increase of just 1.3% compared to the current 13.1 million workers in the manufacturing sector. In comparison, the U.S. economy added 272,000 manufacturing jobs in 2018 alone.
The government hopes that by focusing its resources on semiconductors and green energy, it can promote the growth of a manufacturing ecosystem that ensures U.S. leadership in high-tech manufacturing. Research suggests otherwise.
Analysts at the World Trade Organization summarize the evidence this way: For economies in transition from undeveloped to developed economies, direct investment in manufacturing can actually benefit domestic suppliers. However, for fully developed economies, direct investment does not bring benefits to either domestic suppliers or buyers of industrial products. This is because investors already know what they have to offer and capital markets – particularly in the US – can easily finance the creation of new industries if there is a compelling economic case for doing so.
In fact, the Biden administration’s tendency to include incentives benefiting unions and other progressive interests in these programs may actually make it more difficult for investors to determine the full costs of expanding U.S. manufacturing. On the other hand, Peterson Institute President Adam Posen points out that under a more business-friendly government, policy stimulus programs would be vulnerable to corruption.
There is no doubt that the president is serious about his desire to revive U.S. manufacturing, and it is tempting to view the rise in reshoring as evidence that his administration’s policies are having a transformative impact. But even the most optimistic forecasts suggest Biden’s industrial policies will have little impact on U.S. manufacturing employment.
Karl W. Smith is a Bloomberg Opinion columnist. He previously served as vice president for federal policy at the Tax Foundation and as an assistant professor of economics at the University of North Carolina.