The basic facts are not in dispute. Though the US economy has grown at a healthy clip over the last decade, US industrial production (comprising manufacturing and construction) has not increased: the industrial-production index remains at almost exactly the same level – about 100 – today as in 2017 and even 2014.
US President Joe Biden’s administration sought to change this by introducing major subsidy programs, including the Inflation Reduction Act (IRA) and the CHIPS and Science Act, both of which were passed in 2022. Since then, construction activity, especially in industrial structures, has surged, with non-residential construction spending reaching record highs in 2023. OECD data show that, since 2015, US construction activity has increased by about 80%, compared to less than 20% in the EU.
Such figures tend to be the focus of official evaluations of the IRA and the CHIPS Act by the Biden administration. They might point out, for example, that non-residential construction is now running 30% higher than before the pandemic. But they make little reference to manufacturing output or employment.
The reason is not difficult to discern: manufacturing output has remained flat in the US since 2015, even as it has increased by (an admittedly tiny) 4% in the eurozone and 8% in the European Union as a whole. Likewise, manufacturing employment has not grown since the post-pandemic recovery ended in mid-2022, and it has continued to fall as a share of overall employment. So, while hundreds of billions of dollars in manufacturing subsidies can buy a construction boom – especially when they reward the construction of new facilities, as most of the subsidy programs in the IRA and the CHIPS Act do – they do not necessarily bring about a manufacturing resurgence.
One might be tempted to argue that surging construction of new structures will lead to higher output; it just takes a while. But past surges in US construction activity, such as directly preceding the 2007-08 financial crisis and in 2018, were not followed by strong industrial output growth. If things were different this time around, output should already have started to rise. The fact that much of the new investment over the last two years has gone toward data centres, not factories, further reinforces the impression that it will not lead to a manufacturing renaissance.
The failure of the Biden administration’s subsidy programmes to lift the manufacturing sector, even slightly, might help to explain why so many US workers cast their votes for Donald Trump, not Vice-President Kamala Harris, in last month’s presidential election. In any case, it should serve as a warning to anyone who believes that other economies, such as the EU, should be following America’s lead in implementing a more active industrial policy.
As it stands, most industrial subsidies in Europe, like those in the US, support the construction of new factories. But if production costs are too high to justify a factory, subsidizing its construction will not translate into higher industrial output.
Could Trump be more successful than Biden at boosting US manufacturing? While it is unclear whether he will follow through on this pledge to repeal the IRA on his first day in office – not least because many IRA subsidies go to Republican-led states – there is no doubt that he prefers tariffs to subsidies. The problem, as economists like to point out, is that a tariff amounts to a production subsidy and a consumption tax.
If Trump imposes the kinds of sweeping tariffs he has promised, he would effectively be subsidizing most of US manufacturing – far more than Biden, whose subsidies focused on a few selected sectors. But someone has to pay for these production subsidies. Tariff advocates claim that foreign suppliers will foot the bill, because they will be forced to lower their prices. But most of the burden of the tariffs Trump introduced during his first term was borne by US consumers, who were forced to pay higher prices for imported goods. Why would this time be any different?
Trump is unlikely to be any more successful than Biden in reviving US manufacturing. Attempts by the EU to emulate either his or Trump’s approach will probably also fail. In Europe no less than in America, resisting the secular trend of “de-manufacturing” is a losing battle. – Project Syndicate
- Daniel Gros is Director of the Institute for European Policy-Making at Bocconi University.
