What would it take for an American manufacturing revival?

Note: Posting is sporadic, and will continue to be so, due to the freak occurrence of a natural disaster known as "dissertation"...

Paul Krugman on the maybe-kinda-sorta revival of American manufacturing:

Manufacturing is one of the bright spots of a generally disappointing recovery, and ... a sustained comeback may be under way...[W]hat’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Why might manufacturing be important? There are many theories, but I tend to focus on the fact that manufactured goods are easily exportable. When goods are easily exportable, relatively small changes in exchange rates can allow large changes in the trade balance, which can be an effective way of fighting recessions. Sure, we export a lot of services, but a change in net services exports big enough to fight a recession probably requires a much bigger movement in exchange rates. And exchange rate are "sticky," they don't like to move a lot. So what we could really use right now is a manufacturing export-driven recovery, enabled by a weaker dollar. Brad DeLong and Christina Romer agree.

As Krugman points out in his column, this will be politically difficult. Why? Krugman blames right-wing ideologues, but I somehow doubt that "strong dollar" money-illusion is high on the list of conservative priorities (maybe I'm wrong). My guess is that the financial lobby opposes a weaker dollar. Right now, the dollar is being propped up by the government intervention of our biggest trade partner, China, which buys U.S. bonds in order to finance its currency peg. Those bond purchases keep U.S. interests rates low, which means that our still-fragile financial system, with its still-huge accumulations of possibly-toxic mortgage-backed debt, gets to pretend for another day that it is still solvent. Low interest rates also allow many finance companies to make large profits through the use of leverage. For the dollar to weaken would require China to stop giving our finance companies free money, and so they naturally oppose a weaker dollar. That's just my guess, anyway.

But there are other, deeper reasons for America to be concerned about its manufacturing sector. These reasons are related to the very first econ theory I ever studied (and still one of my favorites) - the New Economic Geography theory, developed by Paul Krugman himself, for which he won the Nobel back in '08.

This theory is based on a fairly simple concept. Since it costs money to transport goods from one place to another, it makes sense for companies to put their factories near to their consumers. Since workers are also consumers, it therefore makes sense for companies and industries to cluster together. This, basically, is why we have cities. Krugman's model divides the world into an urban industrial "core" and a poorer, sparsely populated "periphery" that produces stuff from the land (e.g. food and oil). The core is much richer than the periphery, so if you are a country, you want to be the core.

In this framework, shifting geographic patterns of wealth can cause booms and busts in far-away places. For example, as the center of global economic activity shifts from Europe to Asia, it may make less sense to locate a bunch of heavy industry in, say, Michigan (which is ideally positioned to supply things to America's Europe-facing East Coast).

The thing is, on a global level the U.S. itself doesn't make a natural "core." We have a lot of land, and not a lot of people on that land; geographically, we look a lot more like your average resource-producing country (say, Argentina) than your average manufacturing powerhouse (say, Brazil). Yes, the U.S. has some pockets of high density, and yes, the existence of tradable services complicates the picture. But if you read the news, you hear all the time about companies relocating production to Asia to (hopefully) take advantage of the huge new Asian consumer markets. That is economic geography in action.

If we want to bolster our manufacturing sector over the long run - whether to give us a better way to fight recessions, or to allow us to continue to benefit from industrial clustering, we may need to increase our population density over time. This will require that we do two things. First, we have to continue to allow large-scale immigration. Second, we have to make big policy changes to encourage urban density - public transit, high density housing, etc. Basically, the kind of stuff that Ed Glaeser is always recommending that we do. The alternative (and here I exaggerate) may be a steady process of deindustrialization as we revert to being an exporter of corn and coal.