American Manufacturing - Hurt By Market Flexibility?

An interesting piece and follow up by Noam Scheiber the The New Repubic:

In my piece today about the ways the American managerial class has failed the U.S. manufacturing sector, I included a slightly elliptical riff about the superiority of managers in other advanced economies: "By contrast, European and Japanese manufacturers, who lived and died on the strength of their exports, innovated relentlessly."

The logic of this comes from the Harvard Business Review piece by Robert Hayes and William Abernathy that I cite. Hayes and Abernathy basically make two points. First, because the Europeans and Japanese rely so heavily on overseas markets, where the prices of their products can fluctuate owing to factors beyond their control, like exchange rates and tariffs, their manufacturers are forced to focus on quality and technological superiority. Technological advantages remain even when an exchange rate cuts against you. By contrast, American companies have always had a huge domestic market, so they could afford to mostly compete in terms of price. (They certainly don't have to, but they can get away with it, whereas the Japanese can't and the Europeans couldn't for decades.) As a result, managers at American industrial companies have tended to think a bit more in terms of short-term costs--ways to undercut the other guy rather than outperform him.

Second, because labor markets tend to be less flexible and hourly labor costs tend to be higher in Europe and Japan (consider Germany's famously powerful industrial unions), manufacturers there couldn't traditionally cut costs very easily even if they wanted to. Whereas American manufacturers could often lower costs simply by lowering wages or axing employees, the Germans and Japanese had to either make their workers productive or have them produce more valuable products. It's not that American manufacturers never did the latter, of course. But some of our foreign competitors simply had no choice, and they were very good at making virtue of necessity.

Finally, an unrelated point: I think some readers are slightly misinterpreting the point of my piece. I'm not saying that the shortage of managerial talent caused the decline of U.S. manufacturing. (I think it played some role, but that role was swamped by more important factors, like the forces of globalization and other countries' aggressive industrial policies.) What I'm saying is that, even if we decided to spend a lot of time and resources reviving the manufacturing sector--aggressively subsidizing research and development, coordinating the supply-chains for new industries, providing credit for new firms, pushing back hard when other countries try to poach U.S. companies, etc., etc.--all of that effort might be wasted if we don't have a competent managerial class in which to entrust these industries.

It is an interesting hypothesis, but I am not sure I am totally convinced. The idea is not new, the report he cites is from 1980, and I am not sure how robust the argument is that it is manufacturing innovation that is responsible for the overall decline in manufacturing in the US - which he doesn't. But I do think that to the extent that you hold on to manufacturing in high cost countries is because you can do something the other countries can't.

But the idea that the rigidities in the European labor market create incentives to innovate is provocative.