What exactly constitutes manufacturing? There are some settings that are very clear. If you work at an assembly plant building cars, you are in manufacturing. If you work at a university that educates students and produces research, then you ain’t. But there are other situations that are not as clean cut. Check out this example from the Wall Street Journal (U.S. Agencies Consider Redefining Manufacturing, Mar 14).
“If someone asks me at a party, I say we make binoculars,” said the president of Carson Optical Inc., a small company tucked in an industrial park in this New York City suburb, adding, “It’s a little bit more vague than saying we manufacture them.” …
A stroll through Carson Optical shows why companies like these can be hard to label. Mr. Cameron, a former banker, started the firm 23 years ago after a stint working in Asia, where he saw the potential to import optical goods from Japan.
But the firm today has evolved far beyond just importing the things that others create. In a conference room near the front, the walls are lined with products Carson’s three-person engineering team has designed, including a hand-held microscope used by medical-marijuana growers to study their plants and an anti-reflective lens device that can be clamped onto binoculars and gun sights.
Carson holds 94 U.S. and overseas patents. The company closely monitors how its goods are made, in some cases buying materials needed to make them and sending them to the factories in Asia.
And the evolution continues. Mr. Cameron is shopping for his first computer-guided production machine and is preparing to move to a bigger nearby building to accommodate his growing design and development operation. He plans to use the new machine to make better prototypes but doesn’t rule out someday making some of his own goods.
So is this manufacturing? On the one hand, they are not doing the nitty-gritty tasks of molding parts or fastening them together. On the other, they are doing most of the high value work like product design as well as sourcing material and setting quality standards. Carson Optical may fail a Potter Stewart I-know-it-when-I-see-it test, but it is holding onto the parts of modern manufacturing that create meaningful value.
Why does this matter? Because the federal government is reconsidering how to define manufacturing and more specifically wrestling with the likes of Carson Optical.
Some refer to companies like these as “factoryless goods producers”—firms that handle every part of making their products except the actual fabrication. As industries have gone global, this model has proliferated from furniture making to electronics: Think of Apple Inc. and its iPhones. Now, there is a move afoot among U.S. government agencies to count these companies as manufacturers, which is a surprisingly fraught issue.
The upshot would be an overnight increase in the apparent size of the U.S. industrial sector without adding a single assembly line. It would also change its geography, as places like Silicon Valley would suddenly look much more like a manufacturing hot spot. Backers of the change say this would give a truer picture of the nation’s productive capability, because these firms still do most other functions of manufacturing, from designing goods to overseeing their production and distribution.
How much bigger when the manufacturing sector look? Some Dartmouth economists estimate that if this definition had been in place in the last census survey of manufacturers, an extra 431,000 to nearly two million people would have been classified as manufacturing employees.
That makes the whole discussion seem overtly political as if it were an attempt to redefine the manufacturing sector into a healthy state. However, it is important to recognize that while this specific issue may be new, the overall debate on just how to label different parts of the economy isn’t. The following is from a speech by Gregory Mankiw, chair of Bush’s Council of Economic Advisers, discussing the 2004 Economic Report of the President.
A box in the Economic Report discusses an important consideration in assessing policies that apply to manufacturing: the definition of what constitutes manufacturing is far from clear. For example, when a fast-food restaurant sells a hamburger, is it providing a service or combining inputs to manufacture a product?
The government agencies that collect data on manufacturing are well aware that the distinction is blurry. According to the Bureau of Labor Statistics, bakeries, candy stores, and custom tailors are all part of manufacturing. But one could walk into such a retailer and see many service activities taking place. Sometimes subtle differences can change how an activity is classified. Mixing water and concentrate to produce a soft drink is classified as manufacturing. If that activity is performed at a snack bar, however, it is considered a service.
In the past, it has not mattered to firm owners whether government data collectors classified a business as a manufacturing firm or a service provider. But the blurriness of the definition would matter if policies were based on it.
Beyond demonstrating that this not a new issue, Mankiw’s quote also explains why this matters: At some point the data will affect policy decisions, and it is an open question as to which definition will best guide policy.
So how should we think about Carson Optical in terms of policy? I think there is a case of calling them a manufacturer. People care about manufacturing because manufacturing is essentially synonymous with “good” jobs. Politicians always bemoan the loss of good manufacturing jobs while the phrase good service jobs is akin to kosher ham. If the point of policy is to support the creation of good jobs, then Carson Optical sounds worthy of support. They may not be employing an army of machinists and assemblers but they are creating skilled positions that should demand decent compensation. Labor intensive, low-skill work is unlikely to move back to the US any time soon. Carson Optical is what we’ve got and what can be successful here.