June 18, 2004,
The industrial production index, which measures the physical output of the nation’s mines, factories, and utilities, has surpassed the Clinton-era peak of June 2000, according to a Federal Reserve report released this week. The index topped at 116.373 under Clinton. The May 2004 reading (116.947) was the 20th monthly increase since the index hit its trough (109.108) in December 2001.
This is yet more proof that the Bush tax cuts are working and that the manufacturing sector is recovering.
The auto industry deserves much of the credit for this good news. Throughout the 2001 recession one of the postwar era’s mildest contractions automotive production was among the handful of expanding industry sectors. Detroit is one reason why the industrial production index has ascended to new heights.
And it’s been a team effort. Key players in the revival include the General Motors economists who developed zero-percent financing post-9/11; the advertisers who marketed this idea; and the hundreds of thousands of men and women who build cars in America’s factories. They carried the manufacturing sector through the recession and are among the recovery’s unsung heroes.
The extent of their accomplishment is revealed in Federal Reserve data. Total motor-vehicle assemblies recorded a modest gain in the 2001 recession, reversing severe production declines in five previous recessions (1969-70, 1973-75, 1980, 1981-82, 1990-91). Production of “automotive products” peaked in May 2000, grew during the recession, and has expanded 24 percent since hitting bottom in the month President Bush took office.
More than 80 percent of industrial production components peaked pre-2001, but they’re expanding today. A March 2004 Fed report states, “The revision still places the most recent peak in total [industrial production] in June 2000 and the corresponding trough in December 2001.”
The auto industry’s accomplishments have occurred despite a deflationary price structure that’s been in place since the mid-1990s. This is apparent in the producer price index (generated by the Bureau of Labor Statistics), which measures price changes from the perspective of sellers. Falling prices are great news for consumers but they can reflect a tough environment for producers. The auto industry and its workers have been forced to become more innovative and productive to survive.
The automotive rebound has also occurred in spite of vast federal and state regulatory burdens erected by politicians. These include corporate average fuel economy (CAFÉ) standards that inhibit consumer choice; emission-control standards meant to eliminate the internal combustion engine; and steel tariffs that distort the structure of production and squeeze the supplier network.
No individual possesses the knowledge to direct production to achieve utility and maximize consumer desires. This includes government planners. Only price systems possess this knowledge. The “knowledge problem,” identified by Nobel laureate Friedrich Hayek a favorite of the late President Reagan (see “Going to School on Reaganomics”) is best solved by the market, not government.
This is especially true in the auto industry where various orders of production (aluminum, steel, etc.) are dependent upon one another in nonlinear relationships more complex than the limited knowledge any of us possess. Regulations may seem insignificant until they affect the structure of production in ways, including layoffs, never considered by regulators.
The industrial production index has established a new Bush era peak, and it will reach new heights if Washington gets out of the way and America’s industries are allowed to do what they know best: produce goods for consumers.
Greg Kaza is executive director of the Arkansas Policy Foundation, a non-profit economic research organization in Little Rock.