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How Do You Think About U.S. Manufacturing?

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Monday, 25 March 2013 11:35

Dylan Mathews promised that "this chart will change how you think about U.S. manufacturing." The piece actually has two charts, but neither rises to the bar.

Both charts come from a new book by Robert Z. Lawrence and Lawrence Edwards: Rising Tide: Is Growth in Emerging Economies Good for the United States?. I've not seen the book, but I am familiar with Lawrence as a long-time optimist about the state of the economy and one who pooh poohs the idea that trade might hurt large segments of the workforce. He also seems prepared to ignore substantial evidence, using standard methodology, that shows it does.

Anyhow, the first chart shows a trend line with a rapid decline in manufacturing over the last 5 decades. According to the chart, we are pretty much right on trend. I hate to be picky here, but the fitted portion of the trend-line, which runs from 1961 to 1979, lies almost entirely above the actual data points for these years. That is not supposed to happen, which makes one wonder a bit about this trend. One might also wonder whether it is reasonable to expect a linear relationship. Will manufacturing employment really be zero in 26 years? We might expect a flattening curve as the manufacturing employment share gets small.

But let's leave these quibbles aside, the more striking part is the second graph that tells us the decline in manufacturing is happening everywhere. The chart shows us that Germany, the Netherlands, and Sweden also had sharp declines in manufacturing employment since 1973.

Let's just pick Germany here for comparison purposes. Eyeballing the chart we see that the manufacturing share of employment in Germany fell from roughly 36 percent in 1973 to 24 percent in 2011. Let's call it a decline of one-third.

The U.S. started the period with 23 percent of its workforce employed in manufacturing, and ended with 9 percent. This is a decline of more than 60 percent. Let's suppose that the United States had the same proportionate decline in manufacturing jobs as Germany, with the manufacturing share of total employment dropping by one-third since 1973.

If the U.S. had seen the same proportionate decline in manufacturing shares as Germany, we would have 15.3 percent of our workforce employed in manufacturing in 2011 rather than 9 percent. This would imply an additional 8 million jobs in manufacturing. Does anyone believe that if we snapped our fingers and had another 8 million jobs in manufacturing that it would not have a substantial impact on the labor market?

There is one last point on this end of the manufacturing story that is worth addressing. No one who says this believes that we will stop consuming manufactured goods. In other words, they don't think that the United States will be a country that doesn't have cars and buses, doesn't wear clothes, and doesn't eat packaged foods.

The implicit idea behind the end of manufacturing employment story is that we will import all these items from elsewhere. We are doing much of that at present, as a result we have a trade deficit that is close to 4 percent of GDP ($600 billion a year). However, do the proponents believe that we can run even larger deficits indefinitely into the future as we import a larger share of our manufactured goods?

Many seem to hold the view that we will pay for our manufactured imports with more sophisticated exports, but it is not clear they have given this idea much serious thought. It is not obvious what sector we might look to for such sophisticated exports.

If we're thinking computers and software, forget it. The United States is already a larger net importer of computer software from India. We are likely to lose much of our market share elsewhere in the world in the years ahead to India and other developing countries. Just as low-paid workers in the developing world have undercut our manufacturing workers, relatively low-paid workers in engineering and software in the developing world are likely to undercut our workers in these sectors as well.

We could look to the big surpluses we have on patent and licensing fees. It's possible that these surpluses will expand through the course of the century but that will depend on the ability of the United States to force other countries to respect our patent and copyright monopolies and to pay us ever more money for these claims to property. Perhaps that will happen, but as the relative power of the U.S. diminishes, it is difficult to believe that people living elsewhere in the world will indefinitely pay us vast amounts of money in honor of these late medieval forms of property. It seems more likely they will just tell us to shove our patents and copyrights.

There is one area in which the U.S. does enjoy a substantial surplus. We are a net exporter of tourism services. If the dollar falls enough in response to our trade deficit, then this surplus may grow as fewer people in the United States can afford to travel abroad and more foreigners come here. In this story, we will effectively be waiting tables, making beds, and cleaning toilets for foreign tourists in order to pay for the manufactured goods we buy from abroad.

I suppose that's possible, but I'm not sure if this is exactly the picture that the end of manufacturing folks have in mind.

Comments (14)Add Comment
yes, globally, poverty is shrinking rapidly...
written by pete, March 25, 2013 3:47
the "low-paid" workers are certainly working for less than U.S. folks would, but certainly raising themselves out of the stark alternative of poverty...the takeaway is that foreign poverty ought to be a policy goal? I strongly disagree.

Global poverty has shrunk rapidly as manufacturing has shifted...interesting that U.S. grew more than Germany while losing more manufacturing...
lots of weird stuff here.

essentially, though, trade is great for reducing global poverty, no bout a doubt it...this has to be seen as a good thing. The West has enough resources to pay off the unemployed and early retired here with 10 to 20 times global wages.
Really need a plan
written by Jennifer, March 25, 2013 4:00
So interesting, I completely agree that fitted trend-line is not right. Like a lot of people I tend to glance at a graph and just kind of assume it's accurate because you know it's a graph by a smart person. It's a small point but if I believe if it was accurately drawn you'd have a much sharper downward trend. But that would be both less helpful to the narrative here (everything's ok) and would also kind of reinforce your other point which is do we expect manufacturing to decline to 0? Trend-line or not it's not a good thing, since as you point out, it's a significant loss for which there is no obvious substitute.
When people talk about more sophisticated exports I think of (newer) devices related to food production and energy such as wind turbines and the like. Back in the day--i.e. NAFTA "computer" related jobs were sold as the future, and low-skilled jobs were the past. But I think a lot of people (ordinary, not the people running policy) didn't appreciate how quickly off-shoring would accelerate and how completely dedicated corporations were to decimating labor. Even if there were more "sophisticated" products to manufacture there isn't any reason to think the US would lead in them. You have countries like Germany that actually do manufacturing planning and even China does wholesale investment (that's the side of communism business here doesn't seem to talk about as much) but it's hard to imagine initiatives like that being supported here in any kind of meaningful way. There really needs to be some kind of national discussion about just how to manage unemployment. Do we want to pass laws that in essence make corporations hire people, or at least make them pay taxes, or can we at least make a greater safety net-i.e. national health care, greater welfare benefits recognizing jobs are crappy and scarce.
...
written by urban legend, March 25, 2013 4:44
Germany has lost manufacturing jobs at a slower pace and has retained, relative to GDP, almost three times as many jobs as the U.S. Yet according to BLS, German per-employee compensation costs in manufacturing are much higher, more than 30% higher, than in the U.S. That can't be, right? After all Economics 101 predicts it should go the other way, and everyone says manufacturing is dead in the U.S. because other countries can undercut our wages. Or is it possible Economics 101 has little to say about this, and national policy is far more important?
...
written by Brett, March 25, 2013 7:12
If costs of living fall faster than wages, then it's still a net gain for workers. I've noticed that Baker generally doesn't address this in his posts - it's all about wages, only one half of the "living standards" equation.

However do the proponents believe that we can run even larger deficits indefinitely into the future as we import a larger share of our manufactured goods?

In the case of the US, we'll either export capital or services, which will be increasingly easy as technology progresses. Or our currency will shrink in value to the point where it's expensive enough to buy foreign goods that heavily mechanized local producers can profitably sell substitutes.

Germany has lost manufacturing jobs at a slower pace and has retained, relative to GDP, almost three times as many jobs as the U.S. Yet according to BLS, German per-employee compensation costs in manufacturing are much higher, more than 30% higher, than in the U.S. That can't be, right?

Germany was faster to embrace mechanization and automation, to a far greater degree in the US. It's also worth nothing that they tend to do more "work sharing".
I always address costs
written by Dean, March 25, 2013 7:39
Brett,

when I say "wages," I mean real wages, which factor in prices. I thought everyone understood that which is why i generally don't mention it. you have to have some story on whate services we will export -- we don't have any obvious advanatages.
And then there are the billionaires, naked in the cold, exporting jobs from California
written by Rachel, March 25, 2013 11:17

Actually, there are no naked billionaires shivering in California, to the best of my knowledge. But some of our more privledged residents do want to strip jobs from people who at times find it hard to cope with the winter. The problem is that California's carbon tax, about which the highly privledged people feel so virtuous, raises the price of basic foods. It lowers the effective wage. It causes some job loss. And it increases what we have to import from elsewhere. But
the highly privledged seem to feel that we can make it up to the poor with food stamps, and that this is all part of lighting the way for people in other nations to follow. Nevermind that it's irrational to import products that could be made at less environmental cost here. Nevermind that hurting lower-income people should not be a substitute for negotiations.

A disclaimer: the admirable Dr. Baker is not to be blamed that people like me make shocking observations on his site. But it needs to be said: this carbon tax on essential goods adds to loss of working-class jobs, and makes life harder for many people.
Or have our manufacturers just been cornered?
written by Perplexed, March 26, 2013 12:50
In his book "Cornered: The New Monopoly Capitalism and the Economics of Destruction," Barry Lynn makes some compelling arguments that our manufactures were seriously weakened vis-a-vis large financial and trading monopolies(like Wall Mart)when Congress ultimately overturned "centuries" of laws aimed at preventing price discrimination:
"What is important here is merely to note that during the neoprogressive revival, Congress in 1975 undid the entire structure of pricing policy that had been erected in the previous centuries when it passed a law called the Consumer Good' Pricing Act, which at last legalized price discrimination.

The goal of those who promoted the act was laudable. They believed that big manufacturers like Procter & Gamble had become too fat and lazy. Yet rather than take on the giant conglomerates directly, such as by using antitrust law to make them smaller, the neoprogressives apparently decided that it would be easier to empower retailers to serve as "countervailing" powers able to exert more pressure on the producers.

Though all but forgotten today, the Consumer Goods Pricing Act must be credited with setting into motion the fantastic concentration of power in the hands of the giant retailers and trading companies that we have witnessed in the last generation. The decision six years later, in 1981, to all but suspend enforcement of our classic antitrust laws only accelerated the process. Perhaps the biggest proof of the lack of wisdom of the act is that the consolidation of power among the retailers eventually provided an excuse for round after round of consolidation among the very producers that the authors had originally set out to weaken, like Procter & Gamble."

Are you familiar with Lynn's book Dean? Many of his arguments seem to dovetail with and support those you have been making. Any comments on it if you have read it?

...
written by Brett, March 26, 2013 1:13
@Dean Baker
when I say "wages," I mean real wages, which factor in prices. I thought everyone understood that which is why i generally don't mention it. you have to have some story on whate services we will export -- we don't have any obvious advanatages.

Thanks for the correction.

The advantages are almost never "obvious" - nobody thought back in 1900 would have thought that the US would be dominant in computers in 2000. In the mean-time, we have at least a large segment of the population that is highly educated, plentiful access to capital, a reasonably non-corrupt government, and a relatively safe financial system. We'll figure something out.



Gee, this was an obvious problem
written by PeonInChief, March 26, 2013 11:54
Even my non-economist brain questioned the viability of exporting "services" 30 years ago. It assumed that people in other countries wanted our services (which they often don't), were willing to pay the prices we charged (which they won't), and that the services were sufficiently valuable to offset the prices of the stuff we imported (which they aren't).
...
written by Ellis, March 26, 2013 12:12
There is a difference between manufacturing production and employment. Is manufacturing production actually dropping, as you say? The Federal Reserve says that manufacturing in this country is twice as high as it was 30 years ago. Also, the share of U.S. manufacturing in the global economy has remained pretty steady at something like 22% according to U.N. statistics.
The drop in employment is therefore not due to a drop in production, as you say. Instead, it seems that employment in manufacturing is following the same trend as agriculture -- growing production and productivity.
Incomplete Analysis
written by NWsteve, March 26, 2013 6:09
the referenced charts "end" in 2009...
a quick look at BLS stats show that the Manufacturing Employment level appears to have 'bottomed-out' in Feb., 2009...
and they further show that during the past 48 months there has been an over-time increase in jobs of about 10% for this category, to just under 12m at Feb., 2013...

perhaps Dr. Baker has already found the non-zero end-point, as the % of manufacturing jobs to all non-farm employment is still just under 9%--four years of a more or less 'flat' %, as overall employment has increased as well over this period...

one can hope that this more-current trend will rise in both number of jobs and their share of all jobs moving forward...
@ urban legend
written by NWsteve, March 26, 2013 6:33
curious if we have apples to apples here...

is health care 'covered' in both countries' stats? other employee benefits that are not directly wages? other stat-measure differences?

if the "30%" still holds, what about compensation costs as a percent of finished product shipped? i.e., is productivity per employee higher in Germany?

if we are still at "30%", what about the quality of the finished product? e.g., is a VW the same as a Chevy? is a BMW the same as a Cadillac? same for appliances? for wind turbines?

does Air Bus vs. Boeing make any difference?

are there trade differences/restraints/incentives for US exports vs. Germany?
bribes anyone?

what about R&D?

if we are still at "30%" the US needs a re-think in Marketing and a new strategy in Sales...

what do you think?
Production HAS declined: see Houseman et al 2011 or Mandel 2012
written by E Way, March 28, 2013 5:15
US statistics showing production remaining steady or even growing are misleading.

Susan Houseman and her collaboraters have a piece out in Journal of Economic Perspectives (2011) that analyzes why this is the case. Essentially, the US government assumes declines in input costs are due to productivity increases rather than a shift from higher to lower cost producers of intermediate goods. There has been a vast overstating of US industrial production as a result. If the mechanization story were accurate we would have seen a boom in manufacturing investment in the 2000's. We didn't: instead, it collapsed, which is more consistent with the offshoring everything but the retailer story.

Michael Mandel, a Harvard Econ Phd, has a layman's explanation in the Washington Monthly that is also worth a read:

http://www.washingtonmonthly.com/magazine/january_february_2012/features/the_myth_of_american_productiv034576.php?page=1
...
written by Ellis, March 28, 2013 10:51
The articles that you cite don't "prove" anything. They are assertions. By the way, there are other ways of squeezing more production out of fewer people without a big increase in investment: heavy overtime, speed-up, subcontracting. Anyone familiar with what actually goes on in the modern workplace knows this. Interestingly, Dean Baker, has never commented on this. He seems to steer away from it, in fact.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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