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.