If Manufacturing Jobs Aren't Coming Back, Will We Be Able To Produce Manufactured Goods Without Workers?

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Wednesday, 17 October 2012 13:48

That what people who saw this NPR Planet Money piece must be wondering. The problem is that the United States, as a result of its loss of manufacturing production, now has a large annual trade deficit of $600 billion or 4 percent of GDP. If were closer to full employment it would likely be around 5 percent of GDP, or $750 billion.

At the moment we are able to run these deficits because countries like China are willing to subsidize their exports to the U.S. by spending hundreds of billions of dollars every year to buy U.S. bonds and other assets. This keeps up the price of the dollar relative to their currencies, which makes their goods cheap for people in the United States.

While it is very generous of these countries to subsidize our consumption, it is unlikely they will do so forever. These subsidies keep up demand for their products in the United States, but they could also use the same money to subsidize the purchase of goods and services by their own people. This could lead to substantial improvements in the living standards of the people in the countries who are sustaining the over-valued dollar.

If these countries stopped propping up the dollar then the dollar would presumably fall to a level that it is roughly consistent with balanced trade. This would almost certainly mean a large increase in manufactured exports as well as increased domestic production to replace imports of manufactured goods. Roughly 70 percent of U.S. trade is in goods, and most of these goods involve some degree of manufacturing (as opposed to raw agricultural products or mining output).

It is difficult to imagine an adjustment to more balanced trade that doesn't involve a large increase in production of U.S. manufactured goods. While our trade surplus on services can increase, it seems unlikely that it could go too far towards filling this gap. Also, it is not clear how many more people in the United States will want to work as housekeepers and table servers, since tourism is by far the largest category of service exports, accounting for more than a quarter of the total (travel plus passenger fares).

If we moved to balanced trade and manufacturing adjusted in accordance to its share of total trade, it would imply an increase in manufacturing output of close to 30 percent. Unless we have extraordinary gains in productivity, this would mean considerably more employment in the sector.