The WAPO Tells Us How Not to Think About Manufacturing and Jobs

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Tuesday, 20 November 2012 06:10

A Washington Post blogpost, whose headline told readers that manufacturing jobs are not coming back, gave an incredibly misleading rationale for this assertion. It told readers:

"Manufacturing contributed 20 percent of the growth in global economic output in the decade ending in 2010, the McKinsey researchers estimate, and 37 percent of global productivity growth from 1995 to 2005. Yet the sector actually subtracted 24 percent from employment in advanced nations."

Note that the first two figures refer to global growth, as in whole world. The third number refers to growth in advanced nations. This matters in a huge way. The trade deficit in manufacturing goods that advanced countries ran with the developing world expanded hugely in this decade.

This was conscious policy in many countries as they removed barriers to trade in manufacturing goods while maintaining or increasing barriers to trade in many services, like physicians and lawyers services. Apart from the political implications of this policy (even greater inequality, as a small group of sheltered professionals gain at the expense of the rest of the workforce), there is also the economic problem that trade deficits cannot expand indefinitely.

At present, China and other developing countries are effectively willing to subsidize U.S. consumption of their manufacturing exports by buying up U.S. government bonds that pay negative real interest rates. It cannot be too long before these governments figure out how to create demand by spending money domestically, rather than paying U.S. consumers to buy their stuff. When this happens, manufacturing, which continues to dominate world trade, is likely to flow back to the advanced countries. 

In contrast to the decade from 2000 to 2010, when they were losing shares of world output, advanced countries will then likely be gaining shares. This will almost certainly mean substantial growth in manufacturing employment unless productivity growth, and therefore GDP growth, turns out to be much higher than is generally projected.