Manufacturing, Exported Goods Sharply Up: So What's the Problem?

As Marc Chandler has pointed out in his post entitled The Evolution of U.S. Manufacturing, the constant dollar value of U.S. manufacturing has actually risen over the last thirty years, as has slightly, the U.S. share of world manufactured output relative to other countries. The value of U.S. manufacturing output almost doubled between 1978 and the present (in constant dollars). Further, I add, the dollar value of U.S. manufactured exports has almost tripled since the early 1990s.

It is therefore false and incorrect to argue, as Marc Chandler explains, that

the U.S. no longer manufactures goods; now it manufactures debt. . . The demise of U.S. manufacturing is at the core of the decline of America, its chronic trade deficits and growing international indebtedness. . . .

So accepting these arguments and realizing our misunderstandings, the question fairly becomes, “So what’s the beef?” We ought to be jubilant, right? We are manufacturing more for both consumption and export than we were and we should be pleased with that result.

For the answer, we have to go behind the numbers and look at what has happened to employment in manufacturing and elsewhere, and to the U.S. economy as a result. The popular perception that we are suffering as a consequence of what happened is clearly correct, as it turns out.

The facts are that employment in manufacturing has dropped from a high of about 19 million in 1978-9 to less than 12 million in 2009, as the U.S. abandoned and gave up on much potential manufacturing for both internal consumption and export during that time. Many manufacturing workers became unemployed and others who might have expected jobs in manufacturing did not get them. The reason is manufactured output in the U.S. became much more capital intensive and the productivity of the fewer remaining workers has become much higher.

American manufacturers assumed U.S. workers would not accept lower paying jobs that could not be readily made more capital intensive and manufacturing work in the U.S. was therefore outsourced in large quantities to overseas plants and employers that pay lower wages. We gave away the store, or at least a large portion of it, relative to what we might have retained and we also gave away the jobs of many in the manufacturing sector. We did not even try to compete. Manufacturing growth is now up, but U.S. manufacturing is far below what it could have been. Worse, the net impact on employment in U.S manufacturing has been nothing short of a disaster.

So where does that leave U.S. workers with manufacturing skills? Either unemployed, employed at lower pay in the service sector, in retraining or working for almost flat wages in fewer jobs in U.S. manufacturing. Real wages have largely been constant in U.S. manufacturing because of the very high productivity of the remaining workers in that sector.

Why so productive? It was largely due to substantial capital improvements in manufacturing so that, not surprisingly, the gains went largely to capital or corporate America and not to the remaining employees. This is one reason the income distribution in the U.S. has become so badly skewed toward the wealthy over this period. The wealthy also spend proportionately less of their income on consumption and that too has a bearing.

The impact on aggregate demand in the U.S. of these somewhat structural developments is substantial. Unemployed manufacturing workers spend less. If they get lower paying jobs in the service sector or are in retraining they also spend less. If they remain employed in U.S. manufacturing, their real wages have been constant for some time and they cannot be expected to spend more.

And if new workers wanted to be employed in manufacturing, they have had to work elsewhere, probably also for less, or they are unemployed. That wages and salaries in U.S. manufacturing, as elsewhere, do not quickly adjust downward only compounds the core problem.

The net result is a semi-permanent drop in aggregate demand domestically, as these somewhat structural changes work themselves through the real economy and are increasing less buffered by debt. Our economy declines because of it. Too many jobs were outsourced elsewhere for our manufacturing gains to make up what could have been, especially with the maldistribution of income in America.

It is therefore fair to say that because of foreign competition and the approach to manufacturing in the United States, we have become relatively worse off. Regrettably, we have no industrial policy to address this issue, just as by and large we have no trade policy to focus on our balance of payments. We lack serious working agendas and this is a fault of our political leadership.

Disclosures: No positions.

Comments

[Lok Sang Ho:]

Actually, global manufacturing jobs have been declining secularly for a long time. It is already amazing that US had managed to keep so many manufacturing jobs. HK had almost 1 million manufacturing workers in mid 1980s, but has kept less than 1/10 of that number by now. Even in mainland China, reputed to be the factory of the world, manufacturing jobs had peaked and appear to be on a downward trend. Thanks to increasing productivity, manufactured goods are costing a tiny fraction of their previous prices.

Oct 04 09:05 AM

[Tom Armistead:]

Good article. If the trend toward improved productivity and reduced wages and employment continues indefinitely, we would have a situation where the goods produced would exceed the ability of of the market to absorb them. There would be too many cars and houses, and too few people with jobs and meaningful income to buy them.

That would be horrible. One solutions would involve extending excessive credit so the jobless and underemployed could continue to consume the cornucopia of goods produced by; the hyper-productive manufuruing sector.

Another solution would involve the redistribution of income, from the few remaining wage-earners, or the the wealthy who owned the means of production, to the jobless and underemployed.

Or you could try a combination of the two.

Oct 04 09:09 AM

[Tom Armistead:]

P.S. have a nice day.

Oct 04 09:10 AM

[Michael Clark:]

Nice response, Tom.


On Oct 04 09:09 AM Tom Armistead wrote:

> Good article. If the trend toward improved productivity and reduced
> wages and employment continues indefinitely, we would have a situation
> where the goods produced would exceed the ability of of the market
> to absorb them. There would be too many cars and houses, and too
> few people with jobs and meaningful income to buy them.
>
> That would be horrible. One solutions would involve extending excessive
> credit so the jobless and underemployed could continue to consume
> the cornucopia of goods produced by; the hyper-productive manufuruing
> sector.
>
> Another solution would involve the redistribution of income, from
> the few remaining wage-earners, or the the wealthy who owned the
> means of production, to the jobless and underemployed.
>
> Or you could try a combination of the two.

Oct 04 09:32 AM

[Ricard:]

Interesting article, a great catalyst for discussion.

I'll focus on the following points:

"American manufacturers assumed U.S. workers would not accept lower paying jobs that could not be readily made more capital intensive and manufacturing work in the U.S. was therefore outsourced in large quantities to overseas plants and employers that pay lower wages."

This statement assumes that we were in control of our own destiny, but at least for the sake of argument, I'd point to the opposite. Any job that is relatively more labor intensive will automatically compete with the rest of the world, where for a long time labor costs have been next to nothing. American manufacturers did not have a choice but to outsource, lest their competition in Europe and Japan did so first. Capitalism implies rational conduct, and all other things being the same, the rational business decision is to cut costs whenever possible to a point that is lower than your competition.

Outsourcing also has the effect of raising the living standard of large swaths of the world's population. What then baffles me is not the economic rationality behind outsourcing, but the political calculus that went behind such a move. We buy more Toyotas than any American brand, for instance, yet the Japanese are not part of our political process except as 'close allies'. We also provided a good amount of seed capital to Japan. You would think that an entity that has participated and profited so much off of our consumer base would actually be part of our democracy, but that is not the case here. What guarantees do we have that our investments in Japan will actually bear fruit? I would think that the political basis for such capital allocations would come before economic considerations, but I am not sure that has actually played out over the past 60 years, as we increasingly are seen as propping up weaker economies through gouging our own.


Tom Armistead wrote:
"If the trend toward improved productivity and reduced wages and employment continues indefinitely, we would have a situation where the goods produced would exceed the ability of of the market to absorb them. There would be too many cars and houses, and too few people with jobs and meaningful income to buy them. "

Supposedly this would never happen. If goods became so plentiful that we were free from want, then it would follow that the goods would be available at next to no cost to consumers. I would say this has played out through real world applications. A new economy car today is generally leagues beyond what luxury vehicles were 10-15 years ago, yet costs anywhere from 30%-70% less than new luxury cars sold for back then. I could compare the new Hyundai Elantra (one of the most popular CFC vehicles) to a Benz from 1995, and, outside of engine size and maybe suspension, would find a vehicle that is more comfortable, with more amenities, and for a much lower sticker price, than the 1995 middle-class standard for luxury.

Another example would be consumer electronics. Even though demand has steadily increased, it seems supply has increased even more so. The world makes and sells many more PCs than in the past, PC makers are a larger part of our economy than in the past, and consumers are able to buy PCs for a much lower price than in the past.

Oct 04 10:52 AM

[Ricard:]

Just to further detail the political angle I introduced:

Government investing generally pays off through higher levels of future taxation when the expected productivity results are achieved. Yet, in the case of investing in foreign countries, our government is left out of this taxation scenario. Furthermore, whenever we buy a Japanese or German product, Japanese and German manufacturers book the profit, from which the Japanese and German governments get to tax. To add to this, we also pay for a large percentage of their military protection, which is a contentious issue not only here, but in 'occupied' nations as well.

IMHO, either formalize the protectorate relationship and extend citizenship rights, or demand recompense for our trouble. Or, just pull out (although IMHO this would have grave political consequences).

Oct 04 11:08 AM

[Kimball Corson:]

Perhaps we could charge a bit for foreign access to the US constomer base which most want, while at the same time we try to address our balance of trade problem, by using auctioned import certificates, which are allowable under WTO rules for deficit countries.
Alternatively, instead of auctioning them for some countries, perhaps we could trade them for some political say in those countries economic policies or practices. This way we might buy some gains now lost by too broadly granting favored nations trading status.

Oct 04 12:18 PM

[Old Trader:]

"Perhaps we could charge a bit for foreign access to the US constomer base which most want, "

We do, by way of tariffs, import duties, etc.

Oct 04 01:37 PM

[bbowen7:]

Excellent article. Truly.

The point that we make more stuff than we used to is contrary to the conventional wisdom - which is driven by employment numbers. The point that we have no industrial or trade policy is paramount. The economic cycle will eventually work itself out, but it would be nice if some of the Washington thoughts were about the underlying problem.

Oct 04 02:04 PM

[rosey99:]

Is this really possible? I remember Warren Buffet bringing up the idea of import certificates some time ago. But I also seem to recall that at the time Buffet mentioned that such a policy would probably violate a number of WTO rules. I'd love to be wrong about this, so where did the author find that import certs are allowed by WTO rules? It beats the hell out of a VAT (IMO) which I think is probably on its way.

This is an interesting piece, but I would be interested in seeing how real manufacturing output has changed (say, since the 1970s) in per capita terms (adjusting for population) and as a share of global manufacturing (the US slice of the manufacturing pie).

Based on what I know (or think I know) people in the US spend a slightly lower percentage of income on consumer goods today than in the 1970s, and a smaller % on food too. The big increases (again, as a % of income) have been for health care, housing, and education. And one could argue that a certain portion of the increase for housing is actually education as home-buyers with kids are willing to compete for, and pay a premium for, good schools. I think we can all agree that the portion of income spent on debt service for the "average" household has also gone up.

As for Old Trader's comment above:
The general tariff level in China is around 9.9%, in most cases it can only go up from there. I don't know what the US "general" level is, but the recent punitive tariff on tires raised the tariff from 4%. And then there is that pesky question of the yuan "peg."

IMO WTO rules are a bit complex, so if anyone could direct me to information describing the conditions under which a deficit nation is allowed to issue import certificates, I'd be grateful. Interesting piece.


On Oct 04 12:18 PM Kimball Corson wrote:

> Perhaps we could charge a bit for foreign access to the US constomer
> base which most want, while at the same time we try to address our
> balance of trade problem, by using auctioned import certificates,
> which are allowable under WTO rules for deficit countries.
> Alternatively, instead of auctioning them for some countries, perhaps
> we could trade them for some political say in those countries economic
> policies or practices. This way we might buy some gains now lost
> by too broadly granting favored nations trading status.

Oct 04 02:43 PM

[YaddaMinski:]

If currency markets are are allowed to work, the dollar will stay cheap until the Current Account Imbalance is corrected. A weak dollar should provide an incentive to manufacturer more in America to export as its export will be cheaper relative to foreigners' native goods. That is as long as trade wars don't start. Comparative Advantage is not static.

Oct 04 05:05 PM

[DavyJ:]

I think you missed something very subtle in Tom's comment.


On Oct 04 10:52 AM Ricard wrote:
...
> Tom Armistead wrote:
...

Oct 04 07:40 PM

[chap08:]

I'm afraid you have the only real plan there YaddaMinski - ongoing devaluation of the dollar. We can not support an ongoing trade deficit on this scale. The imbalances will tip us in to chaos. Buffett's import certificates is a theoretical plan designed to achieve the same end without devaluing the dollar. But it would be bureaucratic, costly and open to abuse. It would not work. "Charging a bit for foreign access to the US customer base" will only lead to trade wars and hurt everyone. Given our lack of competitive advantages, a lower dollar is the only logical outcome. The only real question is whether we can move it down gently, or whether it happens in a rush due to our budget deficit.


On Oct 04 05:05 PM YaddaMinski wrote:

> If currency markets are are allowed to work, the dollar will stay
> cheap until the Current Account Imbalance is corrected. A weak
> dollar should provide an incentive to manufacturer more in America
> to export as its export will be cheaper relative to foreigners' native
> goods. That is as long as trade wars don't start. Comparative
> Advantage is not static.

Oct 04 08:04 PM

[The Khan:]

Err, isn't that what has been going on for quite some time now? And has landed us in a steaming pile of?


On Oct 04 09:09 AM Tom Armistead wrote:

> One solutions would involve extending excessive
> credit so the jobless and underemployed could continue to consume
> the cornucopia of goods produced by; the hyper-productive manufuruing
> sector.
>
> Another solution would involve the redistribution of income, from
> the few remaining wage-earners, or the the wealthy who owned the
> means of production, to the jobless and underemployed.
>
> Or you could try a combination of the two.

Oct 05 01:42 AM

[sod:]

The term, 'auction certificate", seems to become more irrelevant as I get further down the posts. Never the less, could someone explain what the term means? Thanks.

Oct 05 02:39 PM