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Last week, I was on vacation. However I did try to keep somewhat up-to-date on the conversations going on without me. One particular post that grabbed a lot of attention was this, by Tim Duy, whose work on monetary policy I typically find to be sharp and insightful. In it, he makes some reasonable points about the state of the economy and the labor market, then sketches some eye-balled correlations and draws unwarranted conclusions about the state of the manufacturing sector and broader economic growth. I found it to be a fairly thin piece of argumentation, but it resonated with others despite this, and so I tweeted that,

Something about the word ‘manufacturing’ makes people lose their analytical senses.

Matt Yglesias picked up on this and wrote a post that got at a lot of what I was thinking, namely, that there’s nothing special about manufacturing. I saw Felix Salmon respond via twitter that he was unconvinced, and as best I could tell, the matter finished there. Let me just add a few thoughts.

There is a sense that people seem to have that the making of things is an activity crucial to a modern economy. It’s crucial because a country that can’t make things is vulnerable to trade collapse. It’s crucial because a country that can’t make things is likely to lose its economic edge. It’s crucial because without manufacturing you can’t export. And it’s crucial because manufacturing jobs, everyone knows, are high-paying jobs that provide a good living to people with limited education.

I don’t think too much of this. Economic activity isn’t about satisfying the demand for objects, it’s about satisfying demand, period, and people demand many things that have little to do with assembly lines and smokestacks — hair-cuts, mixed drinks, financial advice, dentistry, and so on. These activities are important. If they weren’t important, people wouldn’t be willing to pay lots of money for them. Economic growth, meanwhile, is about figuring out how to do more with less. There’s no reason why “doing more with less” ought to be associated with manufacturing rather than services. It’s true that some service sectors that are among the fastest growing in terms of employment — like education and health services — have experienced slow productivity growth. But I think people are far too quick to conclude that this has something to do with the nature of the services provided, rather than with the institutional environment of those sectors and simple cost constraints.

Goods and services are, to a large extent, interchangeable. They constantly replace each other. A whole range of household tasks — services, fundamentally — that used to fall to family or hired help was replaced by manufacturing — of laundry machines, dishwashers, and so on. An entire range of a clerking and administrative services has been replaced by manufacturing — of computers and related hardware. And then there’s the programming; is that production of a good or a service? These days, some of my work finds its way into physical form in the weekly print edition of The Economist. Am I a manufacturer? No, you’ll say, but the printer is. The internet threatens that printer’s job, but it increases the value of my writing (while also making it more difficult for a private firm to capture). In this world, the idea that “manufacturing” is something worth protecting for its own sake makes little sense.

What’s underappreciated is that economic growth is often about labor-saving innovation. This generates jobs in some places but destroys them elsewhere. As part of this process, the created jobs generate value which may often mean high wages. But the very fact of high wages gives employers an incentive to save labor through further innovation. A sector can either be a source of innovation or an oasis of sustainable, high-wage employment, but it can’t be both.

Which isn’t to say that innovation is wealth destroying. Quite the opposite. The last two centuries’ worth of unprecedented technological, institutional, and organizational innovation and associated economic growth have been one long occupational bloodbath. Thousands of job categories have perished. Millions of workers have been displaced.

But economies have, at the same time, created other employment niches, and the wages earned in those jobs have purchased an ever-more-useful array of goods and services. A dollar these days buys vastly more computing power than it did 100 years ago, just as it buys vastly more life-saving capacity at the doctor’s office.

What is crucial then isn’t goods or services or manufacturing or retail. To a certain extent, it is about routine tasks versus non-routine tasks, as routine tasks are more vulnerable to elimination by technology. But as technology improves, “routine” encompasses ever more exotic activities. And to a certain extent it’s about tradeable versus non-tradeable activities, but America exports billions of dollars in services, and technology holds the potential to increase the range of sectors that can be “shipped” across borders.

What is really important is the level, supply, and transferability of skills. And it is here that we seem to have run into problems. We’re not producing enough skilled workers to keep up with the demand for skills, and we’re producing too many unskilled workers. Many of today’s jobs require a great deal of specialized knowledge, which takes a long time to acquire. This generates a lag between labor market demand and labor market supply. It also introduces new risks, since it’s dangerous to invest a long period of time in training for a job that might soon be eliminated. And it’s far from clear that current education and employment policies are at all up to the task of maintaining a labor force that’s both flexible and skilled.

It’s very difficult to know what kinds of things people will need to know how to do ten years down the road (to say nothing of twenty or thirty years down the road). It strikes me as odd and indefensible to say that it’s important to focus on the protection of “manufacturing” activity or employment. Our failure in recent decades has not been the inability to secure for ourselves adequate employment in one sector or another. Our failure has been our neglect of the human input to economic activity, which, like it or not, we need to maintain. As human capital becomes obsolete in one field or another, we have no choice but to take care of it and improve it, or it will fetch steadily less in the open market. We don’t care if an old engine fetches less over time. We care a great deal if an able-bodied individual does.

What will maintenance involve? Investment in health and education. Protection against many personal risks. A safety net. The time and resources to retrain, to maintain and improve social capital, and so on.

It is not necessary, as some worry, that we turn every worker into a PhD. It’s only important that labor supply more closely match labor demand, and that labor market policies acknowledge and address new labor market realities — higher demand for skills, more rapid obsolescence of skills, and so on. It’s not enough to put a worker through high school and as much college as he wants and can afford, let him choose a career, and offer him limited social assistance and unemployment benefits and the promise of Social Security. Too many will either view student debt as an intolerable risk or take it on and find themselves trapped in a career hole. Too many will get stuck working dead-end jobs with no time to retrain. Too many will opt into stable-but-economic-growth-stultifying careers (law!) protected by institutional rigidities, simply to avoid the churn of the more wild business environment.

Tim Duy looks at the rapid growth rates of the postwar years and concludes that manufacturing was the key. But the world has been turned on its head many times since then. The pace of technological change has been astonishing. We can’t, shouldn’t, and shouldn’t want to go back. Forget manufacturing. Forget things. We need to be trying to create an environment in which workers can thrive in an utterly unpredictable world, where the world will be turned on its head tens or hundreds of times over the length of an adult’s career.

Source: Forget 'Manufacturing'