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A few more thoughts on the subject. The most significant criticism I’ve heard is that, duh!, we need goods production so that we have something to export. Let me first say that at no point have I called for the elimination of American manufacturing, and neither do I think that American manufacturing is doomed. As best I can tell, we’re producing a lot of goods and a lot of goods for export — over $500 billion through the first five months of 2010.

Second, services figure prominently in trade. In 2009, the U.S. exported just over $1 trillion in goods, and it exported just over $500 billion in services. Service sector activity is a pretty big part of U.S. trade! And it’s in surplus; in 2009 the service trade surplus was just over $132 billion. That’s pretty good. Technology will continue to increase the range of service activity that is tradeable. So these are very important things to keep in mind.

Next, I want to address this comment:

Ryan, the basic point here is that this post (and Matt Yglesias’ posts supporting it) seem like an exercise in obfuscation. Distinctions between industries and product categories are real, even if those distinctions aren’t fully captured by the word “manufacturing.” That doesn’t mean industrial policy is necessarily a good idea. But trying to laugh away those who call for industrial policy by invoking the fuzzy definition of “manufacturing” is not really going to win you many intellectual points.

It seems fairly obvious to those of us who regularly read your blogs that what you’re really worried about is a trade war with China. You seem to have decided that a trade war is the Big Bad Scary Thing that we must prevent at all costs, and that issues like industrial policy and determinants of trade balances should be looked at through that lens first and foremost.

Now, you may be right that a U.S.-China trade war really is the sum of all fears. And if you really could get people to believe things like “exchange rates don’t matter” and “there’s no difference between manufacturing and services,” you might be able to reduce the chances of that trade war, at the cost of some intellectual honesty. But these arguments just seem so unlikely to most people that it makes you seem like a guy who assumes your conclusions…and that, I am guessing, reduces your ability to persuade people in the long run.

This is mistaken in several ways. And that may be my fault. Perhaps I haven’t been clear enough in what I’m saying.

I do think that a trade war with China would be a bad thing, and I find arguments for protectionist moves against China generally lacking. In particular, I think any measured analysis of the costs and benefits of “getting tough” with China is likely to show that the potential gain from such policies is quite small relative to potential costs.

But I don’t think a trade war is likely to be the worst thing ever, and the issue of imbalances with China is not really what I’m targeting with the manufacturing discussion. Rather, I’m focused on a view of the American economy that I consider to be impoverished and extremely unhelpful.

Obviously, there is something amiss in the American economy. We see this in figures on labor force participation, in stagnant wages, in declining upward mobility, and so on. It is very important to try and figure out what that troublesome something is. And a view that seems wrong and dangerous to me is that 1) the big problem in the American economy is the decline of manufacturing employment, because the manufacturing sector used to be home to good, high-paying jobs for workers without college degrees, and 2) the decline of manufacturing employment can be traced directly to unfair competition from developing nations.

The truth is that the loss of manufacturing jobs was largely inevitable. High-wage jobs are expensive jobs, and the history of innovation is one of labor-saving technological change, pursued precisely because economic activity is more profitable when you can get rid of a bunch of your human workers. Labor-saving technological change revolutionized agricultural economies and in the process it destroyed a massive number of jobs. Now, there are still plenty of places in the world where humans do agricultural work. In some cases, this is because the work in question is specialized enough that machines can’t be found to do it, but in the vast majority of cases it’s because the workers are so doggone poor (which is to say, cheap) that there’s no reason not to use them for agriculture.

In industrializing nations, industry has traditionally absorbed the bulk of these displaced workers, but there too firms have labored tirelessly to automate, automate, automate. Where they can’t automate, they routinize, the better to later automate. This sounds horribly dehumanizing and generally terrible, but it’s how the world got rich — by moving workers from wretched jobs to merely crappy jobs, then kicking them out of the crappy jobs and forcing them to find merely cruddy jobs, then kicking them out of the cruddy jobs and forcing them to find merely unpleasant jobs.

Today, much of the American workforce is no longer employed in manufacturing, largely because manufacturing jobs have been steadily eliminated by technology. This is also true, by the way, of many service jobs. Now, there are still plenty of places in the world where humans do manufacturing work. In some cases this is because the work in question is specialized enough that machines can’t be found to do it, but in the vast majority of cases it’s because the workers are so doggone poor (which is to say, cheap) that there’s no reason not to use them in manufacturing.

But it’s important to point out that through this evolutionary process, people have become steadily more skilled. As agricultural employment shrank, it was recognized that primary education was an important thing for everyone to have. As manufacturing employment became more skill-intensive, it was recognized that secondary education was an important thing for everyone to have. And as all but only the most specialized manufacturing jobs have been eliminated (except of course for the world’s very poor, who, I think I’m right in saying, we’d prefer not to emulate) it is recognized that an undergraduate education is an important…oh! but we’re not supposed to say that everyone should pursue education beyond high school. Some folks aren’t cut out for that, or some such bullshit.

The point is that an economy is a complicated thing, and “manufacturing” isn’t nearly so important as the set of human skills brought to bear as part of the production process, and that factor is just as important (so far as the variables workers tend to care about are concerned) in the production of services as it is in the production of goods. It isn’t the jobs — forget about the jobs, we have no idea what the jobs will be in ten years anyway — it’s whether you have the workforce and a set of social institutions sufficient to take advantage of employment opportunities when and where they arise.

And it’s pretty clear what that means. It means more and better education, and a safety net that can both protect workers against economic volatility and provide the room for quality mid-career training. And it also means, incidentally, a government committed to tight labor markets, recognizing that in tight markets firms will do the job of training workers. The first step there is a set of expansionary policies appropriate given demand shortfalls, and a second step is identification of successful labor market interventions from other economies, including things like wage subsidies (to worker or firm), and possibly cyclical work-sharing programs.

But this is a difficult and unpleasant conversation to have, whereas “they took our jobs” is very simple and attractive and comforting in its way. And what I would like people to do (aside from not risking all kinds of nasty consequences by saber and tariff rattling at our most important economic and diplomatic partners) is question the assumptions involved in declaring that the source of our previous prosperity was what we used to do or make. Because I believe that has very little to do with it.

Source: Forget 'Manufacturing' - Continued