Monday, May 2, 2011

Some Much-Needed Perspective on the Fake Decline of American Manufacturing

As I've noted repeatedly on this blog, one of the most repeated (and effective) myths trotted out by people seeking to thwart free trade through protectionism is that America's manufacturing sector is in dire shape.  For example, here's Louis Uchitelle tritely lamenting the "decline" of American manufacturing in a recent New York Times column:
Losing an industry or ceasing to manufacture a particular product, in this case stainless steel flatware, has indeed become a fairly frequent event. Just in the last few years, the last sardine cannery, in Maine, closed its doors. Stainless steel rebars, the sturdy rods that reinforce concrete in all kinds of construction, are now no longer made in America. Neither are vending machines or incandescent light bulbs or cellphones or laptop computers....

THE loss of manufacturing capacity, measured in lost workers, is startling. From the high point in the summer of 1979, through last month, employment in manufacturing has fallen by 8.1 million, to 11.6 million, with most of the drop in just the last decade. While consumers have benefited from lower prices, made possible by unrestricted imports, on the other side of the ledger are tens of billion of dollars in lost manufacturing wages.
Uchitelle hits a common refrain that the "success" of American manufacturing simply must be measured in terms of manufacturing employment which, as he rightly notes, has been declining since 1979.  Of course, that steady decline is hardly an accurate measure of whether US manufacturing is doing well or poorly, and good economists like Cato's Dan Ikenson and AEI's Mark Perry have repeatedly noted that, in every measure except employment, the US manufacturing sector has been dominating.  As Perry recently stated:
The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated. America still makes a ton of stuff, and we make more of it now than ever before in history, but we’re able to do it with a fraction of the workers that would have been required in the past. We’re still the world’s leading manufacturing economy by far, thanks to the world-class productivity of American manufacturing workers, the most productive in the world. Instead of bashing China, Korea, and Mexico for competing against our manufacturing sector and exaggerating the decline of our manufacturing sector, Americans should take more pride and celebrate our status as the world’s leading manufacturer.

I've also noted repeatedly here that the steady, historic loss of manufacturing jobs is a global phenomenon that has occurred pretty much everywhere, regardless of whether a country is developed or developing or has a trade surplus or deficit.

Such sanity, however, rarely changes the manufacturing pessimists' minds.  Indeed, one of their most frequent (and only) rebuttals is that, sure, the American manufacturing sector has steadily been increasing, but it's not increasing fast enough, as made clear by US manufacturing's declining share of national GDP.  Here's Uchitelle again on this point:
An accurate count would reduce manufacturing’s share of the gross domestic product, or total national output, to less than the 11.2 percent that the Bureau of Economic Analysis has reported through 2009, the latest figure available.

That 11.2 percent would be closer to 10.5 percent, if all of the imported components were counted as imported instead of domestically made. Even the 11.2 percent figure is down sharply from the 14.2 percent share of just a decade earlier, and the nearly 30 percent of the heyday 1950s, when almost every product bought by Americans was also made here.

Concern is increasing that this decline has gone too far. “I think there is a growing recognition that a diminished manufacturing sector will undermine our economy,” says Mark Zandi, chief economist for Moody’s Analytics.
Of course, Uchitelle, Zandi and other people singing this chorus never get around to telling us what US manufacturing's share of GDP should be, but no matter: it's too low, and we need to raise tariffs or implement Japan/China-style industrial subsidies or blah blah blah in order to "save" our struggling industrial base.


From Perry comes an excellent string of blog posts providing irrefutable proof of just how silly this "GDP" argument is.  First, Perry notes that US manufacturing's declining share of GDP is hardly unique.  In fact, as a share of world GDP, global maufacturing has witnessed a startlingly similar decline:

Perry concludes simply:
We hear all the time from Donald Trump and others about the "decline of U.S. manufacturing," about how nothing is made here any more, and how everything that used to be made here is now made in China, etc. An underlying assumption here is that if the manufacturing base is shrinking in the U.S., there is an offsetting manufacturing gain that is captured elsewhere in the world. In reality, the decline in U.S. manufacturing as share of GDP is a really a global phenomenon as the entire world becomes increasingly a services-intensive economy.
Exactly right.  Cafe Hayek's Don Boudreaux has a little more fun with Perry's data, blaming this phenomenon on a rather, ahem, creative perpetrator:
I wonder how Dr. [Ian] Fletcher and his like-minded protectionists explain the facts highlighted by Perry regarding manufacturing output as a share of world GDP. Are aliens from other planets damaging earth’s economy with unfair interplanetary trade practices? Or is humanity across the entire globe foolishly switching to the production of services out of a collective failure to understand that manufacturing – because only it results in the production of tangible, real, masculine stuff – must not decline as a percentage of world GDP lest we earthlings be cast back into poverty by our short-sighted insistence on consuming and producing too many girly-girl services?
Heh.  But back to Perry: he's not done there and next provides an awesome chart showing the dramatic gains in manufacturing worker productivity since 1950 (and thus why total manufacturing employment is an absolutely awful measure of the success or failure of the US industrial sector):
Perry then quotes Chicago Fed economist William Strauss' thorough explanation of what's really going on in the US manufacturing sector:
The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP.
In short, we're making more stuff for less money and with fewer workers (hence, the rising output, declining employment and declining share of GDP).  And while these trends might not be good for some US industrial workers, there is no doubt that American society as a whole is better off.

Don't believe me?  Well, fortunately Perry's got you covered there too, as he concludes his multi-day dismantling of the manufacturing myth with a nice little parallel (inspired by Scott Grannis) between the American agricultural and manufacturing sectors:
The chart above shows agriculture's declining share of U.S. GDP using annual BEA data from 1947-2010. From a high of almost 9% of GDP in 1948, the agriculture sector's share of total output has declined steadily and fell below 1% by 2002. And yet we produce more food today than at any time in history and it's cheaper as a share of disposable income than ever before. Thanks to productivity gains, farm employment today represents only about 2.5% of total employment compared to more than 12% of America's workforce in 1950.

Going all the way back to the early 1800s, more than 80 percent of both U.S. employment and output were directly tied to a relatively inefficient (by today’s standards), labor-intensive agriculture sector of the economy. Food products were very expensive and consumed a large part of a typical household’s income. Over time, technology revolutionized farming, resulting in the same trends we observe today in manufacturing: huge increases in farm worker productivity, reduced farm employment, significantly lower and more affordable prices leading to a reduced share of food in both household income and national income (GDP).

And yet, when have you heard anybody claim that "U.S. farming is dead," or talk about the "decline or demise of America's agriculture industry?" Probably never. But a lot of people talk about the "decline of U.S. manufacturing" even though it's going through the same long-term trend as farming - jobs and output are declining as a share of GDP, but manufacturing output and productivity are increasing. And we're much better off because of it.
Exactly right.  And kudos to Perry for pointing out these important facts in excruciatingly excellent detail.

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