The Future of American Manufacturing

This commentary by Robert Samuelson, while acknowledging the difficulty it causes for individuals, essentially applauds the troubles Delphi is having as a means of eliminating the "contracts that turned the companies into mini-welfare states" and returning to competitive, market-based principles, which means lower wages. Only then, he believes, will manufacturing in the U.S. have a chance to compete. But even with lower wages the future is not certain. For U.S. manufacturers to become competitive, he believes China must revalue its currency:

Do American Manufacturers Have a Future?, by Robert J. Samuelson, The Washington Post (WSJ version, WaPo version here) The question posed by the bankruptcy filing of Delphi Corp. -- the largest U.S. auto parts company -- is whether manufacturing in America has a future. Manufacturing employment now accounts for only one in nine U.S. jobs, down from one in three in 1950. ... the decline reflects higher efficiency -- making more things with fewer people. ... [L]lately, the news about manufacturing has seemed particularly dismal. Since mid-2000, three million jobs have vanished. .... Delphi's bankruptcy suggests that the U.S. auto-industrial complex faces another wrenching shakeout. ... The entire industry is caught in a cost-price squeeze. It needs price "incentives" to sell vehicles. ... High labor costs are ... a huge problem...

Since 1948, the UAW and GM, Ford and Chrysler have crafted contracts ... providing above-average hourly wages..., rich benefits and strong job security. For example, laid-off UAW workers essentially get full salary and benefits indefinitely. But the limited competition of the protected market has given way -- now automakers vie with imports and firms with non-unionized U.S. plants. Now comes the reckoning. ... According to the UAW, Delphi is seeking deep cuts in both wages ... and total labor costs including fringes ... "If we do this right, Delphi will remain one of the world's leading global automotive suppliers," said chief executive Steve Miller. "Yes, with a smaller U.S. manufacturing footprint. … If we do it badly, Delphi may be broken up into small pieces, and America will have lost some of its precious industrial treasures." GM, Ford and Chrysler are also headed toward bankruptcy unless they curb labor and "legacy" costs, he predicted. ... The fate of American manufacturing lies largely in American hands. Of course, some labor-intensive production will go abroad. But in many industries, job losses and cost cutting -- though devastating to individuals -- can sustain production and restore profitability. The American steel industry now produces more than in the 1980s, though it has lost two-thirds of its jobs. ... But one giant unknown clouds everything: China. Until now, its booming U.S. exports have mostly displaced exports from other countries. As China modernizes ... this could change dramatically. The combination of low wages, a huge market and an artificially low currency confers staggering competitive advantages. ... Unless the currency rises substantially, the United States could lose many industries that, by all other economic logic, it shouldn't. Therein lies the real threat of extinction or something close to it.

With respect to China, it is not at all certain that revaluation will help U.S. manufacturers for reasons expressed by Joseph Stiglitz:

Much of China’s recent gains in textile sales … came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed...

So stripping labor down to its barest bones may impose lots of costs on the labor side of the equation with little in the way of higher manufacturing employment to show for it. And in any case, do we want to specialize in low wage manufacturing jobs with wages dictated by world competitive pressures, or perhaps higher wage manufacturing jobs sustained through protectionism? Or might we transition to something better? I don't think we have a clear sense of where our economic ship is headed or even, perhaps, how to steer the ship through policy choices. What will be our competitive absolute/comparative advantages in the emerging global economy?

Comments

[calmo]

Some op-ed jobs at WaPo need to be contracted out so that Robert can feel what it's like to be over-paid and uncompetitive.
Is he paid by WaPo and Delphi/GM or just by WaPo through Delphi/GM?

[dryfly]

And in any case, do we want to specialize in low wage manufacturing jobs with wages dictated by world competitive pressures, or perhaps higher wage manufacturing jobs sustained through protectionism?

There isn't a job that out there that won't be at least effected by world competitive pressure... even health care (visa workers, medical 'vacations', etc).

Academia too... what happens when all those smart foriegn grad students find out they can't all teach here? Maybe they go home and my kid then ends up going to U Bangalore for a tenth what he would at State U? You might ask why would I do that? Answer: Because I have to.

Delphi workers though they had a contract... think tenure is really an more secure? Ask your grad students about it.

Or might we transition to something better? I don't think we have a clear sense of where our economic ship is headed or even, perhaps, how to steer the ship. What will be our competitive advantage in the emerging global economy?

I live this world - I'm in the mfg sector (sales & engineering combined)... I posted on this a few threads ago... we are CLEARLY moving from a period of rapid innovation to one of slower innovation (rate of technical advance)... The Economist wrote a very good article on this back in Feb 1999 at the peak of dot.bomb asking when would it all end & how...

http://www.economist.com/displaystory.cfm?story_id=186628

Well we know part of it (speculative bubbles popping) but the other part was the eventual slowing of innovation & with it decreased productivity growth & worse yet increased commoditization... in that environment price is all that really matters. Read this as meaning less wealth generated... far more zero sum.

The pie is not going to grow as much for a while no matter what we do with fiscal or monetary policy... and on top of that we have a couple billion more people who want a piece of that pie as well.

It shouldn't take a mathematician (like Samuelson) to understand that this is not likely to end well.

[Mark Thoma]

The doors are already open to foreign competition in academia - about a third of our Department faculty is foreign born. And I agree that continued disinvestment in education may well give foreign universities a chance to increase their relative competitiveness. They will in any case.

I hope you'll allow me one last plug for education as a potential means of increasing our future competitiveness. Education is not a guarantee - we've seen that structural adjustments can affect professional workers - but I still prefer that risk to the risk of competing in the global economy of the future without a college degree. And I can safely say, as I struggle to put my third child through college, that I put my money where my mouth is...

[Movie Guy]

Welcome to the New World

PART I - FACING THE REALITY OF TRADE POLICIES AT 37,000 FEET

Imagine going to sleep one night at your home and awakening the next morning to find that you are on an airplane flying at 37,000 feet. You look around the cabin. When you have the opportunity to talk to the flight attendant, you ask her (I like 'her' better - and let's make her good looking)... you ask her, Where are we going?" She looks down at you as if you're clueless and says, "We're going to the future!" You ask where that is. She says, "To the land of globalization and equality." Again, you ask, "Where is that?" She replies, "In the future," and walks on up the isle.

She didn't offer any peanuts, by the way...

You get the idea. This is happening to me, so I'll share the rest with you.

I feel a nudge from the passenger to my right side. He looks at me and says, "Yeah, I asked her that already. Same answers." Before I can ask him a question, the woman in the seat in front of me raises up, turns around, and says, "Hi. I'm from India and I recognize you. I handle all of your administrative backroom tasks for your business. We're going to the future!" Before I can respond, the fellow across the isle waves at me and says, "I forgot my passport. But I like this flight." He is from Mexico. And he is going to the future. The kids running up and down the isle from all parts of the world are like all kids. Having fun. Innocent. And happy. Perhaps happier on this flight. One little boy rushing by stops momentarily, and whispers, "We're moving...to the future," and then runs down the isle to join his friends...from all over the world. I smile.

The point is simple. We are adjusting our future reality to allow for an acceleration in global expansion. Whether we are doing it in the most effective and painless way remains to be seen. But we didn't start out at 37,000 feet, flying to the future based solely on currency valuations and consumer demand. We planned this. We built the airplane. Fueled it. Selected a flight plan. Then lifted off on our journey.

That economic journey began with trade based on formal trade policy. And we have changed our trade policy.

Trade policies built around tariffs and other fees are quite different, naturally, than trade policies built around the near-term reduction and ultimate elimination of all tariffs and other fees. The United States joined the WTO, which absorbed the GATT regulations. The accelerated effort to eliminate tariffs focused initially on large concessions by major trading nations, followed by concessions from other member nations in descending economic order. Member nations are still negotiating their way through that process.

The United States, as an example, opened its borders to greater trade. Trade not based solely on the principal of comparative advantage, but trade based on openness. An open door policy if you will, presently impeded slightly with an average tariff on goods and services of 3.6%. And that tariff percentage is continuing to decline, representing a greater open door policy. Among the trading partners of the United States is a rapidly developing nation which has labor rates of 1/20th to 1/25th of U.S. labor rates. That is China. And China's labor costs, other production advantages including quick grasp of technology, and educational growth are capturing a growing share of former United States, Central American, and other Asian finished goods production.

The trade policies of WTO and the USA are most assuredly the starting point for discussions of trade, economic performance and comparative advantage. Once recognized and acknowledged as having a profound effect on domestic trade performance, the other factors including currency valuation, consumer demand, and commodity pricing logically become the principal issues of discussion because such factors represent variables of adjustment in the trade policy picture. In other words, they influence the effectiveness of trade policy. Rest assured, though, that trade policy changes have an effect on the economic performance and competitiveness of the United States as such policy changes resulted in laying the foundation for a growing shift in the economic landscape of the United States. No question.

If I am fortunate, I will awake in the morning in my own bed. But it's unlikely. Just looking around indicates that I am still on the airplane headed to the future. Wherever that may be. We may experience a soft landing if we don't run out of fuel, but there is quite a discussion ongoing in the cockpit. And some well-heeled passengers in first class, having too good a time, are banging on the cockpit door again. Yelling and spilling their drinks, of course. Telling the pilot that everything will be fine. Don't worry about it. We have credit cards. No sweat. And so on. But the senior pilot who opened the door looks concerned. Of course, the newspaper I found in the seat compartment has a story explaining that his pilots union pension fund is near bankruptcy. I expect that that might worry him. As well as the loud, well-heeled crowd. The same ones chasing the flight attendant who didn't give me any peanuts. I believe that she is pouring champagne up there...including one for herself. Interesting flight. Wherever we're going.

I believe that I will go back to sleep now. And pray for a soft landing. I will probably dream about peanuts. I may have seen my last bag of those. On this flight, anyway.

[Movie Guy]

PART II - POST TRADE POLICY REALITIES AT 37,000 FEET

Yes, we're flying to the future. The pilot announced that we will be receiving a mid-air refuel in a moment. This must be a long flight. I can see the tanker off the right wing now. That looks like a repainted KC-130. You know, a Boeing 707. Wish it was a newer jet. I hope this works. Mid-air refueling is difficult. I am going to put on my seat belt. Yeah, there's the light now. Fasten up. No sign of the flight attendant. Still no peanuts back here. Most people are asleep. Appears to be the norm on this flight. That and watching movies.

The present global trade situation is explained in brief in the following documents.

Existing trade policies resulting in the reduction of trade barriers, as an underlying basis for globalized trade growth, coupled with currency valuation changes, an ongoing global economic recovery, and consumer demand growth provide the general basis for the following 2004 analysis.

I agree that currency valuation changes have adjusted the import-export landscape in Europe, stimulating growth in 2003 and 2004. Moreover, I note that more changes are on the way as evidenced by the recent 19% growth in imports from China to Europe.

Currency valuation changes, though, do not explain the USA's 24% growth in imports from China during the first five months of this year. The China peg to the U.S. dollar, in effect until Thursday, 21 July 2005, eliminated the currency valuation consideration from explanation regarding trends in U.S. imports and exports as addressed in the following presentations. And there is little near-term expectation that the black box peg that China has since adopted will alter its currency value substantially going forward. Message received.

These are worthy documents to read during the flight.

Recent Trends In International Trade
WTO World Trade Report 2005
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1a_e.pdf

World Merchandise Trade by Region and Selected Country, 2004
(see Appendix Table 1)
WTO World Trade Report 2005
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

World Trade of Commercial Services by Region and Selected Country, 2004
(see Appendix Table 2)
WTO Trade Report 2005
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

Global Tariff Profiles
WTO World Trade Report 2005
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-tariff_e.pdf

Country Trade Analysis - two links
http://www.intracen.org/mas/country.htm

http://www.intracen.org/countries/

** These One-Stop-Shop links for individual country economic data represent virtually everything one would want to know. Select a country. Explore. Import and export growth can be analyzed by product group. Hard to beat this source of information.
......

The refuel is finished, the pilot tells us. Only picked up a partial load of fuel, unfortunately. Problem with the coupling device. We'll try to refuel with the next tanker. At night. That's dangerous, but the pilots have no choice. Think I'll take a nap. And dream about the future. Wherever that may be.

The party is raging on up in First Class. It's rowdy. Here's hoping that they calm down and sleep it off before the senior pilot has to waste precious fuel and make an emergency landing to kick some of them off. One hero came back here a few hours ago. Started yelling, "There is no future! There's just today!! Let's party!" That upset the kids. And those of us who were awake. I won't shed a tear if the pilots throw that guy off. And he is a transnational corporate CEO.

The flight attendant is pouring more champagne in First Class. Must have cases of it. Probably more down in cargo hold.

The inflight news channels indicate that Snow and Greenspan didn't make any headway with China over its currency peg. Yeah, as if pigs were going to fly. And it's clear that Delphi planned its bankruptcy around the goal of dumping more production in China. As if that was a surprise.

Time for a nap.

Still no peanuts...

[save_the_rustbelt]

American manufacturing workers:

"Let them eat cake?"

And who needs a middle class anyway?

Time for some creative construction boys!!

(Note: I've been criticising the Big 3 and the UAW for thirty years - they failed to reform the business model - but most lost manufacturing jobs were not with the UAW)

[anne]

The American conservative answer to economic problems always come down to sacrificing the interests of labor, which is why we should be paying attention to how problem similar to our are handled with varying degrees of success from Sweden to France to Japan....

[spencer]

Interestingly, if you look at the industrial production data. Since 1960 industrial production of information technology equipment has averaged something like a 25% percent growth rate while output of all other manufacturing has average growth of around 2.5%.

So it is not a question of manufacturing growth. It is a question of what type of manufacturing growth we experience.

[dryfly]

I hope you'll allow me one last plug for education as a potential means of increasing our future competitiveness. Education is not a guarantee - we've seen that structural adjustments can affect professional workers - but I still prefer that risk to the risk of competing in the global economy of the future without a college degree. And I can safely say, as I struggle to put my third child through college, that I put my money where my mouth is...

Listen D Thoma - I'm putting my money where 'your' mouth is too - I have one studying computer science at a 'large midwestern land grant' & another studying biomedical engineering at RPI - almost breaks the bank. I know education is important - but it is at best only part of the answer. Read my comment to the 'Education' post you linked to...

The trouble is that in an environment where products are commoditizing due to innovation stalling - knowledge is no longer the critical factor it is when new products & processes are first emerging & differentiating due to accelerating innovation.

In low innovation parts of the macro business cycle OTHER factors dominate... labor, capital & material cost advantages. So you can educate yourself relative to your competition all you want but if you and you competition are making basically the same widget with the same capital & material costs... and the knowledge to do that is well disseminated & understood... then the knowledge differential due to better education & training is a marginal advantage at best. Labor rates for such work - educated or not - plunges to that of the least trained adequate producer.

This applies for all of us but is ESPECIALLY keen right now for manufacturing & back office support people where the pay for that 'adequate producer' is something like $1000/year in Shanghai. For software & back office it is about $5000/year in Bangalore.

The 'education will save us' camp ignore this reality completely. You can train & retrain all you want but it will not budge the needle.

They also ignore the reality that we can't all be brain surgeons or economists... so what do we teach the many millions who were doing things like making autoparts or diesel engines or laser printers? Go out and tell them they should be happy making what labor makes in Shanghai because that is the world today?

You have no idea how angry they are going to be when they learn the 'truth'... go 'under cover' someday and talk to 'regular folks'... they are starting to figure it out. I could rip this country apart by the seems once millons learn the lifestyle they have come to expect is currently unfounded. I would not want to be the people in charge then. Heads in street and all those nasty stereotypes come to mind...

This whole discussion reminds me of the saying...

"For every complex problem there is a simple answer and that answer is usually wrong".

No one says education is BAD... it just isn't the answer to this problem. This problem is FAR bigger...

[dryfly]

I've been criticising the Big 3 and the UAW for thirty years - they failed to reform the business model

Amen brother... I've been in the choir listening to your sermons.

[dryfly]

So it is not a question of manufacturing growth. It is a question of what type of manufacturing growth we experience.

That is classic Schumpeter at work - if you compared buggy whips to spark plugs from 1900-1940 you would see the same thing. But we were still making SOMETHING.

The difference is now most of those information technology products are moving offshore too... and the R&D and engineering with it. Believe me - I make stuff for this industry as well as automotive... China is where it is at and if China has competition it isn't coming so much from us as from India, Singapore, etc.

The case you made proves the point we have more of a problem than average people even imagine... and education won't fix it... this is a 'price' issue.

[ken melvin]

"The American steel industry now produces more than in the 1980s, though it has lost two-thirds of its jobs. " I've written here and elsewhere that the real ratio is three-fourths. That's key. That's what wrong with the model. There will never again be enough jobs. The problem, the one Samuelson's in denial about, is wealth distribution. This insistence that the economy is all about production and successful business omits the necessary role of an economic system in income distribution. Whether it's after the revolution , the collapse; or whatever, there will be a new model; one that addresses the changes in production due automation and how the wealth therefrom is distributed.

[Tim Worstall]

Forgive me for asking what might sound like a silly question. But what on earth is an economist doing asking "What will be our competitive advantages in the emerging global economy?"?
Trade and globalization depend upon comparative not competetive advantage, a very different idea.

I’m also puzzled by the wailing over the loss of manufacturing jobs. Please, get over it. Manufacturing is going through the same change that agriculture did a century ago. It’ll end up employing 2-3 % of the labour force just as ag does. Everyone else will be in services.

As an example, in the UK at present manufacturing employment is below 15% of the workforce. The largest exporter is the City of London....financial services.

[anne]

Notice, by the way, just how strong the dollar has been this year. Only the Canadian dollar is as strong:

http://www.msci.com/equity/index2.html

National Index Returns [Domestic Currency]
12/31/04 - 10/18/05

Australia 16.2
Canada 14.2
Denmark 29.4
France 20.0
Germany 16.8
Hong Kong 6.7
Japan 22.4
Netherlands 16.2
Norway 24.2
Sweden 21.6
Switzerland 24.3
UK 11.8

http://www.msci.com/equity/index2.html

National Index Returns [Dollars]
12/31/04 - 10/18/05

Australia 10.6
Canada 15.6
Denmark 13.2
France 5.3
Germany 2.5
Hong Kong 6.9
Japan 8.3
Netherlands 3.7
Norway 14.8
Sweden 1.9
Switzerland 8.4
UK 1.8

[calmo]

ken writes: "The problem, the one Samuelson's in denial about, is wealth distribution."

And that's because those with voices (media, major press) are wealthy.
It is not in their interests to part with their dough. I know that's hard to believe (esp for the spare changers), but it's true.
As further support of this incredible idea, I'll steal their argument. I repeat: it is not in the interests of the wealthy to talk about wealth distribution.
Those who would talk about wealth distribution with the wealthy are beating their tongues against the air, nothing more.
The impact of any arguments advanced by the non-wealthy to the wealthy can be compared favorably to that of the fabled bee hitting the freight train.
All sounds of "wealth distribution" are blocked by a special band pass filter that prohibits the entrance of these sounds into the skulls of the wealthy.

That should do it.

btw dryfly, there are 2 Samuelsons and only 1 of them could be called a mathematician.

[Bob Powell]

My clear view is that our economic ship is sinking. No one is steering the ship. What's perhaps most dangerous is that many don't even think the ship needs to be steered; they think the "market" will take care of it. It will, but the result will be so devastating that it will hardly have been taken care of at all.

A few points: Comparative advantage does not apply ... absolute advantage does and we don't have it because the world is swimming in excess labor supply (and our farm subsidies have increased it). We must look out for the whole, not just the parts, because our economy is failing. This isn't about "trade," it's about the "transfer of the factors of production," an entirely different matter.

Also, at this point in the "long wave" we must stimulate demand, not investment and supply. When Democrats raised taxes on the wealthy in 93, Republicans said the economy would crash. Instead, everyone did better, especially the wealthy. The economy eventually crashed because the Fed raised interest rates, instead of increasing margin requirements to control speculation.

Ending "reverse protectionism" is not "protectionism" and, if our economy isn't worth protecting, what is? There's wide acceptance that protectionism for private capital is OK, but somehow when it comes to protecting social capital, it's a dirty word.

Education won't help because a great many, if not most, technical jobs are vulnerable to offshoring. And Fed policy assures there are always more people that want to work than there are jobs. On how this works and data showing that higher regional growth redistributes jobs but doesn't lower unemployment, see "The State of Colorado Employment" on my site.

On trade, see "The Trade Deficit and the Fallacy of Composition" and the links to other papers toward the bottom of that page on my website. Specifically: "A Systems Thinking Perspective on Manufacturing & Trade Policy" (lists 22 reasons why there's a "job loss recovery"), "Why Offshoring is Economically Unsustainable," and "How the U.S. Subsidizes Offshoring of Jobs."

All this, in my view, is a continuation of the war between capital and labor. Capital is winning big time now; but all will lose in the end.

[Scott Peterson]

The alternative to free trade and globalizing of markets is a closed economy with high tariffs and import barriers to protect domestic production. We already proved with Smoot-Hawley in the 1930's that this choice leads to miserable failure.

[anne]

Another note on the strong dollar. While the dollar is strong against other major currencies, Latin American currencies are as strong or far stronger. Brazil in particular, but Mexico as well, could be headed for what have been repeated currency problems as overly strong currencies finally slash trade balances. Chinese resource demand is supporting Brazil, while oil is cushioning Mexico, so far.

[anne]

http://flagship5.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/04 to 10/18/05

S&P Index is -1.5
Large Cap Growth Index is -1.4
Large Cap Value Index is 0.1

Mid Cap Index is 3.8

Small Cap Index is -0.6
Small Cap Value Index is -1.0

Europe Index is 2.4
Pacific Index is 7.8

Energy is 32.6
Health Care is 9.5
Precious Metals 26.3
REIT Index is 3.4

High Yield Corporate Bond Fund is 1.0
Long Term Corporate Bond Fund is 2.7

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsVIPERByName

Sector Stock Indexes
12/31/04 - 10/18/05

Energy 29.4
Financials -3.6
Health Care 4.1
Info Tech -4.1
Materials -9.7
REITs 3.5
Telecoms -5.8
Utilities 11.3

[howard]

long ago and far away, when i was a mere teenager, pacifist dave dellinger (who was one of the chicago 7), wrote something directed at various new left kinder that went along these lines: "those who want to see wealth more equitably distributed must understand that that doesn't mean everyone else in the world ends up with the american standard of living but rather that the american standard of living falls much closer to that of the rest of the world."

i suppose, on an economics blog, it would be rude to point out that marx noted the tendency of capitalism to race to the bottom more than 100 years ago? (i say this as a committed believer in market economies, btw, but marx, while a sloppy economist, was definitely not an idiot)

[Lord]

The alternative to free trade and globalizing of markets is a closed economy with high tariffs and import barriers to protect domestic production. We already proved with Smoot-Hawley in the 1930's that this choice leads to miserable failure.

I am not sure this is the alternative so much as the consequence, followed by war to get us out of the situation.

[Mark Thoma]

Tim - Feel free to substitute the word comparative for competitive if you wish, no problem. I was simply trying to ask where others see us in the future, say twenty years from now. What will our mix of goods look like? Will manufacturing be a part of that future, or should we accept what may be inevitable and work on the transition to the production of something else? I believe the choices we make now matter. We can build a school, we can build a jail, we can build a road, we can build a damn, we can build a power plant, we can waste the money, we can blow up bombs - there are all sorts of choices for public policy and they matter for our future.

So I was just curious where others see us going. I've expressed the hope that education will be a part of how our future is shaped, but that is certainly not the only approach, perhaps not even out main focus. And that approach is not endorsed as widely as I would have guessed - I'm listening to what all of you say...

[howard]

Mark, just to be fair, i think that education is our only choice, and wherever that leads is wherever that leads.

after all, we did survive stagflation, which seemed endless and unsolvable; we did have the '90s boom, which no one foresaw; there's no reason to give up altogether.

but i think there's little hope in the near term for anything but a continuation of the current trendlines, which don't bode well for the average american household....

[vorpal]

The simple fact is, we have no competitive advantage. And, yes, this may be more important than comparative advantage as this stage of global development.

Why? Comparative advantage works with a limited workforce, but with a population at 6 billion, we have a massive reservoir of unused labor. So in order for manufacturers to choose American labor, we must be absolutely cheaper otherwise they will go to the cheaper abundant labor overseas...as long as it lasts, which could be quite a while.

The fact that Americans require such high pay is a reflection of their inefficient way of life. A Vietnamese can get by on $5,000 a year , but an American "needs" $50,000. So the Vietnamese has a more efficient way of life and gets the job.

To me, that is the ultimate problem. 1) We need absolute advantage. 2) We cannot obtain absolute advantage because we perceive efficiency as only applicable in the workplace, rather than as a way of life.

There you go.

[Movie Guy]

The Future of American Manufacturing

Mark --"So stripping labor down to its barest bones may impose lots of costs on the labor side of the equation with little in the way of higher manufacturing employment to show for it. And in any case, do we want to specialize in low wage manufacturing jobs with wages dictated by world competitive pressures, or perhaps higher wage manufacturing jobs sustained through protectionism? Or might we transition to something better? I don't think we have a clear sense of where our economic ship is headed or even, perhaps, how to steer the ship through policy choices. What will be our competitive advantages in the emerging global economy?"

I agree with your open approach. These are some of the right questions.

I would stick with the focus on competitive advantages. It simplifies the discussion.

This is a good start, one that some of us have asked for on a number of economic blogs for many months.

[dryfly]

So I was just curious where others see us going. I've expressed the hope that education will be a part of how our future is shaped, but that is certainly not the only approach, perhaps not even out main focus. And that approach is not endorsed as widely as I would have guessed - I'm listening to what all of you say...

Eduction will be PART of our future... but if that is all there is for an answer to competitiveness... then we will be bright but very poor.

And I agree - policy matters. Currently our policy is terrible - denial of the seriousness of the issues we face.

[Movie Guy]

Bob Powell,

Well said.

I read your papers. Agree.

[Movie Guy]

Tim Worstall -- "I’m also puzzled by the wailing over the loss of manufacturing jobs. Please, get over it. Manufacturing is going through the same change that agriculture did a century ago. It’ll end up employing 2-3 % of the labour force just as ag does. Everyone else will be in services."

That's not going to work. The U.S. ends up in too big a hole with the trade and current account deficits. U.S. GDP growth rate begins to decline.

US current account deficit $195 billion, choking growth - - Dr. Peter Morici
Sep 16, 2005
http://www.finfacts.com/irelandbusinessnews/publish/article_10003302.shtml

"The ballooning trade deficit is the most significant factor slowing U.S. growth. Over the last year, GDP growth has slowed from 4.5 percent to 3.5 percent. Federal Reserve interest rate increases, by failing to affect mortgage interest rates and other long bond rates, have had little impact. Whereas the current account deficit has taken a lion's bite out of growth."

"Longer-term, U.S. import-competing and export industries spend at least 50 percent more on R&D and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from these trade-competing industries, the trade deficit is reducing U.S. investments in knowledge-based industries and skills, and slashing more than one percentage point off economic growth each year."

[Bob Powell]

Posted above: "The alternative to free trade and globalizing of markets is a closed economy with high tariffs and import barriers to protect domestic production. We already proved with Smoot-Hawley in the 1930's that this choice leads to miserable failure."

The alternative could be and must be "even trade" or "balanced trade," because what's happening now is unsustainable. See Warren E. Buffett, "America's Growing Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to Fix the Problem — And We Need to Do It Now." FORTUNE, 11/10/03 (find with Google).

The concern about a "Smoot-Hawley tariff war" perpetuates the myth that the Smoot-Hawley tariff contributed to the Great Depression. I'm not a fan of Pat Buchanan, but in "The Great Betrayal" (1998) he quotes an economist who points out that:

"... from 1929 to 1933, America's GNP fell from $104 billion to $56 billion, a loss of $48 billion. However, net exports fell by only $700 million, and domestic spending declined by $47.3 billion. In other words, net exports decreased by 1.5 percent of the fall in GNP, as domestic demand fell by the remaining 98.5 percent! It is patently absurd to fuss over that 1.5 percent fall and overlook the other 98.5 percent." p. 249.

The Smoot-Hawley myth is an example of Jay Forrester's observation that in dynamically complex systems we are very adept at discovering a proximate cause of our problems that is obvious, logical, and wrong.

[Movie Guy]

This offers a pretty good summary.

Why the US Trade Deficit is so large and why it matters
By Professor Peter Morici, Robert H. Smith School of Business, University of Maryland
Oct 12, 2005, 13:59
http://www.finfacts.com/irelandbusinessnews/publish/article_10003604.shtml

[knzn]

I think Tim Worstall’s point is more than a semantic one. Much of this discussion seems to rest on the premise that the US needs an absolute advantage in manufacturing – or in some other field – in order to maintain our standard of living. But as a matter of basic economics, as long as our overall productivity continues to rise, our average standard of living can rise, even if we lose all our absolute advantages, because we will always have a comparative advantage in something. So, on average, we may cease to be richer than the rest of the world, but we will always be richer than we are now.

The problem, as some other comments have hinted at, is that raising the average standard of living is not enough. The danger is that the distribution of income becomes wider, so that people in the lower half may actually see declines in living standards even as the average improves. I’m not sure how likely this is, but it is certainly a concern.

The other problem is that, even if deindustrialization doesn’t harm us economically, it sure makes things weird. Our ways of thinking about the economy have been built up on an economy with an industrial core. When and if things like industrial capacity utilization become irrelevant, empirical macroeconomics is going to have to go back to the drawing board.

[vorpal]

Lets think "What if the trade deficit went to zero?" That is, foreign banks stopped buying dollars and all currencies were floated equally, what would that look like? What would be the new configuration?

We import massive amounts of automotive equipment and oil. What could/would we export to pay for it? If we couldn't pay for it, then we would not get it. What would happen then?

Our consumption of internationally tradable product is well beyond our production of such commodities, whether they are manufactured goods or services.

It is not clear to me that the US wouldn't collapse. If our needs exceed our capabilites, then we will collapse. Our capabilites are still high, but are our needs even higher?

[Movie Guy]

Here's a quick look at competitive advantages and type products exported between the U.S. and China.

Source: Dallas Morning News, August 2005
Link: http://www.dallasnews.com/sharedcontent/dws/bus/stories/082105dnbuschinaship.2281c4aa.html
Via: Brad Setser, August 2005

Last year, imports from China reached $197 billion, higher than any other U.S. trading partner except Canada.

TOP 10 U.S. IMPORTS FROM CHINA IN 2004

1. Furniture
2. Toys
3. Footwear
4. Plastic products
5. Computers
6. Tools, screws, latches, etc.
7. Sporting goods
8. Cooking, ironing, heat appliances
9. Kitchenware
10. Electrical and electronic products

[We can soon add automobile parts and components to the top imports list.]

TOP 10 U.S. EXPORTS TO CHINA IN 2004

1. Paper and paper waste
2. Mixed metal scrap
3. Fabrics and raw cotton
4. Newspapers
5. Foam waste and scrap
6. Logs and lumber
7. Wood pulp
8. Plastics
9. Frozen fish
10. Other synthetic resins

SOURCE: PIERS Maritime Research

[Movie Guy]

knzn -- "When and if things like industrial capacity utilization become irrelevant, empirical macroeconomics is going to have to go back to the drawing board."

I would start writing that draft.

[knzn]

It is not right to blame the trade deficit on foreign competition. In order for a trade deficit to exist, it has to be financed. In order for it to be financed, somebody – individuals, businesses, and/or governments – has to make decisions to be net borrowers. Right now it is mostly individuals and governments that are borrowing, and if they decide to stop, and stick to those decisions, then the trade deficit will have to go away. (There might also be a worldwide recession, but eventually we would get out of that recession, and if we continued not to borrow, then we would no longer have a trade deficit.) With interest rates so low, however, it may well be rational for us to borrow so much. The trade deficit is simply the manifestation of how we take advantage of the cheap financing being offered by the rest of the world.

It is misleading to say that the trade deficit is slowing growth. Growth is proceeding at the pace that the Fed is comfortable with. If the trade deficit didn’t exist, the Fed’s policy would slow growth by another mechanism.

[dryfly]

knzn -- "When and if things like industrial capacity utilization become irrelevant, empirical macroeconomics is going to have to go back to the drawing board."

That one is right up there with 'earnings don't matter' - derivred straight from dot.bomb logic.

I don't mind if your capacity isn't utilized but I sure want mine to be... and producing margin to boot.

When Movie Guy gets done reading - I'd like the copy next.

[Mark Sullivan]

MG,

I find your posts interesting, but I've never really understood your fair trade proposal. Obviously, most nations have less strict environmental and labor laws than we do so we can't trade with them. Conversely, western europe wouldn't be able to trade with us if they adopted similar laws, since our labor laws are less strict than those in western europe.

Does fair trade mean no trade?

Let's assume for the sake of argument that China has a sudden epiphany and joins the fair trade regime, adopting our labor and environmental laws whole hog.
Wage differentials will still be enormous.

Why won't factories continue to move to china to take advantage of cheap (unionized) labor there?

[Movie Guy]

Mark,

Your points are well taken.

First question -- "Does fair trade mean no trade?" No, not at all.

Here's part of what I am saying. We're playing on an very unbalanced trading field. We are operating under mulilateral trade policies that, in some instances, insure that we are at significant disadvantage. We agreed to such terms, as a condition of our membership in WTO. In some instances, we achieve better terms in bilateral agreements (even abusive in some cases), but the bilateral agreements are subordinate to the mandates of WTO mulilateral trade accords and policies. So, the main focus goes back to WTO regulatory compliance.

WTO could require minimum environmental and labor standards drafted from an analysis of existing standards in major industrialized nations. Similarly, WTO could put some teeth in its Trade Policy Review mechanism. As such, WTO could play an important role in evaluating trading nations' currency valuations. It's on the list of items to check under a trade policy review. And special reviews are allowed based on global imbalances.

Let's say that WTO enforced minimum environmental standards for all member nations. A better version of the Kyoto Treaty, so to speak. Then the issue would likely be how do developing countries afford such environmental controls. The cheapest way would be to seek FDI corporate partners willing to bear some of the environmental burden for new production. WTO could make this a component of FDI investment by member nations seeking production support from developing nations. WTO could allow for some lead time on other production within such developing nations for their independent exports. In other words, the developing nations wouldn't be held to an immediate higher environmental standard across the board. A phased approch would work better for existing production, but the same slack shouldn't be provided to FDI corporation production. Otherwise, global pollution emissions would grow faster than had such production remained in the developed nations.

Shifting to China, as your example. Ok. FDI investment in China represents the lion's share of global investment. If foreign corporations were having to spend some of the FDI monies on environmental and labor standards, that would increase some elements of cost to moving production to China. Now, let's force the hand on the big issue - currency valuation. If WTO or another international body had the power to regulate or penalize manipulated currency valuations, then China's productions costs would again be saddled with another cost variable. Actually, WTO has the power to penalize China for currency manipulation, but it hasn't made that matter an issue. Nor has the U.S. government. Until Treasury sends a formal notice over to Congress, charging currency manipulation, nothing will happen. And the IMF is thus far useless on this front. Puppies up on the porch while the big dogs play.

Second question - "Why won't factories continue to move to china to take advantage of cheap (unionized) labor there?" Yes, but perhaps not as many.

Your point about wage differentials is correct. We're talking about 1/20th to 1/25th wage differentials in many cases. So, the drawing card is still on the table. But, let's adjust those wages based on correction of currency valuation (whatever that may be) and add the corporate FDI costs for partial support of environmental and labor standards. The result is higher production operating costs. How much higher? I don't know. There are other unfair advantages that come into play in China. Stormy addressed some of these in previous posts, including article references. And Peter Morici discussed such imbalances in his articles and papers. Added together, it's quite a list of incentives.

The point is simple. We really aren't talking about U.S. labor protection until we clear some of the 'reverse protectionism' off of the table. (Credit to Bob Powell for that term; great website and analysis, too.) Yet, we will see another major slug of production flow rapidly to China and elsewhere without such considerations being put in place.

Yes, factories from around the world will continue to relocate to China. But it will no longer take on the appearance of a burst dam, with all corporations flowing down to China for cheap labor and production (my simple Economic Hydrology Theory). The rate of production shift will slow if not reverse in some cases. At a minimum, some of the global FDI investment would flow into other developing countries at a larger rate, which would be a positive development. The overall cost advantage differential less transoceanic transportation costs for corporations producing in China wouldn't be nearly as great. The plus costs of currency revaluation, environmental costs, and labor standards would make the playing field much more level.

Is this the perfect solution for resolving American job losses and wage pressures? No, but it helps. It is the necessary starting point to avoid collapsing the majority of the remainder of American production which can moved anywhere else in the world. The white and blue collar production which can't be relocated is still affected indirectly in many cases. Wage collapses and pressures in one sector can impact other sectors of the economy. And so on.

The present trade and currency arrangements are unsustainable. But, we designed, build, and selected the flight plan for this economic plane that we're flying. A course correction is in order. Or we run the risk of running out of fuel, gliding down to a soft landing or crashing into the mountain.

[anon/portly]

"TOP 10 U.S. IMPORTS FROM CHINA IN 2004: 1. Furniture
2. Toys 3. Footwear [etc.]"

I assume the point of this comment is that we import finished goods and export raw materials. But I thought the reality is that we're essentially just importing the assembly-line labor (or hellish drudgery) embodied in these products - these products are still designed in the US....

It always seems to me to be worthwhile to occasionally reflect on the fact that the export sector is a pretty small fraction of the economy. But maybe this the opium of the insufficiently alarmed.

[Movie Guy]

Right. At least among the principal exports from the U.S. and China.

Your second point is one which is in transition. More of the R&D is inbound to China. In other words, lean manufacturing is shifting into full force. OneStopShop.

[Mark Sullivan]

mg, read your post. Thanks. The day job beckons though. I'll comment another day.

[vorpal]

Fair Trade is Equal Trade.
Imports = Exports

This is also the only sustainable configuration.

[save_the_rustbelt]

"The alternative to free trade and globalizing of markets is a closed economy with high tariffs and import barriers to protect domestic production. We already proved with Smoot-Hawley in the 1930's that this choice leads to miserable failure."

So there is nothing in the middle? No opportunity to manage the change and cushion the blows?

[save_the_rustbelt]

What the politicians have told us for the past fifteen years.

"trade brings prosperity"

Real story...

"trade brings prosperity to some and devastation to others"

I would like to find one politician honest enought to tell the truth.

[vorpal]

Yes, we could manage trade. It's just that the majority of economists are too addicted to dogma to see the possibilities.

Grab a handful of theoretical physicists, and they could have a reasonable solution/proposal in one work week.

[Lord]

as long as our overall productivity continues to rise, our average standard of living can rise

Can, but doesn't have to. Productivity is only measured among the employed.

Manufacturing will become largely automated, producing large volumes of output but employing few. The location will be determined by whether it is best placed near resources or markets and what transportation is involved. The export statistics show we are already focusing more on resource production.

The reduction of labor as an input to manufacturing reduces the incentive to move to China, but there still remains the growth of the market there to attract some businesses.

[Movie Guy]

Lord -- "The reduction of labor as an input to manufacturing reduces the incentive to move to China, but there still remains the growth of the market there to attract some businesses."

Agree. Let me add, if I may, that the incentives to shift production to China may have as much to do with future sales in China as supporting U.S. demand in some cases. It's a 'foot in the door' process that may be driven by certain quiet conditions from China.

"The [manufacturing] location will be determined by whether it is best placed near resources or markets and what transportation is involved."

I suggest that many decisions as applied to American domestic manufacturing now have more to do with with transportation cost and timely movement efficiencies than other considerations. This, of course, flies in the face of lean manufacturing to some extent, but it's my observation. Overseas production flowing to the U.S. marketplace relies on cumulative cost considerations and, generally, transportation no longer appears to be deal breaker.

says...

Houston, we have a problem with the text posting features.

[Mark Thoma]

Hmmm. I'll check it out.

[Update: I think it's fixed, thanks for letting me know.]

[Movie Guy]

That should read "flys" in the face...

[cm]

Lord: "The reduction of labor as an input to manufacturing reduces the incentive to move to China ..."

Sure, but don't forget about environmental regulation, or the lack thereof. Unless the Chinese soon wake up to what is going on and institute stricter rules, they will still have an "advantage" there ... but maybe you would like to breathe smoke instead of air in the US, in other words be "competitive".

[Movie Guy]

Here is what U.S. citizens are competing against, including U.S. corporate and government decisions related to WTO and U.S. trade policy:

Economic Hydrology Theory

The Future of Domestic Production versus Offshoring and Outsourcing to Foreign Locations

Once the WTO and national governments improved the opportunities for corporations to invest in the least expensive global production locations, the stage was set. Coupled with continually improving transportation and communications efficiencies, the successes of offshoring and outsourcing corporations which led the way were met by competitive desires of other corporations to also seek new lowest cost production sources. At present, over 450 of 500 top U.S. corporations have operations in China, as an example.

Unimpeded and with regard to available skill levels and technologies, corporations will seek out the lowest cost blue collar and white collar production sources on the planet and will create new production empires in those locations as fit their market needs. Currency manipulations and other foreign and domestic government incentives that improve foreign-based blue collar and white collar production opportunities increase the rate of flow or transference to such locations. The larger concentration of global production in lowest cost production environments results in a convergence of foreign direct investment (FDI) monies targeted toward achieving greater scales of production at these locations. This effort, in turn, minimizes the need for investment and development elsewhere by such corporations which further eliminates the logistical and technical support chains that previously existed for duplicate operations at facility locations in other nations. The results are reduced overall investment costs, reduced production costs, labor substitution, and reduction of related supporting logistical and technical support services and employment in other nations.

[Stormy]

Excellent discussion. Sorry I missed this (traveling). I love movieguy's top ten import and export list. It says it all.

As an aside, I must add that ultimately this kind of trade strategy will fail globally. It is simply too deflationary and too myopic. The American consumer cannot keep buying indefinitely. And the Chinese consumer is miles away from picking up the slack. At some point we may see a glut of goods with no paying customers—and I mean real paying customers. Credit is reaching its limit. Higher energy costs are going to put severe strains on the wallets of the West.

Ironically, we are in the process of dismantling the primary engine of growth: Real R&D. China hopes to create Western synergy by tossing companies into technology parks and feeding them lots of engineers, giving companies a nice tax ride if they devote 3% of their profits to R&D. Sorry, but that is not how it works. For more on this, see Hu’s study of Chinese technology parks at Gary Lammert’s blog. I spell my own position more fully there.

http://neweconomist.blogs.com/new_economist/2005/10/why_so_many_tec.html#comment-10627076

[Movie Guy]

Stormy,

Stormy,

The first part of the discussion began under the following post:

Mark Thoma - Paul Krugman: The Big Squeeze
http://economistsview.typepad.com/economistsview/2005/10/paul_krugman_th.html#comments

57 comment posts...

[Egan]

Hi. In the future I'm going to keep here links to their sites. But I do not worry about the sites where my link is removed. So if you do not want to see a mountain of links, simply delete this message. After 2 weeks, I will come back and check.