Global Competition and Changes in the Structure of the U.S. Economy

Daniel Altman talks about the decline in manufacturing and other changes in the U.S. economy driven by technological change and globalization:

Exporting Expertise, If Not Much Else By Daniel Altman, Economic View, NY Times: Want to understand what's really happening in the American economy? ...[T]he sea of numbers that pour out of ... statistical agencies... describe some disturbing changes. You can look at the economy in two ways: by production, or by people. The two aren't always the same... This is clear when you look carefully at the biggest long-term trend in the economy: the decline of manufacturing.

Both of manufacturing's two big categories, durable goods (like cars and cable TV boxes) and nondurable goods (like pastrami and pantyhose), have plunged, but the exact trends have differed. From 1965 to 2005, the percentage of payroll employees devoted to durable goods dropped to 8 percent, from 19 percent; over the same period, the share of the economy they represent shrank by just four percentage points. In other words, workers in these industries became a lot more productive as their numbers dwindled.

 

The picture was different for nondurable goods. In that category, the employees' share of the nation's labor force also declined steeply, by nine percentage points, to just 5 percent of the total. But nondurables' share of the economy dropped by even more, by 10 percentage points. ... Most of the losses in nondurable production had already occurred by the early 1990's. That's not too surprising, when you think about it: the nation's agriculture had become about as efficient as it could be, and clothing imports from developing countries like China, Bangladesh and Mauritius were in full swing.

The story for durable goods is more troubling. Half of the decline in production has been a legacy of the last recession: sales went down, and they have stayed down. The situation is a first, and it has been reflected in the labor market, too. ...[A]fter the 2001 recession, [employment] sank below nine million and hasn't picked up. ... The explanation may lie ... in the world's emerging economies. They saturated the American market with nondurables in the 1980's and early 90's, using the profits to move onto higher-value, durable items.

The change in the trend for durable goods was not the only worrisome legacy of the last recession. In the information sector, which had been among the most steadily growing areas of the labor market, growth has completely stalled ... The relatively small industries of broadcasting and Internet publishing have started upward ... But in print publishing, telecommunications and Internet services, the trend has been absolutely flat, despite the economy's return to regular growth.

Of course, there have been winners, too. The share of the economy devoted to medical care services has grown by eight percentage points in the past four decades, with commensurate changes in employment. But this isn't necessarily great news for the economy. ...

The leisure and recreational industries have also expanded, with the share of employment up by four percentage points. Here, too, exporting is difficult: after all, gambling, artistic performances and restaurant dinners usually take place on site. More promising, management and professional services like law and finance resumed their strong growth after taking a hit in the recession. These areas are the ripest for exporting. Need some business advice? No problem. Want some derivatives structured? Great. ...

We are becoming a nation of advisers, fixers, entertainers and high-tech engineers, with a lucrative sideline in treating our own illnesses. ... The change is being forced on us by global competition and our own aptitudes. The first step in dealing with it is to realize what's happening. The second, most likely, is to prepare for more of the same.

Comments

[save_the_rustbelt]

Record bonuses on Wall Street this year.

Record personal bankruptcies this year.

As middle class working people slide further toward poverty there is going to be a backlash, when and where is the question.

[val]

Save the rust belt,

Life is NOT a zero sum game! “Record bonuses on Wall Street this year.
Record personal bankruptcies this year.” These are not mutually exclusive and collectively exhaustive states. Your reasoning is erroneous. You choose to see one persons gain as another loss.

While Mark is an economist and should know better, almost all of his posts fall in the same line of zero sum thinking. He posts a steady stream of articles that point to decline.

There is only one problem, most of what Mark uses other writers to suggest is so dire is simply change. For example, anyone actually familiar with economics would point out that we could tell the same story about farming in America a century ago. A century ago there were people just like Mark and those he loves to quote, who stood tall with their credentials lamenting the end of life. An economist worth her salt would also understand what the service economy is doing. That is, they would understand that the physical transformation of goods today is a fraction of the value add in the production of goods and services. The fact that the weight of a product, be it a toaster, an oven, a TV, or a stereo has fallen dramatically is in no small part due to the injection of information into production. In addition, the planning and scheduling of production today is largely governed by “intelligence” in a way that did not exist even 25 years ago. Finally, supply chain management, a SERVICE, has increased the effectiveness and efficiency of production.

If either Save the rust belt or Mark want to reverse the decline in US manufacturing, please open a plant and produce what ever you want.

[Mark Thoma]

So how does my support of free trade, investment in education, etc., fit into this?

An economist worth her salt would also recognize that there are winners and losers in the transition. If you had actually been reading what I've written you'd realize that a lot of it involves the tension between responding flexibly to transitions and minimizing the costs to those who are affected by the necessary changes. I've promoted, and been hammered repeatedly for doing so, education, retraining, and so on to speed up the change while still not causing undue hardship to those who lose their jobs simply because of structural change, not because any mistakes they have made. That's what the posts about protecting people not jobs were about - one way to take a step in that direction, but there have been lots on this topic.

There are people that are affected by change and pointing out how the economy is changing and who is affected, and changes in manufacturing are one aspect of that, is not the same as standing in the way of change. I've expressed worries about some areas where I see risks building, I'd be remiss not to, but there has been no talk of economic collapse or disaster from me.

Nice try though.

[Yartrebo]

"The fact that the weight of a product, be it a toaster, an oven, a TV, or a stereo has fallen dramatically is in no small part due to the injection of information into production. In addition, the planning and scheduling of production today is largely governed by “intelligence” in a way that did not exist even 25 years ago. Finally, supply chain management, a SERVICE, has increased the effectiveness and efficiency of production."

Minituarization is the product of science (transistor, electricity, photolithography, plastics, etc) and engineering/applied science. I would consider those to fall under the category of science, which is a form of investment and is neither manufacturing (since nothing is built and the results remain with us forever, baring any wholesale book burning) nor service (since it is not consumable). The portion of science has increased since the industrial revolution, but it's still a tiny fraction of GDP at well under 10%.

Lastly, supply chain management (which I take to mean just in time delivery) is nothing new, but faster product lifecycles (which I believe actually hurt our standard of living through faster depreciation and obsolescense) have pretty much forced manufacturers to adopt it, even though it does increase transport costs substantially. Corporations making goods with a steady demand for a good that never changes generally don't use just in time delivery. Coal power plants still have massive heaps of coal outside the plant. Oil refineries still stock something like a month's worth of oil in the storage tanks. Steel mills have something like a year's worth of inventory if their SEC statements are to be trusted. Even if it were a genuine breakthrough, I would consider it science, not service. The service side of it (implementing it) would be done by the same purchasing and sales agents that handled traditional contracting. Only the extra and more labor intensive (air and road vs. rail and sea) transport demand would fall under new services.

Regardless, any investment/spending in the field is dwarfed by consumer services (including the good chunk of business services that's really a form of non-cash compensation to valued employees in the form of perks). The main growth areas in our economy have been retail, fast food, telemarketing, and other low paying, consumer oriented services. None of these jobs have ever miniturized a cell phone or optimized any supply chains.

[camille roy]

"Life is NOT a zero sum game! “Record bonuses on Wall Street this year.
Record personal bankruptcies this year.” These are not mutually exclusive and collectively exhaustive states. Your reasoning is erroneous. You choose to see one persons gain as another loss."

This is specious, as it substitutes right wing froth (faith-based 'trickle down') for facts.

Incomes for most Americans are declining. Debts are rising. Health coverage is declining. Only the richy-rich are doing well. Job security has plunged.

What is your excuse for not being in touch with reality?
Come down off your Republican cloud, try leaving your gated community. You would probably be shocked.

[cm]

Yartrebo: Faster product lifecycles also hurt our quality of life by compressing schedules, more incremental product changes, quality issues and "challenges" in completing development enough before the next product revision is pushed out the door, leading to inefficiency and hence requiring more labor per unit of tangible output. (Which does not seem to translate into proportionally more staffing, but rather longer hours.)

[val]

Mark, I do not dispute that you may have offered many prescriptions to the forces you perceive as ailing the US economy. My point is that you often frame problems as a zero sum game. A suggestion, just scan your headlines and tell me that you give equal attention to what's working and what is perceived not to be working. My read as one who frequents your blog is that it is more about not workings. Given that the economy is dynamic equal weight must be given to drivers or we only are looking at just supply or demand (both are necessary for even simple economic thought). It would be more constructive to also present the opportunities associated with the change from the perceived equilibrium.

Yartrebo, the current state of supply chain management and innovation research that is coming out of MIT, Harvard or Stanford to name a few (not to mention all the major consulting firms) is far broader than your characterization. The “old” distinction between science and technology that you offer fell from favor in the philosophy of science and innovation twenty years ago. I would also add that engineering is not considered a science. Just a couple of questions. Who designs most of Apple's products? Who is SRI? How many service firms are instrumental in the systems integration of major product systems? Hint it is not the companies that make the products but service companies.

Of course supply chain management is not new. The more material question is how much more effective and efficient has the economy become as a result of the recent advances. The current view of supply chain management in business is significantly different than it was 10 or 20 years ago (it owes much of it current view to WWII). Supply chain management is now viewed more broadly as a systems problem that is cradle to grave than a individual company problem. Delivery is now just a small element of the total problem.

Cm, your point is true but conceptually and practically trivial. The magnitude of effectiveness and efficiency gains delivered by these processes within the world economy dwarfs the local inefficiencies that you correctly raise.

camille roy, I would ask you to start thinking and stop preaching. You have no idea what my political affiliation are nor have I offered them in the discussion.

[cm]

val: Hey, as long as you are not the subject of those inefficiencies, everything is fine, is it not.

And regarding zero sum, there are different levels/aspects of reasoning. A system (game) with any limited resource used at capacity is zero-sum in that resource. What one entity takes, another entity loses. The effect is weaker, but still in force, when using/creating more unused resource becomes more expensive in terms of other resources (the resource is quasi-limited). Finally, there is a concept of zero-sum in the time domain -- even if resource limits are not hit here and now, consuming the resource now will take from the future. That holds for resources which are consumed (e.g. burning oil), or used in such ways that they become unusable or harder to use (converting metal to scrap metal, or making valuable commodities into composite products that are dumped and not recycled).

The usual arguments denying zero-sum, while often having at least abstract merit, are also often based on a simplified belief that economic activities can scale to any size, which is not the case. If you step back for a while and consider how much in resources even the most mundane activities like heating, cooling, air-supplying, cleaning, office buildings, running business processes, transporting stuff and people between places, etc. take, what load they put on the environment, and what opportunity cost they exact in terms of useful things not undertaken, it should be pretty obvious.

[cm]

And the zero-sum is not only in physical resources, but also human attention span, or willingness to support/finance/engage in certain activities, on specific terms. E.g. it is not that our healthcare resources are maxed out, but if you don't pay up, you will stand outside the door.

[Mark Thoma]

val - Your really like that "zero-sum" buzzword.

Too bad it has no relevance. I never frame these types of problems as a zero sum game. The most basic exchnge is not zero sum - if I hate pickles but love M&Ms, but you love pickles and hate M&Ms, then we can trade - I give up pickles and get M&Ms. Both of us get something we like better than what we had, and we are both better off. All voluntary exchange has this property.

When I say I support free trade (I had a misspelling, but guess I support free "tirade" too), I didn't think I had to explictly spell out that means I don't beleive the zero-sum thing (shall we go back and talk about how thought has changed on this since Mercantilist times when my gain of specie was your loss?) That's pretty basic. I'm talking about the winners and losers along the trnsition path, not the equilibrium outcomes.

Again, nice try, but buzz-words are not arguments. You you are trying to paint me with a brush and color that do not fit...

Let me quote myself from a November post:Here are the rules I try and play by. I advocate government intervention only when I can justify it through economics, otherwise I believe in the market's ability to do what we expect it to do, deliver goods as cheap as possible in the correct quantities. My default is a laissez faire approach. I don't advocate government sponsored health care and social insurance because I like bloated government, I do it because I believe these are instances where the private market cannot, without regulation or intervention, provide the proper quantities of goods and services at the lowest possible price. I don't think the government should be more active in preventing monopoly power because I dislike big business, I say that because I want a competitive marketplace. I don't want to hug trees of infinite utility, I want market based solutions to environmental problems whenever possible. Simple market principles can do wonders for recycling and conservation programs. I want efficient taxes that minimize distortions. I believe in equal marginal sacrifice to fund government, but that is a normative choice, not something derived from economics. Government should not be any larger than necessary. I don't advocate redistribution of income for the sake of "equity," but I do believe the government should ensure that everyone has an equal chance in life, not an equal outcome but an equal start, and that may involve redistributive policies.

It's quite possible to be a liberal and not abandon economics and not abandon capitalism in particular. We can argue over whether there truly is market failure in this instance or that, I will admit to seeing market failure more often than those on the right. We can debate contestable markets and whether it applies to a particular market, we can debate price cap versus rate of return regulation (no contest, price caps win, but what type of price cap is best?) and how best to make markets competitive (how do you get public utility regulators to understand you have to allow profit to attract entry?), we can debate the economics until the Gateway cows come home. But don't accuse me of being a socialist just because I believe the government is, in its heart of hearts, made up of good people who want to help, because I believe there are times when government is the solution rather than the problem. I don't want to "sound like -- God forbid! -- socialists," the economics of capitalism is the proper battleground for me.One more, from September:Robert B. Reich, former secretary of labor, has ideas on how we might reverse the growing economic insecurity felt by workers. His theme is that we are returning to mistakes we made in the past, an era of protectionism in foreign trade, and increasing impediments to free trade and the efficient use of public and private resources internally. Each of these impediments, when put into place, is well-intentioned, currently the justification is saving jobs. But in the end, collectively, such impediments to the free functioning of markets are self-defeating. We are better off with free, open, and fair trade internally and externally, but before reforms allowing free trade can take place, the typical member of the society must feel sufficiently secure...

This is the kind of progressive change I would like to see Democrats embrace. Democrats should not fear free markets, we should embrace them when they work, and we won’t stop markets from doing their best to work in any case. But we can do a much better job of insulating workers affected by the constant change that comes with free markets. Change that diverts resources to their most efficent use helps us all in the long-run, but workers are hurt through no fault of their own in the process. We can, and in my opinion we should, do much better at providing those workers and their families with economic security.I'll just highlight this "Change that diverts resources to their most efficent use helps us all in the long-run." Not exactly zero-sum.

Doing this takes every bit (and more) of the free time I have. I can spend it cheerleading, or trying to find and address problems. I will let others spend their time cheering or booing as they see fit, and you should feel free to cheer all you like in comments, I will continue trying to diagnose and help find solutions to the problems that prevent the economy from reaching its full potential. I think that's defensible, but you can read into it whatever makes your utility highest.

[save_the_rustbelt]

"Life is NOT a zero sum game! “Record bonuses on Wall Street this year.
Record personal bankruptcies this year.” These are not mutually exclusive and collectively exhaustive states. Your reasoning is erroneous. You choose to see one persons gain as another loss."

Don't confuse my bullitt points with simple-mindedness.

There is a connection. The federal government is not a neutral arbiter, but a bunch of whores to Wall Street and corporate wealth.

As a Repub I hate to say this, but the Rove/Cheney administration has been bought out big time.

Other news:

Good piece in the Columbus Dispatch about Ohio's dying economy.

Tomorrow is "Black Monday" at Ford. Not to worry, they can all work at Wal-Mart.

[save_the_rustbelt]

"education, retraining, and so on to speed up the change while still not causing undue hardship to those who lose their jobs simply because of structural change, not because any mistakes they have made."

Prof:

Training for what? This is the great fallacy, that people should retrain for high value service jobs? What jobs?

I'm reminded of the 70s (some of you may be too young) when everyone was supposed to train to be key punch operators, according to the government and economists. The wave of the future! Any of you run punch cards through a mainframe lately?

Chhange will come. At what pace and how we manage it is up to us, or at least to the people we empower. So far the grade is F-.

[val]

Mark,

As you know the idea of zero sum games is not mine. Now for the assertion that it has no relevance in the domain you presented is simply incorrect. The author you chose to present laid the situation out in a win-lose fashion (zero sum game). The problem with the author's assertion is that he fails to come to terms with the multilevel nature of the phenomena he is addressing. I will agree that the phenomena he sought to explain has much more at work than a simple zero sum game. A much larger question of system dynamics is at play where resources at various levels are moving. With that said, you chose, not I the author, and he chose how to frame the problem.

CM I agree with you that many systems at certain times have zero sum characteristics that dominate their dynamics. Your belief while conceptually attractive non-zero sum situations are rare is mistaken. In any standard game theory treatment one often speaks of win-win, win-lose, lose-win, and lose-lose outcomes. The issue that must be properly framed is what is the nature of the game in question. Focusing simply on the next move may permit the uninitiated to conclude that we have a win-lose situation. However, if we let the game proceed we find that it cannot be defined by the first move.

Save the rust belt, if you want to make all thought political that is your choice, not mine. The author Mark presented didn’t fall victim to political name calling or finger pointing. I would ask you to extract yourself from the practice if you want to be productive in your reasoning. The dynamic at work is much larger. I will offer that from a complex systems perspective the US and more specifically, US manufacturing is inefficient in organizing resources. The competitors (found in Germany, Japan, China, Korea etc.) have all done a better job coordinating their design, development and production processes than US-based firms.

[Mark Thoma]

STR:

Here's what the BLS says on data-entry jobs, including how retraining might help. It's not sugar-coated:

Employment

Data entry and information processing workers held about 525,000 jobs in 2004 and were employed in every sector of the economy; 330,000 were data entry keyers and 194,000 were word processors. Some workers telecommute, working from their homes on personal computers linked by telephone lines to those in the main office. This arrangement enables them to key in material at home while still being able to produce printed copy in their offices.

About 1 out of 5 data entry and information processing workers held jobs in firms providing administrative and support services, including temporary help and word processing agencies, and another 1 in 5 worked for State or local government.

Job Outlook

Overall employment of data entry and information processing workers is projected to decline through 2014. Nevertheless, the need to replace those who transfer to other occupations or leave this large occupation for other reasons will produce numerous job openings each year. Job prospects will be most favorable for those with the best technical skills—in particular, expertise in appropriate computer software applications. Data entry and information processing workers must be willing to upgrade their skills continuously in order to remain marketable.

Although data entry and information processing workers are affected by productivity gains stemming from organizational restructuring and the implementation of new technologies, projected growth differs among these workers. Employment of word processors and typists is expected to decline because of the proliferation of personal computers, which allows other workers to perform duties formerly assigned to word processors and typists. Most professionals and managers, for example, now use desktop personal computers to do their own word processing. However, because technologies affecting data entry keyers tend to be costlier to implement, employment of these workers will decline less than word processors and typists.

Employment growth of data entry keyers will be dampened by productivity gains as various data-capturing technologies, such as barcode scanners, voice recognition technologies, and sophisticated character recognition readers, become more prevalent. These technologies can be applied to a variety of business transactions, such as inventory tracking, invoicing, and placing orders. Moreover, as telecommunications technology improves, many organizations will increasingly take advantage of computer networks that allow data to be transmitted electronically. These networks will permit more data to be entered automatically into computers, reducing the demand for data entry keyers.

In addition to being affected by technology, employment of data entry and information processing workers will be adversely affected by businesses that are increasingly contracting out their work. Many organizations have reduced or even eliminated permanent in-house staff—for example, in favor of temporary employment and staffing services firms. Some large data entry and information processing firms increasingly employ workers in nations with relatively lower wages. As international trade barriers continue to fall and telecommunications technology improves, this transfer of jobs will mean reduced demand for data entry keyers in the United States.

Earnings

Median annual earnings of word processors and typists in May 2004 were $28,030. The middle 50 percent earned between $22,850 and $34,900. The lowest 10 percent earned less than $18,960, while the highest 10 percent earned more than $43,190. The salaries of these workers vary by industry and by region. In May 2004, median annual earnings in the industries employing the largest numbers of word processors and typists were as follows:

Legal services $36,890
Local government 29,190
Elementary and secondary schools 27,630
State government 27,210
Employment services 25,450

Median annual earnings of data entry keyers in May 2004 were $23,250. The middle 50 percent earned between $19,630 and $28,150. The lowest 10 percent earned less than $16,480, and the highest 10 percent earned more than $34,410. The following are median annual earnings for May 2004 in the industries employing the largest numbers of data entry keyers:

Insurance carriers $23,980
Accounting, tax preparation,
bookkeeping, and payroll services 23,120
Depository credit intermediation 21,950
Employment services 21,550
Data processing, hosting,
and related services 20,750

[save_the_rustbelt]

Prof:

You humble me with your thoroughness. I understand these are not necessarily "career" jobs, but retraining "rustbelt-ers" won;t do much good 'cause these jobs don't land here either.

While you were doing homework I was busy watching my neighbor kid thump the Broncos.

Go Steelers!!

......

Sorry for the interuption - my wife got a call from one of her credit card companies, She has super outstanding credit and they are trying to give her more.

I could easily guess by the accent, but I asked anyway.

It was Citibank calling from India (my wife is extremely irritated that her information is being flashed around the world, to the point she uses my credit card for any on-line transactions).

[cm]

val: I'm baffled how you would read into my statement that I believe non-zero-sum situations are rare.

I don't want to get too hung up on this zero-sum thing either, after all you brought this allegation into the discussion.

Nevertheless, there are several bottlenecks and choke points in the global economy as it is set up. For example, misguided (and to some extent deliberate) fiscal & social policies allow the means of exchange to be siphoned off into the merry-go-round of financial instruments trading, managing thereof, and rent collection, so that only a rather small part is used for actual goods & service commerce. For example, from the cited bonuses one or the other car or big-screen home theather system will be bought, but the largest part will be "invested". Even a good part of the luxury expenditure will ultimately be recycled into "investments". That will create of busywork type of jobs, but not enhance aggregate welfare by much, nor enable much useful economic activity outside the luxury sector.

That doesn't mean it's a zero-sum situation, but if you were to get a consistently smaller share (and most likely smaller in absolute inflation-adjusted terms) of a gradually increasing pie, how do you call that?

[save_the_rustbelt]

Here's an interesting dilemma from Ohio:

1) Young people cannot get manufacturing experience because there are no entry level jobs,

2) Those young people do other things or just leave the state,

3) Ohio is facing a huge wave of manufacturng retirements in the next ten years,

4) there will no young, experienced workers to replace them (see #1) and the Ohio Manufactuers Association is whining about this.

How do we fix this cycle?

We can train the young people and then ask them to work at McDonald's for ten years until a job opens up.

More likely the manufactuers willmove out-of-state or overseas.

This is an amazing cluster mess.

[Robert]

Whatever happened to apprenticeships? Conceptually they make a great of sense and help align interests.

[cm]

Robert: The problem with apprenticeships is they cost money (infrastructure & staff to train the apprentices), and we know how it's with money -- why doesn't somebody else pay? In some parts of the industry, the game is to let people get experience elsewhere, and then poach them. This works as long the elsewhere can survive this.

Perhaps there is a connection to mergers & acquisitions. Don't do the R&D and build the market yourself, let somebody else take the risk and make the effort, then buy them out and milk it.

[save_the_rustbelt]

"Whatever happened to apprenticeships? Conceptually they make a great of sense and help align interests."

This has been discussed but with job cuts it is hard to justify apprentices. So we will wait until the boomers retire and then moan and groan because there are not trained replacements. This is what highly paid CEOs do for a living, moan and groan.

[korent]

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