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Wednesday, October 19, 2005

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?

    Posted by on Wednesday, October 19, 2005 at 12:39 AM in Economics, International Trade, Unemployment | Permalink  TrackBack (0)  Comments (56)

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