Understanding American Manufacturing

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I have reposted these posts on the Technology, Engineering sub-board because the thread I started under this title in the Non-Scientific Friendly Chat room got totally derailed by irrelevancies to the intended topic. So let's start again and please keep on topic.


Tyler Cowen: Why America Will Boom Again

It’s not just that Silicon Valley and the Pentagon and our universities give the United States a big edge with smart machines. The subtler point is this: The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America.

This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States.

You’ll hear the word “insourcing” more, too, to join the far more familiar “outsourcing.” For instance, in one manufacturing survey from November 2011, almost one fifth of North American manufacturers claimed to have brought production back from a “low-cost” country to North America. The corresponding number from early 2010 was one tenth of those companies, partly because of rising labor costs in developing nations, and partly because labor costs don’t always matter so much anymore....


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thegwpf.org/international-news/5370-tyler-cowen-why-america-will-boom-again.html

[marchesarosa]

Understanding American Manufacturing
rogerpielkejr.blogspot.com/2012/01/understanding-american-manufacturing.html#comment-form

Writing in the current issue of The Atlantic, Adam Davidson has an absolutely brilliant article on the state of American manufacturing. It is a lengthy article that you should read in full. The article clearly explains why it is that manufacturing jobs are going away, even as the manufacturing sector strengthens. It also explores the challenges facing so-called unskilled workers in a big, rich 21st century economy. The article does this by looking at real people in a real factory.

Here is an excerpt from the piece:

Is there a crisis in manufacturing in America? Looking just at the dollar value of manufacturing output, the answer seems to be an emphatic no. Domestic manufacturers make and sell more goods than ever before. Their success has been grounded in incredible increases in productivity, which is a positive way of saying that factories produce more with fewer workers.

Productivity, in and of itself, is a remarkably good thing. Only through productivity growth can the average quality of human life improve. Because of higher agricultural productivity, we don’t all have to work in the fields to make enough food to eat. Because of higher industrial productivity, few of us need to work in factories to make the products we use. In theory, productivity growth should help nearly everyone in a society. When one person can grow as much food or make as many car parts as 100 used to, prices should fall, which gives everyone in that society more purchasing power; we all become a little richer. In the economic models, the benefits of productivity growth should not go just to the rich owners of capital. As workers become more productive, they should be able to demand higher salaries.

Throughout much of the 20th century, simultaneous technological improvements in both agriculture and industry happened to create conditions that were favorable for people with less skill. The development of mass production allowed low-skilled farmers to move to the city, get a job in a factory, and produce remarkably high output. Typically, these workers made more money than they ever had on the farm, and eventually, some of their children were able to get enough education to find less-dreary work. In that period of dramatic change, it was the highly skilled craftsperson who was more likely to suffer a permanent loss of wealth. Economists speak of the middle part of the 20th century as the “Great Compression,” the time when the income of the unskilled came closest to the income of the skilled.

The double shock we’re experiencing now—globalization and computer-aided industrial productivity—happens to have the opposite impact: income inequality is growing, as the rewards for being skilled grow and the opportunities for unskilled Americans diminish.
Looking for significant job growth in a sector that is in the midst of experiencing a revolution in productivity gains is just bad math.

Edward Alden, writing at the new CFR blog, Renewing America, points to business services where future job growth has significant prospects:

[E]ven as the manufacturing sector will continue to grow, the United States will need to look to other industries for robust, higher-wage job growth. My bet is on the business services sector, in fields such as engineering services, movie and software production, and telecommunications where demand for U.S. services is growing rapidly, especially in the emerging markets. Brad Jensen of Georgetown University and the Peterson Institute has laid out the case in his excellent new book. These sectors already employ twice as many people at higher average wages than in manufacturing, and job growth has been strong over the past decade. The United States runs a steadily rising trade surplus in services, compared with a deep, chronic deficit in manufacturing trade. These are sectors in which the United States, along with Europe, has a strong comparative advantage and the potential to sell much more to the world.

No one sector is going to dig the United States out of the jobs hole we currently find ourselves. But manufacturing is a particularly poor candidate.

With an estimated 40 million unskilled workers (according to Davidson in The Atlantic) the US has a big challenge ahead.

Posted by Roger Pielke, Jr. at 1/24/2012 09:47:00 AM

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This article is followed by an interesting discussion which applies to the UK as well as to the US.

Looking on the bright side, as liberaljoe on The Madrigal Cyber Lounge points out, the West may be ailing but is still "rich" in the highly developed infrastructure that will permit recovery. Being the first into the Industrial Revolution still endows us with on-going, long-term benefits.

[marchesarosa]

From Roger Pielke Jr's Blog
rogerpielkejr.blogspot.co.uk/2012/04/innovation-not-simply-manufacturing.html





Yesterday's New York Times www.nytimes.com/2012/04/04/business/economy/the-promise-of-todays-factory-jobs.html?_r=1 had an absolutely brilliant article by Eduardo Porter on manufacturing, the economy and innovation. The figure above accompanies the article, which deserves to be read in full, but here is an excerpt:

Things have not looked this promising for manufacturing jobs in a long while. Rising costs in China — where the government is letting the currency gain against the dollar and wages are rising at a double-digit pace — are making it more attractive for American companies to produce at home. Expensive oil adds to the cost by pushing up the price of freight.

Yet a revolution in manufacturing employment seems far-fetched. Most of the factory jobs lost over the last three decades in this country are gone for good. In truth, they are not even very good jobs.

As much as the administration needs a jobs strategy, one narrowly focused on manufacturing is unlikely to deliver.

Much of the anxiety about factory jobs is based on the misconception that job losses have been due to a sclerotic manufacturing sector, unable to compete against cheap imports. Until the Great Recession clobbered the world economy, manufacturing production was actually holding its own. Real value added in manufacturing, the most precise measure of its contribution to the economy, has grown by more than two thirds since its heyday in 1979, when manufacturing employed almost 20 million Americans — eight million more than today.

American companies make a smaller share of the world’s stuff, of course. But what else could one expect? Thirty years ago China made very little of anything. Today its factory output is almost 20 percent of world production and about 15 percent of manufacturing value added.

What’s surprising is how little the United States lost in that time. American manufacturers contribute more than a fifth to global value added.

Manufacturers are shedding jobs around the industrial world. Germany lost more than a fifth of its factory jobs from 1991 to 2007, according to the United Nations Industrial Development Organization, about the same share as the United States. Japan — the manufacturing behemoth of the 1980s — lost a third.

This was partly because of China’s arrival on the world scene after it joined the World Trade Organization in 2001. Since then, China has gained nearly 40 million factory jobs. But something else happened too: companies across the developed world invested in labor-saving technology.

The article includes this interesting nugget about the government role in innovation in agriculture:

Remember agriculture? In the 1960s, plant scientists at the University of California, Davis, developed an oblong tomato that ripened uniformly, and its engineers developed a machine to harvest it with one pass through the fields. By the 1970s the number of workers hired for the tomato harvest in California had fallen by 90 percent.

In the book “Promise Unfulfilled,” Philip Martin, an economist at the university, says that in 1979 the worker advocacy group California Rural Legal Assistance sued the university for using public money on research that helped agribusiness at the expense of farm workers. And in 1980, Jimmy Carter’s agriculture secretary, Bob Bergland, declared that the government wouldn’t finance any more projects aimed at replacing “an adequate and willing work force with machines.” It’s hard to say that workers won this battle, however. After Mr. Bergland pulled the plug, research on agricultural mechanization came to a near-halt.

The article's take-home point is a gem:

Each job in an “innovation” industry, broadly understood, creates five other local jobs, about three times the number for an average job in manufacturing. Two of them are highly paid professional positions and three are low-paid jobs as waiters or clerks.

Innovation — not manufacturing —has always propelled this country’s progress. A strategy to reward manufacturers who increase their payroll in the United States may not be as effective as one to support the firms whose creations — whether physical stuff or immaterial services — can conquer world markets and pay for the jobs of the rest of us.

Do read the whole thing.