Concern About The Decline in Manufacturing in the United States? Becker

 

Manufacturing employment as a fraction of total employment has been declining for the past half century in the United States and the great majority of other developed countries. A 1968 book about developments in the American economy by Victor Fuchs was already entitled The Service Economy. Although the absolute number of jobs in American manufacturing was rather constant at about 17 million from 1969 to 2002, manufacturing’s share of jobs continued to decline from about 28% in 1962 to only 9% in 2011.

Concern about manufacturing jobs has become magnified as a result of the sharp drop in the absolute number of jobs since 2002. Much of this decline occurred prior to the start of the Great Recession in 2008, but many more manufacturing jobs disappeared rapidly during the recession. Employment in manufacturing has already picked up some from its trough as the American economy experiences modest economic growth, and this employment will pick up more when growth accelerates.

Still, if past trends continue, the share of American jobs in manufacturing will probably be lower in the future than it was even as late as 2007.  New and exciting technologies, like 3D printing, may bring back some manufacturing output to the United States since labor costs will be a lower fraction of the total cost of manufactured products based on these new technologies. However, these technologies are unlikely to offer many jobs since they are generally labor-saving, not labor-using, but the jobs will require skilled and better paid workers.

Commentators have always lamented a sizable fall in jobs in any large sector of an economy.  A prominent example is the huge decline in farm employment during the twentieth century in all developed countries. In 1900, about 40% of American jobs were in agriculture. This fraction continued to drop during that century, despite a host of special subsidies and tax breaks to the farm sector. Only 2.5% of the American labor force has worked on farms during the past couple of decades. The enormous advances in farm productivity are a major reason behind the disappearance of farm jobs. With about 2% of the labor force currently on farm, the US manages not only to provide the vast majority of food consumed by 300 million Americans, but American farmers have enough production left over to export large quantities to the rest of the world.

Big productivity gains in manufacturing are also a major cause behind the decrease in manufacturing employment in the US. Higher productivity lowered prices of manufactured goods relative to prices of services. Yet employment in manufacturing fell because the lower manufacturing prices did not stimulate a large enough increase in the demand for manufactured goods to offset the productivity increases of the manufacturing workforce.

A second obvious force reducing jobs in American manufacturing has been the growth in China’s economy and its exports of a large variety of cheap manufactured goods (which are a great boon to American and other consumers).  Since China did not become a major player in world markets until after 1990, exports from China cannot explain the downward trend in manufacturing employment prior to that year, but Chinese exports were important in the declining trends in manufacturing during the past 20 years. Finally, the recession cut jobs in all sectors of the American economy, but especially in factories and construction.

President Obama, in his State of the Union address, advocated special tax breaks and support for the manufacturing sector. I do not see any more convincing case for subsidies to manufacturing than there was for the special treatment of agriculture during the long decline in farm employment. Most of the arguments made in support of privileges for manufacturing could be made for services and other sectors of the economy.  For example, although certain manufacturing industries have had high rates of productivity advance, so too has mining, such as through the development of fracking techniques. The most important technological advance of the past several decades has been the computer and the Internet, for these gave birth to email, word processing, apps, online sales, and social networks like Facebook and Twitter.

Instead of singling out manufacturing for special privileges, the government should get behind certain general policies. High on the list would be raising the rate of growth of the American economy, for this will tend to create jobs in most sectors of the economy. More government support may be justified for basic research in science and other areas that would also benefit all sectors, not just manufacturing. Local and state governments, along perhaps with the federal governments, could try to reduce the dismally high dropout rates from American high schools. Dropouts have trouble finding good jobs even in the best of times, and they suffer the most during recessions.

Many other steps can be taken to help the American economy, especially by limiting the growth of entitlements and the federal budget. None of the steps to improve the economy involve favoring manufacturing employment and the manufacturing sector. The call by many for special treatment of manufacturing jobs is basically misguided.

Comments

[TANSTAAFL]

Becker advocates sound policy. Calls by politicians for tax breaks and other public support for manufacturing appeal to sentiment (e.g., bring back the days of Rosie the Riveter), not logic.

[Dennis Tuchler]

Calls for ending tax breaks and public support for particular sectors of the economy are unlikely to have any effect unless a sizable amount of money and clout supports such calls. This is an election year; it is impossible to talk economic sense under such circumstances.

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[Scott Corner]

Out of curiosity, when you state, "Only 2.5% of the American labor force has worked on farms during the past couple of decades," when you say "American", does this include or exclude immigrant labor? In other words, by "American labor force", do you mean people laboring in America; or American laborers? Thanks.

[Linda Morse]

See the current "The Economist" re digital manufacturing. Paints a rosy picture. I think Becker is correct that govt. should stick to putting resources into research, especially in fields like this.

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[NEH]

Why this concern about talk about Manufactures in the U.S.? This has been a perennial issue through out the Political and Economic history of the U.S.. Starting with A.Hamilton's "Reports on Public Credit", "Duties on Imports", "Establishment of a Mint" and his "Report on Manufactures" to Congress in the 1790's. Then we have the likes of H.Clay and his development of the American School of Economics. Whose main tenents were, "Protection of Ag., Industry, and Commerce", "Gov. investments in infrastructure", "Establishment of a National Bank to promote growth of Productive Enterprises rather than speculation (something we all could have used in the last few years of economic decline). Then comes along the likes of Lincoln/Carey of the the 1860's and the "Harmony of Interests" for Ag., Industry, and Commerce"; whose basic tenents were, "Support Industry", "Create and Maintain Infrastructure", "Create and Maintain Financial Infrastructure. So we see, that such activity is well ingrained in the American Political experience.

So given the National and World Wide economic malaise as of late, it is no wonder that questions regarding American Manufactures have become such a hot topic of discussion as of late. Clearly unregulated "Free Markets/Free Trade" has become problematic and requires Review. So once again we have returned to the issues of, "Support Industry", "Create and Maintain Infrastructure", "Create and Maintain Finacial Structures" that support Agriculture, Industry and Commerce in the interests of the American Public. Something which made us the "Arsenal of Democracy"...

[John@Beginner Guitar Lessons]

You're right a lot more steps can be taken to assist the American economy. I didn't know manufacturing jobs has dropped since 2002.

[TANSTAAFL]

NEH -- with your reference to "H. Clay," surely you do not mean Henry Clay the slaveowner who perpetuated the institution of slavery in America for several decades despite its inevitable failure, eventually brought about by the Civil War and the 13th Amendment to the Constitution. Tell us it ain't so. Can't you find more humane examples?

[Storage London]

The different points that Becker brings our attention to are pretty relevant and trully reflect the current situation of the economy in US. With the recession pulling in, so as the major take over of Internet and other technological devices, many things changed and so shifts occured. I was not also aware that manifacturing has suffering in such a way, but the growth in China’s economy and its cheap goods and duplicates are surely one of the reasons for that. Steps should be taken for creating more job opporunities and at the same time for reducing the federal budge.

[NEH]

affl, One and the same, but the instance of slave holding does not function as a counter argument to H.Clay's importance in the development of a coherent National Economic Policy. Unless, of course, the use of "Strawmen" is the "New Logic" in Economic Analysis...

As for the reality of "Slave Holding", it was about as common as were beasts of burden at this time. Just about everyone had them. As a matter of fact, my forebears were slave holders at this time period until they got to the Ohio River and had to manumit them before they could cross over into the Northwest Territory. ;)

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[Social Security Lawyer]

Becker is right. Subsidizing any particular sector of the economy is an attempt to pick winners and losers. History shows us that governments are not good at doing so.

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Create and Maintain Infrastructure", "Create and Maintain Finacial Structures" that support Agriculture, Industry and Commerce in the interests of the American Public. Something which made us the "Arsenal of Democracy"...

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[NEH]

S.S. Lawyer, At times in order for the "Winners" to win the "Losers" have too be propped up. Otherwise, the "Winners" end up as "Losers" as well. And where is the rational in all that? ;)

[Terry Bennett]

NEH - What's wrong with the current Winners ending up as Losers? It sounds pleasingly meritocratic to me.

[NEH]

The "Meritocracy" applies to individual Socio-Political advancement. The potential realities of using it as an Economic program is courting "Disaster" and would make all of the combined historical Depressions look like a picnic on a beautiful summer afternoon.

But, if you want to be the first and leap into the "Abyss" feel free. Just don't expect me and other fellows to follow. Nor are we going to allow you to drag anyone else along. We know better... ;)

[Terry Bennett]

NEH, I understood your previous post to be suggesting that I should be happy paying welfare to someone else, because if that someone else fails I will also fail. I think that was Obama's point to Joe the Plumber. Thank you both for looking out for my interests, but I don't believe that for a minute and prefer to look out for my own interests as I see them. This isn't to say we shouldn't keep people from starving. I just don't buy the rationalization that you're really doing it for me.

Once again considering the original topic, we are discussing the degree to which an economy should be and need be managed. We can go laissez faire, the real meritocracy. We can go totalitarian. Almost all people in our time live under systems somewhere in the middle, and no matter what we say here it's going to stay that way long after I'm dead.

The government can either manage directly - giving people and companies money - or it can encourage certain behaviors by private actors, through monetary and tax policy. The reason Buffett's tax rate (I mean Warren, not Jimmy) is low is that he conforms his behavior to laws that Congress has written to encourage that behavior, because Congress expects that when he uses his money in those ways, the larger economic goals of the country will be supported. We benefit, and Buffett benefits (assuming for the moment Congress is both honest and visionary). I for one think it is appalling management to disqualify a policy just because it benefits "millionaires and billionaires", without regard to whether it also benefits those it was intended to benefit.

Savage capitalism has been tried on a large scale, though not lately, and it exhibits some distinct downsides. What has not yet been sorted out is to what degree the problems emanate from human nature, and to what degree they emanate from the criminality that has historically arisen under a low-management scheme such as the recent blowup in mortgages. I support managing the economy to the degree necessary to negate these problems, but no further.

[Jack]

Terry: And one problem is that of identifying "welfare". For some reason the term connotes those languishing jobless at home, rather than a billion every year going to those "valued associates" of Walmart who typically has the fattest bottom line in world history.

How about the "mortgage interest deduction?" Many like to quote "40% of Americans paying no taxes at all" Perhaps, and a notch above that they pay little, perhaps 18% or a bit more. Thus the "deduction" does something between nothing and little for them. The sweet spot for the deduction are those fairly close to "one percenters" who deduct from their 35% marginal rate the interest on million buck mortgages. Perhaps two of them.

The distortions go well beyond societal unfairness and "welfare for the rich" as we've created a game in which the "investment" has a tax deduction advantage that is never repaid. (By comparison to rental property or most business investments which would deduct interest costs but, later, pay at least a capital gains tax.)

Today....... losses may have "evened the scales" but for most of our generation we've had bright folk with good paying jobs "invest" primarily in the dead and unproductive asset of more house and often more houses, than needs or even wants would predict.

By contrast in a normal era when money does not grow on tax policy subsidized housing, those hoping to increase their income or net worth would be ferreting out businesses in which to invest.

Ha! In one of the earlier booms in So Cal I used to joke about how an economy of selling and reselling homes at higher and higher prices to each other and spending the "profits" on a Mercedes (then mfg in Germany) and B&G wines from France would sustain itself. The answer seems to be that it didn't and will not.

Going back to Posner and Becker's topic for the week, I've little quarrel with their conclusions but would go further to divide mfg into regular "market driven mfg" and "boot strap mfg".

In fairly short order we've been clobbered by the loss of the "cheap oil" we've always been able to count on and perhaps manipulate into being, and the need to deal with global warming.

Thus, there is a need to move more quickly than "the market" is likely to accomplish to:

1. Conserve much of what oil we now waste. (A LOT)

2. Shift much of our transportation to the much cheaper and cleaner natural gas. For example repower most of our trucks in five years or so rather than the likely longer time of "the market".

3. Same with wind, and SOLAR (caps as it IS the biggie of the future) and other alternatives.

Ha! from the Art of War, the best way to avoid taking a beating is not to be in the path of the club when it's swung. WE have control over our NG prices, and though adopting some of the alternatives to oil might be slightly more costly in the short run, it's largely our labor that is being used, as compared to sending $120 abroad and getting one puny 42 gal bbl of oil in return.

4. And this one is straight up "government spending" is to tackle over $2 trillion of long delayed maintenance of highways, bridges, public buildings etc. I'd suggest $300 billion a year both to get the job done and to put many of our construction sector folk back to work.

To this last, we've productive assets, business and private, stuck in gridlocked traffic wasting fuel and wearing out equipment on rough and potholed highways. Assuming our nation is going to be around for a while, it would be far better to do this work while we're in deep recession and come out the other side with a, once again, modern nation with the infrastructure humming and ready to excel in either mfg or services.

We're not "China" and can't dictate the bootstrapping efforts but we are in a situation that like a World War requires some direction from our democratic process.