Thursday, July 22, 2010

Manufacturing a crisis

American manufacturing jobs are declining. Many politicians agree on the cause: greedy corporations moving jobs to countries with inferior wages, non-existent environmental standards, terrible working conditions and minimal social safety nets.

Desperately poor 3rd world people may be overjoyed to have these jobs, but American workers are being savaged. As Senator John Kerry pointed out, it is time to stop “Benedict Arnold” corporations from “exporting” jobs.

This reasoning is nonsense, of course. When Kerry asked, “Why can’t we keep manufacturing jobs in America?” he asked the wrong question. The right question is, “What is an American job and how can we create one?”

An ‘American job’ is a job that can be performed more productively in America than in some other place. That’s how we 'own' that job, and prevent its 'export'. We don't own it because of government subsidy, which is simply taxing one category of employment to prop up another. Preserving American manufacturing jobs, via grants and tax incentives funded by capital borrowed from China, is not simply a recipe for failure, it's ultimately impossible.

The battle over manufacturing job loss is already over. Though protectionist demagogues would like it otherwise, only about 0.6% of manufacturing job loss correlates with foreign manufacturing. The rest is due to productivity improvement, and if American productivity had not risen - requiring fewer worker-hours to produce a given product - the United States would by now have become a 3rd world country.

If you are not convinced of that, then let’s just legislate away the decline in manufacturing jobs. We’ll decree that all jobs must follow the rules of soccer: You can’t use your hands. This will place us at some competitive disadvantage with the rest of the world, but never mind that, we would need a lot more manufacturing workers to keep production steady.

Manufacturing employment decline is due primarily to productivity increases. It finds a parallel in the decline of agricultural employment. 100 years ago 40% of workers worked in agriculture. If that ratio had continued, 54 million of us would be farmers today. Instead, 25% of Americans are employed in jobs that didn’t exist in 1967. How could we have filled these jobs if farming hadn't become more efficient?

Of approximately 135 million American workers in 2003, around 12% earned a living in manufacturing (vs. 24% in 1970), and fewer than 2.8 million were employed in agriculture. Nonetheless, we lead the world in manufacturing and our agricultural industry places 3rd. We sell more manufactured goods than anybody, and we feed a lot of people everywhere.

So, those manufacturing jobs weren't exported; they ceased to exist - worldwide. Between 1995 and 2002, the world’s 20 largest economies experienced an 11% net loss in manufacturing jobs - a decline of 22 million workers. The United States lost about 2 million manufacturing jobs - also an 11% decline. In that same time frame manufacturing output in those 20 countries increased by 30 percent.

Contemporaneously, China lost 15 million manufacturing jobs - a 15% drop. I guess if the United States hadn't been exporting jobs, China would have lost 17 million.

The only argument left to those in favor of government subsidies seems to be that manufacturing jobs are even more precious now than before all this disruptive productivity improvement. Therefore, governments should heavily subsidize their best-loved manufacturing niche, each government trying to outbid the others. That could be argued, but it is easy to see why it would be just as stupid as subsidizing 54 million of us to be farmers.

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