The Washington Post ran an op-ed yesterday with the title, "5 Myths About the Death Of the American Factory," by Gilbert Kaplan, an international trade lawyer. He opens with a bad premise:
Sure, U.S. banking is in trouble, but the longer-term and possibly more damaging threat to the nation's prosperity is the decline of the manufacturing sector.
This is the sort of appeal to industrial policy that governments would be wise to avoid. Our prosperity is based on our ability to create value in the employment of factors of production that we own (i.e., land, labor, and all sorts of capital). It is not based on the success of any one sector of the economy, as long as value is being created in other sectors. To use Kaplan's (weak) line of reasoning against him, how can his statement about the critical role of manufacturing be true when manufacturing is now less than 12 percent of GDP? (See this table.)
Here's his list:
- It's all about cheap wages. American workers are just paid too much.
- U.S. manufacturers can save themselves by investing in innovation.
- Trade laws and trade agreements level the playing field for U.S. manufacturers.
- Good management can make U.S. manufacturers lean enough to fight in the international economy.
- We make high-tech goods here, so we're okay. It's only schlock items that come from abroad.
On #1, #2, and #4, I don't think there is any sense in arguing that the manufacturing sector wouldn't be doing better if wages were lower, if there were more investments in innovation, or if there were better management. So these parts are simply a matter of hitting some threshold Kaplan has in mind, whether to "save themselves" or "to fight in the international economy." Point #5 confounds what we produce with what we consume and so doesn't make much sense as written. As I noted above, we only need care about valuable deployment of our factors of production--schlock or high-tech doesn't matter nearly as much.
Point #3 gets more to the heart of his argument. Kaplan argues, correctly I think, that we don't use our trade laws primarily to advantage our producers. We use our trade laws to try to promote global trade, which in many cases means giving other countries open access to the U.S. consumer without insisting on corresponding advantages for domestic manufacturers. We could take a more aggressive posture. We would conclude fewer trade deals and we would raise prices to the U.S. consumer. And as a matter of policy, that is what we have been very reluctant to do. Consider the example of Airbus, which Kaplan cites as an example of succesful trade promotion by European governments. If those governments want to tax their citizens to provide cheap aircraft for U.S. citizens and others to use, why should we stop them?
This also helps explain why government officials continue to maintain their "strong dollar" rhetoric, even as the dollar is sliding. Historically, this rhetoric seems to translate into a policy of allowing other countries to intervene in foreign exchange markets to keep the value of the dollar high, advantaging their producers and our consumers and disadvantaging their consumers and our producers, while the U.S. government does not explicitly intervene. Like our hands off approach to trade policy, this is a policy choice that keeps the U.S. consumer more comfortable.
That policy outcome is coming under more pressure as macroeconomic prices like oil and foreign exchange become more expensive. The former will hurt manufacturing and the latter will help it, to the extent that it is export-oriented. But nothing about the current environment suggests the need to promote manufacturing per se, or any other sector of the economy above others.
See also Don Boudreaux at Cafe Hayek for a reaction to the op-ed.
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Excellent discussion
There are only three endeavors that create new wealth in a society: manufacturing, farming (agriculture), and mining.
Everything else is just redistributing that money in some way (Wall Street/banking money changers, healthcare and education sectors, various other services -- insurance, making lattes, etc).
Think about other countries that are making money and what the economic drivers are -- petroleum (mining) in mideast, Venezuela, etc., manufacturing (Asia), agriculture (USA -- we export more food than any other nation). US used to have more manufacturing, but much of it has gone overseas (mostly due to cheaper labor, and foreign governments who saw the light and supported manufacturing to build their own economies). We were an incredible power when we dominated in agriculture AND manufacturing. All great empires decline, and we are in decline, and that's pretty much the story here. Even the Roman Empire didn't last forever.
But two things could bring some of the manufacturing back -- higher oil (it costs MUCH more to transport the goods back over here from Asia right now), and universal healthcare. Healthcare costs hurt private sector competitiveness, and if we could cut the cost by half (as the Canadians have done, and their economy is now growing faster than ours) with a more efficient, cost-effective system it would greatly boost our economy, on several levels.
Most important is the fact that manufacturing drives innovation, and you've probably noticed that Asia is producing engineers at a rapid clip. These engineers will invent new technology and drive it forward. To this end the Asians are recruiting top American talent (management and engineering), to help make the transition, and offering higher wages and excellent benefits. With a weak dollar a top engineer can earn much more by working in Asia. Perhaps you haven't noticed but there is something of a "reverse brain drain (US losing key creative labor)" going on right now. I expect new technology will increasingly come from Asia, not the US. Note that Toyota leads in car technology (hybrid innovation) for example. As a result we are losing in the auto industry.
The sources of wealth
Minnesota Mom, you really need to find a really good introductory economics textbook and turn to the chapter on banking. Practically all of the wealth creation of the last couple of centuries has been bank-created wealth and, if what you posted were true, our standard of living would be about that of Bengladesh.
My post
My post about the sources of new wealth (mining, manufacturing, and agriculture) came directly from the CEO of a major (DOW listed) corporation. A very bright guy. Maybe he needs an introductory econ textbook too?
Banks just take the money made in these endeavors and loan it out, ie., they redistribute the money and charge interest (and that money comes from . . . ?)
The only way banks "make" money is by printing more of it, and that's been going on in a big way in the US lately, basically devaluing our currency in the world market. So yes, I suppose you are right, banks can "create" money. BTW, why did the government stop reporting M3?
Minnesota Mom: I'm sure I
Minnesota Mom: I'm sure I could find plenty of CEOs who say stupid things. Supporting your post by pointing to someone important who subscribes to your theory is the classical "appeal to authority" fallacy.
Otherwise, I could just do the following:
"There are four kinds of business: tourism, food service, railroads, and sales; and hospitals/manufacturing; and air travel."
Michael Scott...branch manager, Dunder-Mifflin Paper Company
The financial sector creates value by allowing people and firms with different consumption preferences to trade current consumption for future consumption. I first learned that in Prof. Samwick's Finance 36 class (great course, btw...I still use the notes daily) and have seen it in action every day since. People who live in countries without well-functioning financial sectors have realized this; any idea why microcredit is such a focus of some poor countries?
Classic appeal to the Samwick authority?
I didn't take Samwick's Finance 36 class . . . but I did take Kreider and Macallister's classes . . . and trust me, trading current consumption for future consumption isn't creating real wealth for me personally right now . . . and take a look at what is happening in the US financial sector today . . . can you say "wealth destruction?"
Bear Stearns, Lehman, etc., etc. Those write downs just keep on keeping on.
More confused logic
Appeals to authority are generally acceptable when the person is, in fact, an authority and speaking within their realm of expertise. I would take Prof. Samwick (an economist, finance teacher, and all around very smart person) teaching us Brealey and Myers to be indicative of one authority using another authority's material to cover a subject. I wouldn't make the same assumption about a random, unnamed CEO condensing the entirety of economic activity to 3 industries. But that’s just me. Let me guess: this CEO just happened to be the head of a company in one of those three industries?
Your second point commits the fallacy of composition. That you don’t use the capital markets advantageously doesn’t extrapolate to the rest of us.
Spend some time in a country without a well-functioning capital market to see the impact it has on the poor. There’s a reason the United Nations called 2005 the “International Year of Microcredit” and Muhammad Yunus won a Nobel Peace Prize; it’s not because the UN and the Nobel Foundation are capitalist shills.
Ahhhh . . .
So, an appeal to authority is now ok, as long as the appeal is being made by an "authority" like Samwick?
OK.
Aw, I'm fine with the credit markets and using them to my advantage. I've taken out some whopper HELOC loans, just like my neighbors, and I plan to go into foreclosure, just like my neighbors, on all of it within the next 2-3 years. That way I can walk away from my debt and devalued property . . . and have a chance at an actual retirement. ;-)
But, seriously, do we really have great capital markets here? There haven't been any (as in zero) IPOs in 2008. It appears that companies are going private or going elsewhere (reports are that it is other countries) for credit. Subprime, CDOs, SIVs, etc. have all ruined the credit market in the US as far as I can tell. Investors are fleeing the financial sector in favor of commodities . . . like corn and oil and such.
The funny thing is that the same tiresome cycle repeats. In the old days banks used to fail, but now the government bails them out, as the Fed is actively doing right now. How is this creating wealth? Seems to me it's just piling more debt on the taxpayers. If someone could explain how adding billions of dollars of debt to the taxpayers bill (as was also done during the S&L bailout in the 80's) somehow adds wealth to our society that would help me to understand the concept of banks creating wealth. This time it looks like the bailout will be between 500 billion and a trillion dollars. Where will that money ultimately come from?
I'm trying to understand how banks create new wealth for a society. I must be making the wrong connections or something. I know for sure that I'm losing real money in my bank account because they are paying me 2% interest, and inflation is running at 5 or 6 or 8 percent, depending on which numbers you believe.
Appeals to authority work
Appeals to authority work when the authority is an authority in that subject, not just an authority in some other subject area. Samwick = authority on economics and finance. Random CEO = not an authority on economics and finance. Very simple, really.
You are stating that the banking system creates no wealth. The proper comparison in this case would be:
Wealth of US with no banking system vs.
Wealth of US with current banking system
Yet all of your anecdotes are based on the following comparison:
Wealth of US with perfect banking system (one that isn't subject to tulip-style manias) vs.
Wealth of US with a current banking system
This is another logical error called the utopian fallacy. You're rejecting the banking systems simply because it has warts when compared to an impossible alternative (i.e. a perfect banking system), rather than comparing it to the real alternative (i.e. no banking system).
If you were to say "our banking system is worse than country x's because...", that's one thing and certainly a reasonable discussion (and one for which I have a lot of sympathy). But just saying that something is worthless because it isn't perfect is just illogical.
The Random CEO is Buckley . . . maybe you've heard of him
George Buckley, CEO of 3M Corporation, has 3 PhDs (OK, one is honorary) and no doubt has a corporate economist as a resource, not to mention a speech writing staff that researches accuracy of his statements. He said this in front of hundreds of people, and it was recorded and aired on public TV, which is where I saw it. He wouldn't have said it if it hadn't been vetted by the corporate economist and research staff . . .
And I think Buckley qualifies as an authority on economics and finance, having spent many years successfully running multi-billion dollar companies. I remember what he said very well, because he began his address with this particular statement. So even though you might not consider Buckley and his executive staff good authoritative sources, I do, one who I think is at least as knowledgeable and experienced as Dr. Samwick . . .
Also available from online sources:
"There are only four economic sectors that generate material wealth: agriculture, mining, manufacturing, and construction. Other sectors, such as services and trade, redistribute this wealth, and are built on the products created by the wealth generators. Of the four wealth-creating sectors, manufacturing plays a unique role because, unlike agriculture and mining, it is not directly limited by natural resources and, unlike construction, most manufacturing products are easily transferable across national and international borders. As a result, manufacturing is and will continue to be the fundamental base for the economic health and security of the United States."
http://manufacturingjournal.blogspot.com/2005/11/importance-of-manufactu...
This is taken from another scholarly paper (which I can not access, as it is subscription only).
I stand by my original statement.
Hmmm
- George Buckley's degrees are in engineering, not economics. He is no doubt a smart person. He is not an economist. There are PLENTY of CEOs who have risen through the ranks through their organizational skill and industry-specific talent. That they lead a large organization is in no way indicative of any rigorous macroeconomic training or thought processes. Buckley's quote was likely meant to be inspiration for a company formerly known as Minnesota Mining and Manufacturing. The quote also indicates that he might need a refresher in economics and the importance of financial markets.
- It's amazing that the Manufacturing Journal thinks that manufacturing will continue to be important in the US. Personally, I expected them to say "we're all screwed, just stop reading and try to get into the service sector".
Nobody is denying that manufacturing is important to economic welfare. Jumping from there to statements that banking / finance is just a redistribution of wealth created elsewhere is just silly, no matter how many engineering PhDs think otherwise.
We can agree to disagree
So you think a degree is more important than experience (a PhD in economics vs. a PhD in Engineering and years of experience as a captain of industry, with access to multiple PhD economists to tutor him on the relevant topics), and making financial decisions and leading multi-billion dollar corporations. Buckley did NOT rise through the ranks of 3M . . . he acted as a financial whiz in other environments (led a corporate turnaround at Brunswick) before 3M. In fact, the primary reason he was hired as an outside CEO into 3M was precisely this financial/economic savvy and broad background . . . when he speaks he sounds more like an economist than an engineer, and in fact is considered by his colleagues to be a genius who is capable of understanding the most complex financial and economic concepts. I consider him an authority. Amazing as he is, Samwick isn't the only bright guy in the world.
Maybe an expert is only an expert when they agree with your views . . . that's certainly true in the Bush administration.
I couldn't find the video online, but here's an article about Buckley's talk, and the 8th paragraph or so has the statement I mentioned about sources of wealth.
http://www.midwestbusiness.com/news/viewnews.asp?newsletterID=16481
About the "fallacy of utopia" . . . if expecting our banking system to run without failures and massive taxpayer funded bailouts every ten years is expecting utopia, well then count me as guilty. By the time this latest fiasco is over the Fed (taxpayers) will have bailed out our largest institutions to the tune of (estimated so far) 500 billion to a trillion. Somehow that doesn't seem like a wealth generating operation (unless you count the wealth taken from the taxpayers).
This is my last post on this topic.
Self Justification
Milton Friedman said everyone is good at self-justification, but this guy is a grandmaster. From his bio:
' amerMastickGil Kaplan is a partner at King & Spalding and is in the International Trade Group. His practice focuses on international trade cases and trade policy issues. He has represented clients in a wide range of cases on antidumping (price discrimination), countervailing duties (subsidies), Section 337, (intellectual property infringement) and other trade matters.'
Stop the world, my job wants to get off
Late last year, the number of U.S. manufacturing jobs dropped below 14 million for the first time since 1950. It's hard to find anything else that takes us back to a time before most baby boomers (remember them?) were even born.
Well, if this fellow tells the year by job count he should really be alarmed that the 98+% loss of jobs in agriculture we're back in the 1600s!
But no, this is just another piece confusing decline in the number of jobs in a sector with decline of the sector.
The US manufactures far more than any other nation, Japan is distant second, and by my view of the BEA data US manufacturing in real dollars was every bit as big in 2007 as 1998 ($1.4 trllion 2007 dollars -- Table 6.1D).
As to the job decline in manufacturing while manufacturing itself has thrived (from the 1940s to 2000 manufacturing grew 11-fold while manufacturing jobs fell from 32% of the workforce to 12%) the real explanation is not anywhere on this guy's list of #1 through #5.
It's #6 ... Drew Carey has the hard truth ... it's the relentless inhuman enemy of US workers that's taking their jobs ... The Luddites were right!
BTW for all that Chinese manufacturing is growing it is declining as a percentage of Chinees GDP and Dean Baker himself reports that ... guess what ... China is losing manufacturing jobs!
a study of 20 major economies, found that between 1995 and 2002 more than 22 million factory jobs vanished. The United States wasn't even the biggest loser. America lost about 11 percent of its manufacturing jobs, while Japan lost 16 percent and Brazil lost 20 percent. The biggest surprise: China, which is fast becoming the manufacturing capital of the world, lost 15 percent of its manufacturing jobs.
The Earth is exporting manufactuing jobs!
Let's see a trade lawyer fix that with anti-dumping suits.
Jobs go to where wages are lowest and that's not China anymore
Try Bangladesh, India, Cambodia. I have a friend in textile industry (over 2 million are employed directly and 17 million indirectly in textiles) in China, and they migrated manufacturing to Bangladesh (cheaper labor). It's all about the cost of labor, and believe it or not there are places that are cheaper than China.
http://www.economist.com/displaystory.cfm?story_id=9660703
Farming productivity increases
The reason why 98% fewer workers are employed in agriculture has to do with mechanized farming, hybrids developed during the "green revolution", chemical fertilizers, etc. These advances were truly miracles, and they gave us cheap and available food, freeing labor to move to the city and participate in the industrial revolution.
So it was extreme advances in productivity -- not outsourcing farm jobs overseas -- caused the decline in labor engaged in that sector. While productivity increases in manufacturing do account for a large portion of the job attrition, movement of jobs to overseas plants accounts for many job losses in manufacturing, especially in electronics (there are no TV sets produced in the US anymore), textiles (as cited above), high tech (computer chips), etc.
Since 1950 the growth of
Since 1950 the growth of manufacturing output has been essentially identical to the growth of the overall economy and manufacturing share of output has been unchanged.
However, there has been a massive change in the composition of manufacturing.
Since 1980 the average growth rate of industrial production of high tech manufacturing has averaged some 21% while of non-high tech only averaged 1.2%.
Concealed within this divergence is some of what he is talking about, but also enough to demonstrate that he really does not know what he is talking about.
I agree that other countries
I agree that other countries offer cheaper labor, but is the quality of product as good? From my experiences, no, you get what you pay for. I believe US manufacturing and even design process engineering here in this country is among the best
Buckley and the missing word
You all seem to me to be missing the significance of one word in what Buckley said: "material."
If it is not extracted from the earth, grown on the earth, manufactured from earthly materials (or those from meteorites), or assembled from a combination of extracted, grown, or manufactured stuff, I think you will have to agree it is not material under any reasonable definition of the word.
No one sensible would argue that financial systems do not create wealth through trade. The catch is all of the financial wealth available won't guarantee you food, shelter, and transport if there is none to be had at any price.
This seems to me to be the central problem with solely economic and financial perspectives on life. We depend utterly for our existence for non-financial systems in which we are embedded, and for which we have little to no means of valuation.
On the central point of this dialog, to the extent that manufacturing is absent from regional economies, the innovators, whether engineers or financiers, will find the base on which their activities depend eroding. If the linkages between these activities become too stretched, whether by geographic or cultural distance, the pace and effectiveness of innovation decline, and this decreases the competitiveness of economies where this occurs. This means that capital and labor are less efficiently deployed.
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