Posted on 08/23/2003 4:43:06 PM PDT by E Rocc
In a recent column, I argued that the manufacturing sector of the U.S. economy is in relatively good shape, despite the sharp decline in manufacturing employment. I clearly touched a nerve with this column. Not only did I receive a great many e-mails, but my fellow columnist and mentor Paul Craig Roberts took me to task as well. I can't respond to everything I heard, but following is a response to the most frequent criticisms.
One common complaint is that U.S. companies are simply reselling goods actually manufactured in China. This is just a misunderstanding of how the gross domestic product is constructed. All imports are subtracted from final sales to calculate GDP. Therefore, imports from China or anywhere else can never raise GPD; they always cause it to be lower than if they were produced domestically. GDP measures only actual production on U.S. soil.
The equation goes like this. In 2002, final sales to domestic purchasers equaled $10,866 billion. You add $3.9 billion for the change in inventories nationwide, add $1,014.9 billion for exports, and then subtract $1,438.5 billion for imports. This leaves a net figure of $10,466.2 for GDP. In short, imports reduce GDP and exports increase it.
It is always tempting to think that we can ban imports or tax them in some way and thereby raise domestic output, by forcing consumers and producers to "buy American." The problem is that we import a lot of things we can't produce at all or not enough of domestically, like oil. A lot of imports are industrial supplies and capital goods that are critical inputs into the manufacturing process. Banning them or raising their cost would raise costs for producers, reducing their international competitiveness. It would also invite retaliation by foreign countries. The trade deficit might even rise because exports would fall more than imports fell.
In the end, trade protection has never worked in any country at any time. The long-term effect has always been to impoverish nations that engage in it.
Another criticism I heard is that I used incorrect data to support my point. I looked at total goods production in the U.S., which includes things like mining and agriculture in addition to manufacturing. I did this for 2 reasons. First, the concern I most often hear from people is that Americans no longer make "things." Therefore, I thought that a broader view of goods output was justified.
Second, data just for manufacturing are harder to come by. Goods data are compiled every quarter, while manufacturing data are available only annually and with a lag. The latest data for manufacturing is for 2001, while we have goods data through the 2nd quarter of this year. Furthermore, manufacturing data after 1987 are incompatible with those before because of certain definitional changes.
Nevertheless, looking at manufacturing alone still makes my point. Since 2001 was a recession year, it is reasonable to compare it to the last recession year in 1991. In nominal (money) terms, manufacturing has fallen from 17.4 percent of GDP to 14.1 percent. But in real (inflation adjusted) terms, it is actually up a little, rising from 16 percent to 16.2 percent.
It is critical to use real data to make a valid comparison because prices for many goods such as computers have fallen sharply. Since GDP data are calculated in money rather than volume terms, failing to take account of this fact would give a distorted picture of what is going on. For example, suppose output of some product rose by 10 percent in terms of units, while falling 10 percent in price, due to higher productivity. Using the nominal data would make it appear as if there had been no increase in output. Using real data captures the increase.
Finally, many people wrote to tell me that I could not be right because the factory down the street from them just closed. However, one cannot make national policy by looking at isolated events. It would be like trying to tell what the weather is 1,000 miles away by looking out one's window. To make policy, one must examine comprehensive data that account for new factories and increased output elsewhere, which have offset the closed factories in particular places. The Commerce Department's data is the best there is on this score and far superior to any individual's personal observations.
It is worth remembering that when a plant closes, it is likely to make news, especially if it is the major employer in a small town. The local paper is unlikely to note the opening of a new factory on the other side of the country. Consequently, a parochial perspective can produce a false picture of national trends.
I remain convinced that U.S. manufacturing is fundamentally healthy.
(Excerpt) Read more at humaneventsonline.com ...
Unfortunately the lessons of history are lost on many posters in this forum.
Enlighten us as to your manufacturing experience and knowledge that would lead you to say that. I'm a 25 year veteran, and I haven't seen it this bad, well, ever.
If you mean by "decentralized" that it went overseas in search of squat labor, then yeah, that happened. But it ain't a good thing.
Oh, you know, he'll just get "reskilled" as the Commerce Department geniuses call it. Creative Destruction and all that.
Such a short article probably wouldn't have made the writer's editor too happy, though.
Any family oriented conservative patriotic american should use that as a benchmark as to how our policies are working. What's the scorecard on that account?
So if we raise our average tariffs on Chinese exports to the USA where our greatest one or onecauurent account deficit exists to say 30% what are the Chinese going to do to retaliate? Will they raise their average tariffs on US goods to 71% from the current 70%. With India for example will they go fromn the second highest tariffs on the planet to the highes? Big Fat Deal. Will this have any significant effect on our exports to these nations? No, the consumers in thses nations could maybe have bought some American products if there were no tariffs on American products but this autor is making a nonsensical assertion that does not reflect the current tariff situation. When the Japanese planes were leaving Pearl Harbor were people worried about defending this nation because the Japanese would retaliate?
Then the author is ebullient over the percentage rise of amnufacturing versus teh restr of teh economy. since engineering, IT services, and other services that are being offshored are not part of the manufacturing sector of teh economy he is merely taking as good news for manufacturing what is actually bad news for other sectors.
It is critical to use real data to make a valid comparison because prices for many goods such as computers have fallen sharply. Since GDP data are calculated in money rather than volume terms, failing to take account of this fact would give a distorted picture of what is going on. For example, suppose output of some product rose by 10 percent in terms of units, while falling 10 percent in price, due to higher productivity. Using the nominal data would make it appear as if there had been no increase in output. Using real data captures the increase.Now a little statistical review of what he is not actually taking about when he makes the unsupported conclusion about manufacturing.
Finally, many people wrote to tell me that I could not be right because the factory down the street from them just closed. However, one cannot make national policy by looking at isolated events. It would be like trying to tell what the weather is 1,000 miles away by looking out one's window. To make policy, one must examine comprehensive data that account for new factories and increased output elsewhere, which have offset the closed factories in particular places. The Commerce Department's data is the best there is on this score and far superior to any individual's personal observations.
Here I must agree with his conclusion so far but I would add the following caveat. One must use sound statistical methodology in interpreting those numbers and drawing conclusions from them. Unfortunately the author of this piece either knowingly or inknowingly does not employ the rigor in mathematics required. a percentage is by definition a ratio. Now anyone who had a sixth grade education at least during the run of the Beverly Hillbillies learned that a ratio has a numerator and a denominator and the ratio of manufacturing to the rest of teh econmy does not in itself indicate teh health of the sector only the health of relative to other sectors of the economy.
It is critical to use real data to make a valid comparison because prices for many goods such as computers have fallen sharply. Since GDP data are calculated in money rather than volume terms, failing to take account of this fact would give a distorted picture of what is going on. For example, suppose output of some product rose by 10 percent in terms of units, while falling 10 percent in price, due to higher productivity. Using the nominal data would make it appear as if there had been no increase in output. Using real data captures the increase.
Mr. Bartlett has likely made a significant, though common mistake here in his manipulation of the BEA's real data.
While he doesn't cite exactly where he got his BEA 'real data', I assume because he calls it 'real' and describes the price vs volume advantages of real data, I suspect he is using the BEA's Real Gross Domestic Product by Industry in Chained (1996) Dollars.
If so, his mistake is that aggregates in a chained dollar series are not additive, which means that the components don't add up to the total GDP, which means that each component is not represented in its proper proportion or share of the total GDP, which ultimately means Mr. Bartlett can not compute manufacturing's percent of 2001 GDP as:
16.2 ~ 16.17 = 1,490.3 (from col 2001 line 12) / 9,214.5 (from col 2001 line 1)That math, normally valid, is invalid with chained data. That's why the BEA provides tables with GDP share computed such as Gross Domestic Product by Industry in Current Dollars As a Percentage of Gross Domestic Product
Therein, are the only correct percentages that manufacturing has fallen from 17.4 percent [in 1991] of GDP to 14.1 percent [in 2001] and as also quoted from Paul Craig Roberts critique of Bruce Bartlett Trade nothink.
Lest anyone be concerned that the BEA's computations of GDP share don't adjust for inflation, they do. Inflation is the same percentage for GDP as it is for a component of GDP and so computing manufacturing share of GDP as
MFG share of GDP = (MFG component * inflation pct) / (GDP * inflation pct)is correct because the inflation percentages (whatever they are) cancel out anyway.
Bottom line - Manufacturing's share of GDP has fallen consistently each year from 19.2 percent in 1988 to 14.1 percent in 2001, a decline of 27 percent over the 14 year period is correct as Roberts stated.
But the bottom line is that the Founding Fathers saw tariffs as revenue-producers. Setting aside the national-security exception that even Adam Smith recognizes, there is no way that one can argue with a straight face that a tariff should be imposed on say, imported malted milk balls, and add that the Founding Fathers would approve of it because candy-manufacturing jobs are at stake.
As for American furniture, my experience that most of it is crap (except for Amish-made). So is Chinese, for that matter. The best furniture (price and quality), in my opinion, comes from Scandanavia and E. Europe, and maybe the Czech and Slovak Republics. Canada is in the process of giving-up the ghost.
There remains some excellent, but expensive, American furniture.
American Engineers are surely going to not stand still. Why college and masters degree loans aren't that much. Surely they can tighten their belts and offer themselves for hire at $475 a month!
These are very well paid people in China. $3 an hour for educated people. China is now going to start massively teaching english in school, so they can get more white collar jobs. You don't like it, take $3 an hour and compete with them!
While manufacturing has largely decentralized and de-urbanized (the latter due to dumb environmental laws and parasitic politicians), it's very much still there Enlighten us as to your manufacturing experience and knowledge that would lead you to say that. I'm a 25 year veteran, and I haven't seen it this bad, well, ever.Nearly twenty years here and one of the projects I was working on was the plant I worked at getting moved to Mexico. The corporation probably lost money on that deal. They were hand assembling parts that we made on machines (one operator versus eleven) because they couldn't keep the machines running. I pointed out to a corporate guy that his labor costs were higher than the ones at our plant. He scoffed...until I ran the numbers for him.If you mean by "decentralized" that it went overseas in search of squat labor, then yeah, that happened. But it ain't a good thing.
American manufacturing has definite advantages over the rest of the world, though our educational system appears to be interested in diminishing them. One of the big ones is the independent minded nature of American workers. They come up with "sideways" solutions to problems foreign workers don't. This has been the experience of both the Japanese and European automakers with US plants.
By "decentralization" I meant smaller operations less likely to be in major cities. That's due to CERCLA, due to union "radius rules" where if you move a certain distance or less you have to retain the union, and due to the nature of many big city (Democratic) governments. Rural workers will also work a little cheaper than their city counterparts, but are less attuned to modern manufacturing priorities. Another tradeoff.
The whole idea of moving plants around is a function of corporations being run by lawyers and accountants. It's quite easy to move an office or a call center or even a store. Not so a manufacturing facility, as anyone with a production, engineering, or maintenance background knows. I've seen tremendous efficiency losses hit several companies who were going after the "economy of consolidation" that exists in theory but is elusive in real life. As these stories pile up, the lesson will be learned by prudent managers. Also watch companies that are run by engineers....ISG locally is a good example. By all current logic, LTV Cleveland East should never have restarted. They are up and running now, and expanding, and word has it doing quite well.
-Eric
1. was being forced down the colonists' throats,In other words, the colonists did not "protect" tea in order to raise revenue or protect jobs. The attempt by current-era protectionists to seize-upon what was essentially an common uprising as an example of enlightened economic policy falls short. To highlight this shortcoming, one must merely ask themselves: what is the current state of our domestic tea industry?
2. the colonists were excessively taxed by the government doing the importing, and that
3. the colonists' response was to outlaw its consumption.
Apart from the matter of falsely "appropriating" the motives of the Founding Fathers in order to support various protectionist claims is the problem of finding justification in the language of the Constitution itself. Sure, Congress has the power to levy tariffs and regulate trade. But the Senate also has the authority to ratify a Treaty reducing tariffs or unregulating trade. Article II, Section 2. Yet another problem with the protectionists' selective interpretation.
Furthermore, if the actions of the Founding Fathers (and the actions of the fledgling Republic) exclusively are to be viewed through the prism of protectionism, how does one explain the Barbary War, which occurred shortly after the Revolution itself? Clearly, the U.S. was protecting its interest in free-trade by force. No free-trader dares therefore to claim that military action is the first step to unrestricted trade. Moreover, the Barbary pirates, it could be argued, were the ones "protecting" their domestic industry (essentially toll-based transport), although I find it unlikely that one or more of the pirates themselves were claiming that they needed to do so in order to protect their high-paying jobs.
So this is the crux of your dilemna. You are attempting to make a rational argument based on an appeal to emotion. Witness the howls of "it's for our national security," or "the Founding Fathers wouldn't approve," every time the free-market adversely affects a special-interest. Witness how many times the national-security argument then is subordinated to other factors.
Finally, I suggest that your best claim is not to the national-security exception to free-trade, but rather the fledgling-industry exception. Adam Smith understood that a newcomer to the market might need protection from its well-established rivals until it gets on-its-feet. The entire United States was a "fledgling-industry" during this period. The problem that Milton Friedman and others have pointed-out, and that current-era protectionists (maybe deliberately) overlook, is that the "until" never comes.
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