The Truly Good Shape of U.S. Manufacturing

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 never said tariffs were a "first step", but one of many possible choices. Getting rid of OPIC to underwrite the risks of doing business in 3rd world countries with our tax money would be a better first step.
National Security should never be subordinated to other factors. Our trade policy with Communist China is downright suicidal in the long term. That is not based on emotion, but based on current policies and trends.
I was attempting to draw on our own 200 year history of regulating commerce to our benefit. Even Reagan used tariffs to save Harley-Davidson. Common sense and logic are found in abundance in harpseal's list.

The Boston Tea Party article referenced a previous article:
"Free Trade: The Golden Calf of the Republican Party"
http://www.newsmax.com/commentarchive.shtml?a=2000/3/13/083321
[We must look back to our roots, where men like George Washington supported economic measures against the threat of tyranny, because first, “war was a last resort,” and second, he hoped that “starving their trade and manufactures” would bring “their attention to our rights and privileges."]
This was the point of the Boston Tea Party. We have never had a domestic tea industry. England had The East India Company and that was the target.
I do not believe that I have falsely appropriated the motives of the Founding Fathers. I think that you have when you claim that tariffs were just to collect tax revenue.
The "fledgling industry" argument is valid, but national security is stronger and a reality (all emotions aside). From Lieberman to Kissinger to Duncan Hunter, the losses in manufacturing are seen as a threat to our national security.
Have you seen the articles about how the rest of the world views us? Despite our sacrifices and generosity toward building freedom throughout the globe in the last century we are mostly despised. I think now we should look to our own sovereignty, economy and borders.

In 1970, most women were able to stay at home. Do they have that choice now? Did NAFTA, GATT, or the WTO increase the ability of men to support families?

I've brought this point up many times when debating the Free Traitor lot here and never got a cogent response back. Most in the newer generations are apparently unaware that prior to the mid/late-70s the vast majority of working age men in America could raise a family, buy a house and afford all the basic necessities of life without needing their wives to work. To do this today one must be earning at least 80K--well above the median income level.

Yet that's how it was before our government decided to go down the grossly misnamed "Free Trade" path and sellout out the livelihoods of millions of its own citizens. And I'm sure it's no accident that most Young Americans are unaware that in fact the TRUE standard of living and quality of life was a heck of lot better before these disastrous trade agreements and the dawn of One World Socialism. We can't go talking about that because it might get some folks to start asking a lot of questions.

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?

Right On and the scorecard for "Free Trade" is a dismal failure.

It is still pretty much there?!

Nope. It is still pretty much disappearing. We have seen a hugh increase in the number of companies inquiring and making the move to set up shop in Mainland China.

American companies have generally been the late comers to set up production in China but will soon have the same presence there as the European countries, Taiwan, Singapore, Austraila.

In a recent column, I argued that the manufacturing sector of the U.S. economy is in relatively good shape

They are overregulated, heavily taxed and hated. That is good shape? The writer of this column is really blind or is a public opinion plant.

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