Saturday, March 27, 2010

Made in America

We hear a lot of rhetoric about the erosion of the American manufacturing base, that the United States "doesn't build things" anymore:
Walk into any big-box store in the country and you’d be forgiven for thinking that nothing is made in America anymore.

So many of our everyday purchases — the clothes we wear, the toys our children play with and the electronic devices we rely on for work and entertainment — are manufactured abroad.

Nearly everyone knows someone who lost a job in manufacturing in recent years. The recession that began in December 2007 has been devastating for the sector, leading to a steep drop in production and eliminating more than 2 million manufacturing jobs, about one out of every seven positions, exacerbating a long-term trend.

But that's not the whole story. The problem isn't manufacturing goods. The problem is manufacturing employment. Thanks to advances in productivity and a domestic shift towards higher-value goods, we just don't employ as many people to make things as we used to.

“There’s been a loss of manufacturing jobs, but that’s not the same as a loss of manufacturing,” said Ken Mayland, an economist with ClearView Economics who works with several manufacturing trade associations.

The U.S. manufacturing sector gradually has been transformed to focus primarily on sophisticated items that require fewer skilled workers to produce but create far greater value than the T-shirts, tennis balls and other consumer products that are mainly made overseas. Some U.S. factories also have been able to continue producing lower cost items, such as housecleaners or toothpaste, using highly automated machinery and few people.

In fact, the dollar value of the manufacturing sector's output generally rose between 1987 and 2007, according the Bureau of Economic Analysis, even as its importance as an employer fell.

As a series of graphs on discussion of the topic explain:

Note that since 1960, the index of industrial production has risen from a little below 30 to its current level of about 100. And note the increase is continual -- meaning the number didn't just hover around 30 for most of that time only to spike up in one big move. The index has continually risen over that entire period. This situation is also obvious on a logarithmic chart.

Instead, what people are commenting on is the drop in manufacturing employment. Consider these two charts.

Durable Goods Employment remained fairly steady at 10 million to 11.5 million employees between the mid-1960s to the early 2000s. Then total employment dropped like a stone, losing three million people over the last 10 years. These are levels last seen in 1950.

Non-durable goods manufacturing is even worse. From the mid-1960s to the early 200s, total employment in this area hovered around a 6.8 million. However, starting in 2000, the number fell off a cliff, losing almost 2 million people. This is the lowest the number has been in over 60 years.

However, over the last 15 years we've seen an increase in manufacturing productivity. Consider the following:

Manufacturing Output per hour has increased continually since records have been kept, as has
Multi-factor productivity.

What does all this information tell us?

US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.

In other words, we build a lot of stuff here in the USA. More than we've ever built before, in fact, in terms of value. It's just that, unlike before, we're using higher-skilled workers and more automation to build higher-value products. And while that's not good for lower-skilled workers or for manufacturing employment in general, it's a long way from saying "we don't build things in America anymore."

Where so much political rhetoric has been generated regarding this loss of manufacturing jobs - one side says that overly-demanding labor unions and protectionist tariffs have made American-made goods too expensive to be competitive, while the other side claims that corporate greed, enabled by free-trade agreements such as NAFTA, have caused American jobs to be outsourced to other countries where wages are meager and worker protections non-existent - the simple fact is this: it is productivity, not politics, that have caused an erosion in American manufacturing jobs.

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