Sunday, February 26, 2012

…not an Industrial Nation

By kay.e.strong

In January President Obama touted that an economic recovery “begins with American manufacturing.”

The Brookings report: Why Does Manufacturing Matter? Which Manufacturing Matters?, opined “[p]ublic policy is needed to help strengthen manufacturing and prompt a high-wage, innovative, export-intensive, and environmentally sustainable manufacturing base.”

I just don’t get it.  Why are we so obsessed with looking backward to the future?

The United States is no more an industrial nation now than it is an agricultural nation.  Before the turn of the 20th century, a quarter of the American population was down on the farm.  Now, maybe, 3% , that is, three percent of the population is engaged in plowing-discing-dragging-seeding American fields, raising livestock and caring for fruit and vegetable plants. And three percent is sufficient to put foodstuff on the tables of Americans and have plenty to make the US a net exporter of food!  America’s agricultural sector exhibits high productivity!  Similarly, in its heyday, the manufacturing sector was the backbone of the American economy.  Its relative size of employment today stands shy of 9%, down from 21% in the 1980s. Assuming 150 million workers in the labor force, 3 percent devoted to agriculture, 9 percent to manufacturing, what are all the rest of us doing?  Ah, providing services!  Yup, 87% of American workers are employed in the service economy…and expenditure on services accounted for $7 of our $15 billion GDP in 2011…making the U.S. a Service Nation!

Some lament the loss of high-wage jobs as our manufacturing sector has downsized. What they really miss are the high-paying jobs for low skill/ low educated workers.  But that train ride is over!  As one would expect, comparative advantage has kicked in.  Low-skill manufacturing jobs have migrated to mass-production, low cost facilities abroad.  The world benefits by shrinking deadweight loss from production inefficiency.  Now, about that “high-wage” thing.  Every worker’s pay is based on his marginal revenue product, translated: your wage is equal to your added contribution to company revenue.  The more productive you are, the more you add to revenue.  The US has the unique advantage of mixing workers with high levels of capital—the secret sauce of high-wages in manufacturing today.  On the downside, though, more capital per worker means the manufacturing sector is demanding more skilled workers.  Higher education and higher skills go hand-in-hand with higher wages in both manufacturing and service sectors.  Want high wage?  Get skilled!

The Brookings report argues that manufacturing drives innovation.  I rather believe that innovation hubs like Bell Labs (NJ) or Silicon Valley (CA) drive revenue streams for  manufacturing.   Innovation hubs bring “thinkers and tinkers” together under the same roof.  Closer the proximity, the denser the body count of would-be innovators, the higher the probability of new streams of production for manufacturing.  Lesson: pitch federal dollars toward research and development hives not solo-operations.  Cultivate the innovation ecology of communities.  Strengthen fast pitch innovation techniques such as crowd-sourcing, open-source access and redistribution and social entrepreneurship.  Unharnessed ideas propagate faster.

Another claim of the Brookings report asserts that “[m]anufacturing can make a major contribution to reducing the nation’s trade deficit.”  As can a drop in the relative value of the dollar or a reduction in reliance on imported petroleum products!   As for the export of manufactured goods, specifically, “[o]nly about 4% of manufacturing firms in the U.S. exported in 2000 and 96% of all U.S. exports are sold by just 10% of this already small set of firms.” That 10% would be the industries of chemicals, transportation equipment, computers and electronic products, and machinery.  Clearly then, these industries not manufacturing broadly stand to benefit disproportionately by export push policies. [http://www.brookings.edu/opinions/2012/0220_manufacturing_klein.aspx]

Nostalgia makes for great literature but not a great economy.  We are passed our Industrial Nation prime and in the youthful bloom of our Service Nation present.  Let’s get on with making policy aligned with reality!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

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