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Title: History lessons: Understanding the decline in manufacturing
Source:
soso
URL Source: https://www.minnpost.com/macro-micr ... standing-decline-manufacturing
Published: Feb 19, 2016
Author: Louis D. Johnston, MinnPost
Post Date: 2016-02-19 13:01:40 by SOSO
Keywords: None
Views: 1912
Comments: 28
History lessons: Understanding the decline in manufacturing Email logo Email Share logo Share Tweet logo Tweet Print logo Print By Louis D. Johnston | 02/22/12 . American factory REUTERS/Adam Fenster U.S. industrial decline is a long-run phenomenon and will not be reversed by short-term fixes. New ideas for reviving American manufacturing seem to appear every day. Many of these notions have merit, but most are built on a flawed premise: that the decline in U.S. factory jobs is a recent occurrence, one that can be reversed through tax cuts or trade policy. Unfortunately, U.S. industrial decline is a long-run phenomenon and will not be reversed by short-term fixes. Let’s take a look at the trends and their implications. The really long run Economists traditionally classify economic activity into three sectors: agriculture (including forestry and fishing), industry (including mining, construction, and manufacturing) and services (all activities not included in either agriculture or industry.) You probably have a story in mind about what these data will tell us. The United States was primarily an agricultural economy through the 19th century; then, industry swept the landscape in the late-19th and early 20th century — with America standing as the industrial powerhouse of the world by the 1950s. Things stayed this way until the late-1970s and 1980s, when we first lost our edge to the Japanese, then to the Chinese, and have now become a service economy that doesn’t produce stuff. This story isn’t quite right. Let’s start with where people worked. The graph below shows the distribution of the labor force in agriculture, industry and services from 1840 to the present. The part of the story about agriculture is clearly true: Beginning in 1840 at roughly 70 percent of the labor force, agricultural employment fell to about 40 percent in 1900, 10 percent in 1950, and remains at about 2 percent today. Next, let’s examine the service sector. Here’s where the surprises begin. In terms of employment, the second largest sector was services, not industry. In fact, service employment exceeded industrial employment throughout American history. Looking at industry, the closest that sector got to services was in 1880! A similar story emerges when we look at output produced in agriculture, industry and services. Again, the agricultural sector originally accounted for the largest share of output, but services caught up and exceeded agriculture by the 1880s. Industrial production kept pace until 1910, but after that services pulled ahead and never looked back. Since 1950, the share of output produced in industry has steadily declined, falling from about 40 percent of output to about 25 percent today. The story since World War II Let’s zero in on the period since World War II. To keep things focused, I’ll make three changes to our perspective. First, some might argue that the rise in service employment and output shown above is caused by the growth of government. I’ll focus on private-sector employment and output to see if increasing service employment and output is a product of expanded government or is the result of private-sector changes. Second, I’ll combine agriculture and industry into one goods-producing sector, and then compare that with services. Here’s what we get in terms of employment: Since World War II, the share of private employment in goods production (including manufacturing) has steadily declined from just short of 50 percent to just fewer than 20 percent. The output data look much like the employment data. Just like employment, the share of goods production (including manufacturing) in GDP has steadily declined while the share of services in GDP has steadily risen. A tale of two causes To understand the long-run decline in industry, we need to look at the periods before and after World War II separately. Before World War II, the service sector grew because we got richer. Think about it: From domestic servants to waiters, blacksmiths to cobblers, and barbers to bankers, Americans have always been engaged in a variety of service activities. And, as the American economy grew and average incomes increase, Americans increased their demand for meals, repairs, grooming and financial services. Thus, more and more workers were pulled into the service sector by this increasing demand. When we look at the post-World War II data, a different story emerges. First, productivity grew rapidly in industry, faster than the demand for industrial products, while productivity grew relatively slowly in the service sector. This meant that we needed fewer industrial workers and thus many workers were pushed out of industry. At the same time, we were still getting wealthier and demanding more services, and slow productivity growth in this sector meant that to provide these services it had to pull in the workers shed by industry. Both push and pull forces were present in both periods. But, pull factors (i.e., the increased demand for services) was the predominant cause of decreasing industrial output and employment before World War II while push factors (i.e., rapid productivity growth in industry and slow productivity growth in services) dominated after the war. Implications for policy The decline in manufacturing output and employment is a long-run phenomenon, not just a short-run problem. This means that policies designed to boost manufacturing need to be designed with this long-run trend in mind, and not just react to problems of the last 10 to 20 years. Neither tax cuts nor tougher trade policy address the demand for more and varied services, nor will they address the relatively slow productivity growth in the service sector. Poster Comment: A somewhat dated article but worth revisiting if no other reason to invite informed updated discourse.
chart of distribution of labor force by sector from 1840-2010 Source 
chart of distribution of output by sector from 1840-2010 
Chart of private sector employment as % of total employment 1948-2010 Source: Bureau of Economic Analysis, National Income and Product Accounts 
Chart of private sector output as % of GDP 1948-2010 Source: Bureau of Economic Analysis, National Income and Product Accounts
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#3. To: Stoner, nativist nationalist (#0)
Give this history is Trump right about trade?
I would say he is right. When we reduced the manpower required to feed our nation, we still fed our nation. We did not outsource farming to the Pampas. We fed ourselves more efficiently. With manufacturing the opposite has occurred, in fact in just about all cases it takes more man hours to produce goods overseas than it takes here. The man hours that produce a ton of steel in China would produce 10 tons in America. Even in the extreme case that every manufacturing job was replaced by robots, we would be better off to make sure the robots were here. Increasing labor productivity in manufacturing is nothing new, folks like Henry Ford, Frederick Taylor and the Gilbreths busied themselves with that a century ago. Over the production run of the Model T the price of the car went down, the wages paid to the workers went up. Improving labor productivity is a good thing, and it is not the same thing as outsourcing abroad. With food there is only so much to be consumed, with manufacturing you can create new wants as the ability to produce improves.
Both sentences are generally false in the big picture. The first takes a myopic view, a parochial view of productivity and cost efficiency in the finished, consumed cost of production. A fundamental tenet of macro- economic theory is that resources should flow to the most efficient places that produce a good or service. In the past in the U.S. that was a mix in the manufacturing sector, as with agriculture, that favored capital over labor. In China it is more the opposite. All things equal investment should flow to where the TOTAL cost of production (i.e. - capital, labor, transportation, marketing, regulatory, social, environmental) is the least. For the past few decades that has tipped the scale in favor of China et.al. Capital has left the U.S. because the cost of producing and consuming a pound of X has been less to produce it outside the U.S. than within the U.S. Now I agree that it can be appropriately argued, and should be, that social and environmental factors have not been and still are not being accurately "priced" into the cost of the finished products and its consumption but that is a separate argument. As for food, you have to be blind not to recognize that on a global basis we are nowhere near the amount of food that can be (need be, should be) consumed. The more people that have an adequate amount of food the more people you will have (e.g. - infant mortality rates will decline, life expectancies increased, people will have more babies, etc.) I remind you that there have been and still are many, many loud voices from the Nazi Greens and greedy leftist elites arguing for, if not demanding, world population control. But almost all economic theories breakdown at the boundaries or extremes. For example, if it were possible for the U.S. to produce all the food the world demands at the lowest delivered cost to the respective point of consumption anywhere around the globe by becoming a mostly agrarian economy again, should it? Would it? Would other countries allow that to happen within their respective society? I think that we would agree that the answer to all three is decidedly no. But what if China could supply the world demand for TVs at the lowest delivered and installed cost around the globe? Would we, the U.S., buy all of our TVs from China? Should we? Would the PTB in the U.S. allow that to happen? Then the answers become less certain as there will be others, perhaps many or even the majority of those, that may say yes. An embargo on being able to replace your TV is much less an issue than an embargo on all of the food you need to eat to sustain life. So as pretty much with all things in life, its balance, grasshopper, balance.
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#4. To: SOSO (#3)
Give this history is Trump right about trade?
#7. To: nativist nationalist (#4)
Improving labor productivity is a good thing, and it is not the same thing as outsourcing abroad. With food there is only so much to be consumed, with manufacturing you can create new wants as the ability to produce improves.
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