Wednesday, January 25, 2006

Manufacturing Myths

Good friend Dave McCarthy wrote that his brother-in-law (retired engineer for Boeing; one of the brightest people I know) made the comment that America has very little manufacturing jobs left, and is losing more each year and soon this country will be all service and will produce nothing, thereby ceasing to be a world power. It seems that many people have that concern.

Good friend Vic Quirarte asks how I can say that the U.S. economy is just fine and on the rise when Ford is going out of the country for most of its manufacturing, GM already builds Chevy's in Mexico.

So what about it? Last May I wrote a piece called “Economic Myth and Nonsense” (5/23/05) that included this one: As we outsource our high paying manufacturing jobs, Americans are left with inferior service jobs.

Now is the time to put a stake into the heart of that economic myth. My primary reference is an
article in The Economist magazine, not noted for right wing economic or political views.

In “Manufacturing Employment” (9/29/05) The Economist claimed that the fall in manufacturing employment in developed economies is a sign of economic progress, not decline. Whoa, how can that be true? Well -- look at these factoids.

1. Employment in manufacturing, once the engine of growth, is in a long, slow decline in America (and in the rest of the developed world) with American manufacturing now accounting for less than 10% of total jobs.

2. Manufacturing output in America has been growing by almost 4% a year on average since 1991.

How can these facts be consistent? Productivity is the key to the benefits program. In “Dow Eleven Thousand” (1/9/06) I noted that GDP per capita is determined almost entirely by productivity, that has been growing at a remarkable rate of 3.4% per year for the last 5 years. Thus we are able to produce more goods with fewer workers, as Ford, GM and others are showing.

So manufacturing in America is not in trouble. We still produce twice as much manufactured goods (measured by value) as China. Due to our technological advantages we are able to do it with automation while China relies more on human labor.

Furthermore, advanced technology has allowed us to shift production from labor-intensive products such as textiles to higher-tech, higher value-added, sectors such as pharmaceuticals. While low-skilled jobs have moved offshore, higher-value R&D, design and marketing have stayed at home.

And jobs in these higher paying areas are growing faster than the lower paying jobs in manufacturing are declining. That is also true in the services sector where average wages in the fastest-growing areas such as finance, professional and business services, education and health, are much higher than in manufacturing. That’s right -- the services sector is a great place to work, not at all like the popular Mcjobs myth.

What is happening in America is happening also in all other highly developed countries. Manufacturing jobs disappear because economies are healthy, not sick. Countries that fight this trend through protectionism may be able to retain some lower paying manufacturing jobs but do so at the expense of higher paying high-tech jobs, and their economies flounder. (See “Mythical Protectionism,” 6/26/05). In the last 30 months the American economy has created 4.5 million new jobs while the unemployment rate decreased below 5% and GDP growth averaged 4%. Check out the German economy if you want to see the effects of a little anti-American economic policy.

Finally, what about those workers who lose their manufacturing jobs? Government needs to ameliorate the pains which change inflicts by retraining or temporarily helping those workers who lose their jobs. Unions can help by joining with management to transition workers to higher skill jobs before their manufacturing jobs are lost and schools can help by educating students for the jobs of the future. But those are subjects for another post.


Blogger Ralph said...

Good Info. I haven't worried one way or another but its nice to have facts to refute worryworts.

3:54 PM  
Blogger Roseville Conservative said...

Fantastic post, Bill

Great Information, I am going to pull this down and send it to the "Stop the FTAA" crowd.

6:08 PM  
Anonymous Anonymous said...


Well said!


8:14 AM  
Anonymous Anonymous said...

I just have to respond to this since I am involved intimately and see the decline of manufacturing in the states in the textile and finishing sector.

This is very well said and so true. We get so caught up in hearing all of the negatives that occur from manual labor intensive jobs going away but we don't realize the real reasons for that which you have so eloquently written out.

Since we are an educated nation, we have the money and skills to compete with the rest of the world, to be more efficient, more advanced so of course, with efficiency come less need for manual labor and higher quality of goods, which ultimately means less human contact so that there is less chance of error and higher productivity (machines don't have mood swings like humans do!).

Also, at one time, manual labor was more important, now, we have more need for service oriented jobs, so the job trend has shifted and people have to move with that shift.

So, I believe that jobs exist, they have just shifted and the simpliest way to cope with this shift is through training and education. Who pays for that? That's another topic for another day, right?

On a tangent, Americans can be so hypocritical, on one hand we get upset that we don't support american labor but one of the largest retailers in the world by a landslide is Walmart who drives such demanding price points that the vendors that are "lucky" enough to have a piece of that pie are forced to work with 3rd world countries in order to support the margins AND volume that they are held accountable for. So, although big companies like Walmart are helping to drive the manufacturing out to other nations, the people that support Walmart tend to be people where a lot of the manufacturing used to be at. It's such a vicious cycle.

I'm not sure if I made any sense as I'm trying to just get this off my chest quickly and I must run to meet your son now.


8:18 AM  
Anonymous Anonymous said...

I believe in productivity being a prime value in business and industry. Note BUSINESS is losing people as well. individual productivity in practice means that techniques allow a person to do the job 5 did a few years ago more effectively now. GREAT. But that means one employee working and 4 out of a job. how do you fix that?


8:19 AM  
Anonymous Anonymous said...

Bill — Let’s look at automotive manufacturing. As a retired automotive executive, I know something about the subject.

First, tell your friend Vic not to confuse manufacturing with assembly. Ford, Chrysler and GM have been assembling overseas for sale in the U.S. since the 1970s. Nothing new there. Meanwhile, Toyota, Honda, Nissan, Mitsubishi, BMW, Mercedes-Benz, Volkswagen, Isuzu, Mazda and soon Hyundai are assembling in the U.S since the 1970s. Seems like we win there.

Manufacturing means where are the parts made that are later assembled. Look at the window sticker. Most cars sold in the U.S. are made with the vast majority of parts fabricated in North America. My “Japanese” Honda Accord is 90% North American content. Now let’s look overseas. General Motors has been building cars in Brazil since 1926, Europe since the 1930s, Australia and some 45 other countries since the ‘50s and ‘60s. Ford and Chrysler, same story. Much of the materials in those overseas cars comes from the U.S. and where do the profits go? U.S.A., that’s where.

Read the Ford story more closely. Their losses are in U.S. operations. Ford profits are all from overseas. Why is Ford in trouble? Labor costs pure and simple. Between the unions and the union pensions, Ford, GM and Chrysler pay something like $1500 per car MORE in labor than any of the “foreign” car companies assembling cars in the U.S. And while there are exceptions, as a generalization, these union plants do not have the assembly quality that the non-union plants have. Therefore, if you are a manufacturer, what do you do? Continue manufacturing in the U.S., where you have a more expensive, lower quality product at a loss, or go overseas and build it better and cheaper and ship the profits back here?


8:22 AM  
Anonymous Anonymous said...


Very good. We are in global competition. However, we are situated to be the constant economic leader. While this sounds elitist, that fact is, based in out physical makeup, Western Man has a higher developed creative side of his brain than Eastern Man. Eastern Man, however, has a stronger logic center. So, Eastern Man will always do whatever Western Man does and do it better. However, Western Man is the innovator. With those facts, then, Europe should be doing well. Problem: their cultures and societies foster poor productivity and squelch new idea expansion. Europe is, really, an elitist environment. 1st, they had kings and their minions. Then, they dictators and now they have leaders who rule in the name of this vast undefined mass called , The People " ( read that as Socialism, just another form of totalitarianism ).

Ergo, the U.S. has the best of all. With our immigrant base, we have the creativity of Western Man, the logic from our Eastern immigrant brethren and a free society where anyone can develop an idea and get it to market. Just look at how new " Millionaires " we create each generation. If it were not for rock stars Europe would have, virtually, no " new money ".

Based on these facts, The U.S. and its corporations need to concentrate on new product innovation....... with the realization that within two years of introduction, that new idea will came back to us from the East better and cheaper.....great for the consumer. The U.S. Corporations should care less as they should be onto the next new generation of products. Make a list of all the products we import and close to 100% were invented here. Problem: Wall Street and the Accountants who now run our corporations want " instant gratification " in the form of immediate higher profits and lucrative stock options. We need to break the hold Wall Street has on out corporations by revising the stock option/Upper Management incentive programs and get the accountants out of the CEO chairs. The #2 or #3 person in any corporation should be a financial type to HELP control and steer the Company. But these people should never in the lead position. They are backward thinkers not forward thinkers and R & D money is a good place to cut if you want near term profit increases. However, that is a slow death for the Company.


8:24 AM  
Blogger fetching jen said...

Working for a manufacturer, I've witnessed the supposed "job loss." It is employees who refuse to update and apgrade their skills as the jobs become more technical. We phase them out and hire people who are trained more technically.

I have heard the whining, seen the blame and anger, and 100% of the time it belongs to some fathead who won't grow and change with the times.

12:12 PM  
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