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Some interesting points made here about the decline in manufacturing and whether we'll be able to sustain growth without it. Is a service economy enough to support 300 million people? Can the lack of manufacturing jobs be blamed for the past 3 "jobless" recoveries?

Comments (20)

  • metalasian's picture

    This is something I've always been interested in... how much of this shift do you think is because of unions and minimum wage laws?

  • squawkbox's picture

    I am sure a similar question, "could the US survive without farming?", was posed in the early 20th century.

    We are going through yet another period of creative destruction and will come out stronger after the transition.

  • tandaradei's picture

    @metalasian - nobody will tell you to what extent each factor contributes. Unions def are one of the causes, minimum wage laws probably as well, but its less obvious. But also remember about efficiency rising as technology advances (workers are more productive, so you need less of them to do the same job), about emerging markets, and the fact that China (by means of currency manipulation) is purposefully keeping its population impoverished so that it stays an emerging market for a prolonged period of time, taking away a disproportionately high amount of manufacturing jobs.

  • MMBinNC's picture

    I think that there will be three key ways for us to recover our lost manufacturing capabilities. Have fun with this...

    1. China letting the yuan float. Eventually the price depreciation that China is imposing will become too costly and they will let their currency float, leading to higher manufacturing costs in China and standard of living. That will allow the price gap between goods in the US and China to close quite a bit. I believe that once the prices are more similar, the US could actually recoup a larger portion of the manufacturing because the quality is superior to China's. If inflation of the US dollar occurs, this will probably happen faster because China's currency will lose real value because so many of its reserves are in dollars. I think rather than saying "Wow, this is amazing! Our goods are soooo cheap now!" They will say "Crap! My workers can't buy food now!"

    2. Phasing out of unions. Overall, due to the political and social climate of today, I believe that unions have become a burden on the American worker rather than an instrument of good. This is because it depresses the hiring of new labor because it is so hard to fire union workers and it is so expensive to hire a new one. Today, a company with sub-standard wage policies would not be tolerated like they were in the early 20th Century. As we can see with American Airlines after 9/11, it was not the union who created the largest uproar over executive compensation, but the public- who saw that the wages of the common worker were destroyed while the CEO made millions of dollars in bonus. Also, as we can see in France with the disallowance of the firing of new graduates for two years (is this still in effect?) - it severely depresses hiring to such a low rate that it in itself can cause a crisis. While union contracts in manufacturing are not yet that egregious, other union contracts like those in teaching are (in NY they put bad teachers in "rubber rooms" where they don't teach until they retire because its too hard to fire them with the union contract). Rather than help the worker, it enfranchises the few union members at the expense of non-union workers and the company. Look at the on of the last big steel companies in America, Nucor, no union contracts....hmmmm a coincidence? I think not.

    3. The minimum wage is outdated as well. Much like the steeply progressive income tax in many countries- it was the product of the Progressive Movement, that was in many ways, short-sided. This, yet again depresses hiring in jobs "paid by the hour" such as those in manufacturing, and places a higher burden of cost on the employer. Do I think that a 18 year old, living with his parents should be paid the same as a 70 year old man who had to go back to work because he lost his pension- not at all. Do I think that every job in America deserves a wage of greater than $7.25 an hour, not at all (well in a few years with inflation it may not be that much real money). But people want "more money" for minimal experience and work effort rather than earning higher wages in the long run (without the minimum wage) and working harder. The minimum wage, overall, can depress LR hourly wages, depresses hiring, depresses productivity, and increases the burden on the employer.

    Reality hits you hard, bro...

  • NYNY's picture

    Great comment, MMBinNYC. I'm not sure I 100% agree with your 3rd point though - it doesn't seem feasible to do away with the minimum wage... I worked in a field with a bunch of minimum-wage workers who supported families with their salaries, and I can't even imagine what would happen to them if minimum wage was allowed to go to 0. Economically it makes sense, but realistically I'm not so sure.

    Besides, with no minimum wage, how will IBankers survive? =)

  • oblivion's picture

    Her recommendation is to keep costs down. She concedes that its all cost and focus on the bottom line and there will be lower margins in US based manufacturing operations. She wants a macro trend of increased US manufacturing, but the incentives aren't there on the firm level. The higher margin companies can charge less for their goods and attract better investment capital. Maybe there are ways to work with local municipalities to get costs down, but a lot of businesses have a product and manufacturing is an outsourcing decision.

  • UncleKevin's picture

    Well big picture is this. A truly free market on a global level means better life for most, but way worse for most Americans. Various measures are preventing a total free market, i.e. international trade regulations and immigration legislation (good thing).

    1. Manufacturing jobs here create non price competitive products. They can produce the same thing overseas for much less.

    2. Long term American's wages will decrease vs the rest of the world. This speaks to MMBinNC point #1. The price gap closing works in both directions. Chinese up and US down.

    3. Top jobs that we do well will stay here (banking!), but with lower tier jobs drying up there will be even more of a discrepancy between the rich and the poor.

    It's a bleak picture, but I'm not sure how else it could play out. The only thing I can think of is to find the next killer US industry. Alternative energy anyone?

  • metalasian's picture

    Alternative energy could definitely be a hot space with a lot of growth potential for the United States... but now with the increased ability of the private sector to affect legislation, I don't know if the incentives for (energy) businesses to pursue production of alternative energy will be in place until it's too late. I'd be interested to hear what other people have to say

  • jhoratio's picture

    Imagine this thought experiement:

    There is an island where the king owns a special beach where there is an unlimited supply of special shells that appear nowhere else on earth. The king distributes the shells to the banks of his island and all commerce is conducted in shells - people work for shells. People buy what they need with shells. Some people have lots of shells, some people not so much. There are only 3 things that need to happen for a system like this, as ridiculous as it sounds, to actually work - 1) complete unambiguous control over the shell supply, 2) explicit backing for shells as legal tender, and > 3) the island is completely self-sufficient, producing on its own everything it needs.

    The second someone on this island wants to buy a car and discovers that the rubber needed for tires isn't there, he needs to convert his shells to the currency of the rubber producer. In order for that transaction to happen, the island needs to buy rubber bucks with his shells. For THAT to happen, someone with rubber bucks needs to want to buy shells. If no one with rubber bucks wants to buy shells with their rubber bucks, then no rubber for the island. There are only 2 ways someone with rubber bucks will want to buy shells - 1) if they want to invest in the securities and the real assets of shell island or > 2) they want to buy something that shell island produces.

    If shell island decides to stop making anything, for a little while people will still want to invest in the assets of the island. But in the long run, that will stop making sense if there is no value being created by the island. Service industries can whisk themselves away in a heartbeat. If it no longer makes sense for financial jobs to be in NY, then virtually overnight, they won't be. They'll be gone. The US needs to figure out how to stabilize and grow its manufacturing base or else we are in for extremely bad times. There will come a time when we won't be able to buy anything anymore because no one will want our shells.

  • In reply to UncleKevin
    mxc's picture

    BCbanker:
    2. Long term American's wages will decrease vs the rest of the world. This speaks to MMBinNC point #1. The price gap closing works in both directions. Chinese up and US down.
    See, there's a big flaw in your argument: money is only a numeraire.

    My counter-argument has two sides, which you must read depends on your philosophical views on wealth:

    1. If wealth is only relative, then no matter whether US wages go up or down- in the long run China will catch up and the US will thus be relatively poorer per capita. As money is only a numeraire.

    2. If wealth is absolute, then due to comparative advantage, it is not possible that Chinese wealth goes up while US wealth goes down. As money is only a numeraire.

  • prospie's picture

    i think umair haque's blog is really interesting. here he is talking about products manufactured in places with higher labor standards:
    "I think the real question is: how long can we afford not to [pay more for something made according to higher labor standards]? The less we invest in one another, the worse off we all are eventually. The higher standards we set for ourselves, the more potential value we can create.

    The American manufacturing sector has been eviscerated by an insistence on near-term cost-cutting — and today, our lack of standards and manufacturing competence has led to a dearth of innovation exactly when we need it most."
    http://blogs.hbr.org/haque/2009/07/a_fair_labor_ip...

    my impression, though, is that neither consumers nor businesses will voluntarily live up to his lofty ideals, at least not on their own. let's get real, the "near-term cost-cutting" by american manufacturing he refers to will probably never change, worsening the picture for american manufacturing jobs.

  • In reply to UncleKevin
    tandaradei's picture

    BCbanker:

    3. Top jobs that we do well will stay here (banking!),

    Haha oh man, this is so naive it hurts:D And exactly what is the American comparative advantage in banking, hmm?:) This is hubris at its best. You should hope never to see your claim validated...

  • In reply to tandaradei
    metalasian's picture

    tandaradei:
    BCbanker:

    3. Top jobs that we do well will stay here (banking!),

    Haha oh man, this is so naive it hurts:D And exactly what is the American comparative advantage in banking, hmm?:) This is hubris at its best. You should hope never to see your claim validated...

    That's a constructive argument...

  • In reply to tandaradei
    prospie's picture

    tandaradei:
    BCbanker:

    3. Top jobs that we do well will stay here (banking!),

    Haha oh man, this is so naive it hurts:D And exactly what is the American comparative advantage in banking, hmm?:) This is hubris at its best. You should hope never to see your claim validated...

    Who says we don't do banking well? We managed to screw over not just clients but the entire WORLD.

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