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The Manufacturing of Decline

In this essay, Vaclav Smil (author of Why America is not a New Rome; see the FS review) takes a closer look at the rapid decline of American manufacturing in comparison to other wealthy nations.

Smil challenges the reasons given for why Americans need not worry and argues that the US manufacturing sector needs to lead the way out of our economic trouble.

Smil observes “Continuously acting as if manufacturing’s retreat is inevitable while believing that services will always make up the difference in well-paying jobs will prove costly.”

America has historically been an effective mass-maker of low- to medium- quality products for its huge domestic market, but an inferior exporter. As long as America imported few manufactured goods, energy, and food, this weakness did not matter. Today, however, America has enormous manufactured imports, a huge energy import bill, and a lower surplus on its food trade.

The consequences, in terms of jobs, are plain to see. Today, unemployment in the United States is at almost 9 percent compared to around 7 percent in Germany and 5 percent in Japan. The loss of manufacturing jobs explains a hefty part of the difference. By the end of 2010 only 8.2 percent of American workers were employed in manufacturing, while about 19 percent of German workers and 18 percent of Japanese workers are employed in manufacturing.

Another problematic argument is that job losses in manufacturing are the inevitable consequence of higher stages of economic development. According to this logic, since it is burdened by high labor costs and strong environmental regulations, the United States cannot compete with China and other low-income countries. But as both Germany and Japan demonstrate, high wages and high environmental standards are entirely compatible with continued manufacturing­­ success, if not in low-tech apparel manufacturing, then certainly in high-tech and high-end electronics, automotive, and machine tool manufacturing.

Why should Americans worry about the trade deficit if so many economists say it is a sign of wealth and is nothing to worry about? This rationalization of trade deficits is to be expected from a country that valorizes consumption above all else. But the only reason America has been able to sustain such a high trade deficit for so long is because the United States holds the world’s reserve currency: foreigners buy US bonds, allowing Americans to buy foreign products.

Manufacturing produces a variety of economic benefits that finance and service sectors do not. The higher outputs from manufacturing create important backward-forward linkages that include many traditional jobs (from accounting to job training) as well as entirely new labor opportunities (in e-sales, global representation). As a result, sales of every dollar of manufactured products support $1.40 of additional activity, while the retail sector generates less than 60 cents for every dollar of final sales.14 In terms of job creation there is no comparison. Facebook is valued by Goldman Sachs at $50 billion, nearly as much as Boeing, but Boeing employs some 160,000 people, whereas Facebook only employs 2,000.

Manufacturing acts as a powerful motivator for supporting and expanding suitable training and education because of its own demand for better-educated labor and because of its multiple linkages to intellectual services, transportation, and wholesale and retail operations. Losing manufacturing means reducing opportunities for skill-oriented education. And since more than two-thirds of research and development (R&D) occurs within manufacturing, losing manufacturing means losing R&D and with it a variety of multiplier effects for higher growth. In 2010, the US Department of Commerce released a new study quantifying the American jobs supported by exports: in 2008 that total reached 10.3 million, with nearly 2.8 million in services and 7.5 million in the production of goods. The study also showed how a post-2005 rise in exports increased the share of all manufacturing jobs supported by foreign sales from about 20 percent to more than 25 percent — yet another confirmation of the substantial and realistic opportunities for expanding the sector.

…Compulsory high school attendance, combined with the entrenched belief that there is no comfortable future without a university degree, has also undermined America’s ability to train the skilled labor force needed in modern manufacturing. The German model offers the greatest contrast, with most pupils (about 70 percent) never attending Gymnasium (up to grade 13) but, after Hauptschule or Realschule (ninth or tenth grade), entering a Berufsschule for a wide variety of vocational training in apprentice programs.16 Another helpful recent German development was the unions’ acceptance of smaller wage increases (or even wage freezes) in return for guaranteed employment, as well as the decision made by many owners not to fire workers during the time of slumping demand, but to retain the skilled labor force in anticipation of economic recovery.

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