Manufacturing an Economic Myth

Rick Santorum and Barack Obama both have a soft spot for the manufacturing sector.

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Barack Obama and Rick Santorum probably couldn't agree that August falls in summer, but on one important issue they are closer than the Winklevoss twins. Both regard manufacturing as precious beyond words, and both think the federal government should be making special efforts to promote it.

Obama favors an array of tax breaks to induce manufacturers to keep jobs in the United States, and Santorum wants to completely scrap the corporate income tax on companies in this particular sector.

"Everybody benefits when manufacturing is going strong," said the president. Santorum recently lamented, "We have the manufacturing sector of the economy when I was growing up that was 21 percent of the workforce. It's now nine."

These are not exactly new sentiments. Walter Mondale, the 1984 Democratic presidential nominee, demanded, "What do we want our kids to do? Sweep up around the Japanese computers?"

In 1992, independent presidential candidate Ross Perot, railing against the North American Free Trade Agreement, forecast "a giant sucking sound" caused by jobs going to Mexico. Pundits galore have long warned that we are "losing our manufacturing base."

But if nostalgia were a sound guide to economic policy, we should be building Studebakers and rotary telephones. Neither Santorum nor Obama seems to grasp the realities of manufacturing in 21st-century America.

The first is that it's not declining in the ways that matter. Compared to1990, the total value of U.S. manufacturing output, adjusted for inflation, was up by 75 percent in 2010—despite a drop caused by the Great Recession.

It has declined as a share of gross domestic product only because other industries have expanded even more rapidly. Economist Mark J. Perry of the University of Michigan-Flint points out that in 2009, the total value of America's manufacturing output was nearly 46 percent greater than China's. Over the past two decades, our share of the world's manufacturing has been pretty stable.

The decline in the number of manufacturing jobs is taken as evidence that the sector is sick or uncompetitive or the victim of unfair trade practices. In reality, the change indicates sound health. Our manufacturing workers have become so much more productive that they can churn out more goods with a far smaller workforce.

The same pattern, by the way, is evident in American agriculture. In 1900, 39 percent of all Americans lived on farms. Today it's 1 percent. It's a good thing, not a bad thing, that we need fewer people to produce our food. Likewise with manufactured products.

Manufacturing accounts for a shrinking slice of the total economy mainly because as we grow wealthier, we spend a smaller portion of our income on physical products, like cars and appliances, and a bigger one on services, from health care to cellphone contracts to restaurant meals. That phenomenon holds across the developed world.

It's the result of the free market at work, endlessly shifting resources to accommodate changes in consumer demand. Politicians don't think they should tell Americans to eat at Burger King instead of Chipotle, or buy baseball bats instead of soccer balls. They didn't insist we keep our typewriters when personal computers came along.

For the most part, our leaders take it as normal and sensible to defer to consumer demand, rather than try to dictate it. Given that, why do they think they ought to rig the tax code to push consumption dollars from services, which Americans want, to goods, which they don't want quite so much? Why should they divert investment from more popular businesses to less popular ones?

That's what the measures offered by Santorum and Obama would do. The point is to ease the tax burden of manufacturers at the expense of other companies, on the superstition that the former are more valuable than the latter.

It's hard to see the fairness or the economic logic. When the president unveiled his proposal, Jade West of the National Association of Wholesaler-Distributors complained to The New York Times, "My guys are totally freaked out by manufacturing getting a different tax rate than we do. They're not more important in the economy than retail or distribution or anything else."

In fact, manufacturing is bound to be a diminishing share of any advanced economy. Obama and Santorum can fling money into the teeth of that trend. But anytime politicians want to resist powerful and beneficial economic forces, bet on the economic forces.

Steve Chapman blogs daily at newsblogs.chicagotribune.com/steve_chapman.

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80 responses to “Manufacturing an Economic Myth

  1. The really funny thing is that the real basis for treating manufacturing as sacred is the general cultural impression that “factory work” is more dignified for the working class than service economy work.

    The reason that’s funny is because when manufacturing jobs were new, they were generally regarded as incredibly degrading. Assembly line work was seen as dehumanizing compared to “craftsmanship”. Working as a cog in a large factory was seen as humiliating compared to proudly working on your own family’s farm. Etc.

    So now the left tells us to regard as sacred that which previous generations of the left told us to regard as abominable.

    1. If the choice is between a manufacturing job that makes more money and a service job which makes less, then the manufacturing job gets some dignity points.

    2. +1 The predictable pattern of rhetoric continues.

    3. Manufacturing work is utterly mind-numbing. As a teenager I worked an industrial screen-printing line for two summers. Pallet slides, applies paint on cloth. And again… and again… and again.

      My job? Spraying a thin line of glue on the pallet, load cloth, unload cloth, etc. Cleaning these fifty-foot long machines was more enjoyable than actually working with them.

      I would rather mow lawns, herd cattle, or even sweep floors than work manufacturing again.

      1. More and more of that mind-numbing stuff is being done by robots (I think). They don’t seem to mind as much.

    4. The left is saying the same thing about manufacturing jobs overseas.

      How often are we told of how the core-pour-ray-shuns are exploiting those poor brown and yellow people across the ocean?

      How these humble farmers are being conscripted from the lovely countrysides to live in hellish conditions in the city?

      Manufacturing jobs here? Good. There? Bad.

      1. Yes, but we have insured that manufacturing here protects its workers. Our regulation and minimum wage laws allow niche industries, like organic farming, to charge more money for products that I will buy to fuel my sense of moral superiority.

      2. A cynic might suggest that the left was afraid that manufacturing jobs overseas will do what they did here; put enough money in the hands of the workers that they no longer listen to their ‘betters’.

        1. A cynic might suggest that the left was afraid that manufacturing jobs overseas will do what they did here; put enough money in the hands of the workers that they no longer listen to their ‘betters’.

          Bingo!

    5. Oh, the old stuff is still bad, it’s just now that it is also good. It’s simultaneously bad and good, don’t you see?

    6. The Left is in love with manufacturing largely because it still conjures up Marxist porn: belching smokestacks and oppressed, zombie-like workers, while their bourgeois overloads sit in their offices laughing and lighting cigars with $100 bills.

      Today’s jobs in the service sector, along with other modern atrocities like working for yourself or self-managed teams or employee-owned companies, just don’t provide the visual stimuli to get them off.

      1. They love manufacturing jobs because thats how you form unions. It’s hard to convince individual contractors they need to spend some of their hard earned cash on a Union that will only keep them at a specific wage. As an individual contractor I can change my rates on a daily basis and keep myself employed and I can take any time off i like or work as many hours as I need.

  2. Manufacturing and agriculture are corporeal, services aren’t. Mark J. Perry is so caught up in his graph obsession he can’t separate academics from experience.

    Our agricultural history proves that that the farm’s disappearance will be catastrophic when our economy crashes. Ergo basic manufacturing; it was never the product but the ability to adapt.

    1. But in real dollars manufacturing never declined.

      That should make it obvious to even a child that manufacturing is not and never has been in a “crisis” in the United States.

      The politicians are upset about the decline in manufacturing employment, which is not even remotely close to being the same thing.

      We’re still making all those “corporeal” goods and “corporeal” farm products. We just don’t need the same number of workers to do it.

      1. “But in real dollars” is just as chimerical as “real food pictures”, “real places to live”…

        1. Working on our c-words today, are we rather?

    2. Farms are not going away, it just takes fewer people to make a lot more food. See also: Green Revolution.

      1. Something something agricultural city-state derp!

      2. You’re wrong Suki, farms don’t exist anymore; I had a fascinating discussion with an old man who explained how the farm saved families from starvation when the depression hit the US.

        When city jobs no longer existed, those who had left the rural life were able to return, and be immediately fed. but now his farm is specialized; they are no longer self-sustaining societies with animals, vegetables, freedom to produce crops.

        1. So you advocate a return to savagery as a hedge against recession? If your hypothesis is correct, why were medieval agrarian societies much more vulnerable to famine than modern capitalist societies?

          1. No, I am just saying that the old experience told him what worked; theories are fine in academia but they don’t taste like food

            1. That sounds like a rather folksy perspective. Did you ask him what he thinks of gay marriage?

        2. I assume it depends on your definition of ‘farm’ – because the farm as a specialized business still exists and can be contracted out to supply major companies with product. Over time there has been a decrease in family farms with large crop diversity – but they probably don’t have the capability to compete with the farms that specialize – and therefore has been harder to sustain as a business but it’s not impossible.

    3. In a catastrophe (i.e. the crash) pretty much any change away from basic kinds of items and industries would be a catastrophe.

      1. When city jobs no longer existed, those who had left the rural life were able to return, and be immediately fed. but now his farm is specialized.

        I think you might be underestimating the ability of people to adapt to a catastrophe. Also, what exactly are your proposing as an alternative? Some scheme where you optimize some agriculture for a post-apocalyptic world, just in case? At some cost?

        1. I’m not proposing any alternatives; I think theory is imperfect, and I’m interested in a man’s experience.

  3. “””Compared to1990, the total value of U.S. manufacturing output, adjusted for inflation, was up by 75 percent in 2010″””‘

    It would be nice to have some details on how this is calculated. If all the parts for a item are manufactured outside the USA and the item is only assembled in the USA is that considered to be manufactured outside the US or inside the US? Is this calculated based on free market use or does it also include government spending so that 100 million dollar F-35’s or 10 billion dollar Aircraft carriers or 10 billion dollar Big Digs are included? Are the same products considered to be manufactured in 1990 the same as 2010 or did they change definitions so that a McDonald hamburger is considered to be a manufactured item now?

    Sorry about the questions but its easy to be deceived by statistics if you don’t know how the statistics were generated

    1. As automation increases, fewer workers can produce more goods.

      It’s common sense.

      When politicians talk about manufacturing, they do not talk of productivity or of the value of the goods produced.

      They’re talking about jobs. Union jobs to be specific.

      So when a factory automates a process resulting in a superior product in half the time, the politician will say the manufacturing sector suffered because someone lost their job.

      When in fact everyone else benefited because they now get a superior product at a lower price.

      1. Have to agree with this, the politicians don’t actually care about productivity, they care about votes. One man doing the job of a thousand is increased manufacturing productivity, in politics value is measured by votes, so they would see that as a loss.

      2. Didn’t ask about workers, I asked for the basis of these statistics. Since statistics are easy to manipulate they often are. Inflation statistics are manipulated, employment statistics are manipulated, housing statistics are manipulated, so I am inclined to believe that US manufacturing output statistics are manipulated as well.

        1. I suspect you are right about the statistics, measuring something like manufacturing is difficult because it is such a broad concept, it also gets harder with time as more gadgets and technologies are invented that are added into the manufacturing category.

          I personally prefer the comparison of previous times about what the average plumber, doctor, farmer etc. could buy compared to now, adjusted for inflation.

        2. To answer your question, if final assembly is in the United States, then it is considered “Made in America” and accounted as such.

          And yes, defense manufacturing is most definitely included in the statistics.

        3. I think your question emphasizes WHY politicians need to keep their hands off the economy. I have yet to see any convincing evidence that politicians are capable of understanding a modern economy to a degree required for effective intervention.

      3. Indeed. Factories run on political machines.

      4. Yeah, it’s all about the jerbs.

  4. I challenge a single person, who supports the whole “save our manufacturing” argument, whether they would prefer to pay double for a computer or tv or anything else, simply because it was made in USA.

    The truth is that everyone wants cheaper goods, with comparative advantage everyone wins, other than perhaps the warmongers who fear that moving manufacturing to other nations will weaken their capacity to make war.

    1. Buying cheaper goods makes all parties better off. You have more money in your pocket to spend on goods Americans can produce more skillfully (computer components). The chinese worker is also able to feed his family.

  5. They can reform this tax or get rid of that tax, but so long as union influence guarantees that we cannot charge less for labor than competing nations then we will continue to lose, with perhaps the exception of highly engineered products or items with lots of “moving parts.”

    1. Don’t forget “padding.” Increased productivity could make up the difference in labor cost, but not if the union decides the number of “workers.”

  6. How many of the pro-manufacturing people have ever worked in a factory?

    I have and it sucks.

    1. “I have and it sucks.”

      Ditto

      1. Same here, but it was after school when I was a senior in high school. I cleaned the machines that made the cigars in Wheeling, WV. Part time and I had to pay union dues. Now that factory is silent. The cigars are now made in right-to-work Indiana. Fucking unions.

  7. Manufacturing is going the way of farming in the United States. It’s becoming a capital intensive operation as opposed to labor intensive. The opportunity for employment is on the design and engineering side, not on the put widget A into socket B side.

    1. Sounds like the kind of thing an economist would say.

      Too bad the economists didn’t think of this.

      To hear the economists tell it, the slightest demand will be accommodated by suppliers who will appear mushroom-like over night, without regard to pre-requisists such as infrastructure or expertise which can take many years to develop. One of these days it might be nice to hear from an economist that has a clue how goods and services are actually produced.

  8. Let’s add to this discussion that the manufacturers have traditionally caught hell from everyone. The liability lawyers, the regulators, the planning commissions, Elizabeth Warren, etc….

    1. What previous generations of government thugs fuck up, WE can repair.

  9. If only there were a presidential candidate that wasn’t a big fan of favoritism. Hmm…

  10. Chapman wrote a good article. Holy shit.

    1. It’s hilarious how quickly progressives forgot the whole history of “Unsafe at any speed”, the Ford Pinto memo, “Roger and Me”, etc etc, when it came time to bailout the auto industry.

  11. “For the most part, our leaders take it as normal and sensible to defer to consumer demand, rather than try to dictate it. ”

    If only that were really the case.

    1. I concur.

        1. I’m healthy! Eat three pounds of bread a day to prevent diabetes!

  12. Manufacturing accounts for a shrinking slice of the total economy mainly because as we grow wealthier, we spend a smaller portion of our income on physical products, like cars and appliances, and a bigger one on services, from health care to cellphone contracts to restaurant meals.

    My (admittedly untested) suspicion is that it goes a bit farther than that. It is likely that, as a society gets richer, a decreasing portion of even the value of manufactured goods consumed stems from manufacturing (rather than design, marketing, support services, etc.).

  13. I agree that it is ridiculous to give manufacturing a lower rate than any other industry, but I think an argument could be made that our businesses are suffering overall from our high effective rates. I work for a small-medium sized manufacturer (~400 employees) and our effective rate was 35% — we are rapidly growing and could have used that cash to buy more equipment and hire more people, but instead Uncle Sam confiscated it so he could give it out to temporary green jobs/future bankrupt companies… Don’t even get me started on the global multinationals that pay a near-zero tax rate.

    1. Another similar example here in California. A friend of mine who paves roads had to spend 100% of their profits to keep up with smog regulations. In the past he would have kept all of his equipment and bought a few new pieces of equipment and hired people to run the new equipment but now they can only keep up and may never be able to hire anybody new due to regulations.

    2. I employ five people. My “social” taxes I pay up front is 15%. That is, a person earning $14 actually costs me $16. Sure, I can expense salaries against income but that comes at the end of the year. I need the money NOW. The more I have, the faster I can maybe employ a 6th person, or put money in advertising so I can grow in order to hire more or even buy much needed equipment.

      THIS is the part of the equation – GROWTH – the left simply don’t grasp. It’s such a basic, common sense reality, it baffles my mind how anyone can argue otherwise.

      I with little experience in business picked up it on IMMEDIATELY.

      The more I run my operation, the more I learn how insidious government regulations are and the negative (unseen) impact it has on out economy; even our lives.

      Alas, someone has the power to work against these simple axioms.

      1. ‘picked up on it.’ Yeesh.

  14. You’re right Steve, it’s wrong for politicians to use the tax code to promote “favored” industries – in this case, manufacturing. Now if you’ll excuse me, I’m going to read that Ira Stoll article justifying a capital gains rate far below the rate that median income earners pay.

    I agree that while it is ideal for all manner of taxes to be at a rate between 0% and 3% (inb4 “why so high!?!?!?111”), given a society with high taxes, there shouldn’t be special treatment exceptions: Whether it’s the UAW/Big Agri lobby, or the banks and financial sector.

  15. Now that VW has opened a manufacturing plat in Tn. should I be happy for the new jobs, or sad for the German workers whose jobs were outsourced to a Third World Country ERRRR! the United States?

  16. With overtime some manufacturing jobs can get a first year worker near a living wage! Maybe reaching a living wage in two or three years with benefits.

    Looking at the inflation adjusted take home pay of the same group of random workers over a thirty year time span paints a much more accurate picture. Starting in the 80’s thru 10’s you’ll find that only lawyers and doctors real income grew. If you take lawyers, doctors, and government workers out of the sample, the bottom falls out for the remaining workers. Somehow Chapman’s analysis is not accurate or complete.

    Solution: Use massive tax incentives and bring China to heal on currency manipulation. Hayek will have to suffer until we can bring the working class half-way back. Ok, how about a third of the way back? Also, we can start high road manufacuring for the long term. But not at the expense of low road manufacturing.

    1. Has anyone figured out what a “living wage” is?

      1. It won’t die!

  17. I can understand why Santorum has the nostalgic desire for more manufacturing. He and I are about the same age, and grew up about 20 miles apart, near Butler, PA. When he was a lad, Butler was a booming town with foundries, steel mills, and a Pullman car factory. In the late 70s, just when he graduated from high school, all those factories died, leaving Butler as a ghost town, full of unemployed middle age men who filled the bars and their beer glasses with their tears of a Golden Age.
    I think he never outgrew that sense, after he left, that an economic boom is all about factories where men get dirty and work hard with their hands.
    His father, as a psychologist at the VA Hospital, probably came home with stories of WWII vets who after 25 years in the mills contemplated suicide when their lives came crashing down on them.

    1. Understandable, but labor markets change with technology and productivity. The truth is, that labor skills get obsolete faster with each generation.

      Watch the nanotech guy on Reason TV, and you’ll see that in 50 more years, entire new industries will have been born that will likely grow productivity another order of magnitude, and will obsolete many more hand labor jobs.

      The future is knowledge work in the US. Blue collar labor is uncompetitive here. The Statists have made low cost labor impossible with their infantile and parasitic egalitarian policies. The guy in the vid said that nanotech will allow 1% of the people to work and the other 99% to lay around and be useless fat motherforners.

    2. I fear people who do not want to work, and I expect they will not lay around when they lose their jobs, een if they are on welfare. They will be come crazy from generations of parsitism, and be very dangerous. We are stratifying into an intelligent Productive Trading Class (Trads) and a stupid but violent parasite class (Bugs). We need to be ready to defend against their inevitable attacks.

      Lock and load, my Trad friends. The State will not protect you well enough. They know the Bugs will vote for a bigger State.

  18. On the other hand, Barry Soetero comes from a different point of view about manufacturing – he thinks that the average American serf does not have the intellect (like he does) to be anything more than a work animal.

    1. Is there any doubt?

      Have you met the average American? Most are underqualified to operate a gas station window scrubber.

      1. Is that true of the average American or the median American. I would imagine that its possible that the brilliance of our geniuses skew the average significantly above the median.

        1. A median is a type of average; a mean is another.

  19. Just the continuing economic nonsense. But one thing is for sure: America has to pay off the debt someway or default and strip most of savings nest egg. Then what?

  20. The cause is Debt Whores. Look in the mirror, you may be one.

  21. They took our jobs!

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  23. The “post-industrial service economy” is a sham, pushed by leftists like Robert Reich and the green movement. The economy of the last quarter century, based on consumption and services, was a product of the debt bubble, not of wealth or some advanced stage of development. The west really does need to figure out a way to compete in manufacturing again.

  24. Again, Statists think they know, by divine revelation from Mother Gaia, what the “correct” ratio is of one labor type vs another in the ENTIRE Economy.

    Ironically, the State is exactly what the Statists think the Free Market is: a stupid, uncompassionate, dysfunctional monstrosity with unlimited hunger for money and power, and deceives and coerces people to obtain it.

    Of course in the Free Market, knowledge is vast, compassion is high (in order to serve well), functional diversity and expertise is very high, but power is limited by the virtue of the products, deception is punished by customers, and money only comes if the customer is SERVED WELL.

    So forgive me if I’m not impressed by the State’s wisdom on what appropriate labor apportionments are. They need to respectfully shut their forning suck holes and stick to the only thing they exist for: protecting property rights.

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