Q&A on the FM website

Here is a question asked on the FM website this week (some of these were assertions, which I’ve rephrased at questions): does the US still manufacture anything? Rephrased, is US manufacturing prospering or dying?

Maclaren writes about the decline of US manufacturing here.  Is US manufacturing prospering or dying? See the BLS tables here for the answers.

  • Manufacturing output in the US has increased steadily for generations in both nominal and real terms.
  • Measured by gross output/GDP, it has remains roughly flat, 14% of GDP since 1980.
  • But these measures mask a deterioration, as imports “hollow-out” our manufacturing base — and manufacturing valued-added increases more slowly than gross output. Hence the contribution of manufacturing’s valued-added to GDP was 20% in 1980 but only only 11% in 2008. Just like agriculture, which remains healthy but a shrinking fraction of the US economy.

The last point is the overlooked key. Output grows, but imports take a growing share of that.

Why?  One of the major problems with US manufacturing is the overvalued dollar (much as the overvalued pound was for the UK after WWI). When the bizarre large imbalances in the global economy right themselves, our trade deficit will melt away. That can happen in many ways, some more pleasant for us than other. I recommend that we do not continue trusting to luck in these matters. Some planning and effort now might prevent much pain in the future.

For more about this see Globalization and free trade – wonders of a past era, now enemies of America (16 March 2009).

6 thoughts on “Q&A on the FM website

  1. I would like to see a more detailed analysis of this issue. Key point you make: imports “hollow-out” our manufacturing base — and manufacturing valued-added increases more slowly than gross output. Final assembly in US of foreign produced product. Also, I’d be interested to see how much of this “US” manufacturing is “foreign” companies. I’d like to see what’s happened to the machine tool industry. My impression is that the US dominated this industry in the 60s but does not now — that’s gone to Japan and Germany. If you don’t make your tools, others determine what and how you make things.

    I’d also like to see what is happening in the “service sector.” Again, my impression is that finance, insurance and real-estate are the big players adding little positive (and often much negative) social value. I hear various figures putting this sector at about half of the US GDP.
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    FM reply: I don’t understand most of your questions.

    “how much of this “US” manufacturing is “foreign” companies”
    Why does this matter? Aprox 40-45% of the profit of the S&P 500 companies is earned outside the US.

    “what’s happened to the machine tool industry”
    Who cares about this specific industry, outside those in it?

    “If you don’t make your tools, others determine what and how you make things”
    I doubt if you can cite any evidence for this. Do other nation’s worry about our leading position in some high-tech industries? I suspect this is a bit am US-centric paranoia.

    “I hear various figures putting this sector at about half of the US GDP”
    It’s definitional. Entertainment is a service, but very profitable and likely to grow with the world’s growing income.

  2. “Planning” for this sort of thing would require a national industrial policy. For whatever reason, this sort of thing is not popular in the United States. Go figure.
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    FM reply: Of course we have a national industrial policy, a massive web of tax breaks, regulations, trade credits, and subsidies. Corporations spend million in political expenses each year to maintain it. It’s just not explicitly stated, as that would upset the proles.

  3. FM: “Of course we have a national industrial policy, a massive web of tax breaks, regulations, trade credits, and subsidies. Corporations spend million in political expenses each year to maintain it. It’s just not explicitly stated, as that would upset the proles.

    FM: I agree with your response, however what you describe is merely ad-hoc (unless of course there is a massive conspiracy (which I doubt)). The real situation is more complicated than your description. For example, what is the short-term and long-term affect of corporate mergers? Look at the aerospace and shipbuilding industries … Northrop Grumman is having a multitude of problems containing cost as well as delivering a quality product: see here.

    A large percentage of the engineering workforce in the aviation industry will be retiring in the next 10 years, an AIAA report on the matter: here. I can’t find links, but this is a recurring theme in the industry … Aviation Week routinely reports on the state of the aerospace workforce.

    Presumably, a national insutrial policy would neatly integrate these sorts of issues into a cohesive strategy to ensure the industrial base can support military and Government policy goals. I think it is obvious to say that this is not the case.
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    FM reply: Absolutely, national industrial policies are wonderful. That’s why the various communist nations did so well.

  4. Tried posting a comment but it got lost … is the thread locked?
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    FM reply: They were blocked by the spam trap. It blocks some good comments (for mysterious reasons), but cannot be dispensed with.

  5. FM: Although I agree with your post, although you are describing an ad-hoc “policy” with all its inherent weaknesses and disjointedness. I have tried twice to post a response including URLs, but cannot. Not sure WTF is going on but it’s rather annoying.
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    FM reply: It’s an ad hoc response in one sense. In another it is a coherent policy, using public policies for private gain.

  6. FM: Thanks for posting my comments, apologies for the multiple others.

    Your comment about communist countries is understandible however I think misplaced. I don’t think an industrial policy has to be some sort of central planning activity (a la Soviet Union) that is clearly prone to failure, but rather a method to have synergisms between things like education (think of public k-12 education and how the Govt basically takes charge on this) and workforce development (the responsibility of the companies employing the workforce). I think something like this happened, although not explicitly as an “industrial policy,” in the 1960s when JFK laid down the man-on-the-moon challenge.

    I think another issue is that an industrial policy could potentially assist in aligning businesses with Government policy to address the changing nature of war. For example it is unlikely that there will be another “World War 2” 2GW type conflict that relies on industrial might to help win the war. On the other hand future 4GW style conflicts will probably rely on information war, and the Government should try to foster an industrial base that supports IT and associated electronics. This is not the case at the US Government has shrunk to a tiny percentage of the electronics market and is now subject to problems caused by lead-free solder and counterfeit parts. Coupled with DoD acquisition programs that are “too big to fail” the US could easily be without any capable electronics manufacturers in the next decade.

    To your point, though, the Government pretty much messes up everything it touches so perhaps it is a better idea to leave it alone.

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