Does US Manufacturing Still Matter?

I have heard a great deal of consternation from individuals on all ends of the political spectrum about why America is not making things anymore. This is quite a bit overhyped, but it is true that American GDP is not as reliant on manufacturing as we were half a century ago. Is this a bad thing? Makes you wonder if everyone lamented the move to an industrial society over a hundred years ago and yearned to go back to farming. When a nation first begins to industrialize and manufacture products, it is a huge boost to its economy. Hang on to the manufacturing question a moment: why do industrialized societies (and the US) not simply go back to farming? Farming was good enough for the founding fathers, right?

As farmers’ income increases, they buy better tools and machines that eliminate labor, which in the long run, makes the farmers more profitable and able to buy larger tracts of land, further increasing profit. Fast-forward a few centuries and in modern economies, the farming that does occur is performed by a small labor force with highly-efficient equipment that allows for vast territory to be farmed in a relatively short period of time. Undeveloped economies certainly do a great deal of farming relative to other occupations available in the developed world. Is that where we want to be? Manufacturing is little different. As labor-saving machines emerge, manufacturers gradually eliminate the need for human employees. But who creates these new and highly sophisticated machines? Fortunately, as economies advance, the need for more technical and highly skilled workers increases. This allows workers in advanced economies (who should be better educated than their developing country counterparts) to design the equipment that will be sold to developing world farmers to increase their productivity as they begin to move through the same development cycle that the more advanced nation recently did.

Why do these cycles move in this pattern? Business looks for the “low-hanging fruit”; in other words, the profits that can be made efficiently without too much risk. Once these have been nearly exhausted, business typically looks for other areas where low-hanging fruit can be found. Once all the low-hanging fruit has been consumed, there is typically a revolutionary change in the economic focus of business (agriculture to industrial to knowledge-based, etc). How does this apply to the United States? Take a look at the construction business. The United States was previously a gold mine for the construction industry as the country was expanding rapidly and the low-hanging fruit was found all over. Now, emerging economies are finding their economic footing, and the low-hanging fruit in construction is there, not here. How does this help us? As mentioned in the farming example, once the easy pickings are to be found elsewhere there generally is a need for more advanced services positions, such as international management, lawyers, engineers, translators as well as sales and customer service professionals.

What is the US likely to manufacture in the future? As most manufacturing continues to be performed in countries with developing economies, the US and other developed nations will continue to manufacture, but primarily highly technical items that are physically heavy, such as electric car batteries for sale in American cars. These batteries are so expensive to ship (large in size and physically heavy) that it is currently more economical to build them here. If the batteries were to become smaller and much lighter, they could then potentially be built elsewhere and shipped here.

To simplify even further, the way this works is similar to how you might buy gas for your car. If gas were a dollar cheaper on the other side of town, would you drive all the way there to get it when there’s a gas station less than a mile from your home? For a truck with a 20-gallon tank that is near empty, the answer might be yes, as the savings would be close to $15-20 after figuring in the gas used driving all the way over there. For a small sedan that only needs a few gallons to “top off” the tank, a $2 savings may not be worth it. Using gas as a metaphor for manufacturing from the earlier examples, the “gas” is currently cheaper in developing economies like China, so it makes sense for business to “drive across town” to get it. How much cheaper is it? Official Chinese figures are nearly impossible to get, but labor estimates believe Chinese labor in 2006 was around $0.81/hour (Lett & Banister, 2009). Compare that to about $24/hour (not including benefits) in the United States (United States Bureau of Labor Statistics, 2010). That means that business spends 30 times the amount on employment here compared to China (again, before benefits). So, to better understand this, let’s look at gas on the other side of town again. Currently, gas is around $3.60/gallon. To highlight a proper comparison, gas would need to be 30 times cheaper on the other side of town. If it was your money, and you could fill your car right now with gas for 12 cents per gallon on the other side of town, what would you do?

Courtesy of The Economist: Rich-World Manufacturing 1991-2009

http://www.economist.com/node/18484080?story_id=18484080

Works Cited

Lett, E., & Banister, J. (2009, April). http://www.bls.gov/opub/mlr/2009/04/art3full.pdf. Retrieved August 06, 2010, from United States Bureau of Labor Statistics: http://www.bls.gov/opub/mlr/2009/04/art3full.pdf

The Economist. (2011, April 02). Economics Focus – Cash Machines. The Economist , p. 72.

United States Bureau of Labor Statistics. (2010, August 06). Table B-3. Average hourly and weekly earnings of all employees on private nonfarm payrolls by industry sector, seasonally adjusted. Retrieved August 2006, 2010, from United States Bureau of Labor Statistics: http://www.bls.gov/news.release/empsit.t19.htm

About Barry Saturday

The author is a Lexington, Ky-based financial advisor and formerly taught high school social studies for Fayette County Public Schools. Along with a M.A. in Education, his educational background consists of a B.A. in Foreign Languages and International Economics and an M.A. in Diplomacy with a concentration in Global Commerce. In 2012, he finished a two-month stint student teaching in Xi'an, China, and recently (2018) ran for City Council in Lexington, KY (District 4: Tates Creek / Nicholasville Rd area). Today's news outlets profit most from incendiary, surface-level appeals to emotion, which is poisoning much of our political discourse nationwide. Barry created this site in order to learn more about our world and share that knowledge with others. He hopes this site, aimed at an educated audience, will provide objective information for those seeking greater clarity and understanding than is often available in the current news environment. If you like what you see, feel free to comment and share with your network.

2 Responses to “Does US Manufacturing Still Matter?”

  1. The Economist had some excellent commentary about this exact issue this week. In the Economics Focus, they discuss the fact that America is still the largest manufacturer in the world and has not only increased manufacturing output overall between 1980-2009, America’s manufacturing has doubled (so has Japan’s). Where manufacturing has fallen is relative to other aspects of the economy. In other words, services in the United States have increased far faster than manufacturing, making the share of GDP that manufacturing claims slip from 16% of US GDP to 12%. America then is still producing a great deal of goods, but as the graphs above indicate (courtesy of The Economist), employment in manufacturing has fallen over the past two decades, partly due to automation and partly due to outsourcing. The best news is that the US economy is creating roughly four service jobs per manufacturing job lost. Why then, are so many obsessed with American manufacturing? Jagdish Bhagwati of Columbia University suggests that some in the rich-world have a “manufacturing fetish” (The Economist, 2011). Is he right?

    Works Cited:
    The Economist. (2011, April 02). Economics Focus – Cash Machines. The Economist , p. 72.

  2. Following up on my previous comment, The Economist currently has a very interesting debate running between the two sides. Which one are you on? http://www.economist.com/debate/overview/207

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