Tuesday, February 17, 2009

Manufacturing Jobs and Free Trade

UPDATE: below

Most present-day Democrats are hostile to free trade (President Obama has flip-flopped on the issue). Their core complaint usually regards jobs allegedly lost due to, for example, NAFTA, though their evidence is thin: obviously, there are more U.S. jobs now than before NAFTA; the Congressional Research Service concluded in 2004 that "NAFTA had little or no impact on aggregate employment," a result Prof Mark Perry of Carpe Diem re-affirmed last year.

The loudest opponents of free trade are are especially fretful about supposedly-lost jobs manufacturing jobs they insist are casualties of free trade agreements. The mayor of Lansing, Michigan, Virg Bernero, appeared on CNN last Monday:
The truth is that our industrial heritage is an example of everything that was right with our nation's economy. Good jobs with good benefits created the middle class in this country, and now it is being systematically dismantled under the banner of free trade and globalism.
The current recession has given new impetus to such views (industrial production having fallen worldwide), especially among labor unions.

It's true that rising unemployment means the U.S. is shedding jobs in all sectors, including manufacturing. But that's neither specific to manufacturing nor caused by free trade:
  • Traditional manufacturing job losses are offset by greater employment in other areas. America has become a service economy, and--until the recession--employment in service industries was up:
    Management and professional specialty jobs have grown rapidly during the recent era of globalization. Between 1983 and 2002, the total number of such positions climbed from 23.6 million to 42.5 million—an 80 percent increase. In other words, these challenging, high-paying positions have jumped from 23.4 percent of total employment to 31.1 percent.
    Free trade opponents often ignore this: last week, a liberal I was debating cited this 2006 paper from the liberal Economic Policy Institute, without recognizing that "Trade in services was not analyzed in [that] study." (The claim that service-sector employment consists of low-wage "McJobs" is false.) In addition, free trade boosts employment in export-oriented companies. Finally, free trade lowers consumer prices, benefiting all workers, and preserving jobs in companies (like the auto industry) that take advantage of lower-cost imported materials.

  • Manufacturing employment declines mainly reflect increased manufacturing productivity. Manufacturing jobs may be down, but (before the recession) U.S. manufacturing is steady or increasing. As I recently observed (linking Carpe Diem and the Heritage Foundation), total domestic manufacturing output "has increased even as employment has declined . . . suggest[ing] that increased productivity has allowed the U.S. to make more with less." In other words, as World Trade Organization Director General Pascal Lamy argues, the loss of U.S. manufacturing jobs primarily reflects not trade but "productivity growth brought about by advances in technology." Writing in the Wall Street Journal, Brian Wesbury agrees:
    The problem, if it really is one, is not foreign competition or evil financiers. It is technology and productivity. In the 10 years ending in 2007, durable goods manufacturing productivity averaged an annual growth rate of 4.8%. In other words, if real growth is less than 4.8%, the sector needs fewer workers year after year.

    source: WSJ
    So, it's not trade; rather, "A study by economists Martin Baily of McKinsey & Co. and Robert Lawrence of Harvard University attributes roughly 90 percent of manufacturing's recent job losses to domestic forces." Indeed, the supposed beneficiary of vanished American manufacturing employment--China--itself shed 25 million manufacturing jobs between 1994 and 2004.

  • A good source. Additional evidence comes in a recent National Review article (subscription only) by Jim Manzi, a senior fellow at the Manhattan Institute and chairman of an applied-artificial-intelligence software company. A self-described former fan of preserving the "factory guy," Manzi now says that while "Nostalgia is wonderful. It won’t solve our problems":
    The U.S. has a very productive manufacturing sector. It just looks much different from what most of us imagined it would be. One of the most important differences is that it doesn’t employ many more people than it did in 1947. Here is a chart produced by the Federal Reserve Bank of Cleveland that summarizes the situation:

    source: National Review at 32
    At the end of World War II, manufacturing accounted for about one-third of the U.S. workforce. Today it is about one-tenth. In terms of employment, we are no longer transitioning to a services economy; we are there. Over that same period, manufacturing has consistently represented about 15 percent of rapidly growing U.S. economic output. Manufacturing has become ever more productive; as any industry matures, this becomes increasingly necessary for survival. While continuous improvement is essential for any relatively mature business, the process of improvement itself is fairly routinized, and almost inexorably eliminates labor. Productivity gains are beneficial to consumers, but not so much to employees who have trouble moving or learning new skills. . .

    It is often easier for us to see this from a greater distance. Consider the evolution of the U.S. agricultural sector, which presaged what we have seen in manufacturing. In 1800, America was a nation of farmers. About three-quarters of the labor force worked in agriculture. The proportion has been in almost continuous decline since then. By the eve of the Civil War, it was a little over half; by 1900, it was about one-third. Today, agriculture represents less than 3 percent of the workforce. This has been great for consumers. Farming is incredibly efficient, and food is cheaper and more plentiful in real terms than ever before in human history — to the point that obesity is a serious public-health problem. American agriculture today is also a very successful industry. In 2007, the U.S. exported over $75 billion of agricultural products, and it has maintained a trade surplus in food for decades. It’s just not an industry that can provide employment for very many people anymore. . .

    This same dynamic has been playing out for manufacturing over the past 60 years. . . Eventually, what we now call services will presumably go through the same transformation as farming and factories have, and we’ll have to find a new sector to provide employment.

    At each of these stages, we don’t abandon the maturing industries. We still need food and manufactured goods, and it would be foolish to become completely dependent on foreign supplies for either. In the event of a real shooting war we couldn’t book enough conference rooms to protect ourselves from a determined adversary. But, as we’ve seen, we are well able to feed ourselves, and we have an extremely robust manufacturing economy. In fact, had we tried to freeze in place either family farms or employee-intensive factories, we would probably have a far worse defense capability because we would have less domestic agricultural output and antiquated factories.

    Which new sectors will actually be productive, and how they will ultimately develop, is highly unpredictable. This is why the free play of markets with limited intrusion by the government is so essential. Almost all industrial policy ends up protecting existing institutions: This is a function of human nature and is not fixable with clever program design. In practice, industrial policy normally means maintaining jobs that a ruthless market would eliminate, and subsidizing technological developments that can be exploited by existing large firms. But these are rarely the sources of new high-wage jobs. Ironically, these attempts to protect ourselves end up creating a sclerotic economy that in the long run puts everyone at greater risk.
    Importantly, Manzi pushes one policy that would help America adjust:
    This ever-increasing requirement for abstract-reasoning capabilities is why the terrible performance of American students, as compared with international competitors, is so worrisome. While the culture is a significant source of this problem, we need better schools. . . Our progress in improving the quality of this model has stalled.

    We need a new vision for schools that looks a lot more like Silicon Valley than like Detroit: decentralized, entrepreneurial, and flexible. This will not mean abandoning traditional, disciplined learning, but rather incorporating it as a baseline and doing other things as well.
    Opining last year, USAToday agreed:
    The only real answer to the problem of declining employment in manufacturing lies in educating younger workers and retraining older ones. This is, to be sure, a big challenge and a tough sell politically. American schools continue to underperform, particularly in technical knowledge.
Conclusion: As Fed Chair Ben Bernanke recognizes, "Trade allows us to enjoy both a more productive economy and higher living standards." And, contrary to the claims of union advocates, substituting protectionism for free trade could deepen the recession without restoring factory jobs.

Smarter and more tailored schooling might increase competitiveness and add jobs. Ironically, the biggest obstacle to education reform are unions themselves--the teachers unions. Now, that's a cat-fight I'd enjoy watching.


Carpe Diem updates the numbers and cites an AP story:
The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 -- nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50.


Assistant Village Idiot said...

Homer Simpson: "Facts? You can prove anything with facts!"

I'm only half-kidding. The power of the image, of the narrative, overwhelms the facts here. The picture of the industrial union member making stuff throughout what is now the Rust Belt, gradually moving up, getting better wages and benefits, living the American dream, is one of the iconic images of America-at-her-best. We see this as what made America great, rather than appreciating the more complex interaction between effort, efficiency, machine, process, distribution, etc.

We cling to the image from that earlier era because we can see the progress in retrospect - it was not immediately obvious at the time. Also, the things made were those you could hold in your hands, and that every household measured itself by: refrigerators, cars, power tools. Our progress paralleled America's in our minds.

It's hard to argue against myth.

Carl said...

Of course you're right, AVI. But we no longer get our dairy from the milkman either. "Knowledge industries" jobs now supply vastly more jobs than manufacturing--but our public policy hasn't seemed to catch up.