This post is part of our series, Is Manufacturing Making It?
Using statistics primarily sourced from the Federal Reserve, we are repeatedly told that manufacturing isn't dead, just manufacturing employment, due to all our productivity gains. I must disagree that it's all about productivity, as did a group of economists who met last November to discuss government productivity measures, Louis Uchitelle of the New York Times reporting (via Curious Cat:
... The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.
American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics. ...
This is a problem that even extends, as the article goes on to explain, to the service industry. If your accountant is outsourcing some of their tax processing work to India on the cheap, this also boosts US productivity statistics. Tracking the real impact of that imported carburetor, or any other imported intermediate input (say that three times fast,) in the productivity statistics is presumed to require years of work and congressional funding.
Imported Intermediate Inputs
Courtesy also of the Curious Cat blog, some of the economists who realize that manufacturing productivity measurements are distorted do work at the Federal Reserve and wrote about it in a paper entitled, "Offshoring Bias: The Effect of Import Price Mismeasurement on Manufacturing Productivity" (pdf), by Susan Houseman (Upjohn Institute), Christopher Kurz (Federal Reserve Board), Paul Lengermann (Federal Reserve Board), and Benjamin Mandel (Federal Reserve Board). Emphasis mine:
...... [We document] the rapid rise in both the levels and share of materials used by U.S. manufactures that are sourced from abroad. Over the ten year period from 1997 to 2007, the import share of total materials jumped roughly 50 percent, as the fraction of materials used climbed from 17 to 25 percent.
...
... Although preliminary, our analysis presents evidence that offshoring bias has been substantial in recent years. We find that the growth rate of imported intermediate input prices may have been biased upwards by between 16 to 35 percentage points, which in turn has led the average annual growth rate in manufacturing productivity to be overstated by 0.1 to 0.3 percentage point or by between 9 and 20 percent over the entire period from 1997 - 2007. These numbers are significant, as 0.1 percent average annual growth rate for multifactor productivity is roughly equal to the average annual contribution of capital to manufacturing growth from 1997 to 2007. ...
US manufacturing is losing its footing in consumer markets both at home and abroad, and while the losses aren't total, they're serious. This has been ignored because the financial sector that's been funding the offshoring craze was doing well, and because many observers don't consider job losses to be that big a deal. Now that the finance industry isn't doing well and job losses have been revealed to be a very big deal, now that free trade has been revealed as a unilateral disarmament, can we start caring about this again, please?
The Vicious Cycle
As my colleague Dave Johnson recently pointed out, workers who make $70/week can't buy Whirlpool refrigerators. Nor, for that matter, can they buy new Ford cars. They can't afford mortgages or unsecured lines of credit at the mass consumer levels that would support a robust financial services industry. They can't go out to eat at sit-down restaurants, or afford to patronize other businesses that comprise a strong service sector economy.
Who, in other words, are $70/week workers in Mexico going to be making those refrigerators for? Sure as blazes, it isn't going to be for laid off manufacturing workers in the US who've been pushed into bankruptcy and defaulting on their mortgages in the wake of yet another jobless 'recovery'.
Because the big problem with the declining fortunes of US manufacturing employment is that Wall Street profits become the only thing that recovers after recessions, which seem to be coming thick and fast these days. If that's the kind of future we want, we should keep our eyes fixed firmly on outdated productivity statistics. If it isn't, we should start looking at having a sensible industrial strategy that creates a lot of jobs.
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