“Manufacturing”

Last week, on I was on vacation (not that an explanation is needed these days for a long spell of quiet at this site — sorry, readers) and wasn’t blogging, but I did try to keep somewhat up-to-date on the conversations going on without me. One particular post that grabbed a lot of attention was this, by Tim Duy, whose work on monetary policy I typically find to be sharp and insightful. In it, he makes some reasonable points about the state of the economy and the labor market, then sketches some eye-balled correlations and draws unwarranted conclusions about the state of the manufacturing sector and broader economic growth. I found it to be a fairly thin piece of argumentation, but it resonated with others despite this, and so I tweeted that,

Something about the word ‘manufacturing’ makes people lose their analytical senses.

Matt Yglesias picked up on this and wrote a post that got at a lot of what I was thinking, namely, that there’s nothing special about manufacturing. I saw Felix Salmon respond via twitter that he was unconvinced, and as best I could tell, the matter finished there. Let me just add a few thoughts.

There is a sense that people seem to have that the making of things is an activity crucial to a modern economy. It’s crucial because a country that can’t make things is vulnerable to trade collapse. It’s crucial because a country that can’t make things is likely to lose its economic edge. It’s crucial because without manufacturing you can’t export. And it’s crucial because manufacturing jobs, everyone knows, are high-paying jobs that provide a good living to people with limited education.

I don’t think too much of this. Economic activity isn’t about satisfying the demand for objects, it’s about satisfying demand, period, and people demand many things that have little to do with assembly lines and smokestacks — hair-cuts, mixed drinks, financial advice, dentistry, and so on. These activities are important. If they weren’t important, people wouldn’t be willing to pay lots of money for them. Economic growth, meanwhile, is about figuring out how to do more with less. There’s no reason why “doing more with less” ought to be associated with manufacturing rather than services. It’s true that some service sectors that are among the fastest growing in terms of employment — like education and health services — have experienced slow productivity growth. But I think people are far too quick to conclude that this has something to do with the nature of the services provided, rather than with the institutional environment of those sectors and simple cost constraints.

Goods and services are, to a large extent, interchangeable. They constantly replace each other. A whole range of household tasks — services, fundamentally — that used to fall to family or hired help was replaced by manufacturing — of laundry machines, dishwashers, and so on. An entire range of a clerking and administrative services has been replaced by manufacturing — of computers and related hardware. And then there’s the programming; is that production of a good or a service? These days, some of my work finds its way into physical form in the weekly print edition of The Economist. Am I a manufacturer? No, you’ll say, but the printer is. The internet threatens that printer’s job, but it increases the value of my writing (while also making it more difficult for a private firm to capture). In this world, the idea that “manufacturing” is something worth protecting for its own sake makes little sense.

What’s underappreciated is that economic growth is often about labor-saving innovation. This generates jobs in some places but destroys them elsewhere. As part of this process, the created jobs generate value which may often mean high wages. But the very fact of high wages gives employers an incentive to save labor through further innovation. A sector can either be a source of innovation or an oasis of sustainable, high-wage employment, but it can’t be both.

Which isn’t to say that innovation is wealth destroying. Quite the opposite. The last two centuries’ worth of unprecedented technological, institutional, and organizational innovation and associated economic growth have been one long occupational bloodbath. Thousands of job categories have perished. Millions of workers have been displaced.

But economies have, at the same time, created other employment niches, and the wages earned in those jobs have purchased an ever-more-useful array of goods and services. A dollar these days buys vastly more computing power than it did 100 years ago, just as it buys vastly more life-saving capacity at the doctor’s office.

What is crucial then isn’t goods or services or manufacturing or retail. To a certain extent, it is about routine tasks versus non-routine tasks, as routine tasks are more vulnerable to elimination by technology. But as technology improves, “routine” encompasses ever more exotic activities. And to a certain extent it’s about tradeable versus non-tradeable activities, but America exports billions of dollars in services, and technology holds the potential to increase the range of sectors that can be “shipped” across borders.

What is really important is the level, supply, and transferability of skills. And it is here that we seem to have run into problems. We’re not producing enough skilled workers to keep up with the demand for skills, and we’re producing too many unskilled workers. Many of today’s jobs require a great deal of specialized knowledge, which takes a long time to acquire. This generates a lag between labor market demand and labor market supply. It also introduces new risks, since it’s dangerous to invest a long period of time in training for a job that might soon be eliminated. And it’s far from clear that current education and employment policies are at all up to the task of maintaining a labor force that’s both flexible and skilled.

It’s very difficult to know what kinds of things people will need to know how to do ten years down the road (to say nothing of twenty or thirty years down the road). It strikes me as odd and indefensible to say that it’s important to focus on the protection of “manufacturing” activity or employment. Our failure in recent decades has not been the inability to secure for ourselves adequate employment in one sector or another. Our failure has been our neglect of the human input to economic activity, which, like it or not, we need to maintain. As human capital becomes obsolete in one field or another, we have no choice but to take care of it and improve it, or it will fetch steadily less in the open market. We don’t care if an old engine fetches less over time. We care a great deal if an able-bodied individual does.

What will maintenance involve? Investment in health and education. Protection against many personal risks. A safety net. The time and resources to retrain, to maintain and improve social capital, and so on.

It is not necessary, as some worry, that we turn every worker into a PhD. It’s only important that labor supply more closely match labor demand, and that labor market policies acknowledge and address new labor market realities — higher demand for skills, more rapid obsolescence of skills, and so on. It’s not enough to put a worker through high school and as much college as he wants and can afford, let him choose a career, and offer him limited social assistance and unemployment benefits and the promise of Social Security. Too many will either view student debt as an intolerable risk or take it on and find themselves trapped in a career hole. Too many will get stuck working dead-end jobs with no time to retrain. Too many will opt into stable-but-economic-growth-stultifying careers (law!) protected by institutional rigidities, simply to avoid the churn of the more wild business environment.

Tim Duy looks at the rapid growth rates of the postwar years and concludes that manufacturing was the key. But the world has been turned on its head many times since then. The pace of technological change has been astonishing. We can’t, shouldn’t, and shouldn’t want to go back. Forget manufacturing. Forget things. We need to be trying to create an environment in which workers can thrive in an utterly unpredictable world, where the world will be turned on its head tens or hundreds of times over the length of an adult’s career.

UPDATE: Commenters are making my point. As I mentioned, services figure in the nation’s trade balance, and technological improvements are steadily increasing the range of services that can be exported. Meanwhile, you can build plenty of things for export without employing very many people to do it. Manufacturing employment has fallen steadily over the past few decades, even when manufacturing output has increased. Thanks to technology.

Comments

  1. Noah says:

    I think you are missing an important point. Some goods and services can be exported. Some cannot.

  2. rjs says:

    you cant build a sustainable economy with everyone employed to flip burgers, count each other, empty each others bedpans, search each others luggage, and manage each others money…at the end of the day, you have to have something to trade for the electronic trinkets from china and the oil the country runs on…

  3. Peter T says:

    I can see why this looks all very coherent. But it misses a number of real-life points.

    There are a lot of skills that are learned by doing, and cannot be taught unless someone is doing them. Most of these relate to making things, and organising the making of complex things. You can teach basic machining in 3 years, but it takes another 10 to do it really well, and all that time has to be spent doing it. And you need the people who can do it well to pass it on. This is why so many undeveloped countries struggle to make things that work properly – they have the PhDs and the overseas-trained managers and engineers – they don’t have skilled craftspeople.

    So no manufacturing equals no ability to train these people or gain these skills. The skills are slow to produce and quick to lose (after 50 years of effort, China is now at the level Japan was 50 years ago).

    A second key point is the the ownership of craft skills confers independence and a degree of equality with management (managers think they know what the clerks do, and think they can do without a hairdresser for a time, but they know they cannot operate a lathe, and know that if the line goes down, they will be left clueless and lost).

    High wages in manufacturing reflect this – and in turn pull up wages around the manufacturing core. Lose it, and the wage share falls, and the elites push harder – which in turn leads to less happy outcomes all round (less social and political stability, more investment in repression, less trust – all points made by, among others, Adam Smith).

    Third, making things confers a degree of independence – which improves the bargains you can make in trade. Not only can you export, but you are not compelled to import.

    I would score this one as a win for ordinary common sense.

  4. alex says:

    “demand many things that have little to do with assembly lines and smokestacks — hair-cuts, mixed drinks, financial advice, dentistry, and so on”

    Anyone who characterizes manufacturing as “assembly lines and smokestacks” doesn’t understand the broad range of modern manufacturing activities, and is trying to suggest that manufacturing is an old-fashioned activity not worthy of much consideration in a modern economy.

    Do you think that computer chips are made in plants with belching smokestacks? Are solar cells produced on assembly lines with people in greasy overalls?

    As for hair-cuts and mixed drinks, they’re tough to export. Exporting American financial advice? It’s plausible if you’ve been living in a cave the last few years. Dentistry is much more likely to be an import (dental/medical tourism).

    “We’re not producing enough skilled workers to keep up with the demand for skills”

    Any cites of hard evidence, or is this so much a part of the “conventional wisdom” that Serious People don’t question it?

    “to a certain extent it’s about tradeable versus non-tradeable activities”

    Bingo!

    “but America exports billions of dollars in services”

    An interesting rumination until you look at the numbers – our vaunted trade surplus in services is about 10% of our trade deficit in manufactured goods. Nor has there been any sign of, or reason to believe, that that gap will narrow.

    “and technology holds the potential to increase the range of sectors that can be ‘shipped’ across borders”

    Which should work to the further disadvantage of the US trade balance. Many services (financial advice, dentistry, call centers, computer programming) are much more labor intensive than manufacturing, which works to the disadvantage of a high labor cost country like the US.

    “labor market policies acknowledge and address new labor market realities — higher demand for skills, more rapid obsolescence of skills, and so on.”

    What’s so new about that? Do you really buy into the hype that the last few decades have been a period of unprecedented technological change? Yes as compared to the Middle Ages, but not compared to what our parents, grandparents, and so forth, experienced back to the beginning of the Industrial Revolution.

    Sorry, this post is philosophical musings from a 30,000 foot view. It does nothing to refute Tim Duy’s post, which concentrated on “facts” and “numbers”. Note, for example, the graphs.

  5. OGT says:

    I am glad you mentioned Tim Duy’s piece at the end, because when I saw Yglesias’s post last week my guess was that Duy’s piece and the related debate around the Andy Grove piece was the driver of your comment. If that’s the case you would probably be better off directly addressing it, perhaps, at Free Exchange.

    To the extent that I can make heads or tails of your post, I think you’re missing a number of points. One is the lack of focus on tradable goods (and, yes, some services like software engineering). Tradables are the primary drivers of any region’s economic prosperity. There is a reason no economic development model advocates improved hair cutting efficiency as a path to development, also note that the price of local services like hair cuts is almost always deriven by the Basala-Samuelson effect. Why are there so many more high end salons in Manhattan than Tupelo, MS or Flint, MI?

    Another one is that the manufacturing process represents a great deal of mid-skill level employment from Grove’s piece:

    The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs… Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
    The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs…

    There’s more at stake than exported jobs… A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer.

    Grove’s claim is in part that these skills are in effect networked, we are losing learning by doing skills and human capital building. We also may be giving up absolute advantage in those industries, not just comparative advantage.

  6. Noah says:

    Ryan:

    Simple point here. “Manufacturing” and “services” are not substitutable in terms of their TRADABILITY. You can ship a box of frozen fish sticks to China; you cannot ship a fresh-cooked fish dinner. In fact, this distinction is probably the key one in terms of what things we label “manufacturing” and what things we label “services”.

    Do you just not understand or believe this? Or are you ignoring this point deliberately because its implications for our trade policy would be things you don’t like?

  7. BillSoo says:

    Your article reminds me of the scene in “Restaurant at the End of the Universe” where the Golgafrinchan middle men were tricked into leaving their home planet by the elite (thinkers) and workers (doers) who felt that service type jobs were useless, only to find that one of those service jobs (telephone sanitizer) was necessary to save the planet.

    The point being that you need balance in the economy.

  8. Barry says:

    First, the biggest reason that people are concerned with the loss of manufacturing jobs is because they paid well.

    Second, ‘We’re not producing enough skilled workers to keep up with the demand for skills, …’ is a flat-out lie. How have the salaries for engineers and programmers in the US fared over the past few decades? Way, way behind productivity and GDP/capita growth, IIRC.

  9. Stephen says:

    A few comments on your “Update.” First, the commentators are not making your point. They are emphasizing that exports are critical to our economy, and that it is much easier to trade goods than to trade services. These are not points that you made. Second, while services do figure in the trade balance, their role in international trade is significantly smaller than goods — not surprising, given that it is generally much easier to trade goods than services. Third, the notion that technological innovations will make it easier to trade services is largely irrelevant. There is no reason to believe that international trade in services will even approach international trade in goods in the near future. You also don’t seem to realize that other countries can use the same type of mercantilist practices that undermined our manufacturing sector to undermine our trade in services. Fourth, the notion that you can build things for export without employing very many people is also irrelevant. Once again, the same mercantilist forces abroad that have undermined U.S. manufacturing in general will almost certainly undermine your efforts to build things for export while not employing very many people. Fifth, the notion that manufacturing employment has fallen for “decades” is simply not true. U.S. manufacturing employment was very steady in absolute terms from the 1950s to the year 2000, and then began to collapse soon after China joined the WTO.

    Finally, a broader point. The main reason that so many people are concerned about keeping good manufacturing jobs in the United States is because we realize that it is impossible to develop the type of educated work force on which you are relying. Rather than waste time trying to develop some type of ideal work force that has never and could never exist, we prefer to concentrate our efforts on policies that could actually lift the standard of living for the average American.

  10. Noah says:

    “services figure in the nation’s trade balance, and technological improvements are steadily increasing the range of services that can be exported.”

    Yes…increasing from a very low base.

    “Manufacturing employment has fallen steadily over the past few decades, even when manufacturing output has increased.”

    This doesn’t really address my point…

    The lower the price elasticity of export demand for a country’s products, the more susceptible that country is to swings in its trade balance caused by a combination of nominal price stickiness and nominal exchange rate stickiness. Services, being hard to export, have low price elasticities of demand; hence, having an economy composed mostly of services reduces our exchange rate flexibility.

    Remember, if nominal exchange rates and prices were fully flexible, we would never have a trade deficit or surplus, no matter how much we saved or didn’t save.

  11. Noah says:

    Ryan, the basic point here is that this post (and Matt Yglesias’ posts supporting it) seem like an exercise in obfuscation. Distinctions between industries and product categories are real, even if those distinctions aren’t fully captured by the word “manufacturing.” That doesn’t mean industrial policy is necessarily a good idea. But trying to laugh away those who call for industrial policy by invoking the fuzzy definition of “manufacturing” is not really going to win you many intellectual points.

    It seems fairly obvious to those of us who regularly read your blogs that what you’re really worried about is a trade war with China. You seem to have decided that a trade war is the Big Bad Scary Thing that we must prevent at all costs, and that issues like industrial policy and determinants of trade balances should be looked at through that lens first and foremost.

    Now, you may be right that a U.S.-China trade war really is the sum of all fears. And if you really could get people to believe things like “exchange rates don’t matter” and “there’s no difference between manufacturing and services,” you might be able to reduce the chances of that trade war, at the cost of some intellectual honesty. But these arguments just seem so unlikely to most people that it makes you seem like a guy who assumes your conclusions…and that, I am guessing, reduces your ability to persuade people in the long run.

    That is coming from a longtime fan of yours, by the way.

  12. Stephen says:

    Ryan, you should listen to Noah. The type of arguments you’ve made in this post will not help the cause of free trade with China. If anything, they will persuade a lot of us that there are no good arguments in favor of our current trade relationship with China.

  13. Jim says:

    Your point seems to be grounded in the idea that people are fungible..they aren’t. Well paying high tech jobs are great for that (small) portion of the populace capable of learning them and doing them; but the simple fact is that half the population–by definition–is below average. Unskilled and semi-skilled service jobs do not add enough value to the product to provide the kind of income that is required to live in this country at any respectable level. The upside of globalization is increased efficiency in allocating resources, including labor. The downside is that the price of labor will find a global equilibrium level that is WAY below the standard this country has become accustomed to. The outcome is a return to 19th century patterns where the bulk of the workforce lives just slightly above the poverty level, while a minority reaps the rewards. I’m not sure there’s any way to stop that trend, but I sure don’t have to cheer it on.

  14. BP Beckley says:

    We need to be trying to create an environment in which workers can thrive in an utterly unpredictable world, where the world will be turned on its head tens or hundreds of times over the length of an adult’s career.

    And if that’s literally impossible? I don’t see much of a backup plan.

  15. Noah says:

    Ryan, both this blog and your blog at The Economist are permanent links at the top of my Firefox browser. I read essentially everything you write.

    And I have to say, you are consistently failing to convince the crowd on these trade issues. Most commenters are just not buying it, either here or at Free Exchange. It seems like you’re doing what a lot of economists have historically done, which is to use intellectually shaky arguments to persuade the public that free trade is good, because you think the arguments that you really believe wouldn’t have as much selling power.

    But that strategy has hurt the credibility of economists in general on trade issues, and I don’t think it’s going to be a long-term winner for you either. If what you think is that a trade war with China is really really scary, then SAY THAT, and don’t try to convince us that “manufacturing” is a meaningless term or that exchange rates don’t matter.

  16. dean says:

    1. The article we’re commenting on contains glaring grammatical errors, one of them right in the first sentence, which makes no sense. This indicates that the article was hurried and not thought through.
    2. Re employment and global factors on its decline: Modern nations have seen a steady decline in the percentage of citizens who work (in the USA, for instance, ten-year-olds don’t work in factories or anywhere else). This is the trend that is causing unemployment among many adults who used to have jobs: We just don’t need the unskilled and uneducated masses to work anymore. This is a big worry in my opinion. How do we deal with them? Ignore them, like Bush and Cheney? Put them in the military and send them off to more senseless wars (Bush again)? Or support them off the earnings of those who still work?
    Food for thought, I hope.

  17. Frank Youell says:

    “We’re not producing enough skilled workers to keep up with the demand for skills, and we’re producing too many unskilled workers.”

    Wow, what an insight. Why don’t we “solve” this problem by importing more unskilled workers from the rest of the world?

    Sorry, we already do that.