15 January 2012

Manufacturing, Services, Resources: One is Different

The decline of jobs in manufacturing is the result of innovations that have led to dramatic growth in productivity, as shown in the graph above from a 2011 presentation by William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago. A consequence of productivity growth in manufacturing is that this sector has become smaller as a proportion of the overall economy, even as the absolute magnitude of manufacturing output has increased.

These dynamics should tell you that the simple mathematics of President Obama's new "insourcing" proposal's can only influence jobs at the very thin margin, if at all. The president explained:
“I don’t want America to be a nation that’s primarily known for financial speculation, and racking up debt and buying stuff from other nations,” the president said. “I want us to be known for making and selling products all over the world stamped with three proud words, ‘Made in America.’ ”
But here is the problem: Due to advances in manufacturing productivity that have exceeded the growth of the economy, manufacturing is a shrinking part of the global and national economy. If productivity growth were to slow or reverse, then jobs would be lost overseas anyway. Efforts to expand employment in manufacturing are simply swimming upstream against a strong current.

The Obama Administration does not seem to recognize, at least publicly, the implications of these various trends. The White House explains:
[C]ontinued productivity growth has – as several outside analysts have noted – made the United States more competitive in attracting businesses to invest and create jobs by reducing the relative cost of doing business compared to other countries.
Of course, one of the reasons for productivity growth is lower unit labor costs! 

Seeking to keep manufacturing as an important element of the US economy is not the same thing as increasing employment in manufacturing. The Administration will have far more success supporting job creation by focusing on areas that are expanding parts of the economy, meaning that policy will be going with rather than against the current. Specifically, two other areas of the economy are expanding in both absolute and relative terms, natural resources and services.

While manufacturing seems to garner a lot of attention, particularly in politically important states, that does not mean that the administration is neglecting natural resources, particularly energy (I'll have more to say on services in subsequent posts).

The White House explains the importance of energy resources with a lot less fanfare than its focus on manufacturing (PDF):
Of the major fossil fuels, natural gas is the cleanest and least carbon‐intensive for electric power generation. By keeping domestic energy costs relatively low, this resource also supports energy intensive manufacturing in the United States. In fact, companies like Dow Chemical and Westlake Chemical have announced intentions to make major investments in new facilities over the next several years. In addition, firms that provide equipment for shale gas production have announced major investments in the U.S., including Vallourec’s $650 million plant for steel pipes in Ohio.

An abundant local supply will translate into relatively low costs for the industries that use natural gas as an input. Expansion in these industries, including industrial chemicals and fertilizers, will boost investment and exports in the coming years, generating new jobs. In the longer run, the scale of America's natural gas endowment appears to be sufficiently large that exports of natural gas to other major markets could be economically viable.
The politics of resources, especially energy resources, are problematic for the Obama Administration, with the Keystone XL pipeline Exhibit A. But if expanding jobs means paying attention to those parts of the economy that are expanding rather than shrinking, then the Obama Administration won't be able to keep the ongoing energy revolution on a back burner for too long.


J Storrs Hall said...

In 1962, George Jetson was depicted as working 3 hours a day, 3 days a week. To have a 1950's output with todays' productivity, he'd have had to work only 7 hours a week.

n.n said...

The energy revolution should be comprehensive. We should identify and develop resources as they are most suitable to task. This would suggest that nuclear would be principal for electricity production, oil would be reserved for mobile applications, natural gas for heating, and other technologies as they are circumstantially determined fit for purpose. The myth of "green" energy needs to be dispelled, with the issues arising in different stages of recovery, development, and operation clarified. The irrational fear of nuclear must also be rectified through proper education, which our schools have clearly failed to accomplish. Throughout this process, we should take reasonable steps to remain good stewards of our environment.

Will there ever occur an effective productivity singularity? Where processes and machines become so optimized that it precludes the full employment of the population. What character will our society take then? What criteria will we employ to distribute finitely accessible resources? How will we avoid sabotaging ourselves when redistribution schemes through involuntary exploitation are normalized and threaten to corrupt individuals and society?

I don't think we have reached that state yet; but, there are quantifiable pressures on our society which stem from productivity improvements, globalization, constrained development, and policies that promote converged migration and immigration, especially unmeasured illegal immigration.

Then there is the matter of individual dignity. Everyone has a preference; but, not everyone can be an athlete, scientist, accountant, etc. The instruction of this reality has been bypassed in order to purchase people's loyalty and votes. We are all special until we are not, and a number of us choose to be less than our potential. It is no wonder a large minority of our population seeks to escape reality through drugs, alcohol, etc., and that a majority of marriages end in divorce. We have been actively encouraged to develop unrealistic expectations. From this we have dreams of instant gratification, and the inevitable result has been corruption of individuals and society.

I tend to perceive a comprehensive problem set. I know you present singular issues and question their resolutions; but, is it realistic to address elements of the problem set separately? It doesn't seem likely that we can reasonably assume independence. On the other hand, the recovery and processing of natural resources is one of the principal aspects of our existence.

Joshua said...

"The decline of jobs in manufacturing is the result of innovations that have led to dramatic growth in productivity, as shown in the graph above from a 2011 presentation by William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago. A consequence of productivity growth in manufacturing is that this sector has become smaller as a proportion of the overall economy, even as the absolute magnitude of manufacturing output has increased."

This seems to me to be somewhat incomplete. Another reason for the decline in % of GDP in the manufacturing sector is the appeal of investment in the financial sector. For example, GM found a better return on investment by becoming GMAC.

"Of course, one of the reasons for productivity growth is lower unit labor costs!"

This also seems somewhat incomplete. Labor costs are generally (according to the BSG) somewhere between 8% and 25% cents of manufacturing costs. Addressing costs associated with other aspects of production will offset the higher labor costs in this country.

What is the more sustainable competitive advantage?

Basing policies that extend out into the long-term future on the gap in labor cost is basing a long term approach on something of a relatively short-term phenomenon. Hourly labor cost is growing in China at a very fast rate whereas it is flat in the U.S. The longer that gets extended out, the more decisions based on labor rates in manufacturing shift.

Did you read the report from the Boston Consulting Group on their prediction for growth in the American manufacturing sector?

A better long-term basis for policy formation would be maximizing the cost advantages of manufacturing in the U.S. - i.e., building infrastructure (which has the added benefit of increasing employment). Of course, providing access to cheap energy would also be a way to reduce the cost of manufacturing in the U.S. - but there again, the question of long-term sustainability is also important. Energy sources that cause greater harm to the environment are less sustainable as a long-term financial policy.

Papa Zu said...

In the 1980's I was a regional manager for a Japanese company that built a plant in Maryland capable of producing the entire demand of medical needles and syringes for the USA. When I toured the plant I found 16 workers in the plant (all IT and engineering staff) as raw materials brought to the assempbly line, all production, 100% QC inspection, all transport to the radiation/sterilization area, all packaging and wharehousing, were done by machines and robotics. Not a single human was involved in the entire process of making a product that was superior in every way to previous products and offered 100% QA.

It is likely the lack of "real work" experience that has led to many of his poor decisions when it comes to the economy. The president's latest attempt to cast himself as a leader who will make government more efficient is a cruel joke on the American public as this is just a replay of his strategy in state and local politics in Illinois where he sold himself as a reformer during his campaigns.

However once he was elected to office it didn't take long for the local media to recognize that he was nothing more than just another sequacious run of the mill "Chicago Way" politician. It became a joke as they sarcastically referred to him as the "un-reformer" as he did absolutely nothing to reform Chicago/Illinois politics. He was and still is a charismatic, lovable, empty suit.

Joshua said...

Also, Roger - the decline in manufacturing as a % of GDP in the U.S. is reflected in a similar phenomenon worldwide.


Of course, aggregating those stats worldwides doesn't account for the relative growth in manufacturing as a % of GDP in countries with lower labor costs - but the worldwide phenomenon of decline in manufacturing as a % of GDP does seem to suggest that there is more in play than just labor costs.

Joshua said...

In honor of MLK and apropos of this topic:

"Increasingly, by choice or by accident, this is the role our nation has taken -- the role of those who make peaceful revolution impossible by refusing to give up the privileges and the pleasures that come from the immense profits of overseas investment.

I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a "thing-oriented" society to a "person-oriented" society. When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, materialism, and militarism are incapable of being conquered.

A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies. On the one hand we are called to play the good Samaritan on life's roadside; but that will be only an initial act. One day we must come to see that the whole Jericho road must be transformed so that men and women will not be constantly beaten and robbed as they make their journey on life's highway. True compassion is more than flinging a coin to a beggar; it is not haphazard and superficial. It comes to see that an edifice which produces beggars needs restructuring. A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth."

-- Martin Luther King, Riverside Church, April 4, 1967.


The key piece of enabling technology that drove it all was the integrated circuit then the micro chip. You can start with the slide rule to Kodak teetering on bankruptcy. Even the post office has bit affected. It enabled robotic machining and assembly. The list is very long and goes well beyond manufacturing. You have to wonder where it all leads. I'm reminded of the Dune Trilogy I read 30 years ago.
The Butlerian Jihad
"The target of the Jihad was a machine-attitude as much as the machines," Leto said. "Humans had set those machines to usurp our sense of beauty, our necessary selfdom out of which we make living judgments. Naturally, the machines were destroyed."[4]

Len Ornstein said...


This thread is directly related to your Dec. 6 thread on

"OECD on Income Inequality".

There, as commenter 5. I noted:

"One of the main aims of automation and information technology (IT) has been to increase productivity – more product or service per man hour of 'labor'. The more 'productive' are automation and IT, the fewer workers needed to meet market demands.

With the recent large, worldwide, downturn of economies, employers have finally begun to make the most of automation and IT. As a result, they find less need for additional workers.

But greater unemployment means poorer customers, and therefore reduced ability to pay – that effectively reduces demand.

This is one inevitable long-term consequence of unregulated capitalism – an Achilles' heal – that is bound to increase "Income Inequality"!

Whether this mechanism has finally set in – or, like Malthusean limits on growth – is yet to 'materialize', it can no more be ignored than can the problems of unsustainable depletion of natural resources.

An attractive long-term 'cure' is reduction in population growth, reduction in the average work-week, and reduction in "Income Inequality" through increased hourly 'wages'.

This can only be accomplished by increased transparency in market transactions, and regulation of 'free' markets so as to reduce lying and cheating, and reduce GROSS inequities.

It should be able to generate a continually increase in quality of life as education, research and development are promoted for THESE reasons, rather than for classical 'free market motives'."

Neither you nor others chose to respond.

But it should be clear, that as population growth and depletion of nonrenewable resources continue, economic progress, as envisioned as the motivation for both supply-side and demand-side economic theories, and driven by technical increases in agricultural, manufacturing and communications productivity, must fail.

Some alternate motivational paradigm of continuing increase in quality of life must replace the old profit motive.

The absolute monarchy of Qatar, using its enormous ratio of petroleum reserves to native population, and its ratio of about 4 imported laborers to each native, has transformed itself, in about one generation, from a nation of tent dwellers, to a one with among the highest average standard of living. But this transformation is not sustainable because of the finite supply of oil. And there is growing concern about the increasing lack of motivation among their 'idle rich'.

These are serious problems, that will spread across the world, and that won't go away by themselves.

Please share your views on this looming problem?

(2. n.n above clearly shares similar concerns.)

Roger Pielke, Jr. said...

-8-Len Orenstein

Thanks for the comments, but no, I do not think that increasing productivity is going to lead to a death spiral for capitalism, due to the factors that you cite. In fact, I believe strongly that innovation is the key to economic renewal.

Similar arguments could have been (and were) cited when increasing agricultural productivity transformed agriculture a century ago.

You might find this post worth a look:

The world created 800 million new jobs over the 20 years ending in 2010. What do you think has changed?


Papa Zu said...

Joshua - A values revolution is nothing new as there have been numerous values revolutions throughout history well before MLK (read Lao Tse). Such values revolutions are already happening today. For instance the Taliban is leading a values revolution. You should check it out. ;-)

Len Ornstein said...

9. Roger

Although "The world created 800 million new jobs over the 20 years ending in 2010" the population increased by more than one billion during the same period.

And increasing global non-renewable resources (global capital) have been approaching or passing their peak availabilities. These have previously provided somewhat of a free ride for past economic progress.

That's part of what has been changing – and for the worse!

Innovation has certainly fueled past economic growth – and SHOULD also make it possible to continue growth in the quality of life.

But a paradigm shift in motivation will probably be required. Whether a resulting 'new system' would be perceived as a modification of Capitalism, a hybrid of Capitalism and Socialism – or something else – is beside the point.

P.S. If you go back to your:


as you suggest, you'll find that in comments 1. and 9., in that thread, I raised these same issues. Neither you nor others chose to address the matter at the time.

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