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U.S. Still a Manufacturing Super Power

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Bloggers from the left and the right are attacking both of the likely presidential candidates, Sens. John McCain (R-Ariz,) and Barack Obama (D-Ill.), for their complacency in the face of American “deindustrialization.”

The anger is fueled, in part, by the absurd expansion of “Wall Street” over the past decade – the investment banks and hedge funds that have pulled down mega-profits by pumping up the credit bubble, now gooily imploding all around us. According to the government’s Bureau of Economic, the financial sector accounted for more than 40 percent of all corporate profits in 2007. A disproportionate share of those profits accrued to the upper one-hundredth of 1 percent of the nation’s taxpayers, accentuating a degree of financial inequality not seen since the Gilded Age.

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Debt-150x150_3341.jpg

Illustration by: Matt Mahurin

There is plenty there to stir righteous fury. But first some facts, so we can throw the hand grenades in the right direction.

To start with, the United States is the world leader in manufacturing output by a huge margin. The American share of world manufacturing peaked immediately after World War II, when it was the only game in town. But it has never fallen lower than 30 percent, and has grown significantly since 1980, with some very small share slippage in the 2000s.

When a country’s manufacturing productivity grows rapidly its manufacturing employment invariably shrinks.

The so-called “emerging” countries — like China, Brazil and India — have enormously expanded their shares of output over the past decade, but the big share losers have been the European Union, Russia and Japan. China is now the world’s third largest manufacturer, while Japan is still No. 2. U.S. manufacturing output is about five times that of China.

How can that be? Look at the trade numbers! Look at jobs!

Start with trade. Manufacturing output is usually measured by a method called “value-add;” and it’s especially important in understanding the China phenomenon. Assume A is a car manufacturer who sells nearly finished cars to B, who paints them and ships them to dealers. While B’s gross revenue is the dealer price of the car, his value-add is only what he’s earned for the painting and shipping, since all the rest is remitted back to A.

Much of China’s exports are like B’s – goods for which Chinese workers provide the last processing and finishing steps, while other countries supply most of the value-add.

China assembles and ships iPods, for example, but almost all of an iPod’s value-add, and profits, go to Apple for the software, and to other international companies for chip sets, disk drives and additional high-tech components. But trade data is drawn from prices at customs. So China gets credit for $150 in exports for each iPod it ships, even though 99 percent of the revenue goes to other countries.

What about workers? By one recent estimate, China has 80 million manufacturing production workers, or nearly six times as many as in America. But that is a measure of Chinese backwardness.

When a country’s manufacturing productivity grows rapidly its manufacturing employment invariably shrinks. U.S. manufacturing employment peaked at about 19.4 million workers in 1979; but was down to 13.9 million workers at the end of 2007, the lowest level in more than 50 years, even as its output was steadily expanding.

The same trends are already evident in China, which has been shedding manufacturing jobs even faster than the United States has, as it struggles to move up the technology curve. Low-wage hand assembly isn’t the road to world dominance.

Shrinking work forces and soaring production are hardly new phenomena. America is also the the world leader in agricultural production, but fewer than half of 1 percent of its workers are employed in agriculture.

So why all the focus on manufacturing jobs?

The main reason jobs, and especially manufacturing jobs, are such an issue in the United States, is that the productivity drive has meant downsizing millions of workers, and treating most of them badly. That exposes a deep contradiction at the heart of the American system.

Of all the advanced countries, U.S. companies are by far the most flexible in responding to change. Employers have immense freedom to dismiss workers, or to restaff with different skills, to keep pace with competitive challenges. But perversely, of all the advanced countries, it has chosen to be the roughest on dismissed workers, and to provide the least reliable social safety net. Investors, private equity companies, CEOs, can therefore happily reap the profit and incomes from improved productivity, while leaving their former workers to reap mostly fear and insecurity.

Health care is the most striking example, since for working-age Americans, health insurance is available almost exclusively through employment. The rapid “human-resources adjustments” of market-responsive companies therefore entail near-absolute cutoffs of health insurance. Unemployment benefits and retraining opportunities are, similarly, miserly in the extreme.

But the inequities are now too palpable to ignore. If America is to retain its admirable economic flexibility, the social contract requires major revisions and soon.

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Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”

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