The Loss of American Manufacturing Jobs: The Reasons Are Not Just “Unfair Labor Practices Abroad”

Introduction

Many have bemoaned the loss of US manufacturing jobs to foreign lands. The following quote by Mark Riddix is typical:

One of the biggest challenges facing the American economy is that we lack a domestic manufacturing base. Simply put we do not produce anything anymore. We buy tons of foreign goods and then wonder why we are lacking jobs. We import most of our goods which has resulted in a huge trade deficit and industrial job losses. Our economy has transitioned from an agricultural society to an industrial society to a service economy[1].

And recently, Steve Hansen has argued that job losses are associated with the growing US trade deficit. I quote Hansen:
 

The burr under my saddle is jobs…. Trade deficits export jobs. Some think it is only money on balance sheet – but it is jobs that are exported when a country imports manufactured goods.[2]

Is it correct to associate job losses with the US trade deficit? Should the US worry about losing manufacturing jobs? After all, a growing service sector is a common characteristic of countries with growing per capita incomes. Are the current problems in manufacturing merely cyclical – a direct result of American bankers causing a panic that led to the global recession? Remember that between 1998 and 2007, the US unemployment rate averaged 4.9%. Or are there longer term structural problems at work?

I have looked carefully at recent writings on the subject – many of the claims for why the jobs were lost are way off the mark. It is notable that most of those bemoaning US job losses look at manufacturing as a single industry. It is not. The manufacturing sector is made up of different industries with different dynamics.

What Manufacturing Industries Lost Jobs?  

Looking back to 1975, 1978 was the peak year for jobs in manufacturing. Table 1 shows the manufacturing industries with the largest job losses in the 1978-2007 period.[3] .

What caused these job losses? In reacting to Steve Hansen’s article, John Lounsbury pointed out:

Now, to be fair, not all the employment decline was due to increased employment overseas. Trade deficits remained fairly benign by 21st century standards. Employment declined significantly because of productivity improvements as more and more automation replaced manual labor.[4]

So let’s look at job-saving automation. In the 1987 to 2007 period, manufacturing value added output has increased by 123% while employment has fallen by 21%. This suggests an overall productivity increase of 181% for the manufacturing sector, and it would have been greater if the data had gone back to 1978. So where in manufacturing were productivity gains greatest? Probably in electronics and computers.

When it comes to textiles and garments, the Chinese are by far the most efficient. Consumers around the world would benefit in lower costs if all garments were made in China. And yet, the US quota on garments from China is the largest trade barrier in the world.

The reason for the job loss in primary metals is because the US makes most of its fabricated metals out of scrap metal. China is now the major global consumer of iron ore. The job losses in the remaining three categories can be attributed largely to productivity gains. But why then did the trade deficit grow? Because of growing US demand for goods and services. Read on.

The US Trade Deficit

Hansen and other associate US manufacturing job losses with a growing trade deficit. Hansen suggests that most jobs resulting from new technologies are being created overseas. Again, let’s look at the trade figures for the different manufacturing industries. Table 2 shows what has happened net to those manufacturing industries whose net trade deficits (imports minus exports) between 1989 and 2007.

It appears there is a white elephant in the room: the manufacturing sector with the trade deficit that grew most in this period was oil and gas. This had nothing to do with lower-priced overseas workers and unfair labor practices. It had to do with the growing US dependency on foreign oil. I quote from an earlier piece:

Unlike Japan and China, the US was at one time richly endowed with energy resources. Even today, it is the third leading producer of energy from oil, the second leading producer from coal, the second leading producer of energy from natural gas, and by far the largest producer of nuclear energy. But because of its voracious energy consumption, the US must supplement its own production of energy with imports. It now imports 63% of its crude oil, and this constitutes 21% of all crude oil traded globally. This is an extreme and dangerous dependency.

The European countries and Japan have imposed heavy taxes on motor vehicle fuels so gas prices have been in the $6-$7 range for more than a decade. But the US government policy has been to keep the gas price as low as possible. The result? Per capita, the US consumes almost four times as much oil as the other OECD countries. Is there a US energy policy?

Why does the US import so much oil? Because at existing exchange rates, extraction and shipping oil from overseas is less costly than US extraction. And US extraction costs will continue to climb.

I have written numerous pieces on purchases of US government securities by China and the Japanese to promote their exports. Together, these two countries hold more US Treasury debt ($1.8 trillion) than the Fed ($1.2 trillion). There is no question that this propping up of the US dollar has contributed significantly to US manufacturing job losses.

All of this is not to say American jobs have not been lost to overseas competition. But what more should be done? I have already mentioned the China garment quota – the largest trade barrier in the world. US agricultural subsidies range between $10 and 30 billion annually. More pressure on the Chinese and Japanese to strengthen their currencies?

Conclusion

 

With all the Japanese efforts to keep the Yen from getting stronger, the dollar has lost 60% of its value against the Yen since 1978. And they still export excellent cars to the US at competitive prices. At some point, Americans have to understand that people in other countries are willing to work harder for less. And if that continues, Americans’ real incomes will fall further. It is called global competition.


[1] http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base

[2] http://econintersect.com/b2evolution/blog2.php/2011/01/21/usa-trade-deficit-exports-1-3-million-jobs.

[3] I look only to 2007 because I do not want to confuse the findings with cyclical job losses resulting from the global recession.

[4] https://econintersect.com/wordpress/?p=5769

Related Articles

Exporting Jobs  by John Lounsbury

USA Trade Deficit Exports 1.3 million Jobs  by Steven Hansen

Non-Farm Business Productivty Improves in 2010 – Is This Bad News?  by Steven Hansen

U.S. Had to Export Jobs for Demographic Reasons  by John B. Lounsbury

4 replies on “The Loss of American Manufacturing Jobs: The Reasons Are Not Just “Unfair Labor Practices Abroad””

  1. Elliott asks, “Should the US worry about losing manufacturing jobs? After all, a growing service sector is a common characteristic of countries with growing per capita incomes.”

    The short answer is Yes, we should worry. An “economy” needs workers with jobs. If you export your work you export your jobs. There is nothing in market economics that can replace earned incomes.

    Kevin Phillips has written extensively about the consequences of “financialization” of an economy where “services”, especially finance, becomes too large a share of the national economy. We have reached the point where about 40% of all US corporate profits are ‘earned’ by the FIRE sector, so the US is clearly in the financialization phase of evolution that indicates the end of growth and the beginning of decline. A less generous perspective sees the FIRE sector as simply extracting economic rents without adding value to the economy.

    Reinhart and Rogoff chronicle the inevitable outcomes of financialization in “This Time is Different”. This time is not different. “We have been here before.” And it virtually always ends in banking, currency and economic crises escalating toward financial collapse. I’m no Austrian or fan of von Mises but on this point his arithmetic is unassailable,

    “There are no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

    In their groundbreaking paper, “Inequality, Leverage and Crises”, IMF economists Michael Kumhof and Romain Ranciere explain how a trend toward maldistribution of national income from the 95% of the population who make a living by working, to the 5% of the population who make a living by owning, causes financial crises when the 95% run out of credit and lack sufficient incomes to pay their debts. Most of the benefits of financialization accrue to the top 1/10th of 1% of the income distribution, and when 5% of the population owns practically all of the economy you no longer have a capitalist free market economy, you have feudalism.

    “The people” need to work to earn a living. That’s called “having an economy”. Over the past 30 years of financial ‘liberalization’ and accelerating globalization enabled by the deliberate economic policy of ‘free trade’, the American people have been living on flat or declining incomes supplemented by growing debt as their work and their jobs and their incomes have been offshored. By 2007 Americans had reached their debt ceiling and on Sept.15/08 the financial system would have collapsed into its Austrian inevitability had it not been for the extraordinary monetary and fiscal measures undertaken by the Fed and government.

    Reinhart and Rogoff see that financial liberalization historically and almost invariably leads to financial excesses that precipitate crises that end in tears.

    A modern economy cannot function without a functioning banking system that operates our money and payments system, and without a functioning currency in which to transact. If the banking and money system stall, the economy stalls with it, and stays stalled until the banking and money system are “fixed”. If it is not fixed you no longer have a country. You have anarchy.

    We are not self-sufficient peasant farmers who can get by, albeit hardscrabble like the 1930s, without a functioning economy. If our economy stops delivering food to our grocery stores, gasoline to our gaspumps, electricity and natural gas to our homes; if this happens, we lack access to the barest necessities of life and we die. But before we die we will revolt.

    Poor Arabs and North Africans are currently revolting against their governments. These people typically spend upwards up 50% of their incomes on necessities like food. With recent food price spikes these people are stressed to the point of death. They do not take death lying down. They revolt. Better to be shot in the street than suffer a lingering death from starvation. Revolt might lead to reform and survival. Starvation only leads to death.

    40 million Americans are living on food stamps, as the Federal government indebts itself by an additional $1.5 trillion annually. America’s 95% has reached its debt ceiling and has stopped borrowing more. The structure of our money system, where all the money is issued as debt at interest by the commercial banking system, requires an ongoing increase in debt-cum-money to sustain the inherent Ponzi arithmetic of the scheme.

    Our money supply equals the total amount of money that has been loaned into existence by the banking system and spent into the economy by borrowers. But this money is issued as debt at interest. So for each $1000 of money that is issued as a loan at 5% interest there is a corresponding debt of $1050 charged to the borrower. Where does the $50 of additional money come from to pay the interest? Ask Charles Ponzi. It comes from new borrowers adding additional new money into the Ponzi arithmetic equation.

    The only ‘solution’ to the impossible arithmetic of debt is to be a net exporter, a “mercantilist”; have your population slave away to produce goods that are shipped off for the enjoyment of foreigners in exchange for their money. Of course the salvation of “our” Ponzi money system comes at the expense of a worsening of importers’ money/debt equation. So China is rich in money and poor in goods, and America is rich in those goods and insanely and impossibly indebted in money. We are near the end of the viability of this ‘solution’.

    Bernie Madoff was a Ponzi piker. The whole money system is a Ponzi writ large. Irving Fisher was famously wrong in thinking pre-Crash 1929 was a “permanently higher plateau” in equities, but the man understands money and how money relates to an economy. Thus his MV = PQ formula (later adopted by Friedman who made it famous).

    PQ, prices times quantity of sales at those prices, is a monetary statement of a nation’s GDP (stripping out for now the capital account and trade account with other countries). GDP is measured in “money”, and PQ is total money sales in an economy.

    V is the measure of the people’s “animal spirits” (as Keynes would later call it), which Reinhart and Rogoff call “fragile confidence”. A confident people will spend money when they get it because they expect to soon get more money. A fearful people will hoard money when they get it because they are unsure of tomorrow’s income. When people are spending money the economy hums along. When people are hoarding money the economy seizes up for want of demand.

    Money velocity functions precisely like molecules in a gas. When the molecules are moving faster the pressure increases; when they move slower the pressure relaxes. Fast money velocity exerts upward pressure on prices (and quantities) as people will readily spend their money to acquire consumables and assets at inflating prices. GDP expands. When people lose confidence and their spending slows, the pressure decreases and the price/quantity bubble naturally deflates. GDP declines.

    It doesn’t matter if the changes in GDP are real or notional. “Money” is notional. If you owe $1000 and the asset you paid $1000 for is now worth $700, your debt does not ‘deflate’ along with the real value of the asset. You still owe the full ‘notional’ $1000.

    Don’t confuse a financialized economy with a barter system. Systemic inflation/deflation is impossible in a barter system where the trade goods function as the “money”. If there are more beaver pelts and less tin, beaver prices decline in terms of tin. Beaver and tin to not rise and decline together. That only happens when an exogenous system, “money”, is overlaid on the real goods barter economy. This latter is the system we have today, where we get systemic inflation/deflation due to changes in money.

    M is circulating money supply, about 97% of which is bank deposits that were created by bank loans, which is debt to whoever borrowed the money. New loans add to the money supply. Repayment of loans reduces the money supply. When money supply is growing because people are confidently borrowing, spending and investing, we get economic growth and all is well. When money supply growth goes flat we get economic stagnation and the collapse of speculative enterprises whose financial model depended on ongoing inflation (e.g. LTCM and the more recent subprime mortgage borrowers and lenders). When money supply growth goes negative we get recession that can rapidly become deflationary depression if people panic at the downturn and hoard rather than spend.

    About 97% of all our money is bank deposit money, and about 70% of all bank deposit money was created as mortgage debt, so mortgages are the foundation of our money supply and mortgaged real estate is the collateral asset upon which this mountain of debt precariously perches. When the financialization process finally mortgages an excessive share of a nation’s real estate market, real estate comprising by far the largest share of a nation’s total wealth, and inflates that market with a credit-driven boom that is extremely profitable to financial interests in the short term but catastrophic in the medium term; once an economy has financialized to this extent, Mises indeed becomes inevitable unless some exogenous actor adds new non-debt money into the Ponzi arithmetic equation.

    Bernanke’s QE programs inject something like this kind of new money, but QE adds new money to the banking system, the supply side of the money equation. The money is actually needed at the demand side, all the people whose incomes are insufficient to pay their debts to the banks. Because private sector debt-money has stopped growing the economy is stagnating, and the Ponzi banking system would have already collapsed without the extraordinary rescue effort. Banking system solvency depends on real estate values. When real estate inflation reverses to real estate deflation as we have been experiencing, the banking system becomes insolvent and is then dependent on regulatory forbearance for its continuing existence.

    Joe’s Diner is bankrupt and Joe is living on food stamps, but the 5% who are “capitalist” owners continue their fine “private profits” dining. Except the 5% are really just as bankrupt as Joe, because it is Joe and 10s of millions like him who the 5% lent all their money to. When nobody can pay the money back, there is no “asset”, just a defaulted and written off debt. Bernanke, Hank Paulson et al have been propping up the 5% who continue to live large on what is essentially government borrowing money on the 95% taxpayers’ tab and giving it to ‘the rich’. As zerohedge put it yesterday referring to Saudi Arabia in his blog, “Helicopter Ben Step Aside, Meet Enola Gay Abdullah: Whorism Goes Global”,

    “At least we now know that the political system that follows capitalism after its violent end is always and everywhere whorism, in those brief moments before total anarchy takes over and the inevitable systemic reset button is finally pushed.”

    Are we there yet? Pretty close, I’d say.

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